AUDITOR

Auditor

Every company must have

their accounts audited &
thus must appoint at
least one auditor to audit
its account
APPOINTMENT AUDITOR FOR PRIVATE
CO S267 CA2016

• Appointed by the directors within 30 days

before end of the period for submission of
1st Auditor the 1st financial statements to the ROC
s267(3) (not later than 6 months after the
company’s financial year end).

• Automatically re-appointed unless falls

Subsequent under s269(3).
• An auditor ceases to hold office 30 days
Auditor after the co’s audited financial statements
are circulated to its members.
APPOINTMENT AUDITOR FOR PRIVATE
CO S267 CA2016

• No re-appointment of existing auditor if another auditor

has already been appointed by members
• Auditor was appointed by the board
• The Constitution requires actual re-appointment.
S269(3) • The co receive notice under s270 from members holding
at least 5% of voting power that former auditor should
not be re-appointed
• The members have passed a resolution that auditor
should not be re-appointed.

Not re- • The members can appoint an auditor by passing an

ordinary resolution s267(4)
• The ROC may also appoint upon receipt of an application
appointed in writing from any member
 APPOINTMENT AUDITOR FOR PUBLIC
CO S271 CA2016
• Appointed by the Board of directors before co’s 1st AGM &
1st Auditor hold office until conclusion of the AGM. S271(2) (s340(2)
1stAGM 18 months after incorporation)
(Approved co auditor) • Members may appoint by passing ordinary resolution s271(4)

• Appointed at each AGM, all of which will hold office until the
Subsequent Auditor conclusion of the next AGM.
• Members may appoint at AGM s271(4)

Vacancy • Directors may appoint new auditors to fill in, but while such a
vacancy continues, the surviving or continuing auditors may act
Death/resignation for the time being.

Vacancy • Remove in AGM

• Appoint a new Auditor by members in AGM
Removal • If fail to do so, the Registrar will appoint the auditor s272
 APPOINTMENT S264 CA2016

Consent • A Written consent must be given first before the

person or firm can be appointed as auditors.
s264(5)

• Company may appoint an individual / a firm as

Company auditor
• All partners of a firm are approved company
auditor
Auditor • One partner disqualify, firm should not consent to
the appointment s264
QUALIFICATION Who can be a company auditor?
• The person must be approved as company auditor by Minister
of Finance
s263 • Approval is valid for 2 years period after date of issue unless
revoked by the Minister concerned

• Applicant must satisfy the Minister of Finance in good

s264(1)(c)(i) character, and competent to perform the duties

• Must be registered as a chartered accountant with the MIA & >

Accountant 21 years
• Firm to be admitted & must have passed an exam
Act 1967 • A member of one of the professional bodies under the Act

• A new firm of auditors shall notify ROC within 30 days from

commencement of its business
s265 • A firm of auditors that change in partner/ any change to lodge
a notification within 30 days
DISQUALIFICATION Section 264 CA

Not an approved auditor/ indebted to the co/

An officer of the co/
undischarged bankrupt/ related corporation for >
related corporation
convicted of any offence RM25,000

a partner, employer or
His spouse is an officer of a partner or employee of
employee of an officer of
the co/ related an employee of an officer
the co/ related
corporation of the company
corporation

a shareholder or his he is responsible for or if he is a

spouse is a shareholder of partner, employee or employer of a
a corporation whose person responsible for the making of
employee is an officer of the register of members or the register
the company of debenture holders of the company.
DISQUALIFICATION Section 264 CA

Not an Indebted to
approved the company Connected
auditor for >RM25000

Responsible
An Officer An Officer for keeping a
register

An Employee
An Employee An Employee/
A Partner An Employer An Employee of a A Partner
of his spouse An Employer
shareholder

A Partner An Employee
 REMOVAL/ RESIGNATION
Auditor of a private co holds office according to terms of appointment.
S269(1)

Ceases 30 days from the circulation of financial statements to the

members unless re-appointed S269(1)

Public co, after appointment holds office until conclusion of the

next AGM S273(b)

Early termination by death/ resignation/ removal from office

S267

Resignation by giving notice & effective 21days after date of notice

S281(1)

A notice of resignation must be lodged with the Registrar within 7 days

S282
RESIGNATION @PRIVATE CO
Casual vacancy by resignation, death & removal may be filled by the board
of directors S267(3)(b)

If directors failed, member may pass an ordinary resolution in

writing/ at a meeting S267(4)

Co sends proposed resolution to appoint auditor to members ,

proposed new auditor & outgoing auditor S279 & 298

Outgoing auditor may explain in writing within 14 days from

proposed resolution & request co to circulate S279(4)

