company audits priya

7/27/2019 Company Audits Priya

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INTRODUCTION

A company is said to be an artificial person created by law having a separate legalentity distinct from its shareholders.

It cannot be directly managed by its owners, i.e., shareholders, because they are

very large in number having small holding and also scattered over a wide area.

As such, the management and control of the affairs of the company is done by

other persons generally known as directors.

Hence, it becomes essential for a company to appoint an independent and

qualified person, i.e., an auditor, to verily and certify the truth and fairness of the

financial statements


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Definition of Auditor

An official whose job it is to carefully check the accuracy of business records. Anauditor can be either an independent auditor unaffiliated with the company being

audited or a Captive auditor and some are elected public officials. The term is

sometimes synonymous with "comptroller." Auditors are used to ensure that

organizations are maintaining accurate and honest financial records and

statements. Central Government Act Section 233B in the Companies Act, 1956


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PROVISION OF SEC.233B

(1) Where in the opinion of the Central Government it is necessary so to do inrelation to any company required under clause (d) of sub- section (1) of

section 209 to include in its books of account the particulars referred to

therein, the Central Government may, by order, direct that an audit of cost

accounts of the company shall be conducted in such manner as may be

specified in the order by an auditor 2[ who shall be a cost accountant

within the meaning of the Cost and Works Accountants Act, 1959 (23 of

1959 ): Provided that if the Central Government is of opinion that sufficient

number of cost accountants within the meaning of the Cost

[ The auditor under this section shall be appointed by the Board of directors of

the company in accordance with the provisions of sub- section (1B) of section 224

and with the previous approval of the Central Government: Provided that before

the appointment of any auditor is made by the Board, a written certificate shall

be obtained by the Board from the auditor proposed to be so appointed to theeffect that the appointment, if made, will be in accordance with the provisions of

sub- section (1B) of section 224.]

(2) An audit conducted by an auditor under this section shall be in addition toan audit conducted by an auditor appointed under section 224.

(3) An auditor shall have the same powers and duties in relation to an auditconducted by him under this section as an auditor of a company has under

sub- section (1) of section 227 and such auditor shall make his report to


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the 2[ Central Government] in such form and within such time as may be

prescribed and shall also at the same time forward a copy of the report to

the company.]

(4) 3[ (a) A person referred to in sub- section (3) or sub- section (4) of section226 shall not be appointed or re- appointed for conducting the audit of

the cost accounts of a company.

(b) A person appointed, under section 224, as an auditor of a company, shall notbe appointed or re- appointed for conducting the audit of the cost accounts of

that company.

(c) If a person, appointed for conducting the audit of cost accounts of a company,

becomes subject, after his appointment, to any of the disqualifications specifiedin clause (a) or clause (b) of this sub- section, he shall, on and from the date on

which he becomes so subject, cease to conduct the audit of the cost accounts of

the company.

The Central Government may direct the company whose cost accounts have been

audited under this section to circulate to its members, along with the notice of

the annual general meeting to be held for the first time after the submission of

such report, the whole or such portion of the said report as it may specify in this

behalf.


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(11) If default is made in complying with the provisions of this section, the

company shall be liable to be punished with fine which may extend to five

thousand rupees, and every officer of the company who is in default, shall beliable to be punished with imprisonment for a term which may extend to three

years, or with fine which may extend to five thousand rupees, or with both.]

Power of Registrar to call for information, etc. The company shall, within thirty

days from the date of receipt of a copy of the report referred to in sub- section (4)

furnish the Central Government with full information and explanations or every

reservation or qualification contained in such report.


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GROUPS OF AUDITING

Audits can be classified into two groups namely: Optional Audit and Compulsory

Audits. The audit which is not legally required is called optional audit which is

otherwise known as private audit. The audit which is legally required is called

compulsory audit which is otherwise known as statutory audit.


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Liability under Optional Audits

The audits which are not legally required are called optional audits. Audit of soletrading concerns, audit of partnership firms, etc. are examples to optional audits.

In case of optional audits, auditor comes across two types of liabilities which are

as follows;

Liability for Negligence: While conducting the work of audit, auditor should take

proper care and should show proper skills. Otherwise it amounts to negligence.

For example: Mr. X is a sole trader and Mr. A is his auditor. A has conducted audit

work so negligently and therefore he could not find misappropriation of cash,

amounting to Rs. 10000/-. Now A is liable to pay such amount to X, it is called

liability for negligence


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Qualifications of Company Auditor

According to Sec. 226 of Companies Act, Company auditor should be either

Chartered Accountant or Certified Auditor.

Chartered Accountant: The members of `Institute of Chartered Accountant of

India` are called Chartered Accountants. Their profession is regulated by

Chartered Accountants Act 1949. A firm of Chartered Accountants may alsoconduct company audit. But every partner of such firm must be a Chartered

Accountant.

