Unit – 4

Audit of Final accounts of a company and Investigation

Q1) Define Audit Of Final Accounts Of A Company.

A1)

An Audit of Financial Statements is the examination of an organisation’s financial statements and the accompanying disclosures by an independent auditor.

The Auditor submits his opinion to the concerned authorities in form of his Audit Report.

The purpose of an audit of financial statements is to add trustworthiness and credibility to the reported financial position and performance of a business apart from the legal obligations.

The Companies Act, 2013 requires that all entities that are publicly held, must file annual reports with it, after being audited with a qualified auditor.

Also, different users of the financial statements requires them to be audited.

For instance, Lenders require an audit of the financial statements of any entity to which they lend funds. Similarly, Suppliers may also require audited financial statements before they opt to extend trade credit.

The primary stages while auditing the financial statements:

1)     Planning and risk assessment –

This involves gaining an understanding of the business and the business environment in which it operates.

2)     Internal controls testing –

Involves the assessment of Internal Control practised by the client regarding authorization for expenses, payments for fixed assets, credit sales authorization, segregation of duties, etc.

3)     Conduct of Substantive procedures –

Substantive procedure involves a broad range of procedures. Some of them are explained as under:

a)     Cash - Review of Bank Reconciliations, Cash in Hand, Confirming Bank Balances, etc.

b)    Accounts receivable (Bills Receivables) - Confirming Account Balances from balance confirmation certificates and investigating subsequent collections.

c)     Inventory - Observing the physical inventories, obtaining confirmation of inventories held at other locations, reviewing current production costs, etc.

d)    Revenue - Examiningdocuments supporting sales on random sampling basis, review of subsequent transactions, reviewing the history of sales returns and allowances.

Q2) What do you mean by investigation?

A2)

Inspection, Inquiry and Investigation are provided in Chapter XIV (14 th ) of the Companies Act, 2013. From Section 206 to Section 229, the details of Inspection, Inquiry and Investigations are explained.

Investigation means to carry out a systematic or formal inquiry to discover and examine facts of an incident to establish the truth – as defined in Companies Act, 2013.

Appointment of Investigators by Central Government (Section 210)

On the basis of the following, the Central Government may appoint one or more inspectors to investigate the affairs of the company and to report, thereon:

(a) On the receipt of report of the Registrar or Inspectors under Section 208;

(b) On intimation of a special resolution passed by a company that the affairs of the company ought to be investigated

(c) In public interest –

Where an order is passed by a court or the Tribunal in any proceedings before it that the affairs of a company ought to be investigated, the Central Government shall order an investigation into the affairs of that company.

Q3) Explain the investigation Of Accounts Under Different Situations?

A3)

The main aim of such investigations is to obtain any evidence or facts regarding any malpractice in the course of business, although this may not be the only reason. Investigations may also be undertaken to identify the profits and losses of a business, the assets and liabilities and so on.

Security for payment of costs and expenses of investigation (Section 214)

Where an investigation is ordered by the Central Government then before appointing an Inspector, the Central Government may require the applicants to give a security not exceeding Rs.25,000 towards the costs and expenses of investigation as per the following criteria:

The security shall be refunded to the applicant of Investigation results in prosecution.

Firm, body corporate or association not to be appointed as inspector (Section 215):

As per Section 215 a Firm, body corporate or association shall not to be appointed as inspector for inspection and investigation of the company.

Seizure of documents by the Inspector (Section 220):

Where in the course of investigation, the inspector has reasonable grounds to believe that books and papers relating to any company, body corporate, managing director or manager of such company are liability to destroyed, mutilated, altered, falsified or secreted he may :

(a) Enter the place where such books and papers are kept, and

(b) Seize books and papers after allowing the company to take copies or extracts therefrom at its costs.

The books and papers shall be kept by the inspector in his custody until the conclusion of investigation and thereafter return to the person from whose custody they were seized. Before returning, the inspector may take copies or extracts or place identification marks on them or any part thereof.

Q4) Write short note on Investigator’s Report?

A4)

The provisions regarding Investigator’s Report is explained under Section 223 of the Companies Act, 2013.

(i) Interim and Final Report

Depending on the nature of directions given by the Central Government, an inspector may submit interim reports and on conclusion of the investigation, he shall submit a final report.

(ii) Report to be in writing

Every report shall be in writing or printed or the Central Government may direct in this regards.

(iii) Right to obtain copy of the report

A person may obtain a copy of the report by making an application to the Central Government.

(iv) Authentication and Admissibility in legal proceedings

The report may be authenticated by:

(a) The seal of the company whose affairs have been investigated; or

(b) A certificate of the public officer having custody of the report as provided in Section 76 of the Evidence Act, 1872.

The report shall be admissible in any legal proceeding as evidence of the matter contained in the report.