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A. Audit Exemption Framework

The Companies Commission of Malaysia (SSM) has issued the “Practice Directive (PD)10/2024 Qualifying Criteria for Audit Exemption for Certain Private Companies in Malaysia” which introduced revised qualifying criteria as follows:

  • Simplified eligibility: To replace the previous criteria (i.e. dormant company, zero revenue company and threshold-qualified companies) with qualifying criteria based on turnover, assets and employee thresholds. Under these new criteria, companies are required to meet at least two of the three specified criteria for the current and immediate past two financial years to qualify for audit exemption.
  • Increased thresholds under a phased approach: The qualifying thresholds, not exceeding the prescribed limits for turnover, assets, and number of employees, have been progressively increased over three phases, as set out below:
Year 2025 (Phase 1) 2026 (Phase 2) 2027 (Phase 3)
Financial period Commencing on or after 1 Jan until 31 Dec 2025 Commencing on or after1 Jan until 31 Dec 2026 Commencing on or after 1 Jan 2027
Financial statement submission year Beginning from 1 January 2026 Beginning from 1 January 2027 Beginning from 1 January 2028
Thresholds (not exceeding):
Turnover (RM) <1 million <2 million <3 million
Assets (RM) <1 million <2 million <3 million
No. of employees <10 <20 <30

The turnover, assets and number of employees for the immediate past two (2) financial years must not exceed the thresholds specified above for the respective corresponding phase.

Audit exemption will not be applicable to:

  1. an exempt private company which has opted to lodge a certificate relating to its status as an exempt private company;
  2. a public company including a listed company;
  3. a private company that is a subsidiary of a public company; and
  4. a foreign company.

Pursuant to Paragraph 14 of PD 10/2024, a company that is eligible for audit exemption shall be required to audit its accounts if it receives a notice in writing requiring the company to audit its accounts during a financial year but not later than one month before the end of that financial year from:

  1. any member or members eligible to vote and holding in aggregate of not less than 5% of the total number of issued shares of the company or any class of those shares;
  2. not less than 5% of the total number of members eligible to vote in of the company; or
  3. the Registrar who directs the company to have its accounts audited.

In accordance with PD 10/2024, the number of employees is based on the number of full-time employees employed by the company at the end of each relevant financial year.

Full-time employees include local, foreign, contract workers and workers undergoing probationary period but excluding:

  1. a director who is also working as a full-time employee;
  2. a shareholder who is also working as a full-time employee; or
  3. family members or friends who are unpaid or receiving irregular wages while working in the company.

The SSM FAQs further clarify that, for the purposes of PD 10/2024, full-time employees refer to paid workers who work not less than 6 hours per day for at least 20 days in a month or work for at least 120 hours in a month.

There is no explicit statutory requirement under the CA 2016 for an auditor to formally resign when the audit client opts to be exempted from audit. Under normal circumstances, an auditor of a private company shall hold office in accordance with the terms of his appointment and ceases to hold office 30 days from the circulation of the financial statements unless he is re-appointed (Section 269 of CA 2016).

If the auditor is re-appointed at the last AGM and subsequently the company opted for audit exemption, it is recommended that the auditor formally resign through a letter of resignation to the company. This will help to provide clarity, as it creates a clear trail and formalises the end of the engagement.

The audit exemption for a subsidiary is a legal relief for that entity alone. It does not relieve the group auditor from the requirements under ISA 600 “Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors)”.

The group auditor must determine the entities/subsidiaries at which audit work will be performed in the context of the group audit. There is no specific requirement for the subsidiary to have a separate audit report if it meets the audit exemption criteria.

If sufficient appropriate audit evidence cannot be obtained regarding a subsidiary which is assessed to be a significant component of a group, the audit opinion on the consolidated financial statements may be modified.

Where a holding company qualifies for audit exemption, it is not required to have its company-level financial statements and its consolidated group financial statements audited.

Under the applicable financial reporting standards (MFRS or MPERS), a holding company may still be required to prepare consolidated group financial statements if it has subsidiaries, regardless of its eligibility for audit exemption. As a result, even though these consolidated group financial statements are not required to be audited, they are still required to be prepared for submission to SSM as part of the statutory filing.

To determine eligibility for audit exemption under PD 10/2024, the criteria are applied to each company’s standalone financial statements. Therefore, both a private holding company and its private subsidiaries may still qualify for audit exemption, provided each entity individually meet the audit exemption criteria, even if the consolidated financial statements of the group do not meet the criteria.

