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Lecture 2

Rights, Duties and Liabilities of


Auditors in Malaysia
Organizations that Affect the Accounting
Profession
Ministry of Finance
|
Accountant General’s Department of Malaysia
|
MALAYSIAN INSTITUTE OF ACCOUNTANT
|
MIA Council Supported by
Regulation Of the Accounting
Profession
1. Accountants Act 1967
- set up the mechanism for the regulation of the accounting
profession.
- established MIA
- amended in 2002 to reflect the regulators function of the MIA.
Malaysian Institute of Accountants
(MIA)
• Empowered to issue:
• Accounting guidelines
• Auditing standards
• Internal auditing standards
• Other guidelines such as MIA By Laws (on professional conducts and ethics)
• To conduct:
• Financial Statement review
• Investigation and Disciplinary
• Insolvency issues
• MIA practice review
MIA membership
• Chartered Accountants in practice
• Chartered Accountants Not in practice
• Associate members
• Licensed Accountants
Malaysian Accounting Standard Board
(MASB)
• Independent authority to develop and issue accounting and financial
reporting standards
• Main functions:
• Issue new accounting standards
• Sponsor or undertake development of possible accounting
standards
• Review, revise or adopt the existing standards
• Issue statement of principles for fin. Reporting
• Conduct public consultation
AUDIT OVERSIGHT BOARD
• Independent authority that oversee auditors of PLC
• Established under the Securities Commission
• Main functions:
• Register auditors of PLC
• Conduct inspections and monitoring programs on auditors to
ensure compliance
• Conduct inquiries and impose appropriate sanctions

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Other Players in the Malaysian auditing
profession???
• Bank Negara Malaysia
• Bursa Malaysia
• Securities Commission
• Companies Commission of Malaysia
• Accounting professional bodies

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Statutory Rights, Duties & Obligations
of Auditors
1. Appointment
2. Removal and resignation
3. Rights upon removal
4. Rights to remuneration
5. Rights to access information
Appointment of auditors

• Companies Act 2016


• The auditor is appointed at an AGM & will be an
auditor of the company until the next AGM
• Unless removed [S 172(4)]
• Resigns
Companies Act 2016 - Statutory Rights, Duties
and Obligations of Auditors
Statutory Requirements for Appointment, Removal and Resignation of
Auditors
Appointment (private company)
S.267 (3) Board shall appoint an auditor if the company is a newly incorporated
company, or to fill a casual vacancy, within 30 days before the end of the period
for submission of the first FS. Thereafter, the members shall appoint the auditors
for subsequent period. S 267 (4) members shall do so if the Board fails to appoint.
Appointment (public company)
S.271 states that every public company must appoint an auditor at its AGM
Removal and Resignation

Section 276 and 277 - the removal of the appointed auditors.


Although an auditor is appointed to hold office from the conclusion
of one AGM until the conclusion of the next AGM, the company may
remove him from office at any time by passing a special resolution
Section 281-283- auditors can resign from their post before the
expiry of their term but they must give notice of their intention to
resign
Public listed companies – must inform Bursa Malaysia

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Statutory Duties of an Auditor
• Auditor must report on the accounts that are to be presented to the members at
the AGM [S266(1)]
• [S. 266(2)] The report must be on the basis of (in the auditor’s opinion)
whether the accounts
• Give a ‘true & fair view’ of the company’s affairs (financial performance)
• Comply with the applicable approved accounting standards
• S266(3): The auditor must form an opinion on each of these:
Whether …
• all information & explanations have been obtained
• proper accounting & other records have been kept
• returns received from branch offices are sufficient
• methods used to consolidate are appropriate
Auditor’s opinion
The F/S are true & fair
• What does it mean?

• True is accepted as factual or mathematical accuracy

• Fair is accepted as reasonable

• True vs. Fair

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True vs. Fair
• After finishing classes for the day at 5p.m., Ayu went to canteen and chatted with
her friends.
• Then at 7.00 p.m., on her way back home, she stopped by the library for about 15
minutes to pick up a book, then she went straight home.
• When she got home, her mother asked, “Where have you been? It’s already
Maghrib time.”
• Ayu says, “I came home directly from the library.”

• Did Ayu make a TRUE statement?


