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RECOMMENDED PRACTICE GUIDE

Auditor’s Reports - Companies Act, 1965

COMMENTARY

The requirements of an audit of bodies incorporated under the Companies Act, 1965 (hereby
referred to as the Act) are set out in Part (VI) of the Act and the power and duties of auditors
as to reports on accounts are set out in Section 174 of the Act.

Section 174(l) of the Act requires the auditors to report to the members on the accounts
required to be laid before the company in general meeting. The contents of the auditor’s
report are set out in Section 174(2) of the Act.

Foreign Companies

Foreign companies although not incorporated under the Act are Ref: Section 336A,
required to keep accounting and other records in Malaysia that are Companies Act, 1965
sufficient to explain the transactions and financial position of the
foreign company that relate to its operations in Malaysia. The
records must be audited by a person approved under Section 8 of
the Act.

Auditors

An individual is allowed to undertake audits pursuant to the Ref: Section 8,

Companies Act, 1965 only if he has been granted approval by the Companies Act, 1965
Minister of Finance. An approved company auditor is defined in
Section 4 of the Companies Act, 1965 and provisions for audits
under the name of a firm and a partnership are set out in Sections
9(4) and 9(7) respectively.

As such all reports required to be signed by an auditor pursuant to

the Act must be made by an approved company auditor in
Malaysia.

Reporting Framework

Audits of companies are governed by the following:

(i) Provisions of the Act;

(ii) Conditions laid down by the Minister of Finance in the
issuance of the audit licence;
(iii) Promulgations of the Malaysian Institute of Accountants
such as the Approved Standards on Auditing and the By-
Laws (On Professional Conduct and Ethics); and
(iv) Applicable approved accounting standards issued pursuant to
the Financial Reporting Act, 1997.

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Accounts

The Act defines ‘accounts’ as consisting of profit and loss account, Ref: Section 4,
balance sheet and includes notes or statements required by the Act Companies Act, 1965
(other than auditor's reports or directors' reports) and attached or
intended to be read with profit and loss accounts or balance sheets.

Financial statements, are defined in Malaysian Accounting Ref: MASB 1,

Standards Board (MASB) Standard 1 on ‘Presentation of Financial Paragraph 8
Statements’ as including the following components:

(i) Balance sheet;

(ii) Income statement;
(iii) A statement showing either: -
(a) all changes in equity; or
(b) changes in equity other than those arising from capital
transactions with owners and distribution to owners.
(iv) Cash flow statement; and
(v) Accounting policies and explanatory notes.

These are the same components defined as the term ‘accounts’ in Ref: MASB 1,
the Act. Although the definition in the Act does not include ‘Cash Paragraph 90
Flow Statement’ as a statement required by the Act, the Ninth MASB 5 - Cash Flow
Schedule of the Act requires that a ‘Statement of Changes in Statement
Financial Position’ be annexed to every profit and loss account and
balance sheet.

As both definitions in MASB and the Act refer to the same

components, the reference to accounts and financial statements are
synonymous.

An auditor's report is issued in conjunction with the requirements

of the Act and other legislations, as appropriate, such as the
Housing Developers (Control and Licensing) Act, 1966, Co-
operative Societies Act, 1963, Banking and Financial Institutions
Act, 1989 and the Insurance Act, 1996. Under such circumstances
members should consider whether non-compliance with these
legislations would materially affect the financial statements.

‘Consideration of Laws and Regulations in an Audit of Financial Ref: AI 250

Statements’ requires that the audit should be planned to enable the
auditor to determine the effects of non-compliance (if any), and the
material amounts and disclosures required in the financial
statements. The auditor may be required to disclose this non-
compliance to the relevant authorities. The duty of confidentiality
can be overridden by legislation or the courts of law. However,
consideration must be given to the auditor's responsibility to public
interest. In all such cases, legal advice should be obtained.
In addition, there are occasions when an auditor may be called

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upon to express an opinion on financial statements or certain

elements of a set of financial statements prepared for other
purposes.

This Guide serves as guidance for the preparation of audit reports

pursuant to Section 174 of the Act.

The basic principles and procedures set out shall apply and be
adapted where necessary to cases where an auditor expresses
opinion on certain elements of a set of financial statements
prepared for purposes other than the annual requirements.

Registers refer to those required to be kept under the Act and Ref: Section 11,
exclude other records and journals, which are commonly referred Companies Act, 1965
to as registers.

The New Form of Audit Report

Whilst Section 174(2) of the Act sets down the requirements for
the contents of the auditor's report, it does not set out the
prescribed form.

