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What is audit?
The primary purpose of an audit of a financial
report is to express an opinion on whether the
financial report is prepared, in all materials
respects, in accordance with an identified
financial reporting framework.
Legal framework of auditing ;
The roles and responsibilities of auditors, and their
relationship with other corporate participants, such as
directors & shareholders are governed mainly by company
The Malaysian Accounting Standards Board (MASB) :-
• Established under the Financial Reporting Act 1971, as an
independent authority to develop and issue financial
reporting standards in Malaysia.
•Set up to improve and tighten accounting standards to
give these standards the force law .
• To facilitate enforcement of these standards through
The Audit Oversight Board (AOB) :-
• Established under part III of Securities Commission Act
1993, Commenced in April 2010.
1) to assist the Securities Commission in overseeing the
auditors of public interest entities.
2) to protect the interest of investors by promoting
confidence in the quality and reliability of audited
financial statement of public interest entities, by
•Registering auditors of public interest entities
•Conducting inspections and monitoring programs
on registered auditors to assess the extent of their
compliance with recognized auditing ethical
ScoPe oF WoRK
To obtain audit evidence about the amounts
and disclosure in the financial statements.
Evaluating the appropriateness of accounting
policies used and the reasonableness of
accounting estimates made by the director as
well as evaluating the overall presentation of
the financial statements.
Qualification of auditor
(1) Must be approved as a
company auditor by the
Minister of Finance
according to Sec. 9(1) of CA.
(2) Good character
and competent to
perform duties of
(3) Must register as a
public accountant with the
MIA , under the
Accountant Act 1967, be at
least 21 years old &
considered fit and proper
(4) Must not be closely
related to the company, nor
can be in a position where
officers of the company can
have influence on him.
An auditor preparing for a company any report required
to be prepared by an approved company auditor, unless
if he falls within any of the following categories :
(4) A person who is partner
with an employee of the
company or employee of an
employee of the company.
(1) An officer or
employee of the
(5) A person who is a
director /member of a pvt co.
or a partner of a firm, which
is the managing agent or the
secretaries and treasurers of
(2) A person who is holding any
security of that company.
(3) A person who is a director or
the holder of shares exceeding
5% of the nominal value of the
aPPointMEnt of auditor
APPOINTMENT BY COMPANY
The general rule is that, the company by
means of a resolution of its members is
required to appoint an auditor of each annual
general meeting under Section 172 (1) of the
APPOINTMENT BY DIRECTORS
•To appoint the first auditor for the company
[Section 171(1) CA]
•To fill any casual vacancy in the office of an
auditor. Failing such as an appointment, the
surviving or continuing auditors, if any, may
act [Sec 171(3) CA]
APPOINTMENT BY REGISTRAR
•Where an auditor of a company has been
removed from office, and the company has not
appointed another auditor [Sec 172(8) CA]
•To act on a written application of a member
where the directors of the company fail to
appoint an auditor [Sec 172(10) of the Act]
TERMINATION OF AUDITOR
Resignation of Auditors
• An auditors appointment last until the
end of the following year AGM
• Although an auditor may resign before
his term ends, according to Sec.172(14)
he may not resign if he is the sole
auditor of the company. Must be made
• If he wish to resign, must give notice in
writing to the BOD, who will then
convene a gen. meeting.
TERMINATION OF AUDITOR
Removal of Auditors
• Sec. 172(4) an auditor may not be removed except
by ordinary resolution at a gen. meeting where
special notice (at least 28 days) have been given.
• The co. is required to send notice to auditor and
Registrar of Co. as soon as they receive it.
• Within 7 days after receipt of the notice, make
explanation in writing to the company.
• He can then may request the company to send
copies of his explanation to all members entitled to
attend the gen. meeting.
• At the meeting, he may request for his explanation
to be read & may speak to defend himself.
• Sec 127(7) – When an auditor has been removed,
another auditor appointed at a gen meeting may
• The appointment of new auditor must be made by
a resolution passed by a majority of not less than ¾
of the members of the company who are entitled to
vote (in person or by proxy).
• If the company does not appoint another auditor,
the Registrar of the Co is empowered to appoint for
the company. [Sec.172(8)]
DUTy TO ThE ShAREhOLDER
The auditor is regarded as agents of shareholders rather
than as agents of the directors.
Re London and General Bank
•Auditors are to be appointed by the shareholder and
are to report to the, directly and not to or through the
• This was to ensure that the shareholders received
independent and reliable information respecting the
true financial position of the company at the time the
audit was concluded.
Duty to the company
The auditor owe fiduciary duty to the company to treat
any information and trade secrets acquired by him in the
course of his professional work as confidential.
Auditor are in contractual relationship with the
company and on the basis of ordinary principles of
contract law, can be liable to the company if they fail
to honour the term of the contract.
Duty of care anD skill
•The auditor should not put himself in a position of
•An auditor must exhibit in carrying out his task is that
an ordinary auditor.
Patric Tay V Public Accountant Board
Held : That a failure to follow prescribe statement of
accounting guidelines could amount to professional
Duty to thirD party
Common law has established that an auditor may in
stipulated circumstances be liable to third parties.
Caparo Industries Plc V Dickman
•Perhaps the locus classicus for this principle in so far as
the duty owed by auditor is concerned.
•The Caparo case decided that to establish liability, it
had to be shown there was foresee ability of loss and
damage and that justice and reasonableness require
that liability be found.
Duty to the trustee for Debentures
•The auditor is obliged by the provisions of the CA/by the
debenture/ trust deed to furnish the corporation with
specified report, certificates or documents.
•Within 7 days after furnishing, auditor is obliged to post
a copy of the report, cert / doc to every trustee for the
deb. holder. [sec 175(1)]
Law Society V KPMG Peat Marwick
Held : If a negligent breach of duty to a trustee causes
damage both to the trustee in his personal capacity and
to the trust property, the trustee can claim on both his
own and on the beneficiary’s account
Duty of confiDentially
ii) In accordance with the provision of any written law or
where the disclosure is compelled by the process of law or
by competent authority
i) For the purpose of discharging duties to the company
iii) Where disclosure is reasonable necessary to protect
the auditor’s interest. For example, to defend an action
off negligent or to defend disciplinary action by the
accountant’s professional body.