LAW OF MONGOLIA

June 19, 2015 Ulaanbaatar city

LAW ON AUDITING

/Revised version/

CHAPTER ONE

GENERAL PROVISIONS

Article 1.Purpose of the law

1.1.The purpose of this law is to determine the principles and legal grounds of organisation of auditing activities and regulate relations with respect to the conducting auditing activities, issuing of licences, implementing and monitoring auditing activities.

Article 2.Auditing legislation

2.1.Auditing legislation will consist of the Constitution of Mongolia, the Law on Accounting (Accounting Law), the Law on State Auditing, this law and other legislation adopted pursuant to these laws.

2.2.If a Mongolian international treaty stipulates otherwise than this law then the provisions of the international treaty will prevail.

Article 3.Definitions of terms of the law

3.1.The terms stated in this law will have the following meaning:

3.1.1."auditing activities" means an independent professional activity conducted by an auditing legal entity on the basis of a contract to review the financial statements of a business entity and the financial documents of individuals and issue opinions and provide advice;

3.1.2."auditors" means a person engaging in auditing activities or an auditing team leader and other members;

3.1.3."partner" means an auditor who will be liable for the audit opinion on behalf of the auditing legal entity in relation to the execution of contracted auditing work;

3.1.4."auditing legal entity" means a partnership and a company holding a licence to conduct auditing activities;

3.1.5."audits of financial statements" 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."reviews of financial statements" means reviewing and verifying financial statements of the legal entity and financial document of an individual in accordance with the relevant standards on review engagements ;

3.1.7."other assurance" means reviewing and certifying the financial information in accordance with the relevant international standards;

3.1.8."audit quality control" means monitoring conducted by the authorised state organisation or auditing legal entity itself to see whether auditing activities are conducted in accordance with the relevant standards, laws and regulations.

3.1.9."related services" means contracted works to be conducted in accordance with international standards;

3.1.10."financial documents" means the primary documents of accounting books, equity, assets, liabilities, income, expenditure supporting document, accounting journals, general and sub-ledgers, corrections and reports and other documents related to the financial and economic statements of business entities and organisations;

3.1.11."a client" means a business entity, organisation or individuals that procure the auditing services on a contract basis;

3.1.12."International Standard on Auditing" (ISA) means a document outlining the principles and procedures conducting auditing and other services approved by the International Association of Accountants;

3.1.13."Internal standards on auditing services" means a document adopted by the auditing legal entity in accordance with the ISAs 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 monitoring 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 full financial year.

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

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

3.1.18."Institute' means an organisation specified in Article 3.1.13 of Accounting Law.

Article 4.Conducting an audit activities

4.1.An auditing legal entity which has obtained a licence to conduct the auditing activities according to this law and the Law on Licensing of Business Activities is entitled to conduct the auditing activities.

4.2.Unless law provides otherwise, Article 76.1.10 of the Company Law will be applied when doing auditing of a state and local owned companies or companies with state or local ownership participation.

/This paragraph was revised by the law of 01 May, 2020/

CHAPTER TWO

PRINCIPLES AND STANDARDS OF

AUDITING ACTIVITIES

Article 5.International Standards of Auditing

5.1.Audit assurance and quality control activities, audit, review and other assurance and related services must be carried out in accordance with international standards.

5.2.International Standards on Auditing should be followed when auditing the financial statements of business entities and organisations.

Article 6.Principles of auditing activities

6.1.The following principles will be followed for the auditing activities:

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

6.1.2.to be independent and avoid pressure and circumstances that could make the auditor subject to the domination of others which would lead to a disturbance of their independence;

6.1.3.to keep the confidentiality of the client's information;

6.1.4.to obey with the fair competition principles and procure substantial advertisement that is not misleading clients and not compare itself with other auditing legal entities nor act in a manner contrary to their reputation; and

6.1.5.to approach with a professional sceptical position when performing the auditing activities.

Article 7.Independence of the auditing activities

7.1.Auditor should be independent from a client and a client organisation with respect to the circumstances arising in connection with providing auditing services and in terms of business and private relations.

7.2.The following conditions should be satisfied, in order to comply with the requirements of being independent, by an auditor and the management of the auditing legal entity in terms of business and private relationships:

7.2.1.an auditor must not have received donations or presents nor have been involved in any negotiations to receive donation or gift as specified in Article 3.1.8 and Article 3.1.9 of the Law on regulation of the private and public interest in public services and prevention of the conflict of interest ;

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

7.2.3.they should not be an affiliated person of a client as defined in Article 99 of the Company Law;

7.2.4.there should be no unpaid auditing service fees and unsettled other issues;

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

7.2.6.must not have made an investment, in any form, in an amount equal to five or more percent of the client's share capital within 24 months prior to signing an auditing service agreement.

