AUDITING PROJECT BY Rohit Jagasia Roll No: 22 TY-BBI

Q1) (b) Corporate Governance: Corporate governance refers to the system by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders and specifies the rules and procedures for making decisions in corporate affairs. Governance provides the structure through which corporations set and pursue their objectives, while reflecting the context of the social, regulatory and market environment. Governance is a mechanism for monitoring the actions, policies and decisions of corporations. Governance involves the alignment of interests among the stakeholders. (d) Generally accepted Auditing Practices: The contribution of the United States to accounting theory has been tremendous during the past 50 years. Different committees, associations and institutions have based upon researches conducted, made pronouncements from time to time to develop and improve the principles which are commonly known as Generally Accepted Accounting Practices (GAAP) in the United States. The GAAP are guidelines for specific accounting issues, which are to be followed for the preparation of financial statements. These financial statements, are audited by the auditors who certify that the financial statements have been prepared in accordance with GAAP. (e) Qualified Audit Report: Auditor is an expert in accounts, audit and taxation. His opinion carries weight. Auditors report is respected not only by the shareholders but also by the general public and government authorities. An audit report is qualified in the following cases: When the auditor is unable to get the necessary information or explanation regarding any material items. When the books of accounts are not maintained in a proper manner. When the financial statements do no agree with the books of accounts. When an item which is required to be disclosed as per law is not discussed. When wrong policies are followed by the company. When the provisions of the companies Act are violated by the company. Q2) (a) Audit Committees play a crucial role in corporate governance. Justify with reasons: Audit Committee: Audit Committees have received wide publicity and there is a growing awareness of the benefits of these committees. Primarily, an effective audit committee is a positive step as it strives to enhance the credibility and integrity of financial statements. In this process, the following related benefits accrue as well. It helps board of directors to discharge their ever-increasing responsibilities in an efficient and effective manner with due care and diligence. By utilizing the services of both internal and statutory auditors, it is able to provide full board with well founded recommendations. Thereby, it reduces the burden of top management. It facilitates greater personal involvement by directors especially nonexecutive directors in financial and audit aspects of the company. An effective committee is also concerned to determine whether or not to appoint statutory auditor for non-audit services as well. So, the auditors

relationship via-a-vis management is strengthened. Thus, it reinforces the auditors independence in general. With the establishment of a direct communication link with the internal auditor, audit committee not only provide necessary independence but also is in a position to appraise the effectiveness of the companys entire system of internal controls. Thus, by monitoring and evaluating the results of internal audit, it can suggest overall improvement in the internal controls. By an objective review of managements financial policies including accounting policies and operations, it provides a stimulus for optimal performance by the management. At the same time, the management gets the necessary protection in case of misreporting and mismanagement. The formation of an audit committee is a relatively simple matter, but rendering it effective is more complex. Q2) (b) Professional misconduct in relation to Chartered Accountants. Public Interest: A distinguishing mark of a profession is acceptance of its responsibility to the public. The accountancy professions public consists of clients, credit grantors, governments, employers, employees, investors, the business and financial community and others who rely on the objectivity and integrity of professional accountants to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on the accountancy profession. The public interest is defined as the collective well- being of the community of people and institutions the professional accountant serves. A professional accountants responsibility is not exclusively to satisfy the needs of an individual client or employer. The standards of the accountancy profession are heavily determined by the public interest, for example :-Independent auditors help to maintain the integrity and efficiency of the financial statements presented to financial institutions in partial support for loans and to stockholders for obtaining capital; -Financial executives serve in various financial management capacities in organizations and contribute to the efficient and effective use of the organizations resources; - Internal auditors provide assurance about a sound internal control system which enhances the reliability of the external financial information of the employer; -Tax experts help to establish confidence and efficiency in, and the fair application of, the tax system; and - Management consultants have a responsibility towards the public interest in advocating sound management decision making. Professional accountants have an important role in society. Investors, creditors, employers and other sections of the business community, as well as the government and the public at large rely on professional accountants for sound financial accounting and reporting, effective financial management and competent advice on a variety of business and taxation matters. The attitude and behaviour of professional accountants in providing such services have an impact on the economic well-being of their community and country. Professional accountants can remain in this advantageous position only by continuing to provide the public with these unique services at a level which demonstrates that the public confidence is firmly founded. It is in the best interest of the worldwide accountancy profession to make known to users of the services provided by

