Law on Auditing of Montenegro

Unofficially consolidated translation Law on Auditing ("Official Gazette of Montenegro ", No. 1/2017 dated 9.1.2017), and entered into force on 17.1.2017. I. BASIC PROVISIONS Subject matter Article 1 This Law shall regulate the conditions and manner of carrying out the financial statements audit (hereinafter referred to as: audit), the granting and withdrawal of audit licenses to a statutory auditor and of audit permits to an audit firm, a statutory audit, as well as the other matters concerning the audit. Auditing Article 2 Auditing is the process of checking and evaluating financial statements as well as data and methods applied in the preparation of financial statements on the basis of which an independent expert opinion is given on whether the financial statements in all materially significant aspects give a true and fair presentation of the financial condition and results of a legal entity by applying the International Standards of Auditing and the Code of Ethics for Professional Accountants. Financial statements, referred to in paragraph 1 of this Article, constitute a set of financial statements and other supporting statements that include management reports, management comments, opinions and other documents. The financial statements referred to in paragraph 2 of this Article in accordance with the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) are:

1. statement of financial position (balance sheet);
2. statement of the overall result (balance of success);
3. statement of cash flows;
4. statement of changes in capital;
5. Notes on financial statements. Auditing standards Article 3 The audit is carried out in accordance with the International Standards on Auditing (ISA), issued by the International Standards on Auditing and Assurance Standards Board (IAASB), as a body of the International Federation of Accountants (IFAC), which were adopted and published by the public administration body in charge of finances (hereinafter: the Ministry), or a legal entity entrusted with carrying out such tasks. Use of gender-sensitive language Article 4 The terms used in this Law for natural persons in the masculine gender imply the same expressions in the feminine gender.

The definitions of terms Article 5 The terms used herein shall have the following meanings:

1. Code of Ethics for Professional Accountants means a code adopted on the basis of IFAC International Code of Ethics for Professional Accountants – ICEPA, defining the generally accepted standards of professional accountants’ behaviour;
2. certified accountant means a person who has an accountant certificate issued in accordance with the Accounting Law;
3. the register means a directory of statutory auditors and audit firms;
4. group auditor means a statutory auditor or audit firm carrying out the audit of consolidated accounts;
5. key audit partner means:

• the statutory auditor designated by an audit firm for a particular audit engagement as being primarily responsible for carrying out the audit on behalf of the audit firm; or
• in the case of a group audit, the statutory auditor designated by an audit firm as being primarily responsible for carrying out the audit at the level of the group and the statutory auditor designated as being primarily responsible at the level of subsidiaries; or
• the statutory auditor who signs the audit report;

6. parent undertaking means an undertaking which controls one or more subsidiary undertakings;
7. subsidiary undertaking means an undertaking controlled by a parent undertaking;
8. group means a parent undertaking and all its subsidiary undertakings;
9. network means an organisation which is aimed at mutual cooperation, and to which audit firms or statutory auditors belong, which is clearly aimed at profit or cost-sharing or shares common ownership, control or management, common quality control policies and procedures, a common business strategy, the use of a common brand name or a significant part of professional resources; 10)The IAASB means the International Auditing and Assurance Standards Board as an independent regulatory body of the International Federation of Accountants (IFAC); 11)IFAC means the International Federation of Accountants, which is a global professional body in the field of accounting profession; 12)IFRIC (International Financial Reporting Interpretations Committee) means an IASB committee responsible for analysis of accounting issues in the context of existing International Accounting Standards (IAS) and IASB Framework; 13)ISAs means the International Standards on Auditing (ISA) published by the IAASB and IFAC;
10. IFRSs means International Financial Reporting Standards;
11. ISPPIA means International Standards for the Professional Practice of Internal Auditing published by the International Institute of Internal Auditors (IIA). II.TERMS AND MANNER OF AUDITING The carrying out of an audit Article 6 The audit shall be performed by a statutory auditor or an audit firm. The statutory auditor and the audit firm may carry out audits on the territory of Montenegro if fulfilling the requirements set forth by this Law. Statutory auditor Article 7 A statutory auditor is a natural person who holds an audit license, issued in accordance with this Law.

