undefined | unit 3 auditing standards

Unit 3

Auditing Standards

Q1) Explain Appointment, Powers, Duties and Liabilities of Auditors.

A1)

All the government and non-government organizations have to keep track of their accounts and audit reports as the financial year approaches. The financial statements of these firms need to be thoroughly analyzed and assessed before submitting them to the authorized departments. This assessment of financial documents is done by an Auditor. In case of any discrepancy in the reports, the auditor is held responsible. Thus, the requirement of an auditor is a must for every organization.

Appointment of Auditor

Within 30 Days:

Every company must appoint its first auditor or an auditing firm within 30 days of registration of the company during the annual general meeting or within 90 days, in an Emergency General Body Meeting by the Board of Directors. The first auditor (or the auditing firm) appointed will hold office from the conclusion of the meeting (in which the appointment of auditor has been made) to the time when the sixth annual general meeting is held (five years). Therein, the auditor appointments are reviewed every sixth year.

Written Consent:

A written consent from the auditor, with sufficient proof to suggest that the person (or firm) qualifies the criteria provided in Section 141 of the Act, needs to be submitted before an appointment.

Appointment Notice:

The company should issue an appointment notice to the auditor, and a Form, ADT- 1 is required to be submitted with the registrar within 15 days of the meeting in which the auditor is appointed.

Section 139:

The companies listed in Section 139 (belonging to the class or classes of companies as mentioned in the section) and Rule 5 of the companies (audit and auditor) rules, 2014, will not:

1. Appoint an individual as auditor for more than one consecutive five-year tenure;

2. Appoint an auditing firm for more than two terms of five consecutive years

Provided, the auditor who has finished his term will not be eligible for reappointment in the same company or the auditing firm who has completed a two-year tenure is not eligible for appointment in the same company for five years.

A three-year transition period is given to comply with this requirement. Although, according to the rules, the five years is calculated with the retrospective effect.

Sections 139 to 148 of the Companies Act, 2013 give a complete and detailed summary of the role of an auditor as well as the other requirements, such as their appointments or removal from the company payroll.

Rights and Powers of auditors

According to Section 227(7) of the Companies Act, a company auditor has the following rights:

1. Right of Access Books of Accounts: As per Section 227(1) of the Companies Act every auditor of the company has the right to access at all times to the books of accounts and vouchers of the company, whether kept at the head office of the company or elsewhere. Under section 209(1) (d), a company auditor has the right to examine the cost records also which are required to be maintained by certain companies relating to production sales, stores etc.

2. Right to Obtain Information and Explanations: An auditor can call for any information or explanation from different officers of the company which he may think necessary for the performance of his duties.

Apart from the auditor’s right to obtain information and explanation it is the duty of every officer of the company to furnish without delay the information to the company auditor. If the directors or officers of the company refuse to supply some information on the ground that in their opinion it is not necessary to furnish it, then the auditor has the right to mention that in his audit report.

3. Right to Receive Notices and Other Communication Relating to General Meetings and to attend them: According to section 231, of the companies act an auditor of a company has the right to receive notices and other communications relating to the general meetings in the same way as that of the members of the company.

Similarly an auditor also has the right to attend any annual general meeting and also to be heard at those meetings which he attends and which concerns him as an auditor.

The auditor also has the right to make a statement or explanation with regard to the accounts he has audited. But he auditor is not expected to answer questions in the general meeting.

4. Right to Visit Branches: According to section 228 of the companies act the auditor of the company has the right to visit the branch office or offices of the company.

He can also audit such accounts of eh offices of the company provided that there is not qualified auditor to audit the accounts of the branch office or offices of the company, in such cases, the auditor has the right to access at all times to the books of accounts and vouchers that the company maintains at branch office or offices.

Moreover section 226 of the companies act provides that in case of the company gets the branch accounts audited by some of the local auditors, even the auditor has access at all times, to the books, accounts an vouchers of the company and he can also visit the branches, if he feels necessary.

5. Right to Correct Any Wrong Statement: The company auditor is required to make a report to the members of the company on the accounts examined by him of the final accounts and the related documents which are laid down before the company in the general meeting.

6. Right to sign the Audit Report: As per section 229 of the companies act only the person appointed as auditor of the company or where a firm is so appointed, only a partner in the firm practicing in India, may sign the audit report or authenticate any other document of the company required by law to be signed.

7. Right to Being Indemnified: Under Section 633 of the Companies Act, an auditor is considered to be an officer of the company and he has the right to be indemnified out of the assets of the company against any liability incurred by him in defending himself against any civil and criminal proceedings by the company if it is proved that the auditor has acted honestly or the judgment is delivered in his favour.

