1

CHAPTER 4 – OFFICERS
OF COMPANY -AUDITOR
By Salmiah Salleh
UiTM Kampus Melaka
Law485Auditor201819
 2

LEARNING OUTCOMES
• Students shall be able to:
• Explain the requirement of an auditor of a company.
• Identify who can be a company auditor.
• State and explain the rights or power of auditor.
• State and explain the duties of auditor.
• Apply the law in solving real life problem.

Law485Auditor201819
 AUDITOR 3

• Requirement of an auditor
• Qualification
• Appointment and term of office
• Rights or powers
• Duties
1. To the company
Statutory duties
Duty to attend GM
Duty to carry out audit
Duty to report to appropriate management
Duty to be independent
Duty to use reasonable care and skill
2. To shareholder / outsiders

Law485Auditor201819
 4

REQUIREMENT OF AN AUDITOR
• A company carries on business with the capital contributed by
the shareholders.
• All the affairs of the company are under the control of several
executives i.e. director & officers. Not the shareholders.
• For the protection to the shareholders against any
misappropriation of their money -> the Companies Act provides
compulsory appointment of auditor (independent body)
• The function is to check the company’s affairs and report them
to the shareholders.

Law485Auditor201819
 5

QUALIFICATION
WHO CAN BE COMPANY’S AUDITOR?
• Only an approved company auditor can be appointed.
• Who can be approved company auditor? (s 263(1))
❑ has necessary qualification
❑ Competent to perform the duties of an auditor
❑ of good character
❑ must be registered as a public or chartered accountant
with MIA under Accountant Act 1967.
❑ At least 21 years old.
• Been approved by the Minister of Finance for a period of 2 years
of sooner revoked by the Minister.

Law485Auditor201819
 S 264(1) – THE FOLLOWING CANNOT BE A 6

COMPANY AUDITOR
• If he is not an approved company auditor (s 263)
• If he is indebted to the company…in an amount
>RM25,000.
• If he is
o or his spouse is an officer of the company
o a partner, employer or employee of an officer
o a partner or employee of an employee of an officer
o a shareholder or his spouse is a shareholder of a
corporation whose employee is an officer
• If he responsible for or if he is the partner, employer or
employee of a person responsible for the keeping of the
register of members or the register of holder of debenture
of the company.
• An undischarged bankrupt except with court leave
• Convicted of any offence involving fraud or dishonesty.

Law485Auditor201819
 7

Creditor exceed
XYZ Bhd. RM25000

Mr. F officer
(officer
responsible Employee Employee
For keeping of ABC Bhd Mr. A Mr. C Mr. H
the register of
members or
debenture Shareholder Partner
Partner
holder of the Employer
company) Employee
Employee Mr. I

Partner Mr. E
Employer Or spouse Mr. B
Mr. D Mr. J
Employee
Mr.G

Law485Auditor201819
 APPOINTMENT & TERM OF OFFICE
8

PRIVATE CO
• S267 – private co must appoint an auditor for each financial year.
• R may exempt certain categories of private co from the requirement.
• s267(3) – Board must appoint auditor:
• New company – at least 30 days before the end of the period for the submission
of the first financial statement to the Registrar; or
• To fill a casual vacancy.
• S 267(4) – members must appoint an auditor by ordinary resolution:
• For subsequent years, during the period for appointing auditor; or
• If the Board fails to appoint under s267(3).
• S 268 – if the co fails to appoint, the R may appoint.

Law485Auditor201819
 9

TERM OF OFFICE OF AUDITOR

PRIVATE CO
• S269(1) – shall hold office in accordance with terms of appointment
provided:
• Does not take office until the previous auditor ceases to hold office, unlee he is
the first auditor; and
• He ceases to hold office 30 days from the circulation of the FS(financial
statement), unless reappointed.