The statutory auditor may engage another person to assist him in carrying out an audit, provided that such person carries out the audit under his supervision. The statutory auditor shall act in accordance with the Code of Ethics for Professional Accountants in the performance of the audit engagement. Professional ethics, independence and objectivity Article 8 Statutory auditors and audit firms shall apply the principles of professional ethics in accordance with the Code of Ethics for Professional Accountants. When carrying out an audit, a statutory auditor or an audit firm shall recognize the possibility of a material misstatement or irregularities, including fraud or error, notwithstanding the statutory auditor’s or the audit firm’s past experience of the honesty and integrity of the audited entity and the responsible persons in the entity (professional skepticism). The statutory auditor or the audit firm shall act in accordance with paragraph 2 above, in particular with respect to management estimates relating to fair values of assets, the impairment of assets, asset management and future cash flows relevant to the entity’s ability to continue as a going concern. The statutory auditor or the audit firm shall be independent from the audited entity and:

1. shall not be involved in decision-taking of the audited entity at least in the period during which the audit is carried out, i.e. the period covered by the financial statements to be audited,

2. shall not be in conflict of interest, and shall take all measures to ensure that his/its independence is not affected by the relationships with his/its network, managers, other auditors, employees and other persons whose services are placed at the disposal or under the control of the statutory auditor or the audit firm, or any other person directly or indirectly linked to the statutory auditor or the audit firm by control;

3. shall not carry out an audit if there is any threat of self-review, self-interest, advocacy, familiarity or intimidation created by financial, personal, business, employment or other relationships between the statutory auditor, the audit firm, its network and any person in a position to influence the outcome of the audit, and the audited entity, as a result of which an objective, reasonable and informed third party, taking into account the safeguards applied, would conclude that the statutory auditor’s or the audit firm’s independence is compromised. A statutory auditor, an audit firm, their key audit partners, their employees and any other person whose services are placed at the disposal or under the control of such statutory auditor or audit firm and who is directly involved in the audit activities and persons closely associated with them, may not hold or have a material and direct beneficial interest in, or engage in any transaction in any financial instrument issued, guaranteed or otherwise supported by any audited entity. A statutory auditor or an audit firm shall document in the audit report all significant threats to his/its independence, as well as the safeguards applied to mitigate those threats. If during the period covered by the financial statements, an audited entity is acquired, merged with, or taken over, the statutory auditor or the audit firm shall identify their interests or relationships, including any non-audit services provided to the successor of the audited entity, which could compromise the auditor’s independence and ability to continue with the audit after the acquisition, merger or takeover. In the case referred to in paragraph 7 above, the statutory auditor or the audit firm shall take all such measures and/or safeguards to terminate any interest or relationship that would compromise his/its independence and objectivity of the audit, at the latest within three months. Owners or shareholders of an audit firm as well as the members of the management and supervisory bodies of such a firm or an affiliated firm, shall not intervene in the execution of the audit in any way which jeopardizes the independence and objectivity of the statutory auditor who carries out the audit on behalf of the audit firm. Restrictions on the audit Article 9 A statutory auditor may not carry out an audit of a legal entity:

4. where he is a shareholder, member or founder thereof;

5. where he has performed accountancy, or advisory services for the audit year,

6. in other cases, as established by the Code of Ethics for Professional Accountants. The granting of an audit license Article 10 Audit licenses may be granted to a person who:

7. has the title of certified accountant;

8. has three years of working experience in auditing, of which at least two years in audit work under the supervision of an authorized auditor;

9. has not been convicted of a criminal offense that makes him unfit to perform work in the field of auditing. The audit license shall be granted and withdrawn by the Ministry. The audit license shall be granted on the basis of an application submitted to the Ministry. A license application shall be accompanied by evidence of the fulfilment of the requirements imposed by paragraph 1 above. The license shall be issued for an indefinite period of time. Licenses shall be entered in the Register of Statutory Auditors. Documentation to be filed with an audit license application shall be set forth by a regulation issued by the Ministry. License recognition Article 11 An audit license shall be recognized to a statutory auditor from an EU Member State, who holds an audit license approved by the competent authority of the EU Member State, which by the content and licensing requirements corresponds to the license referred to in Article 10 herein. Audit license may be recognized, subject to reciprocity, to a statutory auditor who holds an audit license issued by the competent authority of a third country, which by the content and licensing requirements corresponds to the license referred to in Article 10 herein. Persons referred to in paragraphs 1 and 2 above, in a license granting procedure, shall pass an examination of the knowledge of national regulations governing taxes, compulsory social security and commercial law. The manner and documentation required for the granting of the license and the taking of the examination referred to in paragraphs 1, 2 and 3 above shall be set forth by the Ministry's regulation. Continuing professional education Article 12 Statutory auditors shall be required to take part in appropriate professional trainings in order to maintain their theoretical knowledge, professional skills and values at a sufficiently high level. The professional training referred to in paragraph 1 of this Article shall be carried out on the basis of a programme of continuing professional education, established by the Ministry. The professional training referred to in paragraph 1 above shall be organized and implemented by the Ministry, or a legal entity entrusted with the performance of such tasks. The Ministry shall submit the programme referred to in paragraph 2 of this Article to the Audit Council for opinion. License withdrawal Article 13 The Ministry shall withdraw the license to a statutory auditor:

10. if it is determined that the data on the basis of which the license was issued are untrue;

11. in case of revocation of the certificate;

12. if he/she performs auditing tasks unprofessionally and inconsistently with the ISA and the Code

of Ethics for Professional Accountants; 4) if he/she performs audit duties contrary to the provisions of this law; 5) if he/she does not remove the irregularities, that is, he does not implement additional measures within the period specified in the control procedure; and 6) if he does not meet other conditions established by this law The Ministry shall inform the issuing authority referred to in Article 11, paragraphs 1 and 2 of this Law of the existence of reasons for the withdrawal of the license referred to in paragraph 1 of this Article. Temporary withdrawal of license Article 14 The Ministry shall temporarily withdraw the license for a period of one year to a statutory auditor who is not professionally trained in accordance with Article 12 of this Law. The Audit Firm Article 15 The audit firm shall be a firm established to carry out the audit assignment in compliance with this Law. In accordance with this Law, the audit may be performed by an audit firm established in Montenegro where:

1. a majority of the voting rights must be held by statutory auditors who satisfy the conditions imposed by Article 10 of this Law, or by an audit firm established in Montenegro or in a Member State of the European Union;

2. a majority or up to a maximum of three-quarters of the members of the management body of the entity must be statutory auditors who satisfy the conditions imposed by Article 10 of this Law, or audit firms which are approved by any EU Member State. Where the firm referred to in paragraph 2 point 2 of this Article is a two-member firm, one member must be a person who satisfies the conditions imposed by Article 10 of this Law. Third-country audit firms may carry out audit assignments in Montenegro, provided they establish a business unit or a representative office in Montenegro in accordance with the Company Law. Permission to perform an audit Article 16 The audit firm may perform audit activities only on the basis of the audit permit issued in accordance with this Law. The license to perform the audit referred to in paragraph 1 of this Article is issued and withdrawn by the Ministry. Permission to perform an audit is issued for an indefinite period of time. The license referred to in paragraph 1 of this Article is issued on the basis of the application. The license referred to in paragraph 1 of this Article shall be entered in the register of audit companies. A company that has not obtained permission to carry out audits in accordance with this Law shall not contain the name "audit firm" in its name. Audit permit application Article 17 Application for an audit permit shall be submitted to the Ministry. The following supporting documents shall be submitted along with the application referred to in paragraph 1 above:

3. evidence of registration with the Central Registry of Business Entities.

4. decision on the appointment of the members of the Board of Directors, with the reasoning;

5. notice on the classification, issued by an authority in charge of statistical affairs;

6. evidence of at least two founders possessing license of a statutory auditor;

7. contract of compulsory insurance against liability for damages in accordance with article 19 of this Law;

8. for audit firms from EU Member States, or a third countries, an opinion of the competent authority (institute, chamber, association and the like) constituting:

• a list of regulations of such a country governing the requirements to carry out audit and the audit quality control,
• a statement from the competent authority that the audit firm in a Member State of the European Union, or a third country, is entitled to perform audit activities and whether there are limitations in carrying out the audit,
• a statement by the competent authority that it shall inform the Ministry about all the quality assurance measures imposed against the audit firm of a Member State of the European Union or a third country. The evidence referred to in paragraph 2, point 1 shall be obtained by the Ministry ex officio. The Ministry shall decide on the application referred to in paragraph 1 of this Article. An appeal may be lodged to the Ministry against the decision of an authorized person. An appeal against the decision referred to in paragraph 4 above shall not postpone the enforcement of the decision. An administrative dispute may be instituted against the decision of the Ministry referred to in paragraph 4 of this Article. Detailed conditions and documentation required for the issuance of the audit permit shall be determined by the Ministry's regulation. Withdrawal of an audit permit Article 18 The Ministry shall withdraw the audit permit to an audit firm where:

1. it is determined that the information on the basis of which the permit was issued is false;
2. the firm ceases to fulfil some of the requirements on the basis of which the license was issued;
3. it fails to comply with the provisions of this Law in carrying out the audit assignments;
4. on behalf of the firm, the audit is carried out by a person to whom the audit license has been withdrawn;
5. the firm fails to remove deficiencies or fails to implement additional measures within the deadline specified in the inspection procedure; and
6. in other cases prescribed by this Law. Liability insurance Article 19 The audit company and the statutory auditor are obliged to conclude a contract on compulsory liability insurance for damage sought by their work to the audited person. The statutory auditor is obliged to conclude the contract referred to in paragraph 1 of this Article on the day of commencement of the audit activities. The sum of insurance referred to in paragraph 1 of this Article is prescribed by the Ministry. Non-audit services Article 20 In addition to audit assignment, an audit firm or a statutory auditor may also provide services in the field of finance and accountancy, financial analysis and control services, tax and other business consulting, the valuation of companies, assets and liabilities, the development and economic evaluation of investment projects. The audit firm or the statutory auditor may not carry out the audit of an entity to which providing the services referred to in paragraph 1 of this Article for the financial year in which the services were rendered. The prohibition referred to in paragraph 2 of this Article shall also apply to the parent undertaking

and subsidiary undertaking of the audit firm or the statutory auditor. Entry in the register Article 21 The Register of Statutory Auditors and the Register of Audit Firms shall be maintained and updated by the Ministry. The register shall be kept in electronic form and shall be published on the Ministry's website. The Register of Statutory Auditors shall contain in particular:

1. name, surname and address of the statutory auditor;
2. the number and date of the decision issuing the audit license;
3. the number and date of the decision on the withdrawal of the audit license;
4. the name, registered office and registration number of the audit firm by which the statutory auditor is employed or otherwise engaged;
5. data on the registration as statutory auditor with the competent authorities of the foreign countries (name of the authority and registration number). The Register of Audit Firms shall contain in particular:
6. the name, registered office and registration number of the audit firm;
7. the number and date of the decision on issuing the audit permit;
8. the number and date of the decision on the withdrawal of the audit permit;
9. the primary contact person and the website address of the audit firm;
10. name, surname and registration number of statutory auditors, who are employed or otherwise associated with the audit firm;
11. name, surname and address of the founders of the audit firm;
12. name, surname and address of the members of the board of directors, that is, the executive director;
13. information on the possible registration of the founders of the audit firm with the competent authorities of foreign countries (name of the authority and registration number). Change of data Article 22 The statutory auditor or the audit firm shall notify the Ministry of any changes in the data entered in the Register of Statutory Auditors, i.e. the Register of Audit Firms, no later than seven days after the change occurring. Data protection Article 23 A statutory auditor or an audit firm shall keep confidential the information and data obtained in the course of an audit. Where the statutory auditor or the audit firm is replaced by another statutory auditor or audit firm, the former statutory auditor or audit firm shall provide to the incoming statutory auditor or audit firm with access to all relevant information and data concerning the audited entity and the most recent audit of that entity. The provision of paragraph 1 of this Article shall also apply in case a statutory auditor or an audit firm ceased to be engaged in audit assignment. Notwithstanding paragraph 1 above, where a statutory auditor or an audit firm carries out an audit of an undertaking which is a part of a group, whose parent undertaking is situated in a third country it shall provide to the group auditor situated in a third-country access to information and data necessary to carry out the audit of consolidated financial statements of the parent undertaking.

III.AUDIT REPORTS AND TRANSPARENCY Audit report Article 24 Audit report with an opinion on the financial statements of a legal entity shall be made in writing, in compliance with ISAs. Audit report with an opinion on the financial statements of a legal entity shall be signed by a statutory auditor on his own behalf or on behalf of an audit firm. If several statutory auditors have been simultaneously engaged in the audit process, the audit report shall be signed by all statutory auditors and a person authorized to represent an audit firm. Financial statements subject to the audit shall be attached to the auditor’s report. Audit report for entities that are required to prepare the management report, in accordance with the Accounting Law, shall contain an opinion on whether the management report is consistent with the financial statements for the same financial year and whether it has been prepared in accordance with the provisions of the Accounting Law. The provision of paragraph 5 of this Article shall also apply to consolidated management reports. Employment prohibition Article 25 A statutory auditor or a key audit partner at least two years after the signing of the audit report shall not:

1. take up a key management position in the audited entity,
2. become a member of the audit committee of the audited entity,
3. become a non-executive member of administrative body or a member of the supervisory body of the audited entity. The employees in an audit firm or a statutory auditor carrying out an audit, as well as the person referred to in Article 7, paragraph 2 of this Law, may not perform the duties, nor be members of the bodies referred to in paragraph 1 above before the expiration of a period of at least one year since the signing of the audit report. Transparency report Article 26 An audit firm or a statutory auditor who carries out the audit of entities referred to in Article 29 of the Law shall, by 31 March of the current year for the preceding year, submit to the Audit Council a transparency report for publication on the Audit Council’s website. The transparency report referred to in paragraph 1 above shall contain in particular:
4. a form of the entity and ownership of the audit firm i.e. statutory auditor;
5. a description of the network and the legal and structural arrangements in the network, if the audit firm is a member of the network,
6. a description of the governance structure of the audit firm,
7. a description of the internal quality control system of the audit firm and a statement by the administrative body on the effectiveness of its functioning;
8. a date when the last quality assurance review was carried out,
9. a list of entities referred to in Article 29 of this Law for which the audit firm or the statutory auditor carried out the audit during the preceding financial year,
10. a declaration concerning the audit firm’s or the statutory auditor’s independence, which also contains an internal review of independence compliance;
11. a declaration on the policy followed by the audit firm concerning the continuing professional education;
12. financial information and data on the total revenue from the performance of the audit and

revenues from non-audit services, 10)the basis for establishing the key audit partners' remuneration. The person authorized to represent the audit firm or the statutory auditor shall sign the transparency report. Keeping audit documentation Article 27 The audit firm, i.e. statutory auditors, are obliged to keep audit documentation for at least six years, starting from the year to which the audit relates. Reporting obligation Article 28 The audit firm, i.e. the statutory auditor, is obliged to report to the audit committee of the legal entity on key issues arising from the audit, in particular the work and failures of internal control. IV. AUDIT MANDATORY AND INTERNAL AUDIT Audit mandatory Article 29 Audit is mandatory for:

• public interest entities;
• medium-sized legal entities;
• parent undertakings, which, together with subsidiary undertakings, meet the conditions for classification in the group of medium legal entities;
• parent legal entities, which, together with subsidiary undertakings, meet the conditions for classification in the group of large legal entities;
• investment companies;
• investment funds;
• investment fund management companies;
• voluntary pension funds;
• voluntary investment fund management companies; and
• other collective investment schemes. Public interest entities, within the meaning of paragraph 1, item 1 of this Article, are:

1. legal entity issuing securities and other financial instruments traded on an organized market;
2. banks and other financial institutions;
3. insurance companies; and
4. legal entities classified in the category of large legal entities in accordance with the Law on Accounting. The classification of legal entities, i.e. the group of legal entities referred to in paragraph 1 of this Article, is carried out in accordance with the Law on Accounting. Audit firms and statutory auditors are obliged to replace the statutory auditor of the audit or the principal audit partner for the audit of the audit report, unless otherwise regulated by a separate law, at the latest every seventh year from the beginning of the audit of the financial statements. In the case referred to in paragraph 4 of this Article, the statutory auditor, i.e. the principal audit partner for audit may perform an audit with the same legal entity, after the expiration of three years from the date of signing the last audit report for that legal entity.

Audit committee Article 30 Entities referred to in Article 29 of this Law shall appoint an audit committee comprising of at least three members. The audit committee shall be appointed by the general meeting of shareholders or the competent body in accordance with the entity’s articles of association. At least one member of the audit committee shall have knowledge in the field of accountancy and shall not be an employee, a shareholder or a member of the governing body in the entity referred to in paragraph 1 above. The competences of the audit committee Article 31 The audit committee shall:

1. monitor the financial reporting process;
2. monitor the effectiveness of the undertaking’s internal quality control and internal audit,
3. monitor the statutory audit of the annual and consolidated financial statements,
4. monitor the independence of the engaged statutory auditors or audit firms that carry out the audit, and in particular the appropriateness of the provision of non-audit services to the audited entity, in accordance with Article 20 of this Law;
5. make recommendations to the general meeting of shareholders or founders about the selection of an audit firm or a statutory auditor;
6. deliberate on plans and annual reports of internal control, as well as other issues related to financial reporting and auditing. Submission of audit reports Article 32 Legal entities referred to in Article 29 of this Law are obliged to submit to the administrative body responsible for taxes (hereinafter: Tax Administration), an audit report with the auditor's opinion on financial statements, in paper and electronic form, no later than June 30 of the current year for the previous business year. The audit report with an opinion on the financial statements referred to in paragraph 1 of this Article shall be published by the Tax Administration on its website. Internal auditor Article 33 A large legal entity is obliged to have an internal auditor. Internal audit with a large legal entity may be carried out by an internal auditor or a separate organizational part of the legal entity in charge of internal audit. A person who performs internal audit activities in a large legal entity may not perform other tasks with that legal entity. An internal auditor, i.e. a person who manages a special organizational section for internal audit, may be a person who has at least a seventh-level higher education qualification (VII), in the volume of 240 credits of MCTS and work experience of at least three years in accounting or auditing jobs. Method of performing internal audit Article 34 Internal auditing is carried out in accordance with International Standards for the Professional Practice of Internal Auditing. Internal audit is organized in a way that ensures the durability of internal audit, availability of audit to all activities, independence, objectivity and impartiality in the work of the internal auditor and

timely reporting on the findings of internal audit, adequate and organized performance of the function of internal audit. Internal audit plan Article 35 The internal audit of a large legal entity is carried out on the basis of annual internal audit plans, which are made on the basis of a risk assessment. The internal audit plan referred to in paragraph 1 of this Article contains in particular:

1. the objectives and tasks of internal audit;
2. areas of business in which risks are particularly pronounced;
3. areas of business that will be subject to audit;
4. deadlines for the execution of planned internal audit activities;
5. the dynamics of reporting on the findings of the internal audit. V.AUDIT COUNCIL Audit Council Article 36 Monitoring and improvement of audit practices is carried out by the Audit Council. Juridsdiction of the Audit Council Article 37 In carrying out the tasks referred to in Article 36 of this Law, the Audit Council:
6. considers and takes positions on issues of development and improvement of audit practice in Montenegro;
7. monitor the process of application of auditing standards;
8. provides initiatives for appropriate and timely solutions in order to apply audit standards as efficiently as possible;
9. provides advice to policymakers, regulators and state bodies;
10. provides professional assistance to improve the quality of financial reporting;
11. publishes on its website reports on the transparency of audit firms, i.e. statutory auditors;
12. gives an opinion on the annual control plan of audit firms and statutory auditors established by the Ministry;
13. provides an opinion on the continuing professional education program of statutory auditors;
14. gives an opinion on the training program of authorized officials; and
15. performs other issues of importance for the realization and improvement of audit practice in Montenegro. The Council considers and gives opinions on drafts and proposals of laws and other regulations of importance for auditing. The Opinion referred to in paragraph 2 of this Article shall be submitted by the Council to the competent ministry which has prepared a law or other regulation of relevance for the audit. The competent ministry referred to in paragraph 3 of this Article shall, within 30 days from the date of submission of the opinion, inform the Council of its positions taken on the occasion of the Opinion of the Council. If the competent ministry and the Council do not reach an agreement regarding the opinion on a particular regulation, the Council may submit its opinion to the Government. Work of the Audit Council Article 38 The work of the Audit Council is public. The Audit Council publishes its conclusions, recommendations and opinions on its website. The Audit Council adopts an annual work programme and a work report, which it submits to the

Government. The Audit Council publishes the annual work programme and work report on its website. The Audit Council adopts the Rules of Procedure, which regulate the organization and operation of the Council. Administrative and technical tasks for the needs of the Audit Council are performed by the Ministry. Composition and appointment of the Audit Council Article 39 The Audit Council has five members who, at the proposal of the Minister of Finance, are appointed and dismissed by the Government. A person may be appointed as a member of the Audit Council, who:

1. has at least a seventh-level higher education qualification (VII) in the volume of 240 credits of MCTS,
2. have at least five years of work experience in accounting, auditing, finance or legal affairs, he has not been convicted of a criminal offence that makes him unworthy of performing duties within the competence of the Council. The majority of the members of the Audit Council shall be persons who:
3. are not actively participating in the performance of audit assignments in accordance with the provisions of this Law; or have not participated in the performance of the audit assignments three years prior to being appointed in the Audit Council,
4. have not been entitled to vote as members of the audit firm three years prior to being appointed in the Audit Council;
5. have not been members of the administrative or governance body of the audit firm three years prior to being appointed,
6. have not been employed by the audit firm or the statutory auditor, i.e. otherwise associated with them, three years prior to being appointed. With the proposal for the appointment of members of the Audit Council, evidence shall be provided on the fulfilment of the conditions referred to in paragraphs 2 and 3 of this Article. Members of the Audit Council shall be appointed for a period of four years with the possibility of re-appointment, no more than twice. Council funding Article 40 Funds for the work of the Audit Council are provided from the Budget of Montenegro. Protection of the confidentiality of data Article 41 Members of the Audit Council shall keep the information obtained in the performance of the duties within the competence of the Audit Council confidential, in accordance with the law governing the confidentiality of data. The provision of paragraph 1 above shall also apply to the members of the Audit Council whose membership of the Council has ceased. VI. OVERSIGHT OF THE WORK OF AUDIT FIRMS AND STATUTORY AUDITORS Oversight Article 42 Oversight over the implementation of this Law and regulations adopted pursuant to this Law shall be performed by the Ministry.

The oversight referred to in paragraph 1 of this Article shall be performed by an authorised official of the Ministry in accordance with this Law and the law regulating inspection control. The authorised official referred to in paragraph 2 of this Article, shall be a person who has at least five years of experience in accountancy and auditing. The authorised official referred to in paragraph 2 of this Article shall attend special training programme approved by the Ministry. The training programme referred to in paragraph 4 of this Article shall be presented by the Ministry to the Audit Council for opinion. Cooperation in the course of inspection Article 43 The Ministry, in the process of inspection, shall cooperate, provide assistance and information and carry out other forms of cooperation with the competent authorities of other countries. The detailed way of cooperation referred to in paragraph 1 of this Article shall be prescribed by the Ministry. The subject matter of oversight Article 44 Apart from obligations and powers determined by the law regulating inspection control, an authorised official shall have the obligation and authority to control in particular whether an audit firm or a statutory auditor:

1. performs an audit in accordance with this Law, the International Standards on Auditing and the rules of the auditing profession;
2. complies with the independence requirements;
3. has the quantity and quality of the engaged resources in accordance with audit standards;
4. meets the requirements for the granting of the audit permit, or audit license;
5. complies with the ethical requirements prescribed by the Code of Ethics for Professional Accountants; and
6. controls the way in which audit fees are charged. Inspection Article 45 The inspection referred to in Article 44 of this Law shall be carried out in an objective manner and in a procedure that excludes conflict of interest between an authorised official and an audit firm or a statutory auditor to be inspected. An authorised official in the course of the inspection shall inspect a sufficient number of audit documents, i.e. test samples to ensure a quality and complete inspection, while applying the International Standards on Auditing and requirements related to the independence of work. The Ministry shall adopt the annual inspection plan of the audit firms or statutory auditors and submit it to the Audit Council for opinion. The frequency of inspections Article 46 The inspection referred to in Article 44 of this Law shall be implemented at least once every three years with an audit firm or a statutory auditor carrying out audits of the entities referred to in Article 29 of this Law. The authorized official shall notify the audit firm or the statutory auditor in writing at least 15 days prior to the commencement of the inspection.

The scope of inspection Article 47 In case of inspection, the inspected audit firm or a statutory auditor shall enable the authorized official to review the audit reports, the documentation on the basis of which audit reports are prepared and other documents in accordance with the objective of the inspection. The audit firm or the statutory auditor shall ensure that the authorized official may carry out inspection at its headquarters i.e. his work premises. Inspection report Article 48 An authorized official shall prepare a report containing the findings and conclusions and shall submit it to inspected audit firm or statutory auditor. The report referred to in paragraph 1 of this Article shall also be submitted to the Audit Council. The Ministry shall publish on its website data containing measures imposed due to major deficiencies found in accordance with the provisions of this Law, including information on the type and the nature of the deficiencies identified and the identity of the person against whom the measure has been imposed. The data referred to in paragraph 3 of this Article shall be published upon the expiration of the deadlines for appeal or termination of the procedure on appeal, where appeal is dismissed. The Ministry shall maintain the data referred to in paragraph 3 of this Article on its website for at least five years from the date of publication thereof. The Ministry shall prepare an annual report on the inspections performed, to be submitted to the Audit Council and shall publish it on its website. Measures imposed in the course of an inspection Article 49 Where established that an audit firm or a statutory auditor fails to comply with the provisions of this Law and the rules of the auditing profession, the authorized official shall propose the following measures:

1. the elimination of deficiencies identified,
2. additional measures necessary for the elimination of deficiencies,
3. temporary ban on the audit firm or the statutory auditor,
4. withdrawal of license to a statutory auditor, or an audit permit to an audit firm. The measures referred to in paragraph 1 of this Article shall be carried out by the Ministry. Removal of identified deficiencies Article 50 An authorized official shall order the removal of identified deficiencies to the audit firm or the statutory auditor where:
5. the ownership and management structure of the audit firm is not in compliance with this Law,
6. the audit firm or the statutory auditor performs the audit assignments contrary to the provisions of this Law,
7. the audit firm or the statutory auditor fails to prepare the transparency report in accordance with Article 26 of this Law and fails to submit it to the Audit Council for the purpose of publishing;
8. the audit firm or the statutory auditor fails to fulfil the requirements imposed to obtain the audit permit i.e. license.

Decision Article 51 The decision ordering the removal of deficiencies shall contain in particular:

1. a description of the deficiencies identified,

2. the deadline by which the audit firm or the statutory auditor shall remove the deficiencies, and file a report on the removal of deficiencies,

3. evidence of the removal of deficiencies which the audit firm, or the statutory auditor shall submit to an authorized official. Additional measures Article 52 An audit firm or a statutory auditor shall be required, through additional measures, to:

4. update the internal quality control system in carrying out audits,

5. improve internal control over the handling of confidential data;

6. take other measures in accordance with this Law, the International Standards on Auditing and the rules of the auditing profession. VII.PENALTY PROVISIONS Article 53 A fine ranging from EUR 500 to EUR 16,500 shall be imposed on an entity for violation, in cases where:

7. failing to obtain an audit license, while using the words "audit firm" in its title (Article 16 Paragraph 6);

8. failing to appoint an audit committee comprising of at least three members (Article 30 Paragraph 1);

9. failing to submit audit report with an opinion on financial statements to the Tax Administration not later than June 30 of the current year for the preceding financial year, in paper and electronic form (Article 32 Paragraph 1);