The co can circulate before 28 days of the date of proposed

resolution circulated for it to pass if majority member agreed
S279(4), s306(4) & 307
May also appoint the replacement auditor at a meeting by special notice.
Does not require notice to & opportunity to explain by outgoing auditor
S280(2)
RESIGNATION @PUBLIC CO
Outgoing auditor submits resignation notice & statement of the
circumstances leading to his resignation S283(1)

May request co to call for a general meeting / to circulate statement

to explain circumstances leading to his resignation S283(2) & (3)

Directors hold members meeting within 28 days from the date of

the receipt of the notice S283(4)

A copy of the statement shall be given to the ROC & stock

exchange if public listed co. S284(a)&(b)

Casual vacancy by resignation/ death/ removal may be filled by Board

of Directors S271(2)(b)

During the members meeting, the co may appoint the replacement auditor
but only after the BoD exercise power. S283(2) & s271(2)(b)
 REMOVAL
May be removed by ordinary resolution of members at a general meeting
& special notice has been given S276 & s277

May request co to call for a general meeting / to circulate statement

to explain circumstances leading to his resignation S283(2) & (3)

Directors hold members meeting within 28 days from the date of

the receipt of the notice S283(4)

A copy of the statement shall be given to the ROC & stock

exchange if public listed co. S284(a)&(b)

Casual vacancy by resignation/ death/ removal may be filled by Board

of Directors S271(2)(b)

During the members meeting, the co may appoint the replacement auditor
but only after the BoD exercise power. S283(2) & s271(2)(b)
 AUDITORS

RIGHTS POWERS DUTIES

• S266 (4), (5) & (7) Auditors have the right to:
• ACCESS at all reasonable times to ACCOUNTING BOOKS, records, registers of
co, vouchers and other records of the co & its subsidiaries. S266(4)
• REQUIRE from any officer of the co or auditor of the related co / any
subsidiary of information he desires for the carrying out of his duties. S266(5)
• ATTEND any GENERAL MEETING and speak on any matter that concerns him
as an auditor. S266(7)
• RECEIVE any NOTICES or communications to any general meeting which a
member is entitled to receive. S266(7)

• *S266(12): Any officer who refuses or fails to give information or records, or

obstructs or delays an auditor in the performance of his duties will be guilty
of an offence punishable with 3 years imprisonment or RM500,000.00 fine or
both.
• REMUNERATION S274
• If appointed by members, the remuneration shall be fixed by members
by ordinary resolution/ other manner
• If appointed by directors, the remuneration shall be fixed by the
directors. If not, the co will fix.
• If appointed by ROC, the remuneration shall be fixed by ROC/ BoD. If not,
the co will fix.

• INDEMNITY S581
• If removed & act honestly & reasonably may apply to court for relief
• Co is permitted to indemnify an auditor for his costs in defending any
proceedings related to any act in his capacity as auditor & judgment is
given in his favour. S289.
DUTIES OF AUDITORS TO COMPANY
3. TO REPORT
TO 4. TO BE
APPROPRIATE INDEPENDENT
MANAGEMENT

5. TO USE
2. TO CARRY REASONABLE
OUT AUDIT CARE & SKILL

6. TO
1. STATUTORY
DUTIES DUTIES OUTSIDERS &
SHAREHOLDERS
1. STATUTORY DUTIES
S266(1) – Auditor shall REPORT TO THE
MEMBERS on the accounts to be presented in
general meeting and on the company’s
accounting and other related records.

S266(2) – Auditor shall state whether the

account is in his opinion properly drawn up so
as to give A TRUE AND FAIR VIEW on the
matter.

S266(3) – An auditor must FORM AN OPINION

as to whether:
a. he has obtained all information and
explanation.
b. proper accounting and other record is
kept by the company.
c. the returns received from branch office is
adequate.
d. the procedure and method used were
appropriate.
S266(6) – The REPORT shall be attached on the
accounts and shall, if any member so requires,
be READ IN GENERAL MEETING and shall be
OPEN FOR INSPECTION by any member.

