CHAPTER 6

LIABILITY OF AUDITORS
FINAL EXAM QUESTION
SESI I:2021/2022
FINAL EXAM QUESTION
SESI II:2021/2022
QUESTION 4
 LEARNING OUTCOME
Students must be able to:
 Discuss the nature of auditors’ liability
 Define the fraud
 Outline the differences between fraud and error

 Provide the explanation on the types of litigation :

 Liability under Common Law
 Liability under Statutory Law

 Provide the discussion on the liability under Common Law

 Provide the explanation on the breach of contract
 Provide the explanation on the negligence
 Provide the explanation on the other cases

 Provide the discussion on the liability under Statutory Law

 Provide the explanation on the statutory law to third party
 Provide the explanation on the criminal liability to third party
 LEARNING OUTCOME
Students must be able to:
 Analyse the limitations of liability
 Discuss the Limited Liability of Partnership (LLP)
 Determine the limited liability agreements

 Determine the role of Audit Oversight Board (AOB)

 Provide the discussion on the nature of Corporate Governance
 Provide the explanation on the Malaysian Code on Corporate Governance

 Determine the auditors’ responsibilities

 Examine the issues related to financial reporting

 Provide the discussion on the whistle-blowing
 Provide the discussion on the competition
 Provide the discussion on the sustainability reporting
NATURE OF AUDITOR’S RESPONSIBILITY
Auditor’s work is heavily relied upon by financial statement users. Thus, it is important that
auditors maintain the credibility of the audit profession.

However, auditors may sometimes fail to exercise sufficient care and skill in carrying out
their audit work. As a result, fraud or material error might not be discovered during the audit
fieldwork. This might lead to legal actions being taken by those who rely on their work.
(Examples : Clients, shareholders, bankers, investors, creditors and government).

Among factors that lead to the increase in litigation against auditors/CPA includes:
 Increased audit complexity caused by computerized systems, new types of transactions and
more complicated accounting standards.
 Pressures to reduce audit time and improve audit efficiency
 Misunderstanding by users that an unqualified opinion is an insurance policy against
misstatements (expectations gap)
 The possibility of the plaintiff to claim 100% of their loss against the auditor, of they were
to win the case
 FRAUD
ISA 240 states that auditors are responsible to obtain reasonable assurance
that the financial statements are free from material misstatements, whether
caused by fraud or error.
An intentional
Definition of misstatement in
Fraud the financial
statement

Fraudulent
financial
reporting
Types of Fraud
Misappropriatio
n of assets
Why Fraud Occurs
 TYPES OF FRAUD : FRAUDULENT FINANCIAL
REPORTING

Examples:
Intentional misstatement : manipulate, falsification or alteration of
accounting records or supporting documents from which the financial
statements are prepared.

Misrepresentation in or intentional omission from, the financial statements

of events, transactions, or other significant information in financial
statements to deceive financial statement users. (conceal the facts)

Intentional misapplication of accounting principles relating to

measurement, recognition, classification, presentation or disclosure.
 TYPES OF FRAUD : MISAPPROPRIATION OF
ASSETS
Examples:
The theft of an entity’s assets
Embezzling cash receipts (diverting them into the private
bank accounts)
Stealing physical or intangible assets (inventory, selling
data)
Causing an entity to pay for goods and services not received
(payment to fictitious vendors)
Using assets for personal use.(Use company’s asset as
collateral for a personal loan)
 ERROR
What is Error?
Error is the mistake made in financial accounting that is not fraudulent in nature.