10. failing to appoint Internal Auditor (Article 33, Paragraph 1). For the violation referred to in paragraph 1 of this Article, a responsible person in the entity shall also be fined with an amount ranging from EUR 250 to EUR 2,000. Article 54 A fine ranging from EUR 500 to EUR 16,500 shall be imposed on a legal entity for a violation, where: 1)performing audit activity, while a majority of the voting rights are not held by statutory auditors who satisfy the conditions imposed by Article 10 of this Law, or by an audit firm established in Montenegro or in a Member State of the European Union (Article 15, paragraph 2, point 1);

11. performing the audit activity, while a majority or up to a maximum of three-quarters of the members of the management body of the entity are not statutory auditors satisfying the conditions imposed by Article 10 of this Law, or audit firms which are approved by any EU Member State (Article 15, paragraph 2, point 2);

12. performing an audit activity and has not been granted an audit license in accordance with this Law (Article 16, paragraph 1);

13. failing to conclude a contract of compulsory insurance against liability for damages that may be caused to a person for whom the audit is performed (Article 19 paragraph 1);

14. failing to notify the Ministry of changes in the data entered in the Register of Audit Firms no later than seven days after the change occurring (Article 22);

15. failing to prepare audit report with an opinion on the financial statements of a legal entity in writing (Article 24 paragraph 1);

16. failing to submit to the Audit Council a transparency report by 31 March of the current year for the preceding year (Article 26 paragraph 1);

17. failing to keep audit documentation for at least six years starting from the year to which the audit relates (Article 27). For the violation referred to in paragraph 1 of this Article, a responsible person in a legal entity - the audit firm shall be fined with an amount ranging from EUR 500 to EUR 2,000. Article 55 A statutory auditor - a natural person shall be fined with a fine ranging from EUR 250 to EUR 2,000 where:

18. performing an audit of an entity where he is a shareholder, member or founder (Article 9, Paragraph 1, Point 1),

19. performing an audit of a legal entity for which he has performed accountancy or provided advisory services for the audit year (Article 9, Paragraph 1, Point 2),

20. failing to conclude a contract referred to in Article 19 paragraph 1 of this Law on the day of the commencement of the performance of the audit assignment (Article 19, paragraph 2);

21. failing to inform the Ministry of the change of data entered in the Registry of Statutory Auditors, within a period of seven days from the date of the change occurring (Article 22);

22. failing to prepare an audit report with an opinion on the financial statements of a legal entity in writing (Article 24, paragraph 1);

23. failing to submit to the Audit Council a transparency report by March 31 of the current year for the preceding year (Article 26, paragraph 1);

24. failing to keep audit documentation for at least six years starting from the year to which the audit relates (Article 27). VIII.TRANSITIONAL AND FINAL PROVISIONS Deadline for adoption of by-laws Article 56 Bylaws for the implementation of this law shall be adopted within six months from the date of entry into force of this Law. Pending the adoption of bylaws referred to in paragraph 1 of this Article, bylaws adopted pursuant to the Law on Accounting and Auditing ("Official Gazette of the Republic of Montenegro", No. 69/05 and "Official Gazette of Montenegro", No. 80/08 and 32/11), shall apply. Appointment of the Audit Council Article 57 The Audit Council shall be appointed within three months from the date of entry into force of this Law. On the date of appointment of the Audit Council, the Accounting and Audit Council, established in accordance with the Law on Accounting and Auditing ("Official Gazette of the Republic of Montenegro ", No. 69/05 and "Official Gazette of Montenegro", No. 80/08 and 32/11), ceases to operate. Appointment of the Audit Committee Article 58 Legal entities which were not obliged to appoint an Audit Committee until the entry into force of this Law shall, within nine months of the entry into force of this Law, appoint an Audit Committee in accordance with Article 30 of this Law.

Validity of permits and licenses Article 59 Operating permits issued to the audit company and licenses issued to the statutory auditor in accordance with the Law on Accounting and Auditing ("Official Gazette of the Republic of Montenegro", No. 69/05 and "Official Gazette of Montenegro", No. 80/08 and 32/11) remain in force. Business alignment Article 60 The audit firm and the statutory auditor referred to in Article 59 of this Law are obliged to align their operations with the provisions of this Law within six months from the date of entry into force of this Law. Initiated proceedings Article 61 The procedures for issuing permits, i.e. licenses for conducting audits, initiated by the entry into force of this Law, shall be terminated according to the provisions of this Law. Expiration date Article 62 On the day of entry into force of this Law, the provisions of the Law on Accounting and Auditing ("Official Gazette of the Republic of Montenegro", No. 69/05 and "Official Gazette of Montenegro", No. 80/08 and 32/11) relating to audit) cease to apply. Entry into force Article 63 This Law shall enter into force od the eight day following its publication in the Official Gazette of Montenegro.