Law485Auditor201819
 10

APPOINTMENT & TERM OF OFFICE

PUBLIC CO
• S271(1) – a public co must appoint an auditor for each financial year.
• S271(2) – Board must appoint an auditor:
• At any time before the first AGM…; or
• To fill casual vacancy.
• S271(4) – members must appoint an auditor by ordinary resolution:
• At the AGM;
• The co failed to appoint; or
• The Board fails to appoint under s271(2).
• S 272 – if the public co fails to appoint, the R may appoint

Law485Auditor201819
 11

TERM OF OFFICE OF AUDITOR

PUBLIC CO
• S273 – auditor of public co shall hold office in accordance with the terms of
his appointment provided that:
• Does not take office until the previous auditor has ceased to hold office, unless
he is the first auditor: and
• He ceased to hold office at the conclusion of the next AGM, unless reappointed.

Law485Auditor201819
 12

VACATION OF OFFICE
• S276(1)
• – may be removed at any time:
• by ordinary resolution in GM; and
• In accordance with s 277 which requires special notice given for such a
resolution.
• S277(2)& (3)-upon receiving the special notice, the co-
• Shall send a copy to the auditor and the Registrar.
• Within 7 days, the auditor may make written representation to the co and
request, prior to the GM, a copy be sent to every members.
• S277(4) & (5) – may require the representation to be read out at the meeting

Law485Auditor201819
 13

RESIGNATION OF AUDITOR
• S281 – auditor may resign by giving written notice to the co at its registered
office.
• If he is not the only auditor; or
• At a GM
• The resignation only effective after 21 days from the notice is given or from
date stated in the notice.
• S282 – the co must send a copy of the notice to the R within 7 days from the
receiving of the notice.

Law485Auditor201819
 14

RIGHTS OR POWERS OF AUDITORS

 The CA 2016 gives the auditor the following rights or power to enable him to
conduct his duties:

1. right to access to the accounting such as books, vouchers and other

records including registers of the company and its subsidiaries.
2. right to require information and explanation from any officer of the
company and any auditor of a related company or of any subsidiary for
the purpose of carrying out his duties.
3. right to attend any GM and to speak in his capacity as auditor
4. right to receive all notices or any other communication relating to any
GM which a member is entitled to receive.

• S266(12) – penalty – imprisonment x>3years or RM500,000 or both.

Law485Auditor201819
 15

PRIVILEGE OF AUDITOR & RELATED

PERSONS
• S 286(1) – in the absence of malice, auditors are not liable for any
action for defamation in respect of statements they make in the
course of their duties as auditors
• S286(2) –publishers of document prepared by auditors also have
similar privilege.
• S286(3) – auditor will not be liable to be sued in any court or subject to
any criminal or disciplinary proceeding for any report made under s
266 submitted by the auditor in good faith and in the intended
performance of any duty imposed on the auditor.

Law485Auditor201819
 16
DUTIES OF
AUDITOR

To shareholders
To the company
and outsiders

To report To use
to reasona
To To be To
To make To carry appropri ble care
attend indepen exercise
report out audit ate and skill
GM dent care
manage
ment

Law485Auditor201819
 SANTAPAN MINDA & ROHANI 17

Law485Auditor201819
 18

A. DUTIES OF AUDITOR TO
THE COMPANY
Law485Auditor201819
 19

1. TO MAKE REPORT
REPORTING TO MEMBERS AND REPORT CONTENTS

• S266(1) – Shall report to the members on the financial statement(FS)

and on co’s accounting & related records.
• Public co – laid before the c in AGM
• Private co –
• circulated to its members; or
• Laid in a meeting of members(MOM)
• S266(2) – in report shall state whether in his opinion the FS properly
drawn up:
- so as to give a true and fair view of FS or CFS(consolidated FS).
- so as to give a true and fair view of the company’s affairs.
- in accordance with the applicable approved accounting
standards

Law485Auditor201819
 20

REPORTING TO MEMBERS AND REPORT CONTENTS(CONT)

• S266(3) – duty to form an opinion to each of the following matters and state
any deficiency, failure or shortcoming:
• Whether has obtained all info and explanation
• Whether proper accounting and other records are kept by the co
• Whether the return received from branch office are adequate; and
• Whether the procedure and method used were appropriate.
• S266(6) – auditor’s report must be attached on the FS or CFS and if
requested, be read in GM and must be open for inspection.

