QUALIFYING CRITERIA FOR AUDIT EXEMPTION

In a recent announcement by the Companies Commission of Malaysia (“SSM”) on August 4, 2017, Practice Directive No. 3/2017 titled “Qualifying Criteria for Audit Exemption for Certain Categories of Private Companies” was introduced. This directive outlines the criteria under which certain private companies are exempt from undergoing audits.

In accordance with Section 20C of the Companies Commission of Malaysia Act 2001 and Subsection 267(2) of the Companies Act 2016 (“CA 2016”), Practice Directive No. 3/2017 specifies the conditions under which private companies are not required to appoint an auditor for a financial year, also known as audit exemption.

The directive states that the following types of companies are eligible for audit exemption:

  • Dormant companies

  • Companies with zero revenue

  • Threshold-qualified companies

It’s important to note that audit exemption does not apply to exempt private companies that have opted to submit a certificate regarding their exempt private company status to the SSM.

(a) Dormant Company Audit Exemption

i. A company is dormant in a financial year if

  • the company does not carry on business and,

  • there is no accounting transaction * occurred.

“An “accounting transaction” refers to a transaction for which the company is mandated to maintain records under section 245(1) of the Companies Act 2016. However, this definition excludes transactions resulting from legal obligations that require the company to make payments and incur related compliance costs.

ii. A dormant company, as defined by the Malaysian Accounting Standards Board (MASB), qualifies for audit exemption under two conditions: 

  • it has been dormant from the time of its incorporation; or

  • it is dormant throughout the current financial year and in the immediate preceding financial year.

iii. The directive’s implementation is as follows: 

  • where the company is incorporated on or after 31 January 2017, the financial statements with annual periods commencing on or after 31 January 2017; and

  • where the company is incorporated on or before 30 January 2017, the financial statements with annual periods commencing on or after 1 September 2017.

(b) Zero-revenue companies Audit Exemption

i. A zero-revenue company, as defined by the Malaysian Accounting Standards Board (MASB), is a private entity that qualifies for audit exemption if:

  • It has generated no revenue during the current financial year.

  • It has not generated any revenue in the immediate past two financial years.

  • The total assets listed in its current Statement of Financial Position (FS) do not exceed RM300,000, and this threshold is also maintained in the FS of the immediate past two financial years.

ii. “Revenue” excludes credit entries that reverse earlier accounting entries, accounting entries associated with taxation, reversals of previously made provisions, and gains recognized from the acquisition of property, plant, equipment, and investment property in the Statement of Comprehensive Income.

 

iii. A company transitions from being inactive when it begins to receive or is entitled to receive revenue.

iv. Any expenses related to maintaining the company are not considered.

v. This directive will be implemented for financial statements with annual periods starting on or after January 1, 2018.

(c) Threshold-qualified companies Audit Exemption

i. A threshold-qualified company, as defined by the Malaysian Accounting Standards Board (MASB), is a private entity eligible for audit exemption if it meets certain criteria.

  • It has generated revenue, including revenue receivable, not exceeding RM100,000 during the current financial year and in the immediate past two financial years.

  • The total assets listed in its current Statement of Financial Position (FS) do not exceed RM300,000, and this threshold is also maintained in the FS of the immediate past two financial years.

  • At the end of its current financial year and in each of the immediate past two financial years, the company has no more than five employees.

ii. This directive will be applicable to financial statements with annual periods starting on or after July 1, 2018.

What is Private Entity

The MASB updated the definition of a private entity on February 28, 2017, coinciding with the enactment of the Companies Act 2016 and Interest Schemes Act 2016 on January 31, 2017. The revised definition applies to financial statements with annual periods concluding on or after January 31, 2017, and is outlined as follows:

A private entity refers to a private company as outlined in section 2 of the Companies Act 2016, which meets the following criteria:

  • It is not obligated to prepare or submit any financial statements under regulations governed by the Securities Commission Malaysia or Bank Negara Malaysia.

  • It is not a subsidiary, associate, or jointly controlled by an entity that is required to prepare or lodge financial statements under regulations governed by the Securities Commission Malaysia or Bank Negara Malaysia.

However, a private company, whether it is itself a management company as defined in section 2 of the Interest Schemes Act 2016, or it is a subsidiary, associate, or jointly controlled by such an entity, is not considered a private entity.

Summary

Any company that chooses to opt for audit exemption must submit its unaudited financial statements to the Registrar, along with the necessary certificate in accordance with sections 258 and 259 of the Companies Act 2016. This submission must include a statement confirming that the company qualifies for audit exemption and that there have been no shareholder requests for a specific year to conduct an audit. The unaudited financial statements must be filed alongside the directors’ report, directors’ statement, and statutory declaration as per sections 251 and 252 of the Companies Act 2016.

It’s important to note that although unaudited financial statements are required, the signature of an auditor is no longer necessary, which can result in cost savings for companies.

At 3E Accounting, we offer assistance in preparing unaudited financial statements at competitive rates, ensuring quality service with over 5 years of experience in this field. If you’re uncertain about audit exemption, feel free to reach out to us. Our professional team is ready to help you navigate through the audit exemption process efficiently.

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