How to Qualify for the New Audit Exemption in Malaysia

How to Qualify for the New Audit Exemption in Malaysia (with Example)

If you are the owner of a Private Company (Sdn Bhd) you will know exactly how much work is involved in preparing your annual audited report. The Malaysian government has introduced revised audit exemption regulations with the aim of reducing the regulatory burden on Small and Medium Enterprises (SMEs).

New Audit Exemption Regulations for SMEs in Malaysia

If you are not aware of your annual compliance obligations, please see our article HERE.

These changes are designed to simplify compliance requirements and promote ease of doing business for SMEs. The new regulations introduce specific criteria that SMEs must meet to qualify for the audit exemption. These criteria may include factors such as annual turnover, total assets, and number of employees. SMEs that meet the specified criteria will be exempt from the requirement to conduct annual audits.

Old Audit Exemption Criteria

Previously, Practice Directive No. 3/2017, issued by the Suruhanjaya Syarikat Malaysia (SSM), establishes the audit exemption qualifying criteria for specific categories of private companies. These categories include:

• Dormant Company;
• Zero Revenue Company;
• Threshold Qualified Company.

New Qualifying Criteria

Practice Directive No. 10/2024, issued by the Suruhanjaya Syarikat Malaysia (SSM) on December 16, 2024, introduces new criteria that certain private companies in Malaysia must meet to qualify for an audit exemption. This directive applies to financial reporting periods that begin on or after January 1, 2025. The introduction of these qualifying criteria and the subsequent audit exemption aims to reduce the regulatory burden on smaller private companies, allowing them to focus resources on their core business operations.

A private company is exempt from audit requirements if it meets any two (2) of the following criteria:

• The annual income of the company during the current financial year and in the immediate past two (2) financial years does not exceed RM3,000,000;
• The total assets of the company in the current statement of financial position and in the immediate past two (2) financial years does not exceed RM3,000,000; or
• The number of employees at the end of the current financial year and in the immediate past two (2) financial years does not exceed thirty (30).

Implementation

The implementation of the threshold criteria for audit exemption will be phased in over three years to ease the transition into the new audit framework.

This phased approach allows companies to adapt gradually to the new requirements while ensuring that the qualifying criteria remain relevant for entities of varying sizes. The thresholds for revenue, assets, and number of employees will be incrementally as follows:

Other Requirements For Audit Exemption

Newly incorporated dormant companies and those dormant for the past and current financial year are EXEMPT from audit requirements.

The exemption under this Practice Directive will not be applicable to:

• An exempt private company which has opt to lodge a certificate relating to its status as an exempt private company to the Registrar pursuant to section 260 of the CA 2016;
• Assets increased from RM300,000 to RM500,000;
• A private company that is a subsidiary of a public company; and a foreign company.

When a company no longer qualifies for audit exemption, it keeps the exemption for the financial years it was eligible for, but loses it for the following years.

The other conditions remain the same as those outlined in the existing practice directive.

Is Audit Exemption Right for You? Evaluating the Pros and Cons

Pros

• Cost Savings: This is often the most significant benefit. Audit fees can be a considerable expense for SMEs, and exemption eliminates this cost.
• Time Savings: The audit process can be time-consuming for management, requiring them to gather information, answer auditor queries, and review findings. Exemption frees up this time to focus on core business activities.
• Reduced Administrative Burden: Audits involve extensive documentation and compliance procedures. Exemption reduces this burden, allowing for more efficient operations.
• Improved Access to Finance: While not always guaranteed, some lenders and investors may view audit exemption favorably, particularly for smaller businesses, as it demonstrates trust in the company’s internal financial management.
• Focus on Growth: By reducing the time and resources spent on audits, companies can redirect their efforts towards strategies for growth and expansion.

Cons

• Increased Risk of Fraud and Errors: Without an independent audit, the risk of undetected financial irregularities, errors, or fraud may increase.
• Reduced Transparency and Accountability: The lack of an independent audit may reduce transparency and accountability to stakeholders such as investors, lenders, and creditors.
• Potential Loss of Credibility: Some stakeholders may perceive a lack of audited financial statements as a sign of weakness in internal controls or financial management, potentially impacting the company’s credibility.
• Difficulties in Obtaining Financing: While some lenders may be comfortable with unaudited statements, others may require audited financials, especially for larger loans or more complex transactions.
• Limited Assurance: Without an audit, there is no independent assurance on the accuracy and reliability of the financial statements.
• Missed Opportunities for Improvement: Audits can sometimes identify areas for improvement in internal controls and financial processes. Without an audit, these opportunities may be missed.

How Do I Apply for Audit Exemption in Malaysia?

Ask your Company Secretary. Let them guide you through the application process — or if you don’t have a Company Secretary yet, let us help you.

Does This Mean Companies Don’t Have to Do Anymore Accounting?

Nope, one of the requirements to apply for audit exemption is that the Private Company must submit their unaudited financial statement. If you don’t do the accounting there is no financial statement. Plus you will need your financial statement to file your tax return for the Company. Therefore accounting is still required.

This Sounds Too Good to Be True, What Is the Catch?

We foresee three major problems with audit exemption in Malaysia (amongst other smaller problems) with not having an audited account:

• Banks may reject your financing application – this is because banks will usually depend on audited financial statement to do risk assessment before granting any loan facility. The absence of audited account may affect your ability to apply for bank financing.
• Investor may not be attracted to finance – if there is no audited account there is no guarantee that the numbers in the management account is correct, so it may dissuade an investor to invest in the company.
• Tax submission is usually be based on an audited financial statement. We foresee some tax filing implications in relation to this practice directive.

Important Note: Best to consult your company secretary.

Frequently Asked Questions (FAQ)

1. What criteria must my company meet to qualify for audit exemption?

A private company is exempt from audit requirements if it meets any two of the following: annual income not exceeding RM3,000,000, total assets not exceeding RM3,000,000, or a headcount not exceeding thirty (30) employees, measured against the current and immediate past two financial years.

2. When does the new audit exemption directive take effect?

Practice Directive No. 10/2024, issued by SSM on December 16, 2024, applies to financial reporting periods that begin on or after January 1, 2025, with the thresholds phased in over three years from 2025 to 2027.

3. If I get audit exemption, do I still need to do accounting?

Yes. One of the requirements to apply for audit exemption is that the Private Company must submit their unaudited financial statement, and you will still need your financial statement to file your tax return for the Company.

4. Which companies are not eligible for the audit exemption?

The exemption does not apply to an exempt private company that has opted to lodge a certificate relating to its status under section 260 of the CA 2016, to a private company that is a subsidiary of a public company, and to a foreign company.

5. What’s the biggest risk of skipping an audit?

Banks may reject your financing application since they usually rely on audited financial statements for risk assessment, investors may be less attracted to finance an unaudited company, and there may be tax filing implications since submissions are usually based on an audited financial statement.

Other Related Articles:

• 3 Types of Business Setup in Malaysia
• How to Setup a Company in Malaysia (i.e. Sdn Bhd Company)?
• What are the Annual Compliance Requirement of a Private Limited Company (Sdn Bhd)?
• How to Choose the Right Company Secretary for your Private Limited Company (Sdn Bhd)?
• What are the Issues faced by foreigner to setup a Company in Malaysia?