Law485Auditor201819
 21

REPORTING TO REGISTRAR

• S266(8) – breach or non-observance

• S266(9) – serious offences involving fraud or dishonesty. (public co)
• S266(13) – penalty on auditor– 5 years imprisonment or RM 3 Million or both.
• S284 – upon ceasing to hold office

Law485Auditor201819
 22

REPORTING TO TRUSTEE FOR DEBENTURE HOLDERS

• S287(1)
• S287(2)

Law485Auditor201819
 23

2. DUTY TO ATTEND GM
• S285 – auditor must every AGM where the FS are laid, to respond to any
question relevant to the audit of the FS
• S285(2) – private co – if hold MOM where its FS are laid – auditor must attend
upon due notice.

Law485Auditor201819
 24

3. DUTY TO CARRY OUT AUDIT

• Before forming an opinion and making a report, an audit
must be carried out. An auditor is required to device
procedure to assist in the detection of errors or fraud.
• Pacific Acceptance Corp Ltd v Forsyth, Moffit J said:
“An auditor pays due regard to the possibility of fraud or
error by framing and carrying out his procedure…”

Law485Auditor201819
 25

4. DUTY TO REPORT TO
DIRECTOR/MANAGEMENT
• If fraud is uncovered or suspected, the auditor is under a duty to report
promptly the matter to the director or other management rather than wait
until the AGM.
Re London & General Bank
WA Chip & Pulp Co Pty Ltd v Arthur Young & co

Law485Auditor201819
 RE LONDON & GENERAL BANK 26

LINDLEY LJ STATE:

• “…the auditors perform their duty to the company and

safeguard the interest of the shareholders by making
communication…to the appropriate level of management
or the directors, during the course of the audit, with an
appropriate report to the shareholders at AGM. They do not
perform such duty if, having uncovered fraud or suspicion of
fraud… they fail promptly to report it to the director…
immediately to management”

Law485Auditor201819
 WA CHIP & PULP CO PTY LTD V 27

ARTHUR YOUNG & CO

• Johnson(manager) made certain unauthorised drawings

between 1978 and 1980. => $64,000
• Auditors became aware of this early 1978 & discussed it with
one of his subordinate but not with his superior.
• The auditors decided in 1978 and 1979 to leave the issue for
the next year.
• Held: the auditors were negligent because of their failure to
take action over Johnson’s account until 1980 audit. They
breached their duty.
Law485Auditor201819
 28

5. DUTY TO BE INDEPENDENT
• Re Transplanter (Holding Co) Ltd, Wynn-Parry J stated:
“ Once a man takes upon himself a position of auditor.. He
must stand aloof and divorced from the aims, object and
activities of the company”

must guard against a conflict of interest

However auditors can seek assistance. When come to form

opinion he must do so independently
Law485Auditor201819
 29

DOMINION FREEHOLDERS LTD V AIRD

 The company vs the auditor for breach of his
contractual duty of care. The auditor sought the
company accountant as a co-defendant. The
accountant had supplied him with incorrect
information.
 Jacobs JA stated:
“They(auditor) must not rely or depend on
company officers for information or
representations in respect of matters upon
which they are required in the course of their
duties to reach an independent conclusion,
and, if they do so rely, they cannot shed their
responsibility by casting the liability on to the
company officer or officers concerned”.

Law485Auditor201819
 30

6. DUTY TO USE REASONABLE

CARE AND SKILL
• Auditor must use reasonable care and skill in carrying out the audit and in
forming an opinion on the company’s account.
• A failure -> liable to the company in damages for:
1. Breach of contract
2. negligence

Law485Auditor201819
 31

LIABILITY IN CONTRACT
• Pacific Acceptance Corp ltd v Forsyth, Moffit J stated:
“ It is beyond question that when an auditor, professing as
he does to possess the requisite professional skill, enters into
a contract to perform certain tasks as auditor, he promises
to perform such tasks using that degree of skill and care as is
reasonable in the circumstances as they then exist”.