8. Right to seek Legal and Technical Advice: The company auditor has the full right to seek the opinion of the experts and to take their legal and technical advice so as to discharge his duties efficiently.

9. Right to Receive Remuneration: As per Section 224(8) of the Companies Act, the company auditor has the right to receive remuneration provided he has completed the work which he has undertaken to do so.

Duties and Liabilities of a Company Auditor (Section 227):

Duties towards the shareholders:

1. Report shareholders about true and fair state of affairs of the company

2. State that balance sheet and profit and loss a/c give all information required by law

3. State that balance sheet and profit and loss a/c agree with the books of account

4. State that balance sheet and profit and loss a/c agree with accounting standards

5. State that he has obtained all the necessary information

6. State whether the company has maintained all books as required by law;

7. State the reasons of qualification in his report

8. State that he has received the audit report on the branch accounts audited by other auditor and how he has dealt with the same in preparing his report

9. Auditor shall state in his report whether:

a) The loans taken are properly secured and the terms of loans are not against the interests of the company

b) Loans given are shown as fixed deposits and the terms of loans are not against the interests of the company

10. Transactions recorded as book entry are not against the interests of the company

11. Personal expenses of directors have not been charged to revenue a/c of company;

12. The company fulfills the requirements of CARO 2003.

Duties towards Company:

1. Prospectus: According to Sec 56, the auditor is required to certify profits or losses, assets & Liabilities and dividend paid etc in the prospectus.

2. Statutory Report: Section 165 requires that the auditor has to certify the statutory report.

3. Public Deposits: Section 58AA requires the auditor to report about whether the company has followed all rules and guideline of RBI in regard to public deposits or not.

4. Signature on Audit Report: Section 229: It is duty of auditor to sign on his report.

5. Insolvency (Section 488): If the company wants itself to be declared insolvent, it is duty of auditor to prepare profit and loss a/c for the current period.

Duties towards Government:

1. CARO-2003: The auditor has to report para-wise that the company has fulfilled all the requirements of CARO-2003.

2. Assist the Investigation u/s 237: It is duty of auditor to assist the investigation ordered by the CG u/s 237.

Duties towards General Public:

1. His office is of confidence and faith. He must be reliable in all respects.

2. He should reveal all material information regarding the state of affairs of the company to the company as well as to the general public.

3. While issuing prospectus u/s 56, he should see that the prospectus does not include any misleading information or material.

Q2) Explain Board Outlines of Company Audit and Auditor’s Report.

A2)

Company Audit

A company is said to be an artificial person created by law having a separate legal entity distinct from its members. It cannot be directly managed by its owners because they are very large in number have small holding and also scattered over a wide area. As such the management and control of the affairs of the company is done by directors but an absolute faith put in directors is not considered to be desirable on social and moral grounds. Hence, it becomes essential for a company to appoint an independent and qualified person i.e. an auditor, to verify and certify the truth and fairness of the financial statements.

Further, the companies usually work with a large staff and auditing serves a very useful purpose of locating all errors and irregularities in their work.

In order to achieve the above objectives, The Indian Companies Act 1956 has made it a statutory obligations for joint staff companies, whether public or private, to get their accounts audited by qualified auditor.

Statutory requirements governing the Company Auditors-

Before commencing the audit work of company, the auditor should go through the following

Ensuring Whether his appointment is in order: Before commencing the audit work of a company the auditor shall ensure that all legal provisions relating to his appointment have been duly compiled with to ensure is appoint is in order. If his appointment is made in general meeting of the company, he should obtain the resolution of his appointment passed in such meeting. In case he has appointed in place of retiring auditor, he shall find out a due notice has been given to the retiring auditor in this regard. In case if the casual vacancy is due to resignation of the auditor, he shall obtain the copy of the resolution passed at general meeting making his appointment. He shall ensure that his remuneration has been fixed by the company as per the provisions of the Act.

2. Inspection of Statutory Books and Documents: Before the auditor commences the work of audit, he should examine the following documents

a. Memorandum of Association.

b. Articles of Association.

c. Prospectus.

d. Certificate of in cooperation and certificate to commence business

He should also examine the following statutory books and registers.

a. Register of Members. (Sec 88)

b. Index of Members. (Sec 88)

c. Register and Index of Debenture holders. (Sec 88)

d. Register to Mortgages and charges (Sec 85)

e. Register of Investment [sec 187(3)]

f. Foreign Register ( Sec 88)

g. Register of Contracts (Sec 188, 184 and 189)

h. Register of Directors, managing Director , Manager and Secretary (170)

i. Register of Director’s Shareholdings (170)

j. Register of Deposits (73)

k. Register of Loans (Sec [186(9)]

l. Minute books (118)

3. Inspection of Contracts: The auditor should inspect and examine the contracts which have been entered into by a company with other e.g.

a. Contracts with the vendors of any property.

b. Contracts with brokers and under writers for their commission.

c. Contract with the promoters for the preliminary expenses, etc.

