COMPANY AUDITOR – POWERS & DUTIES

1. COMPANY AUDITOR – POWERS & DUTIES By: CA. Pankaj Garg

2. POWERS OF AUDITOR • Right of access to books and vouchers • Right to obtain information & explanation • Right to visit branch offices & access to branch accounts. • Right to attend General Meeting • Right of Lien

3. Right of access to books and vouchers Sec. 227(1) provides that 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. • Books & accounts include all books, which have any bearing on the accounts whether these are usual financial books or the statutory or statistical books. • All times implies inspection during normal business hours. • If auditor is denied access to books, his only remedy would be to report to the members.

4. Right to Obtain Information & Explanation • Sec. 227(1) provides that auditor is entitled to require from the officers of the company such information and explanations as he think necessary for the performance of his duties as auditor. • If auditor fails to obtain sufficient information either due to limitation on the scope of duties imposed by management or the auditor is not able to verify books of account due to circumstance beyond one’s control, the auditor may state that he is unable to express an opinion.

5. Right to visit branch offices – Sec. 228(2) Where the accounts of any branch office are audited by a person other than the company’s auditor, the company’s auditor • is entitled to visit the branch office, if he deems it necessary to do so for the performance of his duties as auditor, and • has a right of access at all times to the books and accounts and vouchers of the company maintained at the branch office.

6. Right to attend AGM – Sec. 231 • All notices of, and other communications relating to, any general meting of a company which any member of the company is entitled to have sent to him shall also be forwarded to the auditor of the company; and • Auditor is entitled to attend any general meeting and to be heard at any general meeting which he attends on any part of the business which concerns him as auditor.

7. Right to attend AGM – Sec. 231 • The right of the auditor to attend any general meeting and to be heard there is only permissive. It is not his duty to attend or to take part in the discussion. