CORPORATE AUDIT SECTION 224 224A 225 226 227 228 229 230 231 232 233 233A

233B PARTICULARS. Appointment and remuneration of auditors Special resolution appointment. Appointment and removal of auditors. Qualifications and Disqualification Powers and duties of auditors Branch audit provisions. Signature of audit report. Reading and inspection of auditors report. Rights of auditor to attend general meeting. Penalty for non compliance with 225 to 231 Penalty for non compliance with 227 and 229 Special audit by CG Cost audit.

Qualification and Disqualifications of Auditors. Under section 226(1) of the companies Act a person cannot be an auditor unless: (1) he is a chartered accountant within the meaning of chartered accountants Act, 1949, provided that a firm whereof all the partners are practicing in India are qualified as appointment as auditors may be appointed in the firms name. (2) restricted state auditor and not relevant to date. Under section 226(3) the following persons are not qualified for appointment as auditors of a company: (a) a body corporate. (b) An officer or employee of a company. (c) A person who is a partner, or who is in the employment of an officer or employee of the company. (d) A person who is indebted to the company for amount more than Rs.1,000 or who has given any guarantee or provided any security in connection with the indebtedness of a third person for an amount more than Rs.1,000. (e) Any person who is holding any security of that company.

Under section 226(4) any person who is disqualified by virtue of 226(3)in the (1) Holding company ,or (2) Subsidiary company,or (3) Cosubsidiary company Of the company under question.

First auditor : the first auditor of a company is appointed by the Board of directors within one month of the registration of the company. Subsequent auditor: is appointed by the shareholders in general meeting of the company. He will hold office till the conclusion of the next annual general meeting. Central govt: if no auditor is appointed in an AGM the CG may appoint a person to fill the vacancy. The company must give notice of this within a period of seven days. Casual vacancy : in this case auditor is appointed by the Board except in the case of resignation. Special resolution: in case of a company in which atleast 25% of the subscribed capital is held whether individually or collectively by: (a) public financial institution or a govt. company or any state govt. (b) any financial or other institution established by any provincial or state act in which the state govt. holds not less than 51% of the subscribed share capital (c) nationalized bank or an insurance company carrying on general insurance business. If the company fails to pass a special resolution then no auditors are deemed to have been appointed. Govt company: an auditor of a govt. company is appointed by the CG on the advice of the C & AG of India. Ceiling on number of audits: No auditor can hold more than 30 company audits inclusive of both public and private companies. In the case of a firm, it means per partner who does not have full time employment elsewhere. Remuneration of auditor: Any remuneration paid as fees, expenses or otherwise for such services must be disclosed in the profit and loss account: (a) as auditor. (b) As adviser, or in any other capacity in respect of : (i) taxation matters, (ii) company law matters, (iii) management services; and (iv) in any other manner. Rights of an auditor: 1. 2. 3. 4. 5. 6. 7. Right of access to books, accounts and vouchers, etc. Right to obtain informations and explanations. Right to receive notices and to attend general meeting. Right to make representation. Right to sign the audit report. Right to seek legal and technical advice. Right to receive remuneration.

Duties of an auditor. Statutory duties: 1. Duty to report (s227 ) 2. Duty to enquire ( s 227 (1A) ) 3. Dduty to follow CARO 2003. 4. Other duties in the Companies act. ( s229,s56,s240,s488, and s165) Contractual duties: Duty to have reasonable skill and care. Duty regarding mandatory accounting standards. Duty to the profession itself. Liabilities of a company auditor On the basis of legal implications: a. Under the Companies Act. b. Under the Chartered Accountants Act. c. Under any Special Act. On the basis of nature of liability: a. Civil liability. ( Misfeasance, negligence ) b. Criminal liability Other liabilities : a. Liability to Third Parties. b. Liability for unlawful Acts. c. Liability to article trainees. Signature of audit report Under section 229 of the companies act, only a partner of an audit firm can signor authenticate the audit report of the company under audit. The partner must also be a person practicing in India.

CARO 2003 CARO = Companies auditors report order 2003. It shall apply to every company including a foreign company as defined under section 591 of the companies Act. It shall not apply to the following type of companies: 1. A Banking company . 2. An insurance company. 3. A company licensed to operate under section 25 of the companies act. 4. A private limited company whose: (a) Paid up Capital and Reserves is less than 50 lakhs. (b) Loans outstanding less than 10 lakhs. (c) Turnover is less than 5 crores. This came into force from 01-07-2003. TYPES OF AUDIT REPORTS. Clean report it is also called an unqualified report. It indicates that the report is true and fair. Qualified report- Nature is such that it does not materially affect the true and fair picture. It has a reservation. Adverse report it does not reflect a true and fair picture. Disclaimer of opinion- Because of reasons beyond the control, such report is called a report with disclaimer. DIFFERENCE BETWEEN AUDIT REPORT AND AUDIT CERTIFICATE 1. Audit report is an opinion of the auditor whereas the certificate is a statement showing the accuracy of the subject matter. 2. Example of audit report is the Annual report under section 227 of the companies Act whereas report is bonus computation, computation of income tax returns, etc. SIGNING OF THE AUDIT REPORT (S229) The audit report of the company where any firm is the auditor is to be signed by any partner of the firm who is practicing in India. Mere affixing the seal of the firm will not do the signature of the partner should be present. In the case of the individual or a sole proprietor the signing is done by the person concerned.

SPECIAL AUDIT. Circumstances: under section 233A the central govt. has been given the power to direct specialaudit, where the Govt is of the opinion that: 1. the Affairs of the company are not being managed in accordance with sound business principles. 2. the company isbeing managed in a manner likely to cause serious injury or damage to the interest of the trade, industry or business to which it pertains. 3. the financial position of the company is such as to endanger its solvency. Qualification : the appointment is made by the Central Govt. of any person 1. A chartered accountant within the meaning of chartered accountants act, 1949. 2. may be in practice or not. 3. the same company auditor can also be the special auditor. Rights, powers and Duties of the auditor the special auditor will have the same rights, powers and duties in relation to the special audit as an auditor under section 227 of the Companies Act. However instead of making report to the members of the company the special auditor must report to the central govt. Remuneration of the special auditor. The remuneration of the special auditoris fixed by the govt. but payable by the company.

BRANCH AUDIT. Qualification : for a branch office situated in India, It shall be audited by the company auditors or a person qualified under section 226. If it is situated outside India, it can be conducted in addition to the above by an accountant duly qualified to act as an auditor in accordance with the laws of the country in which it is situated. Appointment: Can be appointed in the general meeting of the company or by authorize the board of directors to appoint a qualified person as auditor for the branch in consultation with the main auditor of the company. Rights , powers and duties of theBranch auditor. He shall have the same rights, powers and duties in relation to the branch audit as an auditor of a company under section 227 of the companies Act.

Remuneration of the branch auditor Fixed by the company in general meeting or by the Board of Directors if so authorized by the company in general meeting. Exemption of branch audit. The central govt. is empowered to give exemptions from branch audit. The central govt is also empowered to withdraw these exemptions. JOINT AUDITOR two or more firms are appointed to conduct the audit of the company. This is the usual case with large companies like insurance and banking companies having a wide geographical network. In such a situation, the following matters assume special importance: Division of work. Where joint auditors are appointed they should by mutual discussion divide the work among themselves. The division of work among joint auditors as well as the areas of work to be covered by all of them should be adequately documented and preferably communicated to the entity. Coordination. If one joint auditor comes across matters which in his opiniondeserve the attention of the other joint auditors then he should communicate to them in writing. Responsibility 1. Each joint auditor is responsible for the area allocated to him regarding the nature timing and extent of audit procedures. 2. Prior to the finalization of the audit the joint auditor must bring to the attention to the other joint auditors matters which require their attention and approval. It is important they should not bring it after the finalization of the audit.

Audit report If any joint auditor is in disagreement in any portion of the report he should explain it by a special report. The idea is that the joint auditor is not bound by the opinion of the majority of the joint auditors in the matters concerning the report.

Distinguish between depreciation and fluctuation Depreciation Fluctuation.

1) Relates to fixed assets (1) Relates to current assets also. 2) Refers in diminution in the value of (2) Refers to increase or decrease in value of Assets. Assets 3) It is permanent reduction in nature (3) it is a temporary phenomenon. 4) It is shown by way of deduction from (4) it is not reduced in the books. Fixed assets. Difference between audit and investigation Particulars Interested parties. Audit Conducted on behalf of Shareholders Audit is compulsory Investigation conducted on behalf of outsiders. investigation is not Compulsory. depends on auditing. Is carried even when Auditing is done. It for a period of 3 to 7 years. Is a thorough examination.

Legal aspects

Interdependence

Does not depend on Investigation.

Duration

It is usually for a year.

Depth of work Computation of Profits

It

is checking.

Is not concerned with Alteration of profits It is conducted to know the True and fair view of the Accounts

concerned with adjustments of net profits. it is conducted to know the financial position and the earning capacity of the Concern.

Purpose

Examples of investigation. : 1. Investigation on behalf of a company or a person who wants to purchase a running business. 2. Investigation on behalf of a person who wants to be a partner in a firm. 3. Investigation on behalf of a person who wants to lend money to a business. 4. Investigation on behalf of the shareholder of a business who suspects a fraud. 5. Investigation on behalf of the tax authority for assessing actual tax liability.

Difference between Cost Audit and Financial Audit. Particulars Concept Cost Audit Is an Audit of Cost Accounts Financial Audit. Is an Audit of Financial Accounts.

Inter relation

Has to Check Inventory Valuation

Has to Check Expenses

Objectives

Have to be ascertained whether (i) According to cost accounting Principles. (ii) cost records have been properly maintained. (iii) cost of production have been properly worked out.

whether (i) books are true and fair

Verification of Stock

Also to check whether stocks Are maintained at proper level Behalf of management. Statutory on behalf of CG.

All Categories of Stock have been included .

Purpose

Behalf of shareholders

Submission of Report audit

Statutory Cost Audit to Central Govt.

Statutory financial To shareholders Yes

Compulsory

No.

Internal control. Refers to the various methods and procedures adopted for the control of production, distribution of the whole system of the enterprise. In other words internal control is the whole system of controls , financial or otherwise established by the management in order to carry on the business in anorderly and efficient manner. It includes internal check, internal audit and other forms of control.

Objectives of internal control As per AAS 6 the following are the objectives of the internal control. 1.Proper authorization Transactions are executed with managements general and specific authorization. For example : cheque payments, vouchers, purchase orders, goods received note, etc. 2. prompt recording of transactions : all the transactions are promptly recorded in the correct amount so as to permit preparation of financial information within proper framework of recognized accounting policies and to maintain accountability of asset s. 3.Restricted access to assets: assets are allowed to access only by a few people who have the capacity to use it properly. 4.Actions against deviations: The actuals are recorded with the standard and the deviations are corrected wherever it is required. Types of internal control (a) Organization : An enterprise should have a plan of organization (b) Segregation of duties : no one person should be allowed for recording as well as for processing. Same person should not be (c)Authorization and Approval : all authorization requires proper approval for eg. Authorized purchases should be approved in the meeting of directors, total amount of payments should beapproved by the accountant and the finance manager. (d)Arithmetical and Accounting : the totaling at various points should be seen and the totaling of the trial balance and the individual ledgers along with other reconciliation statements. (e) Personnel :the training, promotion, transfers and job allocation should be done as properly as possible. (f) Supervision: the supervision of the managers, and other executives should be very professional and done in a timely manner. (g)Managements:

These are controls exercised by management, which are outside the day to day routine of the system. They include review of management accounts, comparison with the budgets, internal audit and any other special review procedures.