Examples of error are:

 Errors of Omission-something is left out an accounting statements by mistake; a
transaction may not be recorded or may be recorded in the wrong place, leading
to an omission on an accounting statement which creates a discrepancy.
 Errors of Commission-data that is recorded or calculated inaccurately; an
accountant might transpose numbers, add instead of subtracting, or make a
similar mistake in accounting.
 Error of Principle-the principles of accounting procedure are applied improperly
or negligently; create accounting errors that will result in discrepancies on
financial statements.
 DIFFERENCES BETWEEN FRAUD AND ERROR

Fraud Error
 Intentional misstatements and usually  Unintentional misstatement in, or
concealment (hide) of the facts. omission from an entity’s
 Could be done by a group of accounting record of financial
personnel or individual. statements.
 Difficult to trace the source of
 Done by individual
occurrence because it might be well
 Able to identify the source/caused
concealed.
 2 types of fraud (i) fraud in financial
reporting; (ii) Misappropriation of
assets.
Sources of Information Gathered
to Assess Fraud Risks
Observing Verbal Cues
Observing Non-Verbal Cues
 FACTORS THAT MAKE FRAUD DETECTION COMPLEX
AND DIFFICULT

• Fraud often involves top management who have ability to

override existing controls
• Fraud is always intentional and thereby intended to be
covered up
• Fraud often involves complex transactions that may be
difficult to understand
• Fraud often starts out small and then it increases when it is
not detected, thereby making it less susceptible to discovery
solely by analytical procedures
TECHNIQUES CLIENTS MIGHT APPLY TO COMMIT FRAUD

• Recording fictitious journal entries, particularly close to the end of an

accounting period, to manipulate operating results or achieve other
objectives
• Concealing, or not disclosing facts that could affect the amounts
recorded in the financial statements
• Altering records and terms related to significant and unusual
transactions
• Omitting, advancing or delaying recognition in the financial
statements of events and transactions that have occurred during the
reporting period.
 TYPES OF LITIGATION
Auditors can be
held liable under
2 classes/types of
law:

Common Law Statutory Law

 COMMON LAW

What is Common Law?

It is the court decisions or case law developed over time by judges who issue
legal opinion when deciding a case. The legal principle announced, then
become precedent for judges who deciding the similar cases in future.

The outcome of application of the common law is subjective, inconsistent,

and sometimes depends on the location where the case is held.
 STATUTORY LAW

What is Statutory Law?

Statutory Law is the written law enacted by the legislative arm of the
government which includes federal securities laws and state statutes. It is
laws passed by the Malaysian Government.

Examples of statutory law in Malaysia are:

Companies Act 2016
Banking and Financial Institutions Act 1989 (BAFIA)
Anti-Money Laundering Act 2001 (AMLA)
Securities Commission Act
 STATUTORY LAW

What is Statutory Law?

Statutory Law is the written law enacted by the legislative arm of the
government which includes federal securities laws and state statutes.

Examples of statutory law in Malaysia are:

Companies Act 2016
Banking and Financial Institutions Act 1989 (BAFIA)
Anti-Money Laundering Act 2001 (AMLA)
Securities Commission Act
CAUSES OF LEGAL ACTIONS AGAINST AUDITORS
Causes of legal
actions against
auditors
Common Statutory
Law Law
Liability to Liability to Statutory
clients third parties liability/civil
Breach liability to third
of party
contract Negligence
Criminal liability
Negligence to third party
Fraud
Gross
negligence

Fraud
 LIABILITY TO CLIENTS - UNDER COMMON LAW
Auditors can be sued by clients and third parties. Among causes of legal actions against the auditor under the
common law are:

Causes of legal
actions under
Common Law

Breach of Gross
Negligence Fraud
contract negligence
 LIABILITY TO CLIENTS UNDER COMMON LAW - DUE TO BREACH
OF CONTRACT
Auditors have a contractual relationship with their client. If the auditor fails to
perform that contractual duty, the breach of contract occurred. As a result of the
breach, the parties to the contract can file a suit.

Example of Breach of contract:

 Violating client confidentiality
 Failing to provide the audit report on time
 Failing to discover a material error or employee fraud
 Withdrawing from an audit engagement without justification
 LIABILITY TO CLIENTS UNDER COMMON LAW - DUE TO BREACH
OF CONTRACT
Among the court remedies to a breach of contract includes:
 Requiring specific performance of the contract agreement
 Granting an injunction to prohibit the auditor from doing certain acts, such as
disclosing confidential information
 Providing for recovery of amounts lost as a result of the breach

Auditor may use the following defense to defend themselves against suits by
clients: (refer next slides for explanation)
 Lack of duty
 Nonnegligent performance (due diligence performance)
 Contributory negligence
 Absence of causal connection
 Auditor’s Defenses

Absence of causal
Lack of Duty Nonnegligent Performance Contributory Negligence
relationship
• Audit firm claims that • The audit firm claims that • The audit firm claims that • To succeed in a lawsuit,
there was no implied or the audit was performed the client’s own actions. client must prove that there
expressed contract. properly in accordance with • Auditors claims that the is a close causal connection
• For example, audit firm auditing standards. client’s loss is resulted from between the auditor’s failure
might claim that • So, even if there is an their interference in to follow auditing standards,
misstatement were undiscovered misstatement, preventing the auditor from with the damaged suffered
uncovered because the auditor is not responsible if discovering the cause of the by the client.
firm only did a review the audit was conducted loss. • For example, if client
service, not an audit. properly. • For example, if the auditors alleged auditor failed to
• So, audit firm will use • Auditor is not a guarantor of had notified the client about complete audit on agreed-
a well written the accuracy of financial the deficiency in upon date resulting in the
engagement letter as a statements since audit is management and that could bank refused to renew loan
basis to show that there subject to limitations, not a lead to theft, but to them, auditor may use
is a lack of duty to complete assurance. management did nothing, defense such as the bank did
perform. the auditor would use so because of the weakening
contributory negligence as a financial condition of
defense. client’s company, not
because of late submission
of audited financial
statement.
• If client failed to show a
close causal connection, it is
called absence of causal
connection
 LIABILITY TO CLIENTS UNDER COMMON LAW - DUE TO
NEGLIGENCE

Auditors can be sued by the clients or third party due to negligence. However, to
be held liable for negligence, there are FIVE (5) conditions to be fulfilled:

1. The auditor owes a duty of care to the plaintiff to conform to a required

standard of care.
2. Breach of duty of care to the plaintiff on the part of the auditor.
3. There is a causal relationship or connection between auditor’s negligence and
plaintiff damage.
4. The plaintiff suffered actual loss of damage.
5. It is fair, just and reasonable for the court to impose a liability on the auditor.
 LIABILITY TO CLIENTS UNDER COMMON LAW - DUE TO
NEGLIGENCE

Auditors can be sued by the clients or third party due to negligence. However, to
be held liable for negligence, there are FIVE (5) conditions to be fulfilled:

1. The auditor owes a duty of care to the plaintiff to conform to a required

standard of care. (Refer next slides on what is duty of care)
2. Breach of duty of care to the plaintiff on the part of the auditor.
3. There is a causal relationship or connection between auditor’s negligence and
plaintiff damage.
4. The plaintiff suffered actual loss of damage.
5. It is fair, just and reasonable for the court to impose a liability on the auditor.
 Duty of Care
What is duty of care?
Duty of care is the obligation to exercise a level of care in carrying out the audit
work. It means, the auditor must:
 Applying the most up-to-date accounting and auditing standards
 Adhering to all standards of ethical behaviour
 Being aware of the terms & conditions of the audit appointment as set out in the
engagement letter
 Employing competent staff who are adequately trained and supervised in
carrying out their duties.
Examples of situations in which an Examples of situations in which an
auditor may be held as negligent auditor may not be held as
negligent

Accepting a certificate despite Accepting the certificate of a

suspicious circumstances responsible official where there are no
suspicious circumstances
Failure to check details in a certificate Conforming to accepted audit
if there are adequate records to do so practices
Relying on unsupported and Accounting standards have been
undocumented representations by complied with
management
 LIABILITY TO THIRD PARTIES - UNDER COMMON
LAW

 In addition to being sued by the clients, auditors may be liable to third parties, under
common law.

 Third parties includes actual or potential stockholders, Vendors, Bankers, Creditors,

Employees, and Customers.

 Auditors may be liable to third parties if they incurred loss due to their reliance on the
misleading financial statements.

 For example, a bank unable to collect a major loan from an insolvent company. The bank
then claims that they rely on the misleading audited financial statements when approving
the loan and that auditor should be held responsible because it failed to perform the audit
with due care.
 LIABILITY TO THIRD PARTIES - UNDER COMMON
LAW

 Under common law, auditor can be sued by third parties for negligence. However, that third
parties must prove that the auditor’s duty of care is extended to them.
 The courts have ruled that auditors can be held liable by clients and third party who are
reasonably expected to rely on audited financial statements. However, the question is:
 whether the auditor knew about that third party?
 Whether that third party is sufficiently proximate to create a duty of care?

3 groups of third parties(users of financial statements) are:

Identified users Foreseen users Foreseeable users

• Specific individual • Not individually • Belong to a general
users who the auditors known, but belong to a class of users whose its
knows will use the specific group of users members, may or may
financial statements to whom the auditor not, use the audited
make a specific knows will use that financial statements.
decision. audited financial
statements.
LIABILITY TO THIRD PARTIES - UNDER COMMON
LAW

Auditor may use the following defense to defend themselves

against suits by third parties: (refer to previous slides for
explanation)

Lack of duty - because no privity of contract

Nonnegligent performance (due diligence performance)
Absence of causal connection
 LIABILITY UNDER STATUTORY LAW
Auditors can be sued by clients and third parties under statutory law. In Malaysia,
legal actions may be brought against auditors if the auditor violates statutory law
such as Companies Act 2016, Securities Commission Act 1993 and BAFIA 1989.
These statutory laws imposed legal reporting responsibilities on the auditor. If the
auditor violates/do not comply these specific statutory duties, auditor may be sued.

Liability under
Statutory Law

Statutory Criminal
Liability to Liability to
Third Party Third Party
 STATUTORY LIABILITY TO THIRD PARTY - UNDER
STATUTORY LAW
 Investors may sue auditors under the common law, statutory law, or both.
 Under statutory law, legal actions may be brought against auditor if auditors violate/not comply to any of
these FOUR (4) statutes.
 The sources of liability usually come from the legal reporting responsibilities imposed on the auditors
under these statutes.

Securities Commission Act

Companies Act 2016 1993
Sources of
liability to
auditors under
Statutory Law
Banking and Financial Securities Industry Act
Institution Act 1989 1993
(BAFIA)
 STATUTORY LIABILITY TO THIRD PARTY - UNDER
STATUTORY LAW
Responsibilities of auditor under Companies Act 2016
Section 167 of the Companies Act 1967 provides for civil liability for misstatement in prospectus.

Auditors are the one who authorize and cause the issuance of prospectus. If a person purchase shares or
debentures on the faith of the issued prospectus, and later he/she suffered loss due to the untrue statement,
(misstatement) or willful non-disclosure of material matters by the auditors, auditors are liable to pay
compensation to that person.

However, auditors are not liable if auditors can prove that:

 They have withdrawn their consent before the prospectus was lodged with the Securities Commission.
 The prospectus was issued without their knowledge or consent, or they have been given public notice after
they became aware of the issue.
 They have withdrawn their consent before the allotment or sale of shares, after becoming aware of the
untrue statement, and have given public notice of the withdrawal.
 They were competent in making the statement and have reasonable grounds to believe that the statement is
true.
 CRIMINAL LIABILITY TO THIRD PARTY - UNDER
STATUTORY LAW
 Auditors can also be subject to criminal proceedings under statutory law.
 Example of criminal liabilities are failure to report non-compliance (Section 266(13) of the Companies Act
2016 ) and insider trading.

 If the auditors are found guilty it will result in the auditors being given large fines and imprisonment.
 However, in Malaysia, criminal action against auditors are considered rare.
 SUMMARY OF MAJOR SOURCES OF AUDITORS’ LEGAL
LIABILITY
SOURCES OF LIABILITY EXAMPLE OF POTENTIAL CLAIMS
1. LIABILITY TO CLIENTS - UNDER COMMON Client sues the auditor because auditor failed to
LAWS discover a material fraud during the audit.
2. LIABILITY TO THIRD PARTIES - UNDER Bank sues the auditor because auditor failed to
COMMON LAWS discover the borrower’s financial statements (audit
client’s financial statements) are materially misstated.
3. CIVIL LIABILITY TO THIRD PARTIES - Combined group of stockholders sues auditor because
UNDER STATUTORY LAWS the auditor failed to discover material misstatement in
financial statements.
4. CRIMINAL LIABILITY TO THIRD PARTIES - Federal government prosecutes auditor for knowingly
UNDER STATUTORY LAWS issued an incorrect audit report.
 LIMITATIONS OF LIABILITY
Auditor actually can minimize/reduce their potential legal liability by applying these methods:

At Individual level (individual auditor/CPA-certified public accountants)

 Deal only with clients possessing integrity

 Auditor should evaluate the integrity of clients and should dissociate itself from clients who lacks of integrity.
 Auditors need to have procedures to evaluate the integrity of clients

 Maintain independence
 The auditor must maintain an attitude of healthy professional skepticism.
 Independence requires auditor to separate themselves from the client’s interest
 The auditor should not tolerate the client’s pressure

 Understand the client’s business

 Auditor must understand the client operations to enable them to cover the misstatements.
 Auditor must equipped themselves with the knowledge of the client’s industry practices
 Auditor must be well versed with the client’s business operations to help them to uncover misstatements

 Perform quality audit

Auditor must obtain sufficient appropriate audit evidence to enable them to detect misstatements and reduce likelihood of lawsuit.

 Document the audit work properly

Auditor must practice good audit documentation because quality audit documentation will act as a defend to an auditor in court. Example of documents that must be documented properly are engagement letter and a
representation letter.

 Exercise professional skepticism

 Auditor need to exercise professional skepticism.
 This is to make them alert to potential misstatement so they are able recognize the misstatement/problem when they exist.
 LIMITATIONS OF LIABILITY
Auditor actually can minimize/reduce their potential legal liability by applying these methods:
At Profession level

 Standard and rule setting

The standard setter like MIA,MICPA and AOB must constantly set the standards and revise them to meet the changing needs
of auditing. For example, they must issue a standards on the auditor’s responsibility to detect fraud to address users’ needs.
 Oppose lawsuits

Audit firm must continue to oppose unwarranted lawsuits even if, in the short run, the costs of winning are greater than the
costs of settling.
 Educate users about the limits of auditing

The profession, leaders of audit firms and educators should educate the readers of financial statement that the auditors do not
guarantee the accuracy of the financial records of future prosperity of an audited company. Perfection are simply not
achievable.
 Sanction members for improper conduct and performance

A profession must police its own membership. For example, MIA have made progress in dealing with the problems of
inadequate auditor performance, but more rigorous review of alleged failures is still needed.
 Lobby for changes in law

Profession must lobby for changes in law to allow an audit firm to practice as limited liability organizations that provide
some protection from litigation.
 LIMITED LIABILITY PARTNERSHIPS (LLP)
Auditors can limit their liability by incorporating as a limited liability partnership (LLP).

LLP is an alternative corporate business vehicle that gives the benefits of limited liability, but allows its
members the flexibility of organizing their internal structure as a traditional partnership.

As a separate legal entity, the LLP itself will be liable to the full extent of its assets. The liability of the
members however will be limited to the investment made in the LLP (the same as for the shareholders in a
company).

The personal assets of each member will be protected. However, this does not imply that the personal assets of
the negligent partner will be protected, as that partner will be separately sued for negligence.

Unlike partnerships, LLPs are required to file annual financial statement including disclosures, very similar to
ordinary limited companies.
 LIMITED LIABILITY AGREEMENTS
Auditors can also limit their liability by agreeing a limitation of liability with shareholders.

In some jurisdictions such as in the UK, companies are permitted to limit the liability of their auditors by
agreement/contract under Companies Act 2006, provided that shareholder’s approval is obtained.

In order to be valid, the agreement/contract must:

 Be fair and reasonable in circumstances (a court can override it if necessary and limit the liability)
 Be for the current year only
 Be approved by a resolution of the entity’s shareholders
 ROLE OF AUDIT OVERSIGHT BOARD (AOB)/LEMBAGA
PEMANTAUAN AUDIT
What is AOB?
AOB was established under the Securities Commission Act 1993 to promote and develop an effective audit
oversight framework and to promote confidence in the quality and reliability of audited financial statements in
Malaysia.

The principle role of AOB is to assist Securities Commission Malaysia (SC) in discharging its audit oversight
functions on public-listed companies.

Another role of AOB are:

 Implementing policies & programmes in ensuring an effective audit oversight system in Malaysia.
 Directing MIA to establish or adopt the auditing and ethical standards to be applied by registered auditors.
 Conducting inspections and monitoring programmes on registered auditors to assess the degree of
compliance of auditing and ethical standards.
 Conducting inquiries and imposing appropriate sanctions against registered auditors who fail to comply
with auditing and ethical standards.
 Cooperating and liaising with relevant authorities and relevant oversight bodies in Malaysia and
internationally.
WHO ARE THE MEMBERS OF AUDIT OVERSIGHT BOARD (AOB)??
 CORPORATE GOVERNANCE (CG)

Corporate Governance is the process and structure used, to

direct and manage the business and affairs of the
company towards enhancing business prosperity and
corporate accountability with the ultimate objective of
realizing long-term shareholder value, whilst taking into
account, the interest of other stakeholders.
 MALAYSIAN CODE ON CORPORATE GOVERNANCE
(MCCG)
 To ensure that public-listed companies practice a good corporate governance, the Securities
Commission issued Malaysian Code on Corporate Governance (MCCG).
 MCCG comprises the principles and best practices for good governance.
 All public-listed companies in Malaysia must adhere to MCCG.
 The latest revised MCCG is as at 28 April 2021.
 BOARD OF DIRECTORS (BOD)
COMPOSITION
To strengthen the independence of BOD:
 BOD should include a balance of executive and non executive directors,(including independent
non-executives) but must comprise a majority of independent directors.
 Serving period of BOD must not exceed 9 years unless approval of retention is given.
 Retention of independent director above 12 years require two tier shareholders’ voting process.

BOD
BOD
Executive Non –Executive
directors : directors :
-CEO -independent
- CFO - shareholder represent
 3
1
Having a well-balanced board of
directors.

Establishing a board with clear

responsibilities and differentiating
their role of directing/governance
from management (job of Key aspects
executives).
of CG
4
2 Ensuring transparency of the
board on the manner in which
they direct and control the
Establishing checks and balances in the
companies.
governance structure with no one having
unfettered power.
 THE FRAMEWORK
FOR NEEDS OF GOOD GOVERNANCE

1 3
GOOD BOARD PRACTICES
• BOD clearly defined roles and authorities.
• Board is well structured.
TRANSPARENT DISCLOSURE

• Financial information disclosed.

• Non-financial information disclosed.
4
• Create appropriate composition and mix of
• Financial prepared according to IFRS.
WELL-DEFINED SHAREHOLDER
skills.
• Minority shareholders rights formalized.
• Planning appropriate Board procedures.
• Well-organized shareholder meeting conducted.
• Directors remuneration in line with best practice.
• Policy on related party transactions.

5
• Board self-evaluation and training conducted.

2 BOARD COMMITMENT
• Board discusses CG issues and has created a CG committee.
CONTROL ENVIRONMENT • CG improvement plan has been created.
• Internal control procedures. • Appropriate resources are committed to CG initiatives.
• Risk management framework present. • Policies and procedures have been formalized and distributed to
• Disaster recovery system in place. relevant staff.
• Independent external auditor conducts audits.
• Independent audit committee establish.
 PURPOSE OF
CORPORATE GOVERNANCE PRACTICE
1. 2.
To ensure To safeguard the 3.
transparency which interest of all To ensure all
eventually ensures shareholders, either shareholders fully
strong and balanced majority or minority exercise their
economic shareholders. rights.
development

4. 5.
To ensure that the To ensure
organization fully trustworthy, moral
recognize the and ethical
shareholders’ environment.
rights.
 BENEFITS OF CORPORATE GOVERNANCE
Helps in brand Ensures organization
7 formation and
development
8 is managed in a
manner that fits the
best interest of all
Provide proper
inducement to owners
and managers to
Maintains investors’ achieve objectives Minimizes wastages,
confidence, as a that are in interest of corruption, risks and
result, company can the shareholders and mismanagement
raise capital the organization
efficiently and
6
effectively
4
Ensures corporate
success and economic
2 Lowers the capital
Give a positive impact
on the share price
cost
growth

3 5
1
 ELEMENTS OF CORPORATE GOVERNANCE

1 3
4
REGULATORY
ACCOUNTABILITY • FRAMEWORK
Encompasses rules as well as the framework of
• Obligation of an individual or organization to relationship and process designed to ensure that
account for its activities, accept responsibility for company managers and directors act in the interest
them and to disclose the results in a transparent of the company and ultimately shareholders ADMINISTRATIVE STRUCTURES
manner. • The framework of rules, relationships, systems and • Structures of CG determines the efficiency and
• Directors should be accountable to shareholders processes within and by which authority is exercised accuracy of the flow of information through and
and management accountable to directors. and controlled in corporation. from the corporation.
• Directors must be accessible to shareholders inquiry
• Integrity of a company’s structure of CG indicates
concerning their key decisions affecting the
the company’s probability of success or failure in
company’s strategic direction.

5
the long term.
• Healthy structure allows the shareholders access to

2 BUSINESS ETHICS AND SOCIAL

accurate and relevant information, ultimately
promoting innovation and transparency.

TRANPARENCY RESPONSIBILITY
• Any information about a company –financial and • Should respond to social issues and place high priorities on
non-financial should be easily made available and ethical standards.
understood by the public. • Should non-discriminatory, non-exploitive and responsible with
• Ensure timely, accurate disclosure on all material
regard to environmental and human rights issues.
matters, including the financial situations, • May result in improved productivity and corporate reputation.
performance, ownership and corporate • May improve company practices and promote social good.
governance.
 AUDIT COMMITTEE

Audit Committee is a a sub-committee in the

governing body that will make arrangement for
internal audit and facilitate the completion of
external audit.
Audit Committee is an independent body
answerable directly to the Board of Governance
and responsible for verifying that the operations
of the company have been conducted and its
books kept in a proper manner.
FUNCTIONS AUDIT COMMITTEE

To appraise and evaluate all

1 functions and activities held by
the company-internal auditor

Assuring the credibility of an

organization that is by overviewing
2 the system of internal control and
the financial reporting process on
behalf of BOD

Reviews issues of accounting policy

and presentation of external
financial reporting, monitors the
3 work of the internal function and
ensures that an objective and
professional relationship is
maintained with the external and
internal audit.
STRUCTURE OF AUDIT
COMMITTEE Audit Committee must be
composed of not fewer than
3 non executive directors.
01
A majority of audit
02 committee must be
independent directors.