• Did Ayu make a FAIR statement?
Duties (Quasi-legal) & Cases
• The auditor should perform an audit based on ISAs (ISA 200 para. 5).
Evidence suggested that ISAs have some legal status
• Failure to do so could amount to:
• breach of duty, unless justified (Lloyd Cheyham & Co. Ltd v
Littlejohn Co. (QBD) [1985])
• Liable to investigation & disciplinary action  withdrawal of
registration as auditor by MIA
• Courts would consider compliance with ISAs in cases of alleged negligence of
auditors
• Auditors and the client should agree on the terms of engagement between
them (to avoid breach of duty)
Continue…
• An auditor does not have a responsibility to carry out audit with the
expectation of fraud & material errors or irregularities.
• ‘He is a watch-dog, but not a blood-hound’ (Re London & General Bank
[1985])
• But, must report them if discovers evidence in ‘normal course of
audit’
• .: audit is not a guarantee
• Must approach audit with professional skepticism (questioning mind) 
deliberate concealment

 Duty of Care
Duty of Care:
• The auditor is required to perform an audit “with the skill, care
and caution which a reasonably competent and careful
auditor would do” (Re Kingston Cotton Mill Co (No. 2) [1896])
• Includes duty of care to directors (Coulthard v Neville Russell
[1998])

Breaches:
• Remedies  Damages = compensation in monetary terms
• A defense to reduce liability  Contributory Negligence = partly the
claimant’s fault
Rights of the Appointed Auditor
1.The auditor has the right to remuneration or fees [S274]
• The fees are agreed upon at the AGM or the members
give the authority to the Directors to agree upon the fees
at a later stage.

2.The auditor has the right to access information (documents, etc.) &
make queries of the officers [S266 (4)]
Rights upon Removal [S.277]
1. The auditor can make representation (justification) in writing within 7
days of the notice of removal.
• This representation must be disseminated to the members (of the
AGM).
2.The auditor has the right to attend the AGM:
• (original) when his term was supposed to expire
• Filling of his removed post
3.The auditor has the right to receive notices of the above meetings
4.The auditor has the right to be heard in the above meetings on any
matters related to being a former auditor
Audit Contract between Auditor and Client
• An engagement letter stipulates the contractual duty of an auditor that arises
and it enunciates the extent of an auditor’s duties in addition to the duties
prescribed by the Act.

• A contract made with an auditor (or by any party), more often than not contains
both express and implied terms. Terms are implied both by legislation and
common law. A standard audit contract always contains two express terms:
• a detailed description of the work to be done; and
• a definition of the degree of care and skill that the auditor must bring to the
task
Duties under Common Law and Equity

Duties arising from Contract Law - Duty to Exercise Reasonable Care and Skill
• Implied term (in the absence of a contract) based on the CA 2016
• An auditor’s duty is only discharged if he can show that he has exercised a
reasonable degree of care and skill in the performance of his work
An auditor must be honest, and must not certify as true what he does not believe
to be true: Lopes LJ explained that “an auditor is under duty to see that he has
performed the work he was required to perform ... with the skill, care and caution
which a reasonably competent and careful auditor would do” (Re Kingston Cotton
Mill Co (No 2) [1896] 2 Ch 279 at 288).
Common Law and Equity ( cont.)

 Common Law Duties arising from Tort Law with regards to negligence
of the auditors
 Tort law expand the scope of auditor’s duties and potential liability.
 Tort (law) of negligence expand the auditor’s duties to parties for
whom the audit is being prepared and also third parties, whom no
contractual duties are owed.
Duty of Care – Law of Tort
Principles laid down by various court precedence in the following cases;
Donoghue v Stevenson [1932] AC 562
Candler v Crane Christmas & Co [1951] All ER 426
Hedley Byrne & Co Ltd v Heller & Partners [1963] 2 All ER 575
Liability would arise with third party users of auditors report if the
relationship can be established.
IAASB Standards

• International Standards on Auditing (ISAs)


• International Standards on Review Engagements (ISREs)
• International Standards on Assurance Engagements (ISAEs)
• International Standards on Related Services (ISRSs)
• International Standards on Quality Control (ISQCs)
Auditing Standards
Auditing standards serve as
guidelines for and measures of
the quality of the auditor’s
performance.

