Question

Diyasa is preparing for its flotation on the Bursa Malaysia and, at present, is concentrating on audit procedures. It needs to establish an audit committee, and also address some issues with regard to its external auditors. The current auditors, Sylo and Partners, are willing to continue their appointment but concerns have been raised by the board in respect of Sylo and Partner’s independence, due to the amount of non-audit work they have carried out for Diyasa in the past. The Chairman of Diyasa is of the opinion that new auditors should be appointed and that the appointment should be put out to tender. The CEO disagrees and would like Sylo and Partners to remain, in order to provide continuity. The board has requested that you to prepare a paper for its consideration. Required Prepare a paper for the board of Diyasa in which you:

(a) Explain the requirements for the composition of an audit committee, and its role and responsibilities, as required by the Malaysia Corporate Governance Code.

(b) Advice how Diyasa should deal with the issues raised in respect of the current auditors

Answer 1

As per Malaysia Corporate Governance Code

Composition of audit committee:

- Audit committee needs to consis of all independent directors

- Should possess a wide range of skills so as to effectively address issues arising in different domains

- Chairman of the audit committee should not be the Chairman of the Board

Role and responsibilities of the audit committee

The key roles and responsibilities of Audit Committee are to establish policies and procedures that consider, among others;

- The competence, audit quality and resource capacity of the external auditor in relation to the audit

- The nature and extent of non audit services provided by the statutory auditors

- Obtaining written assurance from the auditors that they have been truly independent throughout the conduct of audit engagement in accordance with the professional and regulatory requirements

Answer to Part B

Approach by Diyasa to address the issue

- Diyasa first needs to formulate an Audit Committee to deal with matters related to auditors

- Considering that the Board has raised issues regarding the quantum of Non Audit Services, the contention of the Chairman appears to be correct. The CEO, in a way, fall in the category of audited party and therefore, may not always be independent of the auditors.

- Therefore, for an objective evaluation of the auditors, the point of view of the Chairman and the Board seems to be more appropriate and it is advisable that the Board puts floats a tender for appointment of a new auditors.

- Further, the audit committee also needs to outline a framework for audit, as mentioned above in their roles and responsibilities.