Law485Auditor201819
 32

LIABILITY IN NEGLIGENCE
• Professionals owe a duty of care to their clients. An auditor
who uses less than the required degree of care and skill is
liable to the company for any loss suffered as a result but is
not liable only because of failure to detect errors or frauds.
• What is the standard of care expected?
Re Kingston Cotton Mill Co
Re Thomas Gerrard & Sons Ltd
Pacific Acceptance Corp Ltd v Forsyth
AWA ltd v Daniels
Law485Auditor201819
 33

RE KINGSTON COTTON MILL CO

 The auditors failed to detect certain fraud
perpetrated by the company’s director.
 They relied on false certificate supplied by the
director as to the value of stock without
calculated the stock-in-trade at the beginning
of the year.
 Held: the auditors were not liable in breach of
duty. The standard of care did not require them
to take stock. They were entitled to rely on the
manager’s certificate as there were no grounds
for suspicion and the manager was widely
regarded as a man of good character and
trustworthy.
Law485Auditor201819
 34

RE THOMAS GERRARD & SONS LTD

 The company’s managing D had over a period of years,
been making obvious alteration to invoices received from
suppliers.
 Whilst some of these invoices had come to the attention
of the auditors, but they just relied on the stocktaking
procedure set up by the MD, without investigating the
matter any further.
 Held: the auditors were liable to the company
because once the altered invoices had been
discovered, the auditors were put on inquiry and it
was not sufficient that they merely sought assurance
from the MD. This case did not involve an isolated
failure of detection but had gone on for many years.
The auditors, therefore failed in their duty to exercise
reasonable care and skill.

Law485Auditor201819
 35

AWA LTD V DANIELS

 Daniel = auditor of AWA Ltd.
 AWA engaged in Foreign Exchange (FX) Operation.
 FX run by a single person, Koval who was effectively unsupervised and
ran up massive liabilities.
 Daniel was aware – no proper system of recording the transaction, no
segregation of duties and Koval was basically left to his own devices
without being controlled by senior executive of AWA.
 1986 -1987 – Koval’s unsupervised activities generated large losses but
for a time Koval able to conceal this.
 Daniel warned AWA management . Not acted on his warning.
 However, despite knew this, Daniel failed to inform the Board when
asked at a board meeting. He certified the profit despite all the
problems. AWA vs Daniel for negligence.

 Held : Daniel was negligence as he failed to warn promptly the

board of the deficiencies in the accounting record and
inadequacy of the internal controls
Law485Auditor201819
 36

SANTAPAN
MINDA &
ROHANI

Law485Auditor201819
 37

B. DUTY OR LIABILITY OF AUDITOR TO

SHAREHOLDERS AND OUTSIDERS

Law485Auditor201819
 38

• Auditor is under duty to exercise the appropriate standard of care. If not he

is liable in tort of negligent.
• To succeed, outsiders must establish:
• that the auditors owe them a duty of care in carrying out the audit and in
making their report.
• The auditor breach the duty of care
• As a result they suffered loss

Law485Auditor201819
 39
D owes
the P a
duty of
care

Action in
Negligence
P suffers D breach
loss or P vs D
the duty of
injury care

Law485Auditor201819
 40

• At first, professionals like auditor owed a duty only to their client(company)

and not to outsider.
• Cadler v Crane, Christmas
Held: the firm of accountant was not liable to outsider investor who had relied on
a negligently prepared report. Because there was no contract between the
accountants and outsiders and they were under no duty of care.

Law485Auditor201819
 41

• However, the law significantly developed since Hedley

Byrne v Heller[1964], Lord Morris said:
“If someone possessed a special skill undertakes…to
apply that skill for the assistance of another person who
relies on such skill, a duty of care will arise”.

