TOPIC 2

COMPANIES ACT 1965, ACCOUNTANT ACT 1967, LEGAL LIABILITY

ORGANISATIONS THAT AFFECT FINANCIAL REPORTING & AUDIT

Malaysian Accounting Standard Board (MASB) Malaysian Institute of Accountants (MIA) Companies Commission of Malaysia (CCM) Security Commission & Bursa Malaysia (Formerly Known as Kuala Lumpur Stock Exchange, KLSE)
2

Malaysian Accounting Standard Board (MASB)

Established under Financial Reporting Act 1967 Responsible for: issuing new accounting std reviewing and revising existing std issuing of statements of principles (SOP) for financial reporting developing a conceptual framework for accounting std

Malaysian Institute of Accountants (MIA)

established under the Accountant Act 1967 empowered by law to be the regulatory body overseeing accounting profession main functions: determine the qualifications of persons for admission as member; provide training and educations of person practicing @intend to practice issue auditing standards, MIA By Law

Companies Commission of Malaysia (CCM)

Statutory body established under Companies Commission of Malaysia Act 2001 to ensure the provisions of the following acts and law are administered, enforced, carried out and complied The Companies Act 1965 The Trust Companies Act 1949, The Kootu Fund(Prohibition) Act 1971, The Registration of Business Act 1956

Bursa Malaysia
Govern the conduct of stock-broking companies and companies listed on the exchange Issue Bursa Malaysia Listing Requirement listing requirements and disclosure standards that listed companies must comply with.

Security Commission(SC) & Bursa Malaysia

SC set up under Securities Commission Act 1993 Functions: regulate all matters relating to securities and future contracts; acting as registering authority for prospectus of corporations; regulate take over and merger; regulate all matters relating to unit trust schemes

Audit Oversight Board

The Audit Oversight Board ("AOB") is established under Part IIIA of the Securities Commission Act 1993 ("SCA") 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.

COMPANIES ACT 1965

Sec. 169- the financial statements of a company are the responsibility of the company directors Sec 169(4)- the financial statement must be duly audited prior to be presented during AGM Sec 169(14)- the f/s must give a true and fair view of the state of affairs of the company and its results for the period under audit
9

COMPANIES ACT 1965 cont

Appointment of Auditors Sec 172 (2) - company must appoint a company auditor at every general meeting (AGM); and he/she will hold office until the next AGM Only approved company auditor(s) can act as the auditor of the company as specified under Sec 8. - approved by Ministry of Finance

10

COMPANIES ACT 1965 cont

Disqualification of Auditors: Sec 9(1)- a person is prohibited from acting/accepting an appointment as the auditor of a company if he/she is: Indebted to the company or its related company in an amount exceeding RM2500;

11

if he/she is:
An

officer of the company; A partner, employer or employee of an officer of the company; A partner, employee of an employee of an officer of the com; A shareholder of a company or spouse is the shareholder; And so on..
12

Duties of Auditors
Sec 174(2)(a),(b) - auditor is required to state in his report: 1.whether the f/s are in his opinion properly drawn up; (i) so as to show a true and fair view of the matters required by Sec. 169 to be dealt with in the f/s; (ii) in accordance with the provisions of the Act so as to give a true and fair view of the companys state of affairs and result of operations; and

13

Duties of Auditors

cont

1.whether the f/s are in his opinion properly drawn up In accordance with applicable approved accounting standards. 2. in his opinion, whether the accounting and other records and the registers required by the Act to be kept by the company have been properly kept in accordance with the provisions of the Act
14

Duties of Auditors

cont

Sec 174(3) (i) whether he has obtained all the information and explanation; (ii) whether proper accounting and other records (including registers) have been kept by the company as required by the Act; (ii) whether the returns received from branch offices of the company are adequate; and
15

Sec 174 (3)

(iv)

cont

in the case of consolidated f/s, whether the procedures and methods used by a holding company or subsidiary in arriving at the amount taken into any consolidated f/s were appropriate to the circumstances of the consolidation.
16

LETTLER OF ENGAGEMENT
An agreement between the accounting firms and the client for the conduct of the audit and related services. Include engagements objectives, the responsibilities of the auditor and management, and the engagements limitations. (refer page 194 for example).

17

Legal Environment
Audit professionals have a responsibility to fulfill implied or expressed contracts with clients. They are liable to their clients for negligence and/or breach of contract should they fail to provide the services or not exercise due care in their performance.

Business Failure, Audit Failure, and Audit Risk

Audit failure

Business failure

Audit risk

19

Business Failure, Audit Failure, and Audit Risk

Business failure It occurs when a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions.

20

Business Failure, Audit Failure, and Audit Risk

Audit failure It occurs when the auditor issues an erroneous audit opinion as the result of an underlying failure to comply with the requirements of auditing standards.

21

Business Failure, Audit Failure, and Audit Risk

Audit risk It represents the risk that the auditor will conclude that the financial statements are fairly stated and an unqualified opinion can be issued when, in fact, they are materially misstated.

22

Four Major Sources of Auditors Legal Liability

Client* Third party

Federal securities laws

Criminal liability

*The most common source of lawsuits against the US CPAs is from clients.

Auditors Defenses Against Client Suits

Lack of duty to perform Nonnegligent performance Contributory negligence Absence of causal connection

Civil Liability Under the Laws

Securities Commission (Amendment) Act 2003 Any 3rd party who purchased securities described in the registration statements may sue auditor for Material misrepresentations or omissions. Companies Act 1965 Section 46 an auditor is liable to pay compensation to persons who purchase shares/debentures based on untrue statements (including material willful non-disclosure) in prospectus.

What the profession and the individual CA can do and what is being done to reduce the threat of litigation?

26

The Professions Response to Legal Liability

-Research in auditing -Standard and rule setting -Set requirements to protect auditors -Establish peer review requirements -Oppose lawsuits -Education of users - Sanction members for improper conduct and performance - Lobby for changes in laws

Protecting Individual CAs from Legal Liability

-Deal only with clients possessing integrity -Hire qualified personnel -Follow the standards of the profession -Maintain independence -Understand the clients business -Perform quality audits -Document the work properly

Protecting Individual CAs from Legal Liability

-Obtain an engagement and a representation letter -Maintain confidential relations -Carry adequate insurance -Seek legal counsel -Choose a form of organization with limited liability -Exercise professional skepticism