If any statement regarding these contracts has been made by the company in the prospectus, the auditor should see that such statement is correct and that entries relating to such contracts are correctly recorded in the books of account.

4. Study of Previous year’s balance Sheet and Auditor’s report: the auditor should inspect the previous year’s balance sheet to verify the opening balances of the current year. Moreover, according to Companies Act, the corresponding figures of the previous year have to be given in the balance sheet.

The last audit report is inspected by the auditor mainly for two purposes.

a. To formulate a rough idea about the company and its working.

b. To see whether the recommendations made there in have been carried out or not.

5. Study of the Internal Control System in Operation: The study and evaluation of the internal control system in operation is important it serves as a basis there on. It helps the auditor in determining the extent of the tests to which auditing procedures can be restricted.

Audit Report /Auditor’s Report

An auditor’s Report is the format of result of all the effort that goes into the audit. Communicating the Auditor’s findings to interested users is part of all audits. Thus, the Final phase of an Audit involves preparing that communication, which is known as auditor’s report.

According to Lancaster, “Audit report is statement of collected and considered facts, so drawn up as to give clear and concise information to persons who are not already in possession of full facts of subject matter of the report.”

Contents of Audit Report

Under section 227 (2) every auditor is required to make report to the shareholders on the accountants examined by him and every balance sheet and profit and loss A/c and every document declared by law to be part of or annexed to the balance sheet and profit or loss A/C which are placed before the shareholders of the company at the general meeting during tenure of his office. The report has to state whether, in his opinion and to the best of his information and according to the explanations given to him, the said accountants give the information required by the Companies Act in 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 profit and loss account, of the profit or loss account for its financial year.

Sub-section (iii) of the section 227 required that 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 purpose 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 hiss examination of these books, and proper returns adequate for the purposes of his audits have been received from the branches not visited by him .

c. 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 and how he has dealt with the same in preparing the auditor’s report.

d. Whether the company’s balance sheet and profit and loss A/C dealt with by the report are in agreement with the books of accounts and returns.

If any of the matters as referred to in section 227 (2) and (3) is answered in the negative or with the qualification the auditor has to state in his report the reasons for such answer.

The Auditor’s report shall also include a statement on such additional matters as specified by the Central Government under section 227 (4-A) of the Companies Act, This section empowers the Central Government to order the inclusion of certain matters in the auditor’s report.

The Institute of Chartered Accountants of India requires the auditor’s to ensure that the accounting standards are implemented in the presentation of financial statements covered by their audit reports. The deviation should be reported in the report.

Q3) Explain Special Audit of banking companies, Audit of educational institutions, Audit of insurance companies, Audit of non-profit companies.

A3)

Special Audit of a Bank

Auditor will begin his work by carrying out a thorough verification of the assets and liabilities of the banking company. Points to which he must pay his special attention in the performance of this work with regard to each individual asset and liability are discussed below:

1- Cash in hand / with other banks – Auditor will attend on the last date of the period under audit and will verify cash in hand or bullion by actual counting or weighing. He will compare and tally the balance with the Cash Book, the Day Book. Balances with the State Bank or other banks shall be verified.

2- Investments – Auditor shall obtain a list of the investments of the bank. He shall verify these investments at the close of the year by carrying out an actual inspection of the scripts or other documentary evidence available with the bank. He must take utmost care to see that the same investments are not shown to him twice.

3- Advances, Overdrafts, Loans and Cash Credits – Auditor shall obtain a schedule of all loans, advances, cash credits and overdrafts etc from the bank and will then proceed to verify them with the balances of respective leaders. The totals will be compared and checked up with the respective total accounts maintained in the general ledger.

4- The responsibilities of the auditor with regard to the verification of loans and advances etc are very heavy. He will have to pay special attention with regard to the different kinds of advances such as:

a) Advances against government securities;

b) Advances against stock in trade;

c) Advances against properties;

d) Advances against Life policies;

e) Advances against fixed deposits;

f) Advances against bullion.

5- Bills Discounted and Purchased – Auditor will verify bills discounted and purchased as recorded in the books with those which are in the actual possession of the bank. He shall see that the limits fixed by the Board of Directors have not been exceeded and that the total of the Bills Discounted Ledger agrees with the balance of the control account in the General Ledger. He will examine the date of maturity of each bill in order to verify the amount of overdue bills.