professional accountants that they are executed at the highest level of performance and in accordance with ethical requirements that strive to ensure such performance. In formulating their national code of ethics, member bodies should therefore consider the public service and user expectations of the ethical standards of professional accountants and take their views into account. By doing so, any existing expectation gap between the standards expected and those prescribed can be addressed or explained. Objectives The Code recognizes that the objectives of the accountancy profession are to work to the highest standards of professionalism, to attain the highest levels of performance and generally to meet the public interest requirement set out above. These objectives require four basic needs to be met :* Credibility In the whole of society there is a need for credibility in information and information systems. * Professionalism There is a need for individuals who can be clearly identified by clients, employers and other interested parties as professional persons in the accountancy field. * Quality of Services There is a need for assurance that all services obtained from a professional accountant are carried out to the highest standards of performance. * Confidence Users of the services of professional accountants should be able to feel confident that there exists a framework of professional ethics which governs the provision of those services. Q3) (a) Qualifications, disqualifications, rights and duties of a statutory auditor of a company. Only individual, possessing the requisite knowledge and skill, can be appointed as auditor of the company. The auditor should be independent in carrying out his work so that he is able to give an unbiased opinion based on an objective assessment of facts. Thus, he should have no interest, financial or otherwise and whether directly or indirectly, in the company and/or its management. A person, who is Chartered Accountant within the meaning of Chartered Accountants Act, 1949 and holds a certificate of practice, or a partnership firm where of all the partners are Chartered Accountants holding certificates of practice, may be appointed as auditor of a company. However, in the latter case, the appointment as an auditor may be made in the firm name and any of its partners may act in the name of the firm. The following persons cannot be appointed as auditor of a Company: (a) An officer or employee of the company; (b) A person who is partner with an employee of the company or employee of an employee of the company; (c) Any person who is indebted to a company for a sum exceeding Rs. 1,000/- or who have guaranteed to the company on behalf of another person for a sum exceeding Rs. 1,000/-. (d) A person who is holding any security of that company, after a period of one year from the date of commencement of Companies (Amendment) Act, 2000.

If an auditor, after his appointment, becomes subject to any disqualification mentioned above, he shall be deemed to have vacated as such. (1) Every Auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere, and shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor. (1A) Without prejudice to the provisions of sub-section (1), the auditor shall inquire: (a) Whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members. (b) Whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company. (c) Where the company is not an investment company within the meaning of Section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company. (d) Whether loans and advances made by the company have been shown as deposits. (e) Whether personal expenses have been charged to revenue account. (f) Where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the Balance Sheet is correct, regular and not misleading. (2) The auditor shall make a report to the members of the company on the accounts examined by him, and on every Balance Sheet and Profit and Loss Account and on every other document declared by this Act to be part of or annexed to the Balance Sheet or Profit and Loss Account, which are laid before the company in general meeting during his tenure of office, and the report shall state whether, in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and give a true and fair view : (i) In the case of the balance-sheet, of the state of the company's affairs as at the end of its financial year and (ii) In the case of the profit and loss account, of the profit or loss for its financial year. (3) The auditor's report shall also state :

(a) Whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of his audit. (b) Whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him. bb) whether the report on the accounts of any branch office audited under section 228 by a person other than the company's auditor has been forwarded to him as required by clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the auditor's report. (c) whether the company's balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns. (4) Where any of the matters referred to in clauses (i) and (ii) of sub-section (2) or in clauses (a), (b), (bb) and (c) of sub-section (3) is answered in the negative or with a qualification, the auditor's report shall state the reason for the answer (4A) The Central Government may, by general or special order, direct that, in the case of such class or description of companies as may be specified in the order, the auditor's report shall also include a statement on such matters as may be specified therein : Provided that before making any such order the Central Government may consult the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949, in regard to the class or description of companies and other ancillary matters proposed to be specified therein unless the Government decided that such consultation is not necessary or expedient in the circumstances of the case. (5) The accounts of a company shall not be deemed as not having been, and the auditor's report shall not state that those accounts have not been, properly drawn up on the ground merely that the company has not disclosed certain matters if: (a) Those matters are such as the company is not required to disclose by virtue of any provisions contained in this or any other Act, and (b) Those provisions are specified in the balance sheet and profit and loss account of the company. Q3) (b) Who can appoint Auditor under Companies Act, 1956 and under what circumstances? Every company registered in India is required to get its accounts audited by a practicing Chartered Accountant. Section 224 (1) of the Companies Act, 1956 states that every company, whether it is public or private, shall have an auditor to audit its accounts.