7.3.An auditing legal entity will have an auditing activities procedure 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 will include the following persons:

7.4.1.a governing officer and influential shareholder who is capable of determining 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 will have a right to make complaint to the state central administrative organisation in charge of financial and accounting issues if it is considered that the principle of independence specified in the law have been was violated.

Article 8.Restrictions on auditing services

8.1.Any auditing legal entity will be prohibited from providing the auditing services specified in articles 9.1.1, 9.1.2 and 9.1.3 of this law to the same business entity or organisation 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 will 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 will not apply to business entities and organisations subject to the standards specified in Article 4.1.2 and Article 4.1.3 of the Accounting Law.

CHAPTER THREE

CONDUCTING THE AUDITING ACTIVITIES

Article 9.Auditing activities

9.1.Auditing legal entities will conduct the following activities:

9.1.1.auditing financial statements;

9.1.2.reviewing financial statements;

9.1.3.assurance works other than audits and reviews; and

9.1.4.related services.

9.2.Auditing legal entities may conduct certified tax consultancy services subject to obtaining the relevant licence.

9.3.Unless otherwise stated in the law, the auditing legal entity may conduct the asset evaluation, finance and accounting consultancy services as well as and training.

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

9.5.It is prohibited for the auditing legal entity to audit the financial statements of such fiscal year during which it has also done asset evaluation and provided consultancy services on tax and accounting.

Article 10.Mandatory auditing of the financial statements

10.1.The following business entities and organisations are required to procure auditing of their financial statements:

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

10.1.2.business entities and organisations which subject to preparing consolidated financial statements;

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

10.1.4.foreign invested business entities and organisations;

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

10.1.6.other business entities and organisations required to procure auditing for their financial statements according to the laws and international treaties of Mongolia.

10.2.Business entities and organisations stated in Article 10.1 of this law will be required to procure financial statements auditing within the following timeframe:

10.2.1.for a joint stock company more than two weeks prior the shareholder's meeting which will discuss year-end financial statements of such financial year;

10.2.2.for a business entity or organisation, which is under the restructure and liquidation or proposing to sell all of its assets through the auction, 1 month prior the commencement of such actions;

10.2.3.for a bank, it must audit its year-end financial statement by 31 March of the subsequent financial year ; and

10.2.4.other business entities and organisations must audit their annual financial statements by 30 April of the subsequent financial year.

10.3.Issues with respect to timeframes for auditing of the financial statements of budget funded organisations, state and local owned business entities, organisations or business entities, organisations which have state or local ownership participation will be regulated by the Law on Budgets and other relevant laws.

10.4.Business entities and organisations other than those stated in Article 10.1 of this law may procure audits on their financial statements and individuals on their financial documents.

10.5.Auditing legal entities will be responsible for their audit opinion by their own assets.

Article 11.Reviewing financial statements and other assurance

11.1.Business entities and organisations may procure the services specified in articles 9.1.2, 9.1.3 and 9.1.4 of this law on their interim financial statements subject to a request from the authorised state regulatory authority and bank and financial institution.

11.2.Business entities and organisations may procure the services specified in Article 9.1.1 of this law by their own initiation except for cases as provided in Article 11.1 of this law.

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

11.3.1.review economic estimates and research the grounds for the issuing of securities and provide a relevant opinion;

11.3.2.other assurance work stated in the International Standards of Auditing; and

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

Article 12.Auditing work documents and their archiving

12.1.An audit opinion must be supported by true-based evidences those collected by auditor during the audit activities and including information form saved on paper, films, electronically and in any other items.

12.2.An auditing team or auditor will collect working documents by way of inspection, observing, questioning, interviewing, confirmation, re-calculating and performing analytical procedures, at the during the process of auditing financial statement and issue an opinion by performing research and substantive analytics on them.

12.3.An auditing team and auditor will maintain the record of works performed, document findings and document the opinion.

12.4.Auditing work papers should satisfy the requirements of working documents stated in the International Standards of Auditing.

12.5.Auditing work papers are the property of the auditing legal entity and will be kept for 10 years.

Article 13.Agreement

13.1.An auditing service agreement should be concluded, in writing, between the auditing legal entity and the client. The agreement will be effective from the date it is signed and stamped by the authorised representatives of the auditing legal entity and client.

13.2.The respective obligations, responsibilities, scope of work, service term, fees, delivery of results, and regulations governing termination of the agreement should all be stated in the agreement.

Article 14.Rights and obligations of a client

14.1.A client has the following rights:

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

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

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

14.1.4.procure audit review, other review and other confirmation works and financial services and submit proposal to auditing legal entity regarding the recusing the appointed auditor due the circumstances specified in this law when doing mandatory due diligence and other assurance works pursuant to the laws.

14.2.A client has the following obligations:

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

14.2.2.to provide the auditor with conditions and opportunities 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 organisation in accordance with the standards, and also the relevant documents, materials and clarifications have been fully disclosed and the liabilities that may arise in relation to the preceding information.

