Question

Sturdy Tents Sdn Bhd (‘Sturdy Tents’) is a company which manufactures tents. The company’s issued share capital is 50,000 ordinary shares with a par value of RM1 per share. Lance is one of the shareholders in Sturdy Tents. He is unhappy with the fact that Sturdy Tents engages the services of the same auditor for the past ten years. He thinks it is necessary for the company to appoint a new auditor. Based on the above facts, answer the following questions:

a. Discuss the law on appointment and removal of auditors.

b. Explain the roles of an auditor under the Companies Act 2016. Do you agree with Lance that Sturdy Tents should change its auditor? Why?

c. Explain the rights and privileges afforded by the Companies Act 2016 to an auditor to assist them in carrying out their duties.?

Answer 1

Appointment of an auditor

The directors appoint the first auditor of the company. He or she then holds office until the end of the first meeting of the shareholders at which the accounts are laid before the members. At that meeting the members can re-appoint the auditor, or appoint a different one, to hold office from that date until the end of the next shareholders' meeting at which accounts are laid.

However, private companies can pass an 'elective resolution' not to lay accounts before the members in a general meeting. If this is done, then the auditor has to be re-appointed, or a new one appointed, at another meeting of the company's members that must be held within 28 days of the accounts being sent to the members.

Private companies can also pass an elective resolution dispensing with the need to appoint an auditor every year. If that happens, the auditor already appointed remains in office without further formality until a resolution is passed to re-introduce annual appointment or to remove him or her as auditor.

The process is explained in detail, step by step, with copies of all the meeting minutes and notices in our pack of documents to appoint an auditor.

Removal of an auditor

The members of a company may remove an auditor from office at any time during his or her term of office or decide not to re-appoint him or her for a further term. They must give the company 28 days' notice of their intention to put a resolution to remove the auditor, or to appoint somebody else, to a general meeting. A copy of the notice of the intended resolution must be sent to the auditor, who then has the right to make a written response and require that it be sent to the company's shareholders.

If an auditor ceases for any reason to hold office, he or she must deposit a statement at the company's registered office. The statement should set out any circumstances connected with his ceasing to hold office that he or she considers should be brought to the attention of the members and creditors of the company.

If there are any such circumstances, the company must send a copy of the statement to all the shareholders unless a successful application is made to the court to stop this. If the auditor does not receive notification of an application to the court within 21 days of depositing the statement with the company, he or she must within a further 7 days send a copy of the statement to Companies House for the public record.

If there are no such circumstances, the auditor must deposit a statement with the company to that effect. This statement need not be circulated to the members.

Duties of an auditor

1. Statutory Duties

1. Duty to make report

The primary duty of the company auditor is to make report to the members of the company on the accounts examined by him and on balance sheet and profit and loss account.

2. Duty to enquire

The Companies Act, 2016 specifies six matters, which are required to be looked into by a company auditor.

3. Duty to follow Companies Auditors Report Order(CARO)

4. Other duties under the Companies Act:

1. To sign audit report.

2. To report on prospectus on the accounting part.

2. Contractual Duties

1. An auditor has a duty to see that his appointment is in order.

2. He must perform all the duties under the common law.

3. Duties under Legal Decisions

1. He should perform his duties with skill, care and caution.

2. He should check the stock properly.

3. He should examine the terms of the debentures trust deed.

4. He should correspond in writing with the previous auditor.

5. He should verify the arithmetical accuracy of the balance sheet and also enquire into its real accuracy and fairness.

6. He should satisfy himself about the valuation of assets and make personal inspection of securities of the company.

4. Professional Duties

1. To carry on his duties with due regard to public interest, and not his personal interest.

2. To comply with the rules and regulations of the Institute of Chartered Accountants of the country.

3. To be honest, sincere, technically competent and independent.

I agree with Lance because the auditor of a company will be changed with one year intervals.

Rights of an auditor

1. Right of access to books and accounts

2. Right to call for information and explanation

3. Right to visit the branches

4. Right to receive notices

5. Right to attend general meeting

6. Right to correct any wrong statement

7. Right to sign the audit report

8. Right to take legal and technical advice

9. Right to receive remuneration

10. Right to refuse

11. Right to be indemnified

12. Right to the benefits of Limitation Act