topic 2-statutory and regulatory requirement

7/31/2019 Topic 2-Statutory and Regulatory Requirement

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STANDARDS AND PRACTICES

GENERAL STANDARDS(Generally Accepted Auditing Standards)

Auditor should always in their line of work ensure:

Adequate technical training and proficiencyIndependence in mental attitudes to be maintainedDue professional care is to be exercised


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STANDARDS OF FIELD WORK(Generally Accepted Auditing Standards)

1. Work is to be adequately planned and properlysupervised.

2. Sufficient understanding of internal control is to beobtained.

3. Sufficient competent evidential matter is to beobtained to afford a reasonable basis for the opinion.


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STANDARDS AND PRACTICESSTANDARDS OF REPORTING(Generally Accepted Auditing Standards)

1. State whether financial statements are presented inaccordance with standards.

2. Identify circumstances in which principles have notbeen consistently applied.

3. Informative disclosures are adequate unlessotherwise stated in the report.

4. Report should clearly stated the degree of responsibility assumed by auditor.


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STANDARDS AND PRACTICESAuditor Responsibility for Detection of Errors and Fraud

1. Assess the risk of errors and fraud that may cause financialstatements to contain material misstatements.

2. Based on assessment, plan + perform audit to obtainreasonable assurance material misstatements whethercaused by errors and fraud, will be detected.

3. Exercise due care in planning, performing, evaluating resultsof audit procedures, and exercise proper degree of professional skepticism to achieve reasonable assurance thatmaterial misstatements due to errors and fraud will bedetected.


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STANDARDS AND PRACTICESElements of Quality Control

1. Independence, Integrity, Objectivity2. Personnel Management3. Acceptance and Continuance of Clients and

Engagements4. Engagement performance5. Monitoring


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STANDARDS AND PRACTICESApproaches to Auditor Common Law Liability

Ultramares ApproachLiable to client and third party beneficiaries for ordinary negligence

Restatement of Torts ApproachLiable to client and foreseen third parties for ordinary negligence

Rosenblum ApproachLiable to client and all foreseeable third parties for ordinarynegligence

Note:Beside Common Law, cases related to auditors liability may also be found understatutory law, criminal law and also civil law.


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Observation 1

Auditors must have been aware that the financialstatements were to be used for a particular purpose by aknown third party, to be liable to that party for ordinary

negligence.


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STANDARDS AND PRACTICESUltramares Corporation VS Touche (1931)

1. Touche (defendant i.e auditor) failed to discover fictitioustransactions that overstated assets and stockholders equity by$700,000 in the audit of Fred Stern & Co.

2. On receiving the audited financial statements, Ultramares loanedStern large sums of money that Stern was unable to repay becauseit was actually insolvent.

3. Ultramares sued the CPA firm (Touche) for negligence and fraud.

Court found auditors guilty of negligence (should not be liable to anythird party EXCEPT to a primary beneficiary)


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STANDARDS AND PRACTICESCredit Alliance Corp. VS Arthur Andersen & Co (1985)

1. Plaintiffs were major financial service companies engaged in financingpurchase of capital equipment through installment sales or leasingagreement.

2. Plaintiff granted additional credit to L.B. Smith Inc. based on

Andersens unqualified annual audit reports for 3 years ending Feb.1979.3. In 1980, Smith filed for bankruptcy after defaulting several millions of

obligations to plaintiff.4. Plaintiff argued they relied on Smiths statement which overstated

assets, net-worth and financial health of company.5. Charged Andersen with both negligence and fraud because they knew

Smith would utilize the financial statements to gain additional credit.

Court found there were neither a relationship of contractual privitybetween plaintiff and defendant or relationship sufficiently

intimate to be equated with privity. Court dismissed the chargeof fraud.


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Rusch Factors Inc. VS Levin (1986)

1. Plaintiff had asked defendant accountant (Levin) to audit thefinancial statements of a corporation seeking a loan.

2. Certified statements indicated that potential borrower was solventwhen in fact it was insolvent.

3. Rusch Factors sued the auditor for damages resulting from itsreliance on negligence and fraudulent misrepresentations in thefinancial statements.

4. The defendant (Levin) asked for dismissal on the basis of lack of

privity of contract.

Court ruled in favour of the plaintiff (Rusch Factor) because in thiscase, defendant knew his certification was to be used for

potential financiers of the company.


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Observation 3

Open the door to liability for ordinary negligence, tovirtually all third parties who rely on the financial

statements.


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STANDARDS AND PRACTICESRosenblum VS Adler (1983)

1. Plaintiff, Harry and Barry Rosenblum acquired common stock of GiantStores Corporation, publicly traded corporation, in conjunction with saleof their business to Giant.

2. The stocks were subsequently found to be worthless after Giants audited

financial statements were found to be fraudulent.3. Defendant (Adler) was a partner at Touche, Ross & Co. that audited

Giants financial statements. 4. Plaintiff claimed negligence in conduct of audit and negligence was a

proximate cause of their loss.5. Defendant (Adler) argued for dismissal of suit as plaintiff (Rosenblum)

were not in privity with auditor (Adler) and they were not a foreseenparty.Court denied dismissal. Irrespective of whether defendant (Adler) had actual

knowledge of Giants proposed use of audited statements in connection withthe merger, it was reasonably foreseeable that Giant would use statements in

connection with merger.