Similarly, even if the consolidated financial statements of a private holding company and its private subsidiaries do not meet the criteria under PD 10/2024, the private holding company or private subsidiaries may still qualify for audit exemption, provided their standalone financial statements satisfy the relevant criteria.

Audit exemption for a subsidiary company incorporated in Malaysia is determined independently, based on the subsidiary’s own qualifying thresholds for turnover, assets, and number of employees under PD10/2024. Its eligibility is not affected by the holding company’s EPC status or by foreign ownership of its shares.

 

There is no specific requirement to audit the financial statements of all three years.

However, when a new auditor is appointed, International Standard on Auditing 510, Initial Audit Engagements-Opening Balances requires the auditor to obtain sufficient appropriate evidence that the prior period’s closing balances, which become the current period’s opening balances, do not contain material misstatements.

In situations where prior years are unaudited, auditors should refer to ISA 710, Comparative Information—Corresponding Figures and Comparative Financial Statements for further guidance. In particular, paragraphs 14 and 19 provide that if the prior period financial statements were not audited, the auditor shall state in an Other Matter paragraph in the auditor’s report that the corresponding figures or comparative figures are unaudited. Such a statement does not, however, relieve the auditor of the requirement to obtain sufficient appropriate audit evidence that the opening balances do not contain misstatements that materially affect the current period’s financial statements.

If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor is required by ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report to express a qualified opinion or disclaim an opinion on the financial statements, as appropriate, in accordance with ISA 705 (Revised).

Where a company has been under audit exemption and has no existing auditor in office, the incoming auditor is not required to seek professional clearance. Professional clearance is only required when there is a change in professional appointment, for example, when an existing auditor is being replaced.

If the company has never engaged an auditor, such as a company that qualified for audit exemption with no prior audit history, professional clearance not required as there is no previous auditor for consultation.

Where a company qualifies for and opts for audit exemption, the annual return submitted to the SSM should not indicate the name or details of an auditor.

B. Voluntary Audit and Unaudited Financial Statements

Yes, companies may voluntarily appoint auditors even if they qualify for audit exemption for statutory filing purposes. This is often done to enhance credibility with investors, lenders and regulators, comply with grant or loan application requirements, or strengthen its internal governance and control frameworks.

The acceptance of unaudited financial statements by banks and government agencies depends on their respective internal policies and risk assessment frameworks. Generally, audited financial statements are preferred due to the assurance given by an independent party based on the work performed on the financial statements. While some institutions may accept unaudited financial statements, this may be conditional upon meeting additional requirements, such as supporting documentation or provision of collateral.

Unless specifically required, government agencies such as the Inland Revenue Board of Malaysia (LHDN), may accept unaudited financial statements if the company qualifies for audit exemption under the CA 2016.

 

C. Compilation Engagement

The practitioner must be a professional accountant in public practice within a firm that complies with the International Standard on Quality Management (ISQM). Being merely a qualified accountant is not sufficient; the individual and the firm must operate within the required professional practice and quality management framework, as per International Standard on Related Services (ISRS) 4410 Compilation Engagements.

Compilation engagements are governed by the International Standard on Related Services (ISRS) 4410 (Revised) Compilation Engagements. This standard sets out the practitioner’s responsibilities when assisting management in the preparation and presentation of historical financial information without providing any form of assurance, and in issuing a compilation report in accordance with ISRS 4410.

ISRS 4410 applies primarily to the compilation of historical financial information, but it may also be applied with appropriate adaptation to the compilation of other financial information or non-financial information. When a practitioner is asked to assist management in preparing and presenting financial information, consideration should be given to whether the engagement should be performed under ISRS 4410. Indicators that ISRS 4410 may be appropriate include situations where:

  • The financial information is required under law or regulation, or must be publicly filed;
  • External parties may associate the practitioner with the information, creating a risk that the level of involvement may be misunderstood, for example:
    • if the information will be used by parties other than management or those charged with governance, or may reach unintended users; or
    • if the practitioner’s name is associated with the financial information.

For more detailed guidance on the nature and characteristics of compilation engagements, please refer to paragraphs 5 to 10 of ISRS 4410.

 

Although there is no specific prohibition in the MIA By-laws on performing such compilation services, it is important that the firm always consider the potential threats to the fundamental principles and independence before accepting such engagements and where necessary, apply relevant safeguards.