AUD 589

AUDITING 1

Audit Regulations

Prepared by:
Yusarina Mat Isa
UiTM Kampus Puncak Alam
 Learning Objectives
• Able to:
 Explain the relevant regulations affecting auditors
 Understand the relevant statutory and regulatory
requirements concerning auditors in Malaysia

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 Companies Act 2016
Companies Act 1965
Section 8: Company auditors and
liquidators to be approved by Minister
charged with responsibility for finance
Section 9: Company auditors
Section 172: Appointment and
remuneration of auditors
Section 174: Powers and duties of
auditors as to reports on accounts
Companies Act 2016
Section 263: Company auditors to be approved by Minister charged with
responsibility for finance
Section 264: Company auditors -----Disqualification!
Private co.
Appointme Section 267 – appointment of auditor for private
nt company
Section 268 – power to registrar to appoint auditor
Section 269 – office for private company
Section 270 – Prevention to re-appoint as an
auditor
Section 279 – appoint auditor by written resolution
Section 280 – appointment of auditor at a meeting
of members
Removal Section 276- remove auditor from office
Section 277 – special notice to remove auditor
Section 278 – notice to registrar to remove auditor
Resignation Section 281 – resignation of auditor
Section 282 – notice auditor to registrar
Remunerati Section 274 – fixing of auditor’s remuneration
Section 266: Powers and duties of auditors
on
Section 261 – Auditor’s Statement
Public Co.
Section 271 – appointment of auditor for public
company
Section 272 – power to registrar to appoint
auditor
Section 273 – office for public company
Section 279 – appoint auditor by written
resolution
Section 280 – appointment of auditor at a
meeting of members
Section 276 – remove auditor from office
Section 277 – special notice to remove auditor
Section 278 – notice to registrar to remove
auditor
Section 281 – resignation of auditor
Section 282 – notice auditor to registrar
Section 283 – rights to resign for public company
Section 284 – duty to inform upon cessation of
office
Section 285 – attendance of auditor to AGM
Section 274 – fixing of auditor’s remuneration
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 Qualification (Section 263)
(1) Any person may apply to the Minister charged with the
responsibility for finance to be approved as a company auditor
 (2) The Minister may, if he is satisfied that the applicant is of good
character and competent to perform the duties of an auditor …, upon
payment of the prescribed fee, approve the applicant as a company
auditor.
 (4) Every approval…including a renewal of approval of a company
auditor shall be in force for a period of two years after the date of issue….
 (5) The Minister may delegate…his powers…to any person, or body of
persons charged with the responsibility for the registration or control
of accountants in Malaysia.
 (7) …, “person” mean a chartered accountant as define under the
Accountants Act 1967 [Act 94].
 

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 Disqualification (Section 264)
(1) A person shall not 
(a) knowingly consent to be appointed as an auditor for any company;
(b) knowingly act as an auditor for any company; and
(c) prepare, for…a company,…report[s]…if 
(i) he is not an approved company auditor;
(ii) he is indebted to the company…in an amount exceeding
twenty-five thousand ringgit;
  (iii) he is 
  (A) or his spouse is an officer of the company;
  (B) a partner, employer or employee of an officer of the company;
  (C) a partner or employee of an employee of an officer of the
company; or
  (D) a shareholder or his spouse is a shareholder of a corporation
whose employee is an officer of the company.
(iv) he is responsible for…the keeping of the register of members or the

register of debenture holders of the company;

(v) he is an undischarged bankrupt…; or
(vi) he has been convicted or any offence involving fraud or dishonesty
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 Appointment (Section 267-273)
Types of Appointment
Appointed by: Successor/
First To Fill Casual Retired
Auditor Vacancy Auditor New
Auditor
Board of Directors  
(BOD)
Shareholders     
(Ordinary resolution (if the BOD fails
at the AGM) to appoint)

Companies    
Commission of
Malaysia (CCM) (if the company fails to appoint, upon application in writing)

• General Rule – only the shareholders at an annual general meeting (AGM)

can appoint an auditor.
• Appointment by the BOD and CCM are the exception to the general
rule. 6
 Removal (Section 276 - 278)
Shareholders Notice Resolution
(at a General Meeting) (Number of Days) (Majority)
Special notice of Ordinary resolution of
Removal of existing auditor 28 days 50% + 1 majority

Special notice of Special resolution of

Appointment of successor 28 days ¾ majority
auditor

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 Resignation (Section 281-283)
• Notice in writing
• Term of auditor ends after 21 days from the
date of notice.

