ТУРШИЛТЫН ХУВИЛБАР +(976)-11-312513 info@legalinstitute.mn(2022-11-23-ны өдрийн орчуулгын хяналт)                                  Unofficial translation

LAW OF MONGOLIA

June 19, 2015     

    Ulaanbaatar city

ON AUDITING

/Revised version/

CHAPTER ONE

GENERAL PROVISIONS

Article 1.Purpose of the Law

1.1.The purpose of this law is to define the principle and legal ground for auditing activity and its organization and to regulate relations with respect to the operation, licensing, implementation, and monitoring of auditing activity.

Article 2.Legislation on Auditing

2.1.The  legislation on Auditing shall consist of the Constitution of Mongolia, the Law on Accounting, the Law on State Auditing, this law, and other legislative acts enacted in conformity with these laws.

2.2.If an international treaty, to which Mongolia is a party, provides otherwise than this Law, the provisions of the international treaty shall prevail.

Article 3.Definitions of terms of the law

3.1.The following terms used in this law shall have meanings as follows:

3.1.1."Auditing activity" means an independent and professional activity of an auditing legal entity, on the basis of a contract to review the financial statements of a business entity and organization and the financial documents of an individual and issue opinions and provide advice;

3.1.2."Auditor" means a person who is conducting auditing activity or the leader and other members of an auditing team;

3.1.3."Partner" means an auditor who shall be liable on behalf of a auditing legal entity for the auditing opinion in relation to performing the contracted auditing work;

3.1.4."Auditing legal entity" means a partnership or a company holding a license for conducting auditing activity;

3.1.5."Financial statements auditing" means reviewing the financial statements of a legal entity and the financial documents of an individual in accordance with the relevant international standards, issuing an opinion and providing recommendations;

3.1.6."Verification of financial statements" means reviewing and verifying the financial statements of a legal entity and organization and the financial document of an individual in accordance with the relevant standards on verification;

3.1.7."Other validations" means reviewing and validating the financial information in accordance with the relevant international standards;

3.1.8."Auditing quality control" means monitoring conducted by an auditing legal entity itself or the authorized state agency on whether auditing activity is conducted in accordance with the relevant standards and legislation.

3.1.9."Relevant financial services" means contracted works to be performed in accordance with international standards on the relevant service;

3.1.10."Financial documents" means the primary documents of accounting books, equity, assets, liabilities, revenues and expenses, accounting journals, general and sub-ledgers, corrections and reports and financial and economic relevant statements of business entity and organization and other documents;

3.1.11."Client" means a business entity, organization or individual, being audited based on a contract;

3.1.12."International Standard on Auditing" means a document indicating the principles and procedures of conducting auditings and other services approved by the Association of International Accountants;

3.1.13."Internal standards on auditing services" means a document adopted by the auditing legal entity in accordance with the International Standard on Auditing and other similar guidelines and followed by such auditing legal entity;

3.1.14."Working paper" means documents collected in accordance with the auditing and quality control international standards being prepared and collected by an auditor him/herself in the course of conducting auditing activities including financial documents, records, calculations, reports, research and analysis materials, meeting minutes and information received from the relevant person;

3.1.15."Interim financial statements" means a financial statement issued with respect to a period shorter than a fiscal year.

3.1.16."Audit team" means a partner, auditor, assistant auditor, or expert appointed by the auditing legal entity to perform certain contracted auditing work.

3.1.17."Standard Committee" means a committee specified in Article 21.1 of the Law on Accounting; and

3.1.18."Institute" means an organization specified in Article 3.1.13 of the Law on Accounting.

Article 4.Conducting an auditing activity

4.1.An auditing legal entity that has obtained a license to conduct the auditing activities according to this law and the Law on Permit is entitled to conduct the auditing activities.

/This paragraph was amended according to the law as of June 17, 2022/

4.2.Unless otherwise provided by law, Article 76.1.10 of the Company Law shall be applied when auditing a state and locally owned company or company with state or local ownership participation.

/This paragraph was amended according to the law as of May 1, 2020/

CHAPTER TWO

PRINCIPLES AND STANDARDS OF AUDITING ACTIVITY

Article 5.International Standard on Auditing

5.1.Auditing validation activities shall be carried out in accordance with international standards on quality control, auditing, verification, other validation and relevant services.

5.2.International Standards on Auditing shall be followed when auditing the financial statements of a business entity and organization.