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

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

14.2.7.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 will 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 will be paid based on the agreement.

14.5.Article 14.1.1 of this law will not apply to state budget funded organisations.

Article 15.Rights and obligations of auditor

15.1.An auditor will have the following rights:

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

15.1.2.to be familiar with audit working paper documents and information which previously conducted in relation to the client;

15.1.3.to demand and familiarise with the documents and information relevant to performing audit activities from corresponding banks and financial institutions and other relevant business entities and organisations.

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 will have the following obligations:

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 occurrence of circumstances under which it is unable to conduct audit or involve other professionals and inform about it to its own organisation and the client, if necessary;

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

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 documents, in the form acceptable to both of them, demanded by other auditing legal entities in accordance with Article 15.1.2;

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

15.2.7.not to do any action which is humiliating the other auditors reputation.

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

Article 16.Output of the auditing activities

16.1.An output of the auditing activities will be an opinion. If services other than financial auditing has been provided in accordance with the International Standards of Auditing, there will be reports required by the relevant standards. In accordance with the International Standards of Auditing, a serious internal control problems will 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 should 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 should 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 audit opinion will be reflected in annual financial statement which is covered by the audit activities.

Article 17.Possessor's rights regarding the audit

17.1.An employee and shareholder of a business entity, organisation 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 agreement.

17.2.Rights specified in Article 17.1 of this law will 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 member 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 organisations.

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 agreement will be entered with person who has ordered such services.

17.4.An authorised 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 will provide information from time of time as requested.

CHAPTER FOUR

POWERS OF STATE ORGANISATION WITH RESPECT TO AUDITING ACTIVITIES

Article 18.Organising the implementation of the law

18.1.The state central administrative organisation in charge of financial and accounting issues will 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 licence;

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

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

Article 19.Auditing legal entity

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

19.2.An auditing legal entity will conduct auditing activities based on the licence obtained from the state central administrative organisation in charge of financial and accounting issues.

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

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

19.3.2.a director, partner has a certified public accountant's life time title and obtained appropriate permits from the Institute;

19.3.3.must have at least two full time certified public accountants with life time title;

19.3.4.no professional ethics have been breached by auditors;

19.3.5.has an office and equipment's required for its operation;

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

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

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

19.3.9.additional requirements specified in other legislations.

19.4.An auditing legal entity which is authorised to provide auditing services to business entities and organisations subject to standards specified in Article 4.1.1 of Accounting Law will must have at least four life time certified public accountants.

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 will not apply to the branch director.

Article 20.A licence to conduct auditing activities

20.1.An applicant requesting for licence to conduct auditing activities (auditing licence) will prepare the following documents and submit them to the state central administrative organisation in charge of financial and accounting issues 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 licence;

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 audit quality review standards of auditing activity;

20.1.6.internal control regulation of organisation;

20.1.7.detailed curriculum of auditors;

20.1.8.reference on ethics of a certified public accountant;

20.1.9.consent from the Institute; and

20.1.10.payment receipt of stamp duty fee.

20.2.A licence to conduct auditing activities will be granted for 3 years term pursuant on decision of a Cabinet member in charge of financial and accounting issues 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 licence will 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 organisation and in other auditing legal entities under the contract.

Article 21.Quality control of auditing activities

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

21.2.An auditing legal entity will perform the quality monitoring on its auditors activities in accordance with the quality monitoring guidance approved by management of such auditing legal entity.

Article 22.Extension, suspension and termination of auditing licence

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

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

22.3.The following documents should be submitted for the extension of auditing licence:

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 licence will not be extended if the terms and conditions of the licence have been breached.

22.5.A Cabinet member in charge of financial and accounting issues will suspend auditing licence up to three months in the occurrence of the following circumstances:

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

22.5.2.Article 9.4 of this law has been breached;

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 breached Article 20.4 of this law.

22.6.A licence will be resumed if the circumstances for the suspension stated in Article 22.5 of this law were remedied.

22.7.A licence will be terminated in the following cases except as provided in the Licensing Law:

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

22.7.2.avoided to show the office, working documents and other necessary information that are required to perform quality monitoring 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 breaching this law, other legislation and regulations.

CHAPTER FIVE

Miscellaneous

Article 23.Liability for breach of law

23.1.Unless an official who has breached this law is subject to criminal liability, he or she shall be held liable as provided by the Law on Public Service.

23.2.An individual, legal person who has breached this law is subject to the liability in accordance with Criminal law or Law on Offence.

/This Article has been revised by the law of 04 December, 2015/

Article 24.Entry into force

24.1.This law will become effective as of 1 January 2016.

SPEAKER OF THE PARLIAMENT OF MONGOLIA Z.ENKHBOLD