6- Contra Accounts – Usually they relate to the following types of accounts (a) Bills for collection (b) acceptances, guarantees, letters of credit etc, opened on behalf of the customers. These items appear on both sides of the balance sheet as they constitute both the assets and liabilities of the bank.

7- Branch adjustments – This item discloses the combined effect of the differences in the inter-branch balances. Auditor shall verify this item from the certificates of balances received from branches preparing reconciliation statements.

8- Other Assets – Other assets of the bank shall include premises, furniture and fixtures, stock of stationary, interest accrued on investments etc. Auditor shall examine the title deeds or any other type of documentary evidence in order to ascertain that the assets of the bank, on the date of the Balance Sheet, do exist in the name of the bank and that they have been properly valued.

9- Liabilities – Important items which usually appear on the liabilities side of the Balance Sheet of a bank are the customer’s deposits, borrowings from other banks or agents etc, bills payable, branch adjustments, liabilities for outstanding expenses and contingent liabilities etc. Auditor will try to check up the understatement or overstatement of liabilities.

Audit of Educational Institutions

Audit of books of educational institutions like school, college, universities etc. or other such institutions which are engaged in the educational field is known as audit of educational institutions. Auditor should check income and expenditure account and balance sheet of such institutes in order to verify and report the true and fairness of results presented by income statements and financial position presented by the balance sheet. Generally, the methods and procedures for vouching and auditing is same even though an auditor of educational institution should perform following tasks:

The auditor should go through the University Act. Trust deeds and should note the rules and regulations relating to accounts. The governing body may pass resolutions from time to time in respect to accounts. A copy of minutes books should be made available to him so that he may be able to confirm whether the decision of the government body have been compiled with.

Auditor should obtain a copy of budget or financial statements to study of different heads of income and expenditure.

Auditor should thoroughly assess the strength of internal check.

Auditor should vouch the grant-in-aid from the government carefully.

Auditor should verify the receipts of monthly fees from students, from counterfoils or carbon copy of the receipts. He should also see whether cash received has been banked daily or not.

Other charges from the students such as examination fees, laboratory fees, fines etc. should be carefully verified.

Any fees received in advance should be properly adjusted.

The concession of fees and other charges should be duly authorised by the proper authority. Any charges becoming irrecoverable should be written off only after proper authority has recommended.

Any grant-in-aid or funds received for a particular purpose must be utilised for the same.

The donations and other subscriptions from the various authorities have been accounted for and acknowledged.

The income from property, investment etc., should be properly verified from the vouchers.

Auditor should vouch the amount of salaries paid with the Salary Register. Any increment given to an employee shall be duly sanctioned.

The staff provident fund should be verified and it should be seen that it is invested as per the rules.

The establishment expenses must be carefully vouched and it should be seen that capital expenditure has not been treated as revenue expenditure or vice versa.

The payment of scholarship should be verified with the receipt from students and Scholarship Register.

All the assets and liabilities should be properly exhibited in the balance sheet.

The stock of equipment, stationary, furniture should be carefully verified.

While making payment of staff salaries, income tax should be deducted at source and shall be duly deposited with the Income Tax Department.

Audit of Non –Profit Institution:

Examine the constitution, rules and regulations or the Trust Deed if any.

Examine that the fund for specific purpose have been used accordingly.

Vouch the donations and Receipts.

Vouch the Income from Investments.

Vouch the Receipt of Rents.

Vouch the payment with the minute book of the trustees or the managing committee regarding important payments.

Verify the purchase of Investments.

Verify the cash and bank balance.

See the accounts are drawn up according to the regulations.

If any special Act has been passed by the State relating to the Charitable Institutions, see that the form of accounts and auditor’s report are drawn up according to the regulation.

Audit of Insurance Companies:

Vouch the premiums received with the copies of insurance policies, cover notes or premium receipts.

Interest and dividends are to be checked.

The Claims paid or payable by the company to be checked.

Commission payments should be vouched.

Management Expenses should be examined.

All the reinsurance in detail should be checked.

All the investments made and cash balanced should be verified.

Scrutinize carefully the outstanding branch and agency balances to determine that they are recoverable.

See that the sufficient amount has been set aside as reserve for unexpired risks.

Make sure that all the contingent liabilities are ascertained and provided for.

Make sure that the code of conduct has been duly observed as it is required to be observed by the insurance companies in India.

See that the annual accounts of insurer have been prepared in accordance with the prescribed forms and regulations.

Q4) Explain Audit of educational institutions.

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