Article 6.Principles of auditing activity

6.1.The following principles shall be followed in the auditing activity:

6.1.1.to conduct auditing activities with the methods and forms stated in the International Standards on Auditing;

6.1.2.to be independent and avoid any circumstances that being under pressure and control that may affect in losing his/her independence;

6.1.3.to keep the confidentiality of the client information;

6.1.4.to follow the fair competition principles and for this purpose, to advertise realistically to not mislead clients and not compare one's organization with other auditing legal entities, and to not act contrary to their reputation; and

6.1.5.to approach with professional skepticism when performing auditing activity.

Article 7.Independence of the auditing activity

7.1.Auditor shall be independent of a client and a client organization in terms of work and private relationship, and in the circumstances arising in connection with providing auditing service.

7.2.In order to comply with the requirements of independence of the management of the auditing legal entity and an auditor of work and private relationship, the following conditions shall be ensured:

7.2.1.an auditor has not received a donation or gift nor has been involved in any negotiations to receive a donation or gift as provided in Article 3.1.8 and Article 3.1.9 of the Law on Regulating the Private and Public Interest in Public Services and Prevention of the Conflict of Interest;

7.2.2.auditing service fee is not determined based on the results of the operation of the client organization and financial standing or the nature of the auditing opinion;

7.2.3.to not be a related party of the client as defined in Article 99 of the Company Law;

7.2.4.there shall be no unpaid auditing service fee or other issues unsettled;

7.2.5.a member of the auditing team shall not be related to any of the governing officers or influential shareholder of the client as a relative or in-law; and

7.2.6.to not invest in any form, with an amount equal to five or more percent of the client's share capital within 24 months prior to signing an auditing service contract.

7.3.An auditing legal entity shall have auditing activities procedures and internal monitoring regulations.

7.4.A governing officer and influential shareholder of a client referred to in Article 7.2.5 of this law shall include the following persons:

7.4.1.a governing officer and influential shareholder who can determine the financial and management resolution of the client; and

7.4.2.a governing officer and influential shareholder of a parent or subsidiary company of the client.

7.5.A person using an audited financial statement shall have a right to lodge a complaint with the state central administrative organization in charge of financial and accounting matters if it is considered that the principle of independence specified in this law is violated.

Article 8.Restricting auditing service

8.1.Any auditing legal entity shall be prohibited from providing the auditing service specified in Articles 9.1.1, 9.1.2 and 9.1.3 of this law to the same business entity or organization for more than five consecutive years.

8.2.An auditing legal entity being replaced after five years in accordance with Article 8.1 of this law shall be prohibited from providing auditing services to such client for a subsequent three years following the replacement.

8.3.Article 8.1 of this law shall not apply to a business entity and organization subject to the standards specified in Article 4.1.2 and Article 4.1.3 of the Law on Accounting.

CHAPTER THREE

CONDUCTING AUDITING ACTIVITIES

Article 9.Auditing activities

9.1.Auditing legal entities shall conduct the following activities:

9.1.1.auditing financial statements;

9.1.2.verifying financial statements;

9.1.3.other validation; and

9.1.4.relevant services.

9.2.An auditing legal entity may conduct certified tax consultancy service after obtaining the relevant license.

9.3.Unless otherwise provided in law, it may conduct finance and accounting consultancy service and organize training.

/This paragraph was amended according to the law as of June 17, 2022/

9.4.An auditing legal entity is prohibited from conducting an activity other than those stated in articles 9.1, 9.2 and 9.3 of this law.

9.5.An auditing legal entity is prohibited from auditing the financial statements of the fiscal year which provided consultancy services on tax and accounting of the client organization.

/This paragraph was amended according to the law as of June 17, 2022/

Article 10.Statutory auditing of the financial statements

10.1.It is compulsory for the following business entities and organizations to be audited their financial statements:

10.1.1.business entities and organizations subject to standards stated in Article 4.1.1 of Law on Accounting;

10.1.2.business entities and organizations which is subject to consolidated financial statements;

10.1.3.business entities and organizations going through restructure and liquidation or proposing to sell all of its assets through an auction;

10.1.4.foreign invested business entities and organizations;

10.1.5.a fund provided in Article 36.2 of Civil Code;

10.1.6.other business entities and organizations to be audited their financial statements according to the laws and international treaties of Mongolia.

10.2.Business entities and organizations stated in Article 10.1 of this law shall be audited their financial statements within the following timeframe:

10.2.1.for a joint-stock company, at least two weeks in advance of the shareholders' meeting which shall discuss year-end financial statements of such fiscal year;

10.2.2.for a business entity or organization which is under the restructure, liquidation or proposing to sell all of its assets through an auction, one month prior to the commencement of such actions;

10.2.3.for a bank, it shall be audited its year-end financial statement by 31 March of the subsequent fiscal year;

10.2.4.for other business entities and organizations, it shall be audited their annual financial statements by 30 April of the subsequent fiscal year.

10.3.Matters of timeframes for financial statement auditing of budget funded agency, state and local owned business entity, business entities and organizations which have state or local ownership participation shall be regulated by the Law on Budgets and other relevant laws.

10.4.Business entities and organizations other than those stated in Article 10.1 of this law may have their financial statements audited, and individuals may have their financial documents audited.

10.5.An auditing legal entity shall be responsible for their auditing opinion by its own assets.

Article 11.Verification of financial statements and other validation

11.1.At the request of the authorized state regulatory authority and bank and financial institution, business entities and organizations may receive the services specified in articles 9.1.2, 9.1.3 and 9.1.4 of this law on their interim financial statements.

11.2.A business entity and organization may receive the services specified in Article 9.1.1 of this law on its own initiation except for cases as provided in Article 11.1 of this law.

11.3.Other validation work shall include the following services and evaluation activity of the financial information, monitoring and risk management system:

11.3.1.review economic estimates and grounds for the study in connection with issuing of securities and provide a relevant opinion;

11.3.2.other validation works stated in the International Standards on Auditing; and

11.3.3.assess the internal financial monitoring system of a business entity or organization.

Article 12.Auditing working paper and its preservation

12.1.An auditing opinion shall be supported by reliable evidence and the working papers collected by auditor during the auditing activity shall be in the form of information saved on paper, films, digital and in any other items.

12.2.An auditing team or auditor shall collect the evidence and working papers by inspecting, observing, questioning, interviewing, confirming, recalculating and performing analytical procedures the during the process of financial statement auditing and issue shall issue an opinion by performing study and analysis on them.

12.3.An auditing team and auditor shall keep the records of performed working papers, document the opinion.

12.4.Auditing working papers shall satisfy the requirements of working papers stated in the International Standards on Auditing.

12.5.Auditing working papers shall be the property of the auditing legal entity and shall be preserved for 10 years.

Article 13.Contract

13.1.An auditing service contract shall be entered into in writing between the auditing legal entity and the client. The contract shall be effective from the date it is signed and stamped by the authorized representatives of the auditing legal entity and the client.

13.2.The respective obligations, responsibilities, scope of work, service term, fees, delivery of results, and termination of the contract shall be stipulated in the contract

Article 14.Rights and duties of a client

14.1.A client shall have the following rights:

14.1.1.to select an auditing legal entity which has a license to conduct the auditing activities;

14.1.2.to demand the auditor to provide an explanation regarding the auditing opinion;

14.1.3.to lodge a complaint with the court if it does not agree with the auditing opinion; and

14.1.4.to contract to auditing examination, verification and other validation works and to receive financial services; and in case of a statutory due diligence and validation works pursuant to the laws, to submit proposal regarding the removal of the appointed auditor, to auditing legal entity, if there is a legal ground;

14.2.A client shall have the following duties:

14.2.1.to hand over financial statements issued in accordance with the relevant international standards to an auditor for examination;

14.2.2.to ensure the auditor with conditions for conducting auditing activities;

14.2.3.to provide the documents and information required by the auditor in a timely manner;

14.2.4.to provide the auditor with a confirmation letter regarding the proper reflection of business and financial activities in accounting reports and statements of such organization in accordance with the standards and the relevant documents, materials and statements have been fully presented and the liabilities that may arise in relation to the preceding information;

14.2.5.to promptly correct the accepted errors and breaches, which were revealed during the review, in relation to bookkeeping and financial statement;

14.2.6.to not to disturb, intervene and pressure auditing activity from the management of organization; and

14.2.7.to obtain and provide any required documents requested by the auditor from a third party.

14.3.The executive management or managing accountant of the client shall be responsible for financial statements provided to an auditor whether its issued in compliance with the relevant international standards and regulations and rules adopted by the competent authority and accuracy of other documents and information.

14.4.Auditing service fees shall be paid based on the contract.

14.5.Article 14.1.1 of this law shall not apply to state budget agencies.

Article 15.Rights and duties of auditor

15.1.An auditor shall have the following rights:

15.1.1.to obtain documents and information that are relevant to performing duties specified in auditing contract, from a client or its executive management, managing accountant officer, internal auditing unit officer, financial and accounting officer and to perform observation, questioning, interview and verification;

15.1.2.to have access with the previous auditing working papers and information of the client;

15.1.3.to demand and have access to the documents and information relevant to performing auditing activities from corresponding banks and financial institutions and other relevant business entities and organizations.

15.1.4.to obtain advice from the Standard Committee in case if there is any misunderstanding arisen between auditing team and the client with respect to auditing activity procedure, standards, and ethics of the qualified accountant.