This audit is called statutory audit and through it the Companies Act ensures that the persons carrying on business with others money are accountable to them. The appointment of auditor is mandatory in the Annual General Meeting for the following year. The auditors appointed at the Annual General Meeting hold the office from the conclusion of the Annual General Meeting at which he is appointed until the conclusion of the next Annual General Meeting. Thus, the Act seeks to ensure that the appointment of auditors is not in the hands of the directors and is vested in the general body of shareholders. However, the first auditors of the Company are appointed by the Board of Directors within one month from the date of incorporation of a company. The auditors, so appointed, hold the office until the conclusion of the first annual general meeting of the Company. If the Board fails to appoint the first auditor, the company may do so at a general meeting. As per Sec 226 of Companies Act, 1956, a person who is Chartered Accountant within the meaning of Chartered Accountants Act, 1949 and holds a certificate of practice, or a partnership firm where of all the partners are Chartered Accountants holding certificates of practice, may be appointed as auditor of a company. However, in the latter case, the appointment as an auditor may be made in the firm name and any of its partners may act in the name of the firm. The following persons cannot be appointed as auditor of a Company: 1. An officer or employee of the company; 2. A person who is partner with an employee of the company or employee of an employee of the company; 3. Any person who is indebted to a company for a sum exceeding Rs. 1,000/- or who have guaranteed to the company on behalf of another person for a sum exceeding Rs. 1,000/-. 4. A person who is holding any security of that company, after a period of one year from the date of commencement of Companies (Amendment) Act, 2000. If an auditor, after his appointment, becomes subject to any disqualification mentioned above, he shall be deemed to have vacated as such. Q4) (a) 1) Long Form Audit Report The auditor of public sector banks, private banks and foreign banks have to furnish a long form audit report as per the requirements laid down by RBI. The LFAR to be submitted by the statutory central auditor should be addressed to the chairman of the bank concerned and a copy thereof should be sent to the RBI. The LFAR to be submitted by the branch auditor should also be addressed to the chairman of the Bank and a copy of the same should be sent to the Statutory Central Auditor. The LFAR highlights certain important areas of the working of the banks, such as , internal control systems, accounting policies, profitability, and financial position. The LFAR should be submitted within the time limit. In absence of the time limit, it should be submitted along with the main audit report or thereafter. It cannot be a substitute for the main audit report. (b) 2) Verification of Re-insurance business in an insurance company:

It is necessary to ascertain whether all treaty and facultative underwritings are in accordance with the reinsurance program approved by the Board and have been submitted to IRDA for the particular year. The auditor should examine whether re-insurance outward (Indian & Foreign), Re-Insurance inward (Indian and Foreign), both treaty and facultative underwritings, are as per prescribed parameters prevailing for the year under audit for which the audit is being conducted. Reinsurance underwritings should be based on the Gross- direct underwriting. It is necessary to ensure that overall Gross Direct Premium, claim paid, outstanding claims opening and closing are adopted after due authentication and verification at operating offices level. It is very essential to examine, in depth, mega risks which involves huge inflow and outflow of premiums, including facultative coverage. Department wise and major risk wise Gross to Net position should be analyzed to find out any dislocation of underwriting and also to ensure the accuracy of the underwriting.

(3) How do the provisions of the companies act ensure independence of an auditor? Independence implies that the judgement of person is not subordinate to the wishes or directions of another person who might have engaged him or to his own self-interest. If hes not independent of the management, his opinion would mean little to shareholders, prospective investors, bankers, government agencies and others who are concerned with the financial statements of the company. An auditor must fulfill his obligations even when it means opposing or denying the wishes of those who have employed him and who know he may cease to do so. An auditor can be removed before the expiry of their term or auditors who are being removed prior to the expiry of their term, have the right to make written representation to the members of the company and to be heard orally at the meeting. Thus, the Act seeks to provide a number of safeguards to ensure the independence of the auditor.

THANK YOU.