The most significant changes in the new form are in the

requirement to describe the management and auditor's
responsibilities, the nature of the audit and the work that the
auditor has performed. These clarifications will alleviate users
misconception about the role and responsibility of the auditor, and
the extent of assurance that an audit work provides. The following
are basic elements of the auditor's report set, some of which is
already part of the current requirements for auditor's report: -

(i) Title - Report of the Auditors Ref: AI 700 - The

(ii) Addressee - Members (shareholders) of the Company Auditor's Report on
(iii) Introduction - Role and responsibility of the Directors and Financial Statements
the Auditor.

(a) This identifies the financial statements being audited

including the date of and period covered. Financial
statements are frequently accompanied by
supplementary information and a Chairman's statement
in the Annual Report. These are not specifically
required to be audited or reported upon and the
auditor's report on the financial statements should
indicate this clearly. The usual manner is to identify
the statements included in the auditor's report by
referring to the pages of these financial statements
being reported on. However, members attention is Ref: AI 720 - Other
drawn to the requirements of AI 720 in arriving at their Information in
opinion, which requires that there should be no Documents Containing

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material inconsistencies or material misstatement of Auditing Financial

facts; Statements

(b) It states that the preparation of the financial statements

are the responsibility of the company's directors; and

(c) It states that the responsibility of the auditor is to

express an opinion on the financial statements.

(iv) Scope

It covers all the requirements set out in the approved

standards on auditing issued by MIA. A statement that the
audit was planned and performed to obtain reasonable
assurance about whether the financial statements are free of
material misstatement should also be included.

It should also describe the audit as including: -

(a) Examining, on a test basis, evidence to support the

financial statements amounts and disclosures;

(b) Assessing the accounting principles used in the

preparation of the financial statements;

(c) Assessing the significant estimates made by

management in the preparation of the financial
statements; and

(d) Evaluating the overall financial statements

presentation.

The report should include a statement by the auditor that the

audit provides a reasonable basis for the opinion above.

(v) Reporting

This sets out the reporting responsibility of the auditor and

the requirements pursuant to Section 174(2) of Act (the
Audit Opinion).

(vi) Name(s) and Signature(s) of Signing Auditor(s)

Auditor's signature, name and licence number.

(vii) Name and Address of Auditing Firm

Audit firm's name, number and address should be stated. It is

also the practice for some companies to provide a separate

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listing of the companies auditors and their addresses. Where

the address is shown as an attachment, it need not be
disclosed in the audit report.

(viii) Date of the Report

All reports must be dated and should not be earlier than the Ref: AI 560 -
date the financial statements are approved by the Board of Subsequent Events
Directors and the relevant statutory declarations as required AI 580 - Management
by the Act. Representations

Audit Opinion

Audit reports must be clear and concise. An unqualified report

must not contain any reservation or important explanation, which
may be construed as a qualification, and cast doubts on the
reliability of the audited financial statements and be written in an
affirmative language.

An unqualified opinion is given when the auditor is satisfied in all

material respects with the matters required to be reported upon.

Accounting Requirement

Accounting and other records are required to be kept by the

company pursuant to Section 167(1) of the Act to enable true and
fair accounts to be prepared from time to time and to be kept in
such manner as to enable them to be properly audited.

True and fair is not defined. It is generally accepted that accounts

which are prepared in accordance with generally accepted
accounting principles, which includes the consistent application of
accounting policies, applicable approved accounting standards and
the requirements of the Ninth Schedule and the provisions of the
Act, which provide adequate disclosure of information relevant to
the proper understanding of the financial statements, would give a
true and fair view.

The Companies Act, 1965, amended by the Companies Ref: Section 166A -
(Amendment) Act, 1998 includes a provision to require a company Compliance with
to apply approved accounting standards in the preparation of Approved Accounting
accounts. It also provides that where any conflict or inconsistency Standards
arises between the provisions of an applicable approved
accounting standard and a provision in the Ninth Schedule in their
respective applications to the accounts or consolidated accounts of
a company, the provision of the applicable approved accounting
standards shall prevail.

There are, however, occasions where compliance with an Ref: Section 166A(4),

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applicable approved accounting standard may be misleading or Companies Act, 1965

would not give a true and fair view. Under such circumstances the
directors are not required to comply with the applicable approved
accounting standards.

However, the directors have to:

(i) disclose by way of a notes to the accounts their reason for

not preparing the accounts or consolidated accounts in
accordance with the approved accounting standard; and

(ii) give particulars in the note of the quantified financial effect

in the accounts or consolidated accounts if the relevant
approved accounting standard was complied with.

The Act requires the profit and loss account and balance sheet to Ref: Section 169(1),
be audited before they are laid before the company at its annual (3), (4), Companies
general meeting. Act, 1965

Section 174(1) of the Act requires an auditor to report to the

members on the accounts required to be laid before the company in
general meeting. Accounts include the statement of changes in
financial position and as such, this statement should also be
audited.