15.2.An auditor shall have the following duties:

15.2.1.to conduct auditing activities at a high professional level and in accordance with laws and international standards;

15.2.2.to refuse to conduct auditing in case of a circumstance which is unable to conduct auditing or involve other professionals and inform about it to its own organization and the client, if necessary;

15.2.3.to not use any information which was obtained during the auditing for a private purpose or refuse to disclose to the others unless otherwise stated in law;

15.2.4.to provide a written or oral explanation in relation to a basis of the auditing opinion if requested by the client;

15.2.5.to present working papers demanded by other auditing legal entities in accordance with Article 15.1.2 of this law in the form acceptable to both;

15.2.6.to inform the authorized person stated in Article 17.2 of this law regarding information stated in Article 17.1 of this law; and

15.2.7.to not do any action which defamation of the other auditors.

15.3.The requirements specified in Article 15.2.3 of this law shall apply even after auditor has cease to perform his/her duties.

Article 16.Output of the auditing activity

16.1.An output of the auditing activities shall be an opinion. If services other than financial auditing has been provided in accordance with the International Standards on Auditing, there shall be reports required by the relevant standards. In accordance with the International Standards on Auditing, a serious internal control problems shall be reported to the Auditing Committee or Board of Directors in the absence of such committee. The report may be in a form of recommendation.

16.2.Clarifications and notes regarding special events such as major or conflict of interest transactions that caught the attention of auditor during the auditing activity will be an integral part of the audited and certified financial statements.

16.3.An auditor's opinion shall be signed and approved by the director or partner.

16.4.If a client accepts the occurrence of errors in financial statements indicated in opinion of the auditing legal entity, such error shall be corrected. If the disagreement regarding the acceptance and correction of error occurred in financial statements was not resolved, then they may approach to the Standards Committee for a professional opinion.

16.5.A correction of the errors in the financial statement which has been identified by auditing opinion shall be reflected in annual financial statement which is covered by the auditing activity.

Article 17.Possessor's rights regarding the auditing

17.1.An employee and shareholder of a business entity, organization has a right to demand the auditor to provide opinions in relation to the financial statements, liabilities, assets movement, conflict of interest transactions and other transactions, financial standing and operation results based on the contract.

17.2.Rights specified in Article 17.1 of this law shall be exercised by the following person:

17.2.1.a shareholder who owns 10% or more of total issued shares of open joint stock company or independent director of the Board of Directors;

17.2.2.a member of partnership or cooperatives;

17.2.3.a shareholder of closed joint stock company and limited liability company; and

17.2.4.members equal to 10% or more of all members of a non-governmental organizations.

17.3.If additional verification service from auditing legal entity is required in connection with exercising the rights specified in Article 17.1 of this law, an contract shall be entered with person who has ordered such services.

17.4.An authorized person stated in Article 17.2 of this law has a right to demand information regarding the auditing legal entity or person exercising rights of senior auditor. The executive management shall provide information from time of time as requested.

CHAPTER FOUR

POWERS OF STATE AGENCIES WITH RESPECT TO AUDITING ACTIVITY

Article 18.Organizing the implementation of the law

18.1.The state central administrative organization in charge of financial and accounting matters shall exercise the following functions:

18.1.1.to inform the public through its web page on monthly basis a list of licensed auditing legal entities and auditing legal entities that meets the requirements specified in Article 19.3 and Article 19.4 of this law, as well as information on the suspension and revocation of their licenses;

18.1.2.to monitor whether licensed auditing legal entities are complying with the terms and conditions of the license;

18.1.3.to approve a regulation with respect to performing auditing quality control on the auditing legal entities; and

18.1.4.to perform auditing quality control on the auditing legal entities every three years.

Article 19.Auditing legal entity

19.1.An auditing legal entity shall conduct the auditing activities in the form of partnership or limited liability company.

19.2.An auditing legal entity shall conduct auditing activities based on the license obtained from the state central administrative organization in charge of financial and accounting matters.

19.3.An auditing legal entities shall satisfy the following requirements:

19.3.1.a founder, shareholder shall be a certified public accountant of Mongolia;

19.3.2.a director, partner shall be authorized as a certified public accountant for an indefinite period and obtained appropriate permits from the Institute; .

19.3.3.to have at least two full time certified public accountants authorized for an indefinite period;

19.3.4.no professional ethics have been breached by auditors;

19.3.5.to have an office and equipment required for its operation;

19.3.6.not less than two third of all certified public accountants shall be a citizen of Mongolia in case the founder or a shareholder is a foreign entity;

19.3.7.not less than one third of total shares shall be held by the Mongolian citizen and certified public accountant in case if the founder or a shareholder is foreign entity;

19.3.8.auditing activities must comply with the international standards; and

19.3.9.other additional requirements specified in legislation.