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 Remuneration (Section 274)
• Appointed by the shareholders
o fixed by ordinary resolution at the General
Meeting.
• Appointed by the BOD
o fixed by BOD; if not so fixed by the company.
• Appointed by CCM
o fixed by CCM or BOD; if not so fixed by the
company.

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 Powers and Rights (Section 266)
• Right of access to accounting and other records.
• Right to inquire information and explanations.
• Right to attach or endorse the auditors’ report on the financial
statements.
• Right to receive all notices and minutes of general meeting.
• Right to attend general meeting.
• Right to speak at general meeting.
• Right to report to CCM.
• Rights upon removal.
o Make representation within 7 days of receiving special notice.
o Request representation be sent by the company to shareholders.
o Read the representation

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 Duties (Section 266)
• Report to the members on
– The financial statements.
– The accounting and other records.
• Report any deficiency, failure or shortcoming
• Express opinion in the report on
– The true and fair view of financial statements.
– The compliance with the approved accounting standards.
– The defect or irregularity in the financial statements, if any.
– The proper keeping of accounting and other records and the registers.
• The information and explanation as required

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 MIA By-Laws
PART I: By-Laws on Professional Ethics Part II: By-Laws on Professional Conduct and Practice
PART A: GENERAL APPLICATION PART A: ALL PROFESSIONAL ACCOUNTANTS
100 Fundamental Principles and Conceptual Framework 400 Induction Course upon Admission
110 Integrity 410 Continuing Professional Education
120 Objectivity 420 Description and Designatory Letters
130 Professional Competence and Due Care 430 Public Practice Programme
140 Confidentiality 440 Attention to Correspondence and Enquiries
150 Professional Behaviour 450 Compliance with Orders, Directions or Requirements
PART B: PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE PART B: MEMBERS IN PUBLIC PRACTICE
200 Introduction 500 Method of Practice
210 Professional Appointment 510 Professional Indemnity Insurance
220 Conflicts of Interest 520 Death or Incapacity of a Sole Practitioner
230 Second Opinions 540 Referrals
240 Fees and Other Types of Remuneration 550 Quality Assurance and Practice Review
250 Marketing Public Practice Services 560 Engagement Partners
260 Gifts and Hospitality 570 Prospective Financial Information
270 Custody of Client Assets
280 Objectivity–All Services
290 Independence – Audit and Review Engagement
291 Independence— Other Assurance Engagements
PART C: PROFESSIONAL ACCOUNTANTS IN BUSINESS
300 Introduction
310 Conflicts of Interest
320 Preparation and Reporting of Information
330 Acting with Sufficient Expertise
340 Financial Interests, Compensation and Incentives Linked to
Financial Reporting and Decision Making
350 Inducements

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 Significance of MIA By-Laws
• All professional bodies impose a code of conduct on their members.
• This code of ethics provides a set of principles and rules that offer
guidance to members.
• Ethics – set of moral principles, values or acceptable behaviour
• In Malaysia, MIA issued the MIA By-Laws (on Professional Ethics,
Conduct and Practice)
– Provide standard of conduct in daily professional life
– Important for gaining public confidence in auditors’ services

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 Fundamental Principles

Integrity Objectivity

Professional
Confidentiality Competence and Due
Care

Professional
Behavior

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 Fundamental Principles
110 Integrity
To be straightforward and honest in all professional relationships.
Professional Relationships = Straightforward x Honest (Fair Dealing x
Truthfulness)

Integrity
o Not corrupted.
o Information provided in the reports, returns and correspondences are
not false, not misleading, not furnish recklessly, no omission, no
obscurity.
 Straightforward
o Free from ambiguity.
 Honest
o Not leading into false statement.
 Fair dealing
o Not bias, not prejudice (justify the judgment with knowledge of the
facts).
 Truthfulness
o Factual.

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 Fundamental Principles
120 Objectivity
To not allow bias, conflict of interest or undue influence of others to override
professional judgments.
Professional Judgments = Unbiased x No Conflict of Interest x No Undue
Influences

Objectivity
o Judgments are supported with evidence.
o Verifiability exists in that two auditors working independently of each
other will come up with similar conclusions.
o Absolute independence is impossible (Arens, 2nd. Ed., Ch.1, p.5).
 Unbiased
o Not prejudice.
 No conflict of interest
o Private interest vs. public obligation, uphold obligation to the users of
financial statements.
 No undue influence
o Mutual respect in auditor-client relationship, uphold professional
rapport.

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 Fundamental Principles
130 Professional Competence and Due Care
To maintain professional knowledge and skill at the level required to ensure that a client
receives competent professional services based on current developments in practice,
legislation and techniques and act diligently and in accordance with applicable technical
and professional standards.

Professional Services = (Ordinary, Prudent, Reasonable)(Knowledge x Skill) x Sound Judgment x Act

Diligently
Professional Competence and Due Care
o Competence  Attainment = Qualification; Maintenance = Continuing Professional
Education.
o Due care = Carefully and thoroughly perform the procedures on timely basis; Standard
of conduct required of an ordinary, prudent, and reasonable person.
 Knowledge
o Understand the relevant technical, professional, and business development and
sustain with continuing professional education.
 Skill
o Hands-on, on the job/ in house training, supervision.
 Sound judgment
o Judgments are supported with factual evidence.
 Act diligently
o Remain constant to the purpose, perform according to standards, understand the
inherent limitation in auditing.

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 Fundamental Principles
140 Confidentiality
To respect the confidentiality of information acquired as a result of professional and business
relationships and, therefore, not discloses any such information to third parties without
proper and specific authority, unless there is a legal or professional right or duty to disclose,
nor use the information for the personal advantage of the professional accountant or third
parties.
Safeguard Information = Respect the Value and Ownership (Do Not Disclose x Do Not Use)
 
Confidentiality
o The unauthorized disclosure or use of information poses a threat to clients.
o Entitle to use the experience gained from a client on another client.
• Disclosure
o Alert on the possibility of inadvertent disclosure
• Exemption
o Authorized by client.
o Permitted by law
 Subpoena for legal proceeding.
 To the public authorities.
o Use as evidence in legal proceeding.
o Professional rights to disclose
 Practice review.
 To respond to an inquiry or investigation.
 To protect the professional interest.
 To comply with technical standards and ethical requirements.

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 Fundamental Principles
150 Professional Behavior
To comply with relevant laws and regulations and should avoid any action that discredits the
profession.

Conduct = (Laws x Regulations)(e.g. Companies Act 2016, Financial Services Act 2013 and
Islamic Financial Services Act 2013, Capital Markets and Services Act 2007) x Honor Profession
(including By-Laws)
 Professional Behaviour
o Avoid actions that a reasonable and informed third party to conclude adversely affects
the good reputation of the profession.
Advertising, marketing and promotion
o In accordance with laws; Professionally dignified; In good taste; Not making exaggerated
claims; Not making disparaging comparison with the work of another chartered
accountant.

• Not bring the profession into disrepute

o Professionally dignified (honorable) and in good taste (within the normal social
standards).

• Honest and truthful

o Do not make exaggerated claims
o Do not make disparaging references or unsubstantiated comparisons (belittle).

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 Professional Independence
• Professional independence: Attitude of mind characterized by integrity
and objective approach to professional work. Auditor should be and be
seen to be free from any conflict of interest.
• Independence in audit means taking unbiased viewpoint in audit
report, audit tests and evaluation of results.
• Increased reliability of audit report used by the users to make decisions.