Reporting Responsibilities

The reporting responsibility pursuant to Section 174(2) of the Act,

requires the auditor to state the following matter in his report to
members of the company: -

(a) Whether the accounts and, if the company is a holding

company for which consolidated accounts are prepared, the
consolidated accounts are in his opinion properly drawn up: -

(i) so as to give a true and fair view of the matters

required by Section 169 to be dealt with in the
accounts and, if there are consolidated accounts, in the
consolidated accounts;

(ii) in accordance with the provisions of this Act so as to

give a true and fair view of the company's affairs; and

(iii) in accordance with the applicable approved accounting

standards; and

(aa) If in his opinion the accounts, and where applicable the

consolidated accounts, have not been drawn up in
accordance with a particular applicable approved accounting

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standard: -

(i) whether in his opinion the accounts or consolidated

accounts, as the case may be, would, if drawn up in
accordance with that approved accounting standard,
have given a true and fair view of the matters
required by Section 169 to be dealt with in the
accounts or consolidated accounts;

(ii) if in his opinion the accounts or consolidated

accounts, as the case may be, would not, if so drawn
up, have given a true and fair view of those matters;
his reasons for holding that opinion;

(iii) if the directors have given the particulars of the

quantified financial effect under Section 166A(5), his
opinion concerning the particulars; and

(iv) in a case to which neither subparagraph (ii) nor (iii)

applies, particulars of the quantified financial effect
on the accounts or consolidated accounts of the
failure to so draw up the accounts or consolidated
accounts, as the case may be;

(b) whether the accounting and other records and the registers
required by this Act to be kept by the company and, if it is a
holding company, by the subsidiaries other than those of
which he has not acted as auditor have been, in his opinion,
properly kept in accordance with the provisions of this Act.

(c) in the case of consolidated accounts: -

(i) the names of the subsidiaries (if any) of which he has

not acted as auditor;

(ii) whether he has considered the accounts and auditor's

reports of all subsidiaries of which he has not acted
as auditor, being accounts that are included (whether
separately or consolidated with other accounts) in the
consolidated accounts;

(iii) whether he is satisfied that the accounts of the

subsidiaries that are consolidated with other accounts
are in form and content appropriate and proper for the
purposes of the preparation of the consolidated
accounts, and whether he has received satisfactory
information and explanations as required by him for
those purposes; and

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(iv) whether the auditor's report on the accounts of any

subsidiary was made subject to any qualification
(other than a qualification that is not material in
relation to the consolidated accounts), or included
any comment made under subsection (3), and, if so,
particulars of the qualification or comment;

(d) any defect or irregularity in the accounts or consolidated

accounts and any matter not set out in the accounts or
consolidated accounts without regard to which a true and
fair view of the matters dealt with by the accounts or
consolidated accounts would not be obtained; and

(e) if he is not satisfied as to any matter referred to in

paragraph (a), (b), or (c), his reasons for not being so
satisfied.

If the auditor is unable to report affirmatively in respect of (a), (b),

or (c) above, he must say so, giving rise to a qualified report.

In addition the auditor is required by Subsection (3) of Section 174

to form an opinion on the following matters: -

(a) whether he has obtained all the information and

explanations that he required;

(b) whether proper accounting and other records (including

registers) have been kept by the company as required by
this Act;

(c) whether the returns received from branch offices of the

company are adequate; and

(d) whether the procedures and methods used by a holding

company or a subsidiary in arriving at the amount taken
into any consolidated accounts were appropriate to the
circumstances of the consolidation;

and he shall state in his report particulars of any deficiency, failure

or shortcoming in respect of any matter referred to in this
subsection.

This report is to be made on the basis of exception reporting i.e.

the auditor only makes reference to the circumstances if he is not
satisfied with his conclusion.

Both MASB 1 and Paragraph 4 of the Ninth Schedule provide that

the cash flow statement is a component of the financial statements.
As such, pursuant to MASB 5 and Section 166A of the Act, it has

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to be reported accordingly.

(A) Compliance with the provisions of the Act - Section

174 (8)

"If an auditor, in the course of the performance of his duties as

auditor of a company, is satisfied that: -

(a) there has been a breach or non-observance of any of the

provisions of this Act; and

(b) the circumstances are such that in his opinion the matter
has not been or will not be adequately dealt with by
comment in his report on the accounts or consolidated
accounts or by bringing the matter to the notice of the
directors of the company or, if the company is a subsidiary,
of the directors of its holding company,

he shall forthwith report the matter in writing to the Registrar."

