Regulatory Framework of Auditing

Regulatory Framework of Auditing



Regulatory Framework of Auditing

Chapter 2 Regulatory Framework of Auditing


1.       Discuss the statutory requirements for audits.
2.       Explain the appointment procedures of auditors
3.       Discuss the removal procedures and resignation procedures of an auditor.
4.       Identify the rights and duties of an auditor under Companies Ordinance.



1.      Statutory Requirements of Audits

1.1       Legal requirements

1.1.1    It includes Companies Ordinance, Listing Rules and other relevant legislations
1.1.2    Companies Ordinance:
(a)        The Companies Ordinance requires every limited company in HK to have an annual audit after which the auditor must give an opinion on whether the client’s financial statements give a true and fair view and comply with the relevant legislation.
(b)       Also, the Companies Ordinance sets out the rights and duties of auditors, procedures of appointment, resignation and removal of auditors.
(c)        Reasonable skill and care should be exercised by auditors when carrying out an audit assignment.
1.1.3    Listing Rules:
Listing Rules specify the safeguard procedures which should be carried out to identify conflict of interest and maintain independence.

1.2       Professional requirements

1.2.1    As part of the regulatory mechanism to monitor professional accountants’ conduct, HKICPA has issued Hong Kong Standards on Auditing (HKSAs), Practice Notes (PN) and Industry Auditing Guidelines for its members to follow in their professional practices.

2.      Appointment of Auditors

2.1       Persons qualified to be appointed as auditors

2.1.1    The requirements for person qualified to be appointed under the Companies Ordinance includes:
(a)        Person qualified to be appointed under S.393(1) of the Companies Ordinances – A person shall not be appointed as auditor of a company unless he is qualified to be appointed as auditors under the Professional Accountants Ordinance.
(b)        Person not qualified for appointment as auditor under S.393(2) of the Companies Ordinance
(i)         An officer or an employee of the company or its subsidiary and holding companies.
(ii)        A person who is a partner of or an employee of an officer or an employee of the company or its subsidiary and holding companies.
2.1.2    A person shall be qualified to be registered under Professional Accountants Ordinance as a Certified Public Accountant (CPA) if the Council of HKICPA satisfied that he or she
(a)        has attained the age of 21 years and is of good character and is a fit and proper person to be a CPA.
(b)        is a student or a member:
(i)         a registered student of HKICPA and has passed the examinations required.
(ii)        a member of an accountancy body which has a mutual or reciprocal recognition agreement with HKICPA and he/she has complied with all conditions for the recognition and full exemptions was granted.
(iii)       registered as a professional accountant at any time before the relevant day.
(c)        has fulfilled the practical experience prescribed by the Council of HKICPA.

2.2       Appointment Procedures

2.2.1    Appointed by members at annual general meeting (S.396)
(a)        Every company is required to appoint an auditor for each financial year by a resolution passed at the AGM.
(b)        If the directors fail to appoint the first auditors before the first AGM of the company, the company may appoint an auditor in the general meeting.
(c)        The company may fill any casual vacancy in the office of auditor in general meeting.
2.2.2    Appointed by directors (S.397)
(a)        To fill a casual vacancy (臨時的空缺)
(b)        If the directors have not done so within one month after the casual vacancy occurs, the members may, by a resolution passed at a general meeting, appoint a person to fill the casual vacancy.
2.2.3    Appointed by court (S.398)
Where at an AGM of a company, no auditor is appointed or reappointed, the court may, on the application of any member of the company, appoint a person to fill the vacancy.


3.       Vacation of Office

3.1       Removal of auditors

3.1.1    The removal of an auditor before expiry of term of office includes the following procedures:
(a)        Ordinary resolution and special notice (S.419(1) & (2) of the Companies Ordinance).
(b)        On receipt of such notice, the company shall forthwith (立刻) send a copy thereof to the auditor proposed to be removed (S.419(3) of the Companies Ordinance).
(c)        Notice of the resolution so passed shall be given to the Registrar of Companies within 15 days, except for private companies (S.419(4) of the Companies Ordinance).

3.2       Resignation of auditors

3.2.1    Upon resignation, the auditors must deposit a notice in writing to the registered office of the company and send, within 15 days, a copy of the notice to the Registrar.

4.      Rights and Duties of Auditors under Companies Ordinance

4.1       Rights of Auditors (S.421 – 423)

4.1.1    An auditor has the following rights so as to carry his or her duty properly:
(a)        Resignation notice – deposit a resignation notice in writing to that effect at the company’s registered office and the notice shall be effective only when it is signed by auditors.
(b)        Make representation – have a statement of circumstances connected with the resignation or the termination, prepared by the auditor who retires or is removed sent to all members; or to have them read out at the general meeting, except that the auditor is using the notice to secure needless publicity for defamatory matter.
(c)        Resigning auditor may requisition meeting – require the director to convene a general meeting for the purpose of receiving and considering such explanation of the circumstances connected with his resignation as he may wish to place before the meeting.
(d)        Attend general meeting – receive all notices and communication of, attend and be heard at the general meetings at which his term of office would otherwise have expired and it is proposed to appoint a new auditor.

4.2       Duties of Auditors (S.424-425)

4.2.1    It is the duty of resigning auditor and auditor who retires or is removed to give the company:
(a)        a statement of circumstances that should be noted by the members or creditors of the company, if the person considers that there are circumstances connected with his resignation or termination.
(b)        a statement to that effect if the person considers that there are no such circumstances.



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Regulatory Framework of Auditing


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Regulatory Framework of Auditing



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Regulatory Framework of Auditing