S266(8) – If the auditor is SATISFIED that:

a. there has been a breach or non-
observance of the provisions of this Act; and
b. the circumstances are in his opinion the
matter has not been or will not be
adequately dealt with by comment in his
report on the accounts or by bringing the
matter to the notice of the directors of the
company,
He shall REPORT THE MATTER in writing to the
registrar.
• An auditor must carry out an
audit before he can form an
opinion on whether the
company’s accounts provide a
true and fair view of its position.
• An auditor is required to
devise procedures to assist in the
detection of errors or fraud.
 • Carry out an audit
Step 1 • Devise procedures to detect errors/fraud

• Form opinion
Step 2

• True & fair view

Step 3
 Pacific Acceptance Corp Ltd v
Forsyth (1970)
“An auditor pays due regard
to the possibility of fraud or
DUTY TO error by framing and carrying
out his procedures, having in
CARRY OUT mind the possibilities that if a
AUDIT substantial or material error
or fraud exist, he has a
reasonable expectation that
it will be revealed.”
 S266 (8) & (9) CA2016
If an auditor is satisfied :
(a) there is a breach / non-observance of any provisions of
CA2016 - S266(8)
(b) the circumstances that will not adequately dealt in his
report on financial statements / informing the directors
of the co/ holding co directors - S266(8)
(c) serious offence involving fraud / dishonesty committed
against the public co - S266(9)

An auditor shall report in writing to the Registrar.

 report
Not in
adequately serious
breach
dealt in offence writing
report
Re London & General Bank [1895]
If an auditor UNCOVERS FRAUD or SUSPECT the
existence of FRAUD in the course of audit, he is
UNDER A DUTY TO REPORT promptly the matter
to the director or other management rather than
wait until the AGM. Otherwise, he would have
failed to perform his duties.

An auditor will also BREACH HIS DUTY if he had

DETECTED A POSSIBLE IRREGULARITY not
amounting to a suspicion of fraud BUT FAILS TO
INVESTIGATE FURTHER AND REPORT the matter.
WA Chip & Pulp Co Pty Ltd v Arthur Young & Co (1987)
Johnson, the company’s finance and administration
manager, made UNAUTHORIZED DRAWINGS between
1978 and 1980.
The drawings were advances for travel purposes which
exceeded actual claims.
Johnson also used a facility whereby employees could
use the company’s name to claim trade discounts for
personal purchases. By September 1980 there was in
excess of 64,000 dollars.
The company’s auditors became AWARE of Johnson’s
drawings in 1978, but only BROUGHT UP the issue in the
1980 audit.
The court held that the auditors were NEGLIGENT and in
breach of their duty as they failed to take prompt action
over Johnson’s account until the 1980 audit.
 WA Chip & Pulp Co Pty Ltd v Arthur Young & Co (1987)
AWARE of Johnson’s
drawings in 1978

but only BROUGHT UP the

issue in the 1980 audit.
1. UNAUTHORIZED DRAWINGS bt
1978-1980 - advances for travel
purposes which exceeded actual
claims.
2. Used a facility whereby Auditors were NEGLIGENT
employees could use the co’s name & in BREACH OF THEIR
to claim trade discounts for DUTY as they FAILED TO
PERSONAL PURCHASES. TAKE PROMPT ACTION
By Sept 1980 - in excess of $64,000.
over Johnson’s account
until the 1980 audit.
ensure shareholder received

‘TRUE & FAIR VIEW’

• The purpose in requiring an auditor to be independent is to
ensure that the shareholders receive an unbiased opinion of
the ‘true and fair view’ of the company’s position s266(2)(a)
& s248 CA2016.
• Case: Re Transplanters (Holding Co) Ltd [1958]
• Auditors MAY SEEK ASSISTANCE from the company’s
directors, accountants and other employees in carrying out
their functions. But the auditors CANNOT RELY ON them for
information IN FORMING their own INDEPENDENT opinion.
• Case: Dominion Freeholders Ltd v Aird [1966]
• Auditors MUST NOT RELY ON COMPANY OFFICERS for
information in respect of matters upon which they are
required in the course of their duties to reach an
INDEPENDENT CONCLUSION.
• Failure to use reasonable care and skill renders an
auditor liable to the company in damages for
breach of contract and negligence.
• 5.1 Liability in contract
• Case: Pacific Acceptance Corp Ltd v Forsyth [1970]
• Held: When an auditor PROFESSING that he do
POSSESSES the requisite professional SKILLS, 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 that exist.
5.2 Liability in negligence
An auditor who uses less than the required degree of care and skill is liable to
the company for any loss suffered.

