Global Compliance

Audit Obligation for Commercial Companies in UAE

The law which governs the auditing of companies in the United Arab Emirates (UAE) is Federal Law Number 2 of 2015 regarding the Commercial Companies Law hereinafter referred to as the Companies Law or the Law. This article will examine the procedure of auditing under the Companies Law. It will also assist the readers to identify the process of appointing an auditor in the company, as also the rights and duties of the concerned auditor. The article in respect of mandatory audits for commercial companies in UAE applies to all the public or private joint stock company (PJSc) or the limited liability company (LLC), sole proprietorship, other types of companies.

Audit Requirements:

The Law under Article 27 obliges every joint stock company as well as a limited liability company (LLC) to appoint one or more auditors in order to audit the accounts of the company every fiscal year. It further allows other type of companies including sole proprietorship to appoint an auditor in accordance with the provisions of the Law. The companies established under the Law must prepare financial accounts annually or yearly and must adhere to the International Accounting Standards and Practice while preparing the reports whereby, providing a clear view of company’s profits and losses.

The partners or shareholders of the company are allowed to obtain a copy of the last audited accounts or the audit report or statements of its holding or subsidiary company. The company must provide the statements within ten (10) days from the date of the request. Article 94 of the Law stipulates the agenda of the annual general assembly, wherein the quorum must discuss the auditor’s report, the financial statements of the company as also the remuneration of the auditor.

Every LLC must have one or more auditors who must be elected at the general assembly of the partners of the firm every year. The provisions for public/ private joint stock company applies to LLC. In accordance with Article 175 of the Companies Law, the auditor can request the board of directors to convene the board meeting. Wherein, the general assembly should be convened within at least fifteen (15) days from the date of the invitation sent by the auditor.

Appointment of Auditor:

Every public joint stock company/ LLC shall have one or more auditors nominated by the board of directors and simultaneously approved by the general assembly. The assembly can appoint the auditor/auditors for one renewable year, whereas, such term should not exceed three (3) successive years thus, the auditors must undertake his duties for the next annual general assembly. The owner of the company may, during the incorporation of the company, appoint an auditor with prior approval of the competent authority to perform his duties until the first general assembly. The assembly must ascertain the fees for the auditor, provided that the remuneration must reflect in the accounts of the company. The board of directors should issue a decision pertaining to the following conditions which the auditor must adhere to:

• Must possess a license to practice the profession in state and must have experience of auditing the joint stock companies/ LLC;
• Approved by competent authority;
• Not to inter-relate the profession of the auditor and the capacity as a shareholder in the company;
• Should not be a partner or agent of any of the founders of the company or should be related to the board of directors of the company;
• The name of the auditor must be approved by the Central Bank if the companies have obtained the license from the Central Bank.

Rights and Duties of the Auditor

• The auditor can invite the general assembly on his request made to the board of directors.
• Approving the financial statements of the company.
• To seek relevant information for any or all transactions whilst auditing the accounts of the company.
• Article 246 of the Companies Law enumerates the responsibilities of the auditor as follows:
  • The auditor should review the accounts of the company including the balance sheets, profit and loss account, all the transactions of the company with related parties, ensure the applicability of the Companies Law and the Articles and Memorandum of Association of the company.
  • Upon reviewing the accounts of the company, the auditor is obliged to prepare a report as an outcome the inspection and should provide the report to the General Assembly and the competent authority.
  • He must review the records and other documents of the company, seek explanations for any particular transactions and must verify the assets and liabilities of the company.
  • If the company fails to provide the adequate auditor explanations, he must mention it explicitly in his report directed to the board of directors. However, if Board of Directors fails to facilitate the same, the Board of Directors should provide a copy to the competent authority.
  • The auditor must seek relevant information and explanations from the auditors of the holding company.
• The auditor is further under an obligation to keep confidentiality concerning the particulars of the company, failing of which the auditor will be dismissed from the company and will be liable for the severe penalty. (Article 247)
• The auditor is prohibited from purchasing the securities of the company whose accounts are audited by him or sell such securities or offer consultancies on the concerned securities.
• The auditor must notify the competent authority of any violation of the provisions of the Companies Law in ten (10) days from the date of detecting the violation/ criminal activity.

Auditor Report and its Contents

Pursuant to Article 245 of the Law, the auditor shall issue a report on the accounts so audited. If the company appoints more than one auditor, the auditors should distribute their duties and must prepare a separate report on the task assigned and must also prepare one combined report for which they will be jointly liable. The report must bear the name and signature of the auditor. The report should specifically highlight whether or not the accounts are in consonance with the provisions of the Law and whether the accounts depicts the true financial position of the company.

The auditor report should reflect the following particulars basis that the report was prepared in accordance with the provisions of the law:

• The financial position of the firm at the end of the fiscal year, more specifically the balance sheet;
• Profit and loss accounts;
• Regular accounts of the company;
• Statement showing the purchase of any shares and stocks;
• Statement mentioning that the report is identical to the books and records of the company
• Statement dealing with the conflict of interest and financial transaction between the company and any of its related parties;
• Any violation of Articles of Association during the fiscal year which had an adverse effect on the company’s financial position, whether such contradiction is resolved or not or is it still prevalent.
• Whether there is a penalty imposed on the company due to such contraventions;
• State the financial position of the company at the end of the fiscal year and the profit and loss account of the holding as also the subsidiary companies which is inclusive of consolidated statements as a whole.

Glossary:

• Commercial Company Law: Federal Law Number 2 of 2015 regarding Commercial Companies Law of UAE.
• Civil Code: Federal Law Number 5 of 1985 regarding the Civil Transactions Law.
• Ministry: Ministry of Economy.
• Company: the commercial company.
• Diligent Person: The person possessing sufficient expertise and commitment required for performing his work.
• Competent Authority: the local authority having competence with regards to the affairs of the companies in the relevant emirate.
• Member of the Board of Directors: any member of the members of the board of director of the company which includes the chairman as well.