Certified Auditor: The persons who are the holders of certificates issued by

Central Government under Certified Auditors Rules are called Certified Auditors.

They can also carry on auditing profession at anywhere in India. They are also

eligible to conduct Company Audit


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Disqualification of auditor

Body corporate

Officer or employee of the company

Partner or employee of an office or employee of the company.

Insolvent person

Lunatic person

A person who is indebted to the company for a sum exceeding Rs. 1000/-

A person who has given guarantee for such sum relating to the company.

If a person is disqualified to holiday company, automatically he gets disqualified

to its subsidiaries also.

In the same way if a person is disqualified to subsidiary company, he gets

disqualified to related holding

Company also. The liabilities of an auditor can be classified into two groups;

namely, liability under optional audits and liability under statutory audits


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Liability under Companies Act, 1956

Companies act has created civil liability to company auditor at times and at times

criminal liability.

Civil Liability: The following sections of companies act read about civil liability of

company auditor;

Section 227 of Companies Act, 1956: Company auditor has to specify certain

items in audit report.

In the absence of such specification civil liabilities arises.

Section 543 of Companies Act, 1956: If auditor mis-uses funds of the company at

the time of liquidation, he comes across civil liability.

Section 62 and 63 of Companies Act, 1956: If Company auditor unknowingly

certifies false prospectus, civil liability arises.

Case laws:

London and General Bank: In this case auditor of the banking company gives clean

report though the banking company has not made proper provision for bad and

doubtful debts.


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Union bank of Allahabad: In this case auditor of the banking company gives clean

report though financial statements are of fraudulent nature.

London oil storage Co. Ltd vs Sean Husluct and Co: Here actual petty-cash differs

from recorded balance. But auditor gives clean report.

Criminal Liability: The following sections read about Criminal liability of company

audit.

Section 628 of Companies Act, 1956: If company auditor certifies any false

statement knowing that it is false. He will be charged with imprisonment up to

two years with or without fine.

Section 539 of Companies Act, 1956: If company auditor destructs records of the

company at the time of liquidation, he will be charged with imprisonment up to

seven years with or without fine.

Section 62 and 63 of Companies Act, 1956: If company auditor certifies fraudulent

prospectus knowingly he will be charged with imprisonment up to two years with

or without fine.

Section 240 of Companies Act, 1956: If company auditor does not co-operate with

government inspectors, he will be charged with imprisonment up to six months

with or wit


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RIGHTS OF AUDITOR

1) Right of access to books of account and vouchers 255(1).

2) Right to receive information and explanations.

3) Right of access to books and papers of branch 255(2).

I4) Right to receive notices of general meetings and to attend those meetings.

(255(6)).

5) Right to make representation where another person is being appointed as

auditor. (253(3)).


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DUTIES OF AUDITOR

Duties of auditor under section. (255(3)) are:

1) To give a report to the members on the accounts, books of account,

balance sheet and Profit and loss account examined by him. (255(3)).

2) Where any matter reported upon is answered in the negative or with a

qualification the report shall include reasons for such qualification with factual

position.

3) To include in the report of the company such matters as directed by the

Federal Government.

4) To attend those general meetings of a listed company, either himself or

through authorized person, in which the balance sheet, profit and loss account

and the auditors' report are to be considered.

A) To make report for inclusion in prospectus. (Section 53 read with Part I ofSchedule II).


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B) To certify receipts and payments account in the statutory report (Section157).

C) To make report on declaration of solvency in case of voluntary winding up.

D) To exercise reasonable care and skill in carrying out his duties and make such

inquiries as considered necessary.


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Ceiling on Number of Cost Audits

The sub-Section (2) of Section 233B inter-alia provides that before the

appointment of any auditor is made by the Board, a written certificate shall be

obtained by the Board from the auditor proposed to be so appointed to the effect

that the appointment, if made, will be in accordance with the provisions of

Sub-Section (1B) of Section 224.

Section 224(1) (B) provides that no company or its Board of directors shall appoint

or re-appoint any person who is in full time employment elsewhere or firm as its

auditor if such person or firm is, at the date of such appointment or re-

appointment, holding appointment as auditor of the specified number of

companies or more than the specified number of companies.

The proviso to Section 224(1B) further provides that the provisions of this sub-

Section shall not apply, on and after the commencement of the Companies

(Amendment) Act, 2000, to a private company.

It should be noted that the Companies (Amendment) Act, 2000 has inserted a

provision (Explanation

II) to Section 224, whereby the provisions of sub-section 1-B shall not apply to a

Private Company.

It means that for computing the limit on number of companies for audit, Private

Companies should not be counted.

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