Re Thomas Gerrard & Sons Ltd [1968]

The company’s managing director had been MAKING ALTERATIONS to
invoices received from suppliers.
The auditors DID NOT INVESTIGATE the invoices that had come to their
attention but instead relied on the stocktaking procedure set up by the
managing director.
When the company went into liquidation, the liquidator brought action
against the auditors.
The court held that the auditors had FAILED in their duty to exercise
reasonable care and skill. They should have examined the suppliers’
statement and communicated with the suppliers and then inform the
board, but they did not do so.
5.2 Liability in negligence
Re Thomas Gerrard & Sons Ltd [1968]

MAKING DID NOT liquidator brought AUDITORS had

INVESTIGATE action against the FAILED in their
ALTERATIONS
the invoices that auditors duty to exercise
to invoices
had come to reasonable
received from
their attention care and skill.
suppliers
They should have:
but RELIED ON THE - examined the suppliers’
STOCKTAKING statement &
PROCEDURE set up - communicated with the
by the managing suppliers &
director - then inform the board,
- but they DID NOT DO SO.
 2. MEMBERS &
SHAREHOLDERS

1. CO 3. OUTSIDERS

DUTY
OF
CARE
Must prove AUDITOR OWE AUDITOR
DUTY OF CARE in carrying BREACHED the
out audit & making report duty of care

CAUSED
Relationship
OUTSIDER
of proximity
SUFFER LOSS
 2. Existing
relationship of
proximity
between Auditor
& Outsider
3. Reasonable to
1. Loss/ damage impose on the
was foreseeable Auditor a duty of
care

Liable to
outsider who
relied on the
report, if
conditions
fulfilled:
• Royal Bank of Scotland v Bannerman [2005]
• Auditor aware of the relationship between the
audited co & the lending bank.
• The bank would rely on the audited account when
deciding on loans to the said audited co.
• A duty of care may arise.
Hedley Byrne v Heller [1964]
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.
• Shaddock & Associates Pty Ltd v
Parramatta City Council [1981]
• Auditors will only be liable to outsider if
they are aware or should have been aware,
that their report may have been used by a
particular outsider.
Arenson v Cassan Beckman Rutley
An auditor, in his capacity as AN EXPERT, was requested to VALUE
THE SHARES of the company for the purpose of determining a
‘fair value’ to be paid for the shares under contract of sale.
On the basis of the auditor’s valuation, the SHARES WERE SOLD
AT A PRICE FAR BELOW ANOTHER VALUATION later made by the
auditor.
The seller brought an ACTION against the auditor, alleging that
the original valuation had been made NEGLIGENTLY.

The court held that an expert who valued share, knowing that the
valuation was to be used by the buyer and seller in calculating the
price for the shares, was LIABLE to them both if he or she made
the valuation negligently.
 Arenson v Cassan Beckman Rutley

requested to value shares

SHARES
to determine ‘fair value’ WERE SOLD AT
A PRICE FAR
BELOW the 2nd
valuation.
Alleging that the original valuation
had been made NEGLIGENTLY.
An expert who valued share, KNOWING that the
valuation was to be used by the buyer and seller in
calculating the price for the shares, was LIABLE to
them both if he or she made the valuation negligently.
• Limit Auditor’s legal duty of care
• Limited to the audited co & its members &
• NOT any other person for the contents of
the report.

• s266 of the CA2016

 Caparo Industries pIc v Dickman [1990] 2 AC 605
House of Lords
• Caparo Industries purchased shares in Fidelity Plc in reliance of the accounts
which stated that the company had made a pre-tax profit of £1.3M. In fact
Fidelity had made a loss of over £400,000. Caparo brought an action against
the auditors claiming they were negligent in certifying the accounts.
• Held:
• No duty of care was owed. There was not sufficient proximity between Caparo
and the auditors since the auditors were not aware of the existence of Caparo
nor the purpose for which the accounts were being used by them.
• Lord Bridge:
• (The Caparo test)
• “What emerges is that, in addition to the foreseeability of damage, necessary
ingredients in any situation giving rise to a duty of care are that there should
exist between the party owing the duty and the party to whom it is owed a
relationship characterised by the law as one of "proximity" or
"neighbourhood" and that the situation should be one in which the court
considers it fair, just and reasonable that the law should impose a duty of a
given scope upon the one party for the benefit of the other.”
 Caparo Industries pIc v Dickman
[1990] 2 AC 605 House of Lords
purchased shares In fact Fidelity had
in Fidelity Plc in made a loss of over
reliance of the £400,000
accounts which
Caparo brought an
stated that the
action against the
company had made a
auditors claiming
pre-tax profit of
they were negligent
£1.3M. in certifying the
accounts

No duty of care was owed.

There was not sufficient proximity between Caparo and
the auditors since the auditors were not aware of the existence of
Caparo nor the purpose for which the accounts were being used by them.
Caparo Industries pIc v Dickman [1990] 2 AC 605 House of Lords
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