Statutory and Regulatory Audit Requirements in Malaysia

Audit Requirements and Exemptions

Not every company faces the same level of audit scrutiny. The Companies Act 2016 distinguishes between public and private entities regarding their obligation to undergo a statutory audit.

Mandatory Audits

For public companies, an auditor must be appointed for every financial year under Section 271(1). Furthermore, Section 248(2) dictates that financial statements must be audited before they are circulated to members or presented at an Annual General Meeting (AGM).

Warning: Non-compliance with Section 248(2) is a serious offense. It can result in imprisonment for up to one year, a fine of up to RM500,000, or both.

Audit Exemptions for Small Companies

To reduce the financial burden on micro and small enterprises, new exemption criteria were introduced via SSM Practice Directive No. 10/2024, effective from 1 January 2025.

A private company may be exempt from a statutory audit if it meets at least two of the following three criteria over the current and the preceding two financial years:

Who is NOT eligible for exemption?

• Public companies (including listed companies).
• Private companies that are subsidiaries of public companies.
• Foreign companies.
• Exempt private companies that have opted to lodge a certificate of exempt status with the Registrar.

Auditor Appointment, Qualifications, and Disqualifications

How an Auditor is Appointed

To act as a company auditor, an individual must first be an approved Chartered Accountant as defined by the Accountants Act 1967. Under Section 263(1) of the CA 2016, a Chartered Accountant must apply to the Minister of Finance for approval. The Minister grants this approval for a period of two years, provided the individual is competent and of good character.

Before an appointment becomes official, the individual (or at least one partner in the case of an audit firm) must provide written consent to the company.

Disqualifications

To maintain the integrity of the audit process, the law prevents certain individuals from serving as auditors. An individual is disqualified if they:

• Are not an approved company auditor.
• Are indebted to the company or its related corporation for an amount exceeding RM25,000.
• Are an officer, partner, employer, or employee of the company (including certain specified spouse and shareholder relationships).
• Are an undischarged bankrupt or have been convicted of fraud or dishonesty.
• Have a conflict of interest, such as being involved with persons responsible for maintaining the company's statutory registers.

Corporate Governance and the Role of the Audit Committee

Beyond the strict letter of the law, companies are encouraged to follow the Malaysian Code on Corporate Governance (MCCG). The MCCG 2021 emphasizes the "CARE" approach: Comprehend principles, Apply practices, and Report outcomes.

The Audit Committee's Oversight

The MCCG places significant emphasis on the Audit Committee's role in supporting the Board. Key responsibilities include:

1. Financial Reporting Oversight: Members should be financially literate and maintain professional skepticism, challenging management on unusual transactions or complex judgments.
2. External Auditor Independence: The committee must oversee the appointment and reappointment of auditors, ensuring their competence and assessing whether audit fees are appropriate to support high-quality work. They must also review any non-audit services provided to the firm to prevent independence threats.
3. Internal Audit Function: The committee ensures the internal audit function is effective, independent, and reports directly to them rather than to management.

Oversight and Professional Standards

While the Companies Act governs the legalities, the quality of the audit itself is maintained through two other mechanisms:

1. International Standards on Auditing (ISAs): Auditors must perform their work in accordance with ISAs to ensure consistency and quality in expressing an opinion on whether financial statements provide a true and fair view.
2. The Audit Oversight Board (AOB): Established under the Securities Commission Act 1993, the AOB provides independent oversight of external auditors of Public Interest Entities (PIEs). The AOB conducts inspections to ensure auditors comply with ethical and auditing standards and has the power to impose sanctions.

Exam Tip: Remember that while the Board of Directors is responsible for the preparation of financial statements, the Auditor is responsible for expressing an opinion on those statements. The Audit Committee acts as the bridge, providing oversight to ensure both parties function effectively.