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STANDARDS AND PRACTICESTenants Corporation VS Max Rothenberg and Co (1971)

1. Plaintiff (Tenant), a corporation owning apartment house, sueddefendant (Rothenberg), a CPA firm for damages resulting from failureof defendant to discover embezzlement by plaintiffs (Tenant Corp)managing agent, Riker. Riker had orally engaged Rothenberg atannual fee of $600.

2. Plaintiff (Tenant) maintained Rothenberg had been engaged to performall accounting + auditing services.

3. Defendant (Rothenberg) claimed he was only engaged to do write-upwork and prepare financial statements and tax returns. As evidence:plaintiff (Tenant) booked the accountants fee as auditing expensesand defendant marked (Rothenberg) each page of financial statementsas unaudited.

The court found CPA firm (Rothenberg) negligence in performance, defendant wasengaged to perform an audit. Regardless audit or write-ups, it was a duty toinform client of known wrong-doings. The worksheets indicated defendant

did perform some audit procedures.


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Tenants Corporation VS Max Rothenberg and Co (1971)

Landmark case for accountants liability when they are associated

with un-audited financial statements.

1. The case demonstrated the importance of engagement letters toclearly establish an understanding with client regarding nature of services to be provided.

2. It also demonstrated the need to follow up on unusual findings evenwhen the CPAs are not performing audits.


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Companys Act 1965

NOTE

For the following notes, please refer to CompanysAct 1965 and related text book for details.


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Companys Act 1965 Section 8

1. Company auditor to be approved by Minister charged with responsibilityfor finance.

2. The Minister charged with responsibility for finance may delegate all orany of his powers under this section to any person or body of personscharged with the responsibility for the registration or control of accountants in Malaysia.

(if dissatisfied, may appeal to Yang Di Pertuan Agong who may in hisdiscretion confirm, reverse or vary the decision)


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Company Auditors.1) A PERSON shall not knowingly consent to be appointed, and shall not

knowingly act, as auditor for any company and shall not prepare, for oron behalf of the company, any report requires by this Act to be preparedby an approved company auditor:

a) If he is not an approved company auditorb) If he is indebted to the company or to a corporation that is deemed to be

related to that company by virtue of section 6 in an amount exceedingRM2500

c)If he isi. An officer of the company

ii. A partner, employer, or employee of an officer of the companyiii. A partner or employee of an employee, of an officer of the companyiv. A shareholder or his spouse is a shareholder of a corporation whose employee

is an officer of the company.


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Company auditors.

d) If he is responsible for or he is the partner, employer or employee of a

person responsible for the keeping of the register of members or registerof holders of debentures of the company

(Penalty: RM30,000)


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Companys Act 1965

Section 9Company Auditors.

6. No company or person shall appoint a person as auditor of a companyUNLESS that last-mentioned person has, prior to the appointment,consented in writing to act as such auditor. No company or personshall appoint a firm as auditor unless firm has, prior to theappointment, consented in writing under the hand of at least onepartner of the firm, to act as auditor.

7. The appointment of firm in the name of the firm as auditors of acompany, shall take effect and operate as an appointment as auditors

of the company, of the persons who are members of that firm at thetime of the appointment.


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Companys Act 1965 Section 166A

Compliance with approved accounting standards(the approved accounting standards shall apply to the accounts of a company

or the consolidated accounts of holding company..)

Section 167Accounts to be kept.

(Every company and the directors and managers thereof shall cause to bekept such accounting and other records ..)

Section 167A

Systems of Internal Control(.the directors of a public company or subsidiary of a public company shall

have in place a system of internal control that will provide reasonableassurance..)


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Appointment and Remuneration of Auditors(Before first AGM, directors or company may appoint person (s) to be auditor,

hold office until the conclusion of first AGM)

Section 172(4)Removal of Auditor

(Company Auditor may be removed from office by resolution of the companyat general meeting of which special notice has been given but not

otherwise)


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Companys Act 1965 Section 172(5)

Removal of AuditorWhere special notice of resolution to remove auditor is received by a company:

a) Send a copy of notice to auditor and to the Registrar; andb)

Auditor may, within 7 days after receipt of notice by him, makerepresentation in writing to the company and request that, prior tomeeting at which the resolution is to be considered, a copy of representations be sent by company to every member of the company towhom notice of meeting is sent.

Section 172(6)

Removal of AuditorCompany shall send copy of representations as so requested and auditor may

require that representations be read out at the meeting


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Companys Act 1965 Section 172(7)

Removal of Auditor

Where auditor is removed from office in pursuant of subsection (4) at generalmeeting of the company:

a) Company may, at meeting, by resolution passed by majority of not lessthan of such members of company as being entitled to vote (in personor proxies) appoint anothe r person nominated at the meeting asauditor; OR

b) The meeting may adjourned to a date not earlier than 20 days, not laterthan 30 days after meeting, and the company may, by ordinaryresolution, appoint another person as auditor, being a person notice of whose nomination as aud itor has (at least 10 days before resumption of adjourned meeting) been received by the company.

Section 172(8)Removal of Auditor

Company shall after removal of auditor from office, give notice in writing toRegistrar and if company does not appoint an auditor, Registrar shallappoint an auditor.


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Companys Act 1965

Section 172(14)An auditor of a company may resign:

a) If he is not the sole auditor of the company; ORb) At general meeting of the company

Section 172(15)An auditor of a company may resign:

If an auditor gives notice in writing to directors that he desires to resign,

directors shall call a general meeting of the company as soon aspracticable for the purpose of appointing an auditor in place of the oneresigned, and on appointment of another, the resignation shall take

effect.


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Auditors Remuneration

If company is served notice sent by or on behalf of At least 5% of total number of members of company ORHolders in aggregate of not less than 5% in nominal value of companys issuedshare capital

requiring all emoluments paid or receivable by auditor (including by partner, employer,employee.of auditor); by or from company or any subsidiary in respect of services

other than auditing services rendered to the company, the company shallforthwith:

c) Prepare or cause to be prepared a statement showing particulars of allemoluments..

d) Forward a copy of statement to all persons entitled to receive notice of generalmeeting

e) Lay statement before company at general meeting

Defaults by company and every director of company in default, guilty of offence leading topenalty of RM 2500.


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Powers and Duties of Auditors to Report on Accounts

Section 174(2)

An auditor shall in his report, state:a) Whether accounts (consolidated accounts where applicable) are in his

opinion properly drawn up:i. So as to give true and fair view of matters required by section 169ii. In accordance with the provisions of this Act so as to give true and

fair view of companys affairs iii. In accordance with applicable approved accounting standards


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Section 174(2)(aa) If in his opinion the accounts (if applicable, consolidated accounts) have

not been drawn up in accordance with particular applicable approvedaccounting standards:

i. Whether if drawn up in accordance with standards, would give true and fairview

ii. If in his opinion, accounts would not, if so drawn up, have given true and fair

view, reasons for holding that opinioniii. If directors have given particulars of quantified financial effect under subsection

166A(5)( ie whether accounts or consolidated accounts are not made outaccording to standards), of failure to so draw up the accounts or consolidatedaccounts.


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Section 174(2)

An auditor shall in his report, state: b) Whether the accounting and other records and registers required by

Act to be kept by company (or by subsidiaries which he has not actedas auditor) have been in his opinion, properly kept in accordance withprovision of Act.

c) In the case of consolidated accounts .(name of subsidiaries,accounts accounted for, whether auditor report of subsidiaries subjectto any qualification etc)


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Section 174(2)

An auditor shall in his report, state:

d) Any defect or irregularity in accounts (or consolidated)

e) If he is not satisfied as to any matter referred to in paragraph a), b), c)

and his reasons for not being satisfied.


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Section 174(3)It is the duty of an auditor to form opinion as to each of the following matters:a) Whether he has obtained all information and explanations that he requiredb) Whether proper accounting and other records have been kept by company as

required by Act.c) Whether returns received from branch offices of the company are adequated) Whether procedures and methods used by holding or subsidiary in arriving at

amount taken into any consolidated accounts were appropriate to circumstances

of consolidation.

(State in report particulars of any deficiency, failure, shortcomings regardingthe above).


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Section 174(4)Auditor has right of access at all reasonable times to accounting and other

records, entitled to require from any officer of company and any auditorof related company such information and explanations as he desires foraud it purpose.

Section 174(5)Rights as above applicable to auditor of holding on consolidated accounts.

Section 174(6)Auditors report attached to, endorsed on accounts or consolidated accountsshall be read at general meeting, open for inspection at any reasonable

time.


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Section 174(8)Auditor in course of performance of duties, if he found breach or non-

observance etc by company, shall forthwith report the matter in writingto the Registrar.

Section 174(8A)Auditor should report when discovered fraud and dishonesty against

company.

Section 174(9)Failure of officer of corporation without lawful excuses to allow auditor access

to records, explanations etc, delay or obstruct auditors performance of his duties or exercise of his power, led to guilty of offence against Act.

Penalty: 2 years imprisonment OR RM30,000 OR Both


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Steps in Accepting Audit Engagement

1. Evaluate integrity of managementCommunicate with predecessor auditorMake inquiries of other third partiesReview previous experience with existing clients (before deciding to continueengagement)

2. Identify special circumstances and unusual risksIdentify intended users of statementsClients legal and financial stability Auditability of entity

3. Assess competence to perform auditIdentify audit teamConsider need for consultation and specialist

4. Evaluate independence5. Determine ability to use due careAssess timing of appointmentConsider the scheduling of field work (interim, year- end, budget, clients personnel)

6. Prepare engagement letter

topic 2-statutory and regulatory requirement

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