Law485Auditor201819
 42

SHADDOCK & ASSOCIATES PTY LTD V

PARRAMATTA CITY COUNCIL (1981)
• High Court of Australia held: that the duty to take reasonable care arises
whenever a person gives information or advice to another upon a serious
matter in circumstances where speaker realises, or ought to realise, that he is
being trusted to give the best of his information or advice as a basis of action
on the part of the other party…the speaker comes under a duty to exercise
reasonable care…”

Law485Auditor201819
 43

ARENSON V CASSAN BECKMAN RUTLEY &

CO
Shares sold at a
Seller of share price far below the Buyer of share
correct valuation

The seller vs the auditor for negligence in valuating the value of the shares.

Held: an expert who value share, knowing that the valuation was to be used
by the buyer and the seller in calculating the price for the shares, was liable
to them both if he or she made the valuation negligently.

Law485Auditor201819
 44

SCOTT GROUP LTD V MCFARLANE

• The auditor negligently prepared an audit report on the

company which was filed with the ROC.
• This report was relied upon by outsiders who made a
takeover bid for the company.
• The auditors were held not liable because no damage
resulted from their negligence.
• Majority of Court of Appeal held: the auditors owed a duty
of care to persons whom they knew or ought to have
known would rely on the lodged account which they had
audited.
Law485Auditor201819
 45

SANTAPAN MINDA
 KEJAYAAN tidak akan dapat dicapai dengan sekelip mata
tetapi untuk mencapainya, memerlukan kesungguhan dan
usaha yang berterusan.
Manusia yang berusaha
Adalah
Mereka yang inginkan kehidupan
Tapi
Manusia yang tidak mahu berusaha
Adalah
Mereka yang inginkan kematian

Law485Auditor201819
 SANTAPAN MINDA
46

& ROHANI

Law485Auditor201819
 47

Law485Auditor201819
 48

Law485Auditor201819
 49

MUKJIZATNYA AZAN

• Pesanan Semasa Mendengar Azan...

• Kematian itu pasti menjelma. Hanya masa dan waktunya yang tidak kita ketahui.
Cuba kita amati. Mengapa kebanyakan orang yang nazak, hampir ajal tidak dapat
berkata apa-apa.... lidahnya kelu, keras dan hanya mimik mukanya yang menahan
kesakitan 'sakaratul maut'.
• Diriwayatkan sebuah hadis yg bermaksud: "Hendaklah kamu mendiamkan diri
ketika azan, jika tidak Allah akan kelukan lidahnya ketika maut menghampirinya. "Ini
jelas menunjukkan, kita disarankan agar mendiamkan diri, jangan berkata apa-apa
pun semasa azan berkumandang.
• Sebagai orang beragama Islam kita wajib menghormati azan. Banyak fadhilatnya.
Jika lagu kebangsaan kita diajar agar berdiri tegak dan diamkan diri. Mengapa
ketika azan kita tidak boleh mendiamkan diri? Lantas sesiapa yang berkata-kata
ketika azan, Allah akan kelukan lidahnya ketika nazak .
Law485Auditor201819
 50

• Kita takut dengan kelunya lidah kita semasa ajal hampir tiba maka
kita tidak dapat mengucap kalimah "Lailahaillallah.." yang mana
sesiapa yang dapat mengucapkan kalimah ini ketika nyawanya
akan dicabut Allah dgn izinNya menjanjikan syurga untuk mereka.
• Dari itu marilah kita sama-sama menghormati azan dan mohon
kepada Allah supaya lidah ini tidak kelu semasa nyawa kita sedang
dicabut.
• "Ya Allah! Anugerahkanlah kematian kami dengan kematian yang
baik lagi mulia, lancarkan lidah kami mengucap kalimah
"Lailahaillallah.." semasa sakaratul maut menghampiri kami.
• Amin ..amin..amin Yarobbal a'lamin.."

Law485Auditor201819
 51

Law485Auditor201819