19.4.An auditing legal entity which is authorized to provide auditing services to business entities and organizations subject to standards specified in Article 4.1.1 of Law on Accounting shall have at least four certified public accountants authorized for an indefinite period.

19.5.An auditing legal entity may have its branch with at least one full-time auditor in permanent position. Article 16.3 of this law shall not apply to the branch director.

Article 20.A license to conduct auditing activity

20.1.An applicant requesting for license to conduct auditing activity shall prepare the following documents and submit them to the state central administrative organization in charge of financial and accounting matters if applicant has considered that it complies with the requirements stated in Article 19.3 of this law:

20.1.1.application for granting the license;

20.1.2.the State Registration Certificate if an applicant is a legal entity;

20.1.3.a resolution to establish auditing legal entity;

20.1.4.draft charter of the auditing legal entity;

20.1.5.internal and auditing quality control standards on auditing activity;

20.1.6.internal control regulation of organization;

20.1.7.detailed resumes of auditors;

20.1.8.reference on ethics of a certified public accountant;

20.1.9.permit from the Institute; and

20.1.10.payment receipt of stamp duty.

20.2.A license to conduct auditing activity shall be granted for 3 years term pursuant on decision of a Cabinet member in charge of financial and accounting matters if it has considered that documents stated in Article 20.1 of this law have satisfied the requirements.

20.3.An auditing legal entity obtained a license shall use a word "Auditing" after its name.

20.4.A certified public accountant working in auditing legal entity is prohibited to work simultaneously in other organization and in other auditing legal entities under the contract.

Article 21.Quality control of auditing activity

21.1.An auditing legal entity is obliged to establish an internal monitoring system for monitoring auditor's activity and implement the quality control over its auditing activity. A person who is implementing the executive management of auditing legal entity shall be responsible for this.

21.2.An auditing legal entity shall perform the quality control on its auditor's activities in accordance with the quality control guidance approved by management of such auditing legal entity.

Article 22.Extension, suspension, and termination of auditing license

22.1.A request for extension of license shall be submitted along with the supporting documents to a Cabinet member in charge of financial and accounting matters at least of one month prior the expiration of the license.

22.2.A license of the auditing legal entity shall be extended for a term same to its initial period subject to compliance with the terms and conditions of this law and the Law on Permit and conducted its activity in accordance with established regulations and standards.

/This paragraph was amended according to the law as of June 17, 2022/

22.3.The following documents shall be submitted for the extension of auditing license:

22.3.1.an application;

22.3.2.operational reports of last three years;

22.3.3.list of employees;

22.3.4.reference of social insurance payments regarding its full-time auditors; and

22.3.5.reference regarding certified public accountant's professional ethics.

22.4.A license shall not be extended if the terms and conditions of the license have been breached.

22.5.A Cabinet member in charge of financial and accounting matters shall suspend auditing license up to three months in the following circumstances:

22.5.1.article 8.1 and Article 8.2 of this law have been violated;

22.5.2.article 9.4 of this law has been violated;

22.5.3.it was found that terms and conditions stated in Article 19.3 have not been satisfied; and

22.5.4.auditing legal entity that has been engaged with full-time employment with individuals who violated Article 20.4 of this law.

22.6.A license shall be reinstated if the circumstances for the suspension stated in Article 22.5 of this law were remedied.

22.7.A license shall be revoked in the following cases except as provided in the Law on Permit:

/This paragraph was amended according to the law as of June 17, 2022/

22.7.1.failed to compile working papers in accordance with International Accounting Standards and ISA;

22.7.2.avoided to show the office, working papers and other necessary information that are required to perform quality control on the auditing legal entity;

22.7.3.proven that the financial statements have been fraudulently verified; and

22.7.4.has conducted its activity by violating this law, other legislation, and regulations.

/This paragraph was amended according to the law as of June 17, 2022/

CHAPTER FIVE

MISCELLANEOUS

Article 23.Liability for the violators of the law

23.1.In case the actions of a civil servant violating this Law have not a criminal nature, they shall be subject to liability specified in the Law on Civil Service.

23.2.Any person or legal entity violating this Law shall be subject to liability specified in the Criminal Law or the Law on Violations.

/This Article was modified according to the law as of December 4, 2015/

Article 24.Entry into force

24.1.This Law shall enter into force on January 1, 2016.

CHAIRMAN OF THE STATE GREAT KHURAL OF MONGOLIA Z.ENKHBOLD