• Two criteria for auditor to be and be seen as independence:

– Independence of mind
• able to maintain unbiased attitude throughout audit
• The state of mind that permits the expression of a conclusion without being affected by
influences that compromise professional judgment, thereby allowing an individual to act
with integrity, and exercise objectivity and professional skepticism.
– Independence in appearance
• interpretation of users of financial statement of the auditors’ independence.
• The avoidance of facts and circumstances that are so significant that a reasonable and
informed third party would be likely to conclude, weighing all the specific facts and
circumstances that a firm’s, or a member of the audit assurance team’s, integrity,
objectivity or professional skepticism has been compromised.

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 Threats and Safeguards
• Threats could compromise (the mind) and perceived to compromised (the
appearance) compliance with fundamental principles of ethics. Threats will
inappropriately influence the judgment or behavior.
• If the auditor determines that the threats to compliance with the
fundamental principles are not at an acceptable level, the auditor shall
determine whether appropriate safeguards are available and can be
applied to eliminate or reduce the treats to an acceptable level.

S S A F I
Self- Interest Self- Review Advocacy Familiarity Intimidation
Threat Threat Threat Threat Threat

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 Threats and Safeguards (cont.)
Threats Example
Self-interest threat - The threat that a financial or other interest • Threats due to financial interest
will inappropriately influence the professional accountant – Shareholder; Loan from
judgment or behavior. client.
• Threats due to other interest –
Guarantees from client/ director.

Self-review threat - The threat that a professional accountant will • Threats due to auditing own
not appropriately evaluate the results of a previous judgment work (i.e. non-audit services)
made or service performed by the professional accountant, or by - Preparing of financial
another individual within the professional accountant’s firm, on statements.
which the accountant will rely when forming a judgment as part of - Tax consultant
providing a current service.
Advocacy threat - The threat that a professional accountant will • dealing in, or being a promoter of,
promote a client’s position to the point that the professional shares or other securities in an
accountant’s objectivity is compromised. audit client 
Familiarity threat - The threat that due to a long or close • Spouse working in client co
relationship with a client, a professional accountant will be too • Serving the same client for
sympathetic to their interests or too accepting of their work. considerably long time
Intimidation threat - The threat that a professional accountant will • Hold back audit fee
be deterred from acting objectively because of actual or perceived • by giving physical threats to
pressures, including attempts to exercise undue influence over the auditor’s family members,
professional accountant. relatives or loved ones

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 Threats and Safeguards (cont.)
Safeguards

Safeguards created by Safeguards in the work environment

The profession,
The legislation, or
Firm-Wide Engagement-Specific Client’s
The regulation.
Safeguards Safeguards Systems and Procedures

Examples of Safeguards:

Firm-wide safeguards
Engagement-specific safeguards
Safeguards within the client’s
systems and procedures
• Using different partners and engagement teams with separate
reporting lines for the provision of non-assurance services to an
assurance client.
• Policies and procedures to monitor and, if necessary, manage the
reliance on revenue received from a single client.
• Disclosing to those charged with governance of the client the nature of
services provided and extent of fees charged.
• Rotating senior assurance team personnel.
• The client requires persons other than management to approve the
appointment of a firm to perform an engagement.
• The client has competent employees with experience and seniority to
make managerial decisions.

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 Audit Oversight Board
• The Audit Oversight Board (“AOB”) is established under Part
IIIA of the Securities Commission Act Malaysia 1993 (“SCMA”)
which came into force on 1 April 2010 to promote and
develop an effective audit oversight framework and to
promote confidence in the quality and reliability of audited
financial statements in Malaysia.
• Auditing the auditors who audit PIEs.
• Why establish the AOB?
o A strong corporate governance framework requires monitoring the
necessary assurance on the rigour (meticulousness) of the audit
process and the quality and reliability of audited financial statements.
o Provides independent audit oversight over PIEs and to ensure our
regulatory framework for auditors is on par with international
standards.

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End of Topic 2