Clarification has been obtained from the Registrar of Companies

on the scope of Section 174(8) of the Ac, in particular the term
‘in the course of the performance of his duties as auditor of a
company’.

The Registrar has confirmed that in his opinion this section

applies to all breaches of the Act noted by the auditor in the
course of his audit. Thus, all breaches encountered in an audit,
whether relating to the accounts, accounting records or other
aspects of the Act, will have to be reported to the Registrar if the
auditor feels the alternative actions referred to in Section
174(8)(b) are inadequate to deal with the matter.

This would also include the Directors' Report although it is not

part of the accounts that is reported upon by the auditors.

Therefore, in his judgement on whether to report a breach or non-

observance of provisions of the Act to the Registrar, the auditor
should: -

(a) consider the evidence of a breach or non-observance and be

satisfied that a breach or non-observance has actually
occurred; and

(b) form an opinion on whether in the circumstances of a

particular case the matter has been or will be adequately
dealt with in the manner prescribed in Section 174(8)(b)
other than by reporting to the Registrar.

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The onus of reporting to the Registrar in such circumstances has

no legal limit as regards to the breach or non-observance and the
decision lies entirely with the reporting auditor.

The reporting requirement makes reference to consolidated

accounts but this is not defined in the Act. Group or group
accounts are also not expressly defined in the Act. The Ninth
Schedule to the Act, however, only refers to the holding company
and its subsidiary companies.

On the other hand, MASB defines a group as a parent and all its Ref: MASB 11 -
subsidiaries. It also states that a parent is an enterprise that has one Consolidated
or more subsidiaries. Consolidated financial statements are Financial Statement
financial statements of a group presented as that of a single and Investment in
enterprise. Subsidiaries

The reporting auditor is appointed pursuant to Section 172 of the

Act. The appointment is for the company and not for the group.

Subsidiaries for which the auditor of the holding company has not
acted as auditor, would include those audited by a firm whose
constituent partners are different from those of the firm auditing
the holding company and audit firms which are not registered in
Malaysia pursuant to the Act and the Accountants Act, 1967.

The concept of whether an audit is not material and pervasive or

otherwise does not operate in respect of Section 174(2)(b), as it is
specific in that accounting and other records and their registers are
either kept in accordance with the Act or otherwise. Thus, unless
the records are unavailable for the same reason, the auditor's duties
clearly require either an adverse or an unqualified opinion to be
reported.

A disclaimer of opinion in respect of accounting and other records

is appropriate when the auditor has not had satisfactory access to
those records. This would normally lead to a general disclaimer on
the financial statements.

(B) Exempt Private Companies

Every company is required to file an Annual Return in the

prescribed form as set out in the Eighth Schedule of the Act and to
file with the accounts of the company. The accounts are required to
be laid before the annual general meeting held on the date to which
the return is made up to.

However, an exempt private company may choose not to file the

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accounts with the Registrar. When accounts are not filed, an

Exempt Private Company Certificate confirming its status should
be attached to the Annual Return. This is to be signed by a
director, the company secretary and the auditor.

In addition, the auditors are required pursuant to Section 165A of

the Act to state: -

(a) whether the company has in his opinion kept proper

accounting records and other books during the period
covered by those accounts;

(b) whether the accounts have been audited in accordance with

this Act;

(c) whether the auditor's report on the accounts was made

subject to any qualification, or included any comment made
under Section 174(3), and, if so, particulars of the
qualification or comment; and

(d) whether as at the date to which the profit and loss account
has been made up, the company appeared to have been able
to meet its liabilities as and when they fall due.

(C) Foreign Companies

Section 336 of the Act states that the provisions of the Act apply to
foreign companies operations in Malaysia. The auditor shall be
required to report on these operations pursuant to Section 174 of
the Act.

(D) Financial Institutions

When the accounts or Directors' Report of a financial institution Ref: Section 169(19),
incorporate modifications and exceptions as determined by the Companies Act, 1965
Bank Negara in accordance with the Act, is necessary for the
auditor to state this fact in his report.

The form of the accounts and the auditor's report is set out in GP8
issued by the Bank Negara Malaysia.

(E) Insurance Companies

The auditor's report to members on the accounts of insurance Ref: Section 2(1) of
companies should comply with the requirements of the Act. In Part I
addition, the auditor is required to report in accordance with the
provision to the Fourth Schedule of the Insurance Act, 1996 on the
accounts lodged with the Director-General of Insurance.

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If the accounts presented to members (shareholders) are prepared

in the form prescribed by the Insurance Act, 1996 as provided in
Section 169(18) of the Companies Act 1965, the report of the
auditor should include a statement to this effect.

The form of the accounts and the auditor's report is set out in GP
I5 issued by the Bank Negara Malaysia.

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