Structure of The chairman should be an

Audit 03 independent non-executive
director.
Committee
At least one member of the audit committee:
i. Member of the MIA
04 ii. If not member of MIA, must at least
have 3 years working experience
iii. Passed examination specified in Part 1
of the Schedule of Accountant Act 1967
iv. Must be member of one the
Associations of Accountant specified in
Have written terms of reference
05 (TOR) which deal clearly with its Part 11 of 1st Schedule of Accountant
authority and duties Act 1967.
DUTIES OF AUDIT COMMITTEE

Consider the appointment of the

1 external auditor, the audit fee and any
questions of resignation or dismissal.

Discuss with the external auditor, the

nature and scope of audit, and ensure
2 coordination where more than one
audit firm is involved.

Review quarterly and year-end financial

statements, focusing on changes in
3 accounting policies and practices,
significant adjustments arising from the
audit, going concern and compliance with
accounting standards and other legal
requirements.
 ROLES OF AUDIT External auditors
COMMITTEE may discuss with
audit committee if the
auditor are worried
May launch special about the f/s, could
investigation from time not find information
to time (e.g.: if a fraud in any other way, feel
had been discovered, obstructed(audit
the audit committee Liaison with external committee may
may ask for a report on auditor-audit committee investigate on the
how it happened and sets the scope for the auditor’s behalf).
how to prevent it in the external audit.
future). Discuss problem and
6
4 reservation arising
Review the work of
internal audit
2 Review the system of
from the interim and
final audit.
internal control

3 5
1
 ROLES OF AUDIT
COMMITTEE

Review the adequacy of Review, approve or Consider major

the scope, function and accept any appraisal, findings of internal
resources of the appointment, or investigations and
internal audit function, resignation of senior management’s
and that it has the staff members of the response.
necessary authority to internal audit function.
Review the external
auditor’s
carry its work.
10
Consider any related
party transactions
12
management letter
and management’s
8 that may arise within
the company or
response. group.
11 13
7 9 Consider other topics
as defined by the
Review the internal audit program and results of board.
internal audit process and ensure appropriate actions
are taken on the recommendations of internal audit
function.
 Improving the quality
Strengthening the role
of the accounting and
of non-executive
auditing functions.
directors.

Strengthening the
objectivity and ADVANTAGES
Better monitoring of
credibility of financial OF AN AUDIT compliance with
reporting. COMMITTEE standards, laws and
regulations.

Strengthening the
independence of the Improve communication
internal audit between directors,
functions. auditors and
management.
 Difficulty in sourcing
May split the board the right candidate for
the position of non-
executive directors.

Create conflicts within DRAWBACKS

company. Take up too much time
OF AN AUDIT
and cost.
COMMITTEE

Invade/intrude on May be powerless if they

management’s could not enforce
responsibility. recommendations or
report to the shareholders
effectively.
 AUDITORS’ RESPONSIBILITY RELATING TO FRAUD
ISA 240 states that the primary responsibility for the prevention and detection of fraud rests with those charged
with the governance (Board of Directors) and also the management.

Hence, it is important that those charged with the governance (Board of Directors) and also the management to
place a strong emphasis on fraud prevention (to reduce opportunities for fraud to take place). This involves a
commitment to create a culture of honesty and ethical behavior.

Under ISA 240, an auditor’s responsibility is:

To obtain reasonable assurance that the financial statement taken as a whole are free from material
misstatement, whether caused by fraud or error.

Since an audit is subject to inherent limitation, there is the risk that some material misstatement may not be
detected, even though the audit is properly planned and performed in accordance with the ISAs.

Therefore, the auditor’s objectives are:

 To identify and assess risks of material misstatement of the financial statement due to fraud.
 To obtain sufficient appropriate audit evidence through designing and implementing appropriate responses.
 To respond appropriately to fraud or suspected fraud identified during the audit.
DISCUSSION ON WHISTLE BLOWING
DISCUSSION ON COMPETITION
DISCUSSION ON SUSTAINABILITY REPORT