ISAs are
IAASB issues International considered to
Standards on Auditing (ISAs).
be minimum
standards of
performance for
auditors.
IFAC members
General Principles and Responsibilities
• ISA 200 Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with International
Standards on Auditing
• ISA 210 Agreeing the Terms of Audit Engagements
• ISA 220 Quality Control for an Audit of Financial Statements
• ISA 230 Audit Documentation
• ISA 240 The Auditor’s Responsibilities Relating to Fraud in an
Audit of Financial Statements
• ISA 250 Consideration of Laws and Regulations in an Audit of
Financial Statements
• ISA 260 Communication with Those Charged with Governance
• ISA 265 Communicating Deficiencies in Internal Control to
Those Charged with Governance and Management
Risk Assessment and Response to
Assessed Risks
• ISA 300 Planning an Audit of Financial Statements
• ISA 315 Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its
Environment
• ISA 320 Materiality in Planning and Performing an Audit
• ISA 330 The Auditor’s Responses to Assessed Risks
• ISA 402 Audit Considerations Relating to an Entity Using a
Service Organization
• ISA 450 Evaluation of Misstatements Identified during the
Audit
Audit Evidence

• ISA 500 Audit Evidence


• ISA 501 Audit Evidence – Specific Considerations for
Selected Items
• ISA 505 External Confirmations
• ISA 510 Initial Engagements – Opening Balances
• ISA 520 Analytical Procedures
• ISA 530 Audit Sampling
• ISA 540 Auditing Accounting Estimates, Including Fair Value
Accounting Estimates, and Related Disclosures
• ISA 550 Related Parties
• ISA 560 Subsequent Events
• ISA 570 Going Concern
• ISA 580 Written Representations
Using Work of Others

• ISA 600 Special Considerations – Audits of Group


Financial Statements (Including the Work of
Component Auditors)
• ISA 610 Using the Work of Internal Auditors
• ISA 620 Using the Work of an Auditor’s Expert
Audit Conclusions and Reporting
• ISA 700 Forming an Opinion and Reporting on
Financial Statements
• ISA 705 Modifications to the Opinion in the
Independent Auditor’s Report
• ISA 706 Emphasis of Matter Paragraphs and Other
Matter Paragraphs in the Independent Auditor’s Report
• ISA 710 Comparative Information – Corresponding
Figures and Comparative Financial Statements
• ISA 720 The Auditor’s Responsibilities Relating to
Other Information in Documents Containing Audited
Financial Statements
Specialized Areas

• ISA 800 Special Considerations – Audits of Financial


Statements Prepared in Accordance with Special Purpose
Frameworks
• ISA 805 Special Considerations – Audits of Single Financial
Statements and Specific Elements, Accounts or Items of a
Financial Statement
• ISA 810 Engagements to Report on Summary Financial
Statements
PROFESSIONAL ETHICS &
INDEPENDENCE
ETHICS & INDEPENDENCE
• Ethics = system or code of conduct based on moral duties and
obligations that indicates how one should behave.

• Professionalism = the conduct, aims, or qualities that characterize or


mark a profession or professional person.

All professions operate under some type of code of ethics/ conducts.


E.g- MIA issues By-Laws (On Professional Conduct and Ethics) for
auditors.

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Fundamental principles on professional
ethics
1. Integrity

2. Objectivity  Independence

3. Professional competence & due care


• Professional skepticism
• Professional judgment

4. Confidentiality

5. Professional behavior

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Independence
• Auditors are expected to behave ethically & professionally

• Independence is important. What is “independence”?

• Unbiased, not under the influence of the client, not related to the client’s
organisation

• Independence (ISA 200):


• Independence in mind - objective and unbiased in their actions and
• Independence in appearance - perceived by knowledgeable users of financial
statements as independent

• Why do you think it is important for auditors to be seen to be ‘independent’?

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Rules/guidance for maintaining
independence
Financial interest
Family relationships
Loans
Performing Non-audit services (NAS)

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Prohibited non audit services
• Bookkeeping or other services related to the accounting records of
audit client
• Financial information systems design and implementation
• Appraisal and valuation services, fairness opinions, or contribution-in-
kind reports
• Actuarial services
• Internal audit outsourcing services
• Management functions, etc
Threats to behaving professionally /
ethically/ independently
• Self-interest threat – i.e. partners’ compensation schemes; who the
clients are.
• Self-review threat – NAS
• Advocacy threat – NAS
• Familiarity threat – Long-term audit clients, rationalizing behaviour
• Intimidation threat – Ex-auditor now working with audit clients

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Problems faced by auditors that may affect
their professionalism:
• Low-balling
• decrease (initial) audit fees (lucrative management service fees)
• Audit fees restricted by regulation.
• Need to maintain audit to recover costs .: affects independence

• Opinion shopping
• Choose auditor that agrees with accounts
• Threaten to change auditors

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Safeguards
• Safeguards created by the profession, legislation, regulation
• Educational, training & experience requirements for entry into the profession
• Continuing professional development requirements
• Corporate governance regulations
• Professional standards
• Professional or regulatory monitoring & disciplinary procedures
• External review by legally empowered 3rd party
• Safeguards in the work environment
• Effective, known complaint system & duty to report breaches

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The Role of Professional Skepticism in
Auditors’ Judgments
• ISA 200 states that “independence enhances the auditor’s ability to
act with integrity, to be objective and to maintain an attitude of
professional skepticism”
• U.S. auditing standards define skepticism as involving “an attitude that
includes a questioning mind and a critical assessment of audit
evidence”
The Role of Professional Skepticism in
Auditors’ Judgments
• Professional skepticism includes being alert to, for example:
• Audit evidence that contradicts other audit evidence obtained
• Information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence
• Conditions that may indicate possible fraud
• Circumstances that suggest the need for audit procedures in addition to
those required by the ISAs
The Role of Professional Skepticism in
Auditors’ Judgments
• Professional skepticism is important because without it auditors are
susceptible to accepting weak or inaccurate audit evidence
• An auditor who is professionally skeptical will do the following:
• Critically question contradictory audit evidence
• Carefully evaluate the reliability of audit evidence
• Reasonably question the authenticity of documentation.
• Reasonably question the honesty and integrity of management
Corporate Governance
“The process and structure used to direct and manage
business and affairs of the company towards promoting
business and corporate accountability with the ultimate
objective of realizing long-term shareholder value while
taking into account the interest of other stakeholders” –
MCCG 2017

The owners (shareholders) elect a board of directors to


provide oversight of the organization’s activities and
accountability to stakeholders”
Key Elements of Corporate
Governance
1. Business prosperity
2. Accountability
3. Enhancing shareholder value
4. Structure
5. Process
Primary parties involved in corporate
governance
• Shareholders
• Boards of Directors
• Audit Committee as a subcommittee of the Board
• Management
• Internal Auditors
• Professional bodies – (eg: MIA, MASB,MICPA, other professional
accountancy bodies)
• Regulatory Agencies (eg: SC, CCM,BNM,AOB)
• External Auditors
Events of the Last Decade (in the US)
• The corporate governance failures were broad and a number of
different parties contributed to those failures
• There was much finger pointing at the auditing profession for its
failures
• “Practicing professionals should place the public interest above the
interests of clients, particularly when participating in a process
designed to develop standards expected to achieve fair
presentation…. Unfortunately, the auditor today is often a participant
in aggressively seeking loopholes”
Public Oversight Board (POB) Concerns
• Analytical procedures used inappropriately to replace direct tests of account
balances
• Audit firms not thoroughly evaluating internal control and applying substantive
procedures to address weaknesses in control
• Audit documentation, especially related to audit planning, did not meet
professional standards
• Auditors ignored warning signs of fraud and other problems
• Auditors were not providing sufficient warning to investors about companies that
might not continue as “going concerns”
Principles of Good Corporate Governance
• Transparency is a critical element of good corporate governance, and companies
should make regular efforts to ensure that they have sound disclosure policies
and practices
• Independence and objectivity are necessary attributes of board members;
however, companies must also strike the right balance in the appointment of
independent and non-independent directors to ensure an appropriate range and
mix of expertise, diversity, and knowledge on the board
Corporate Governance and the Audit

• Good governance is important to the conduct of an audit for one very


simple reason: companies with good corporate governance are less
risky to audit
• These companies generally have the following characteristics:
• Are less likely to engage in “financial engineering”
• Have a code of conduct that is reinforced by actions of top management
• Have independent board members who take their jobs seriously and have sufficient time and
resources to perform their work
• Take the requirements of good internal control over financial reporting seriously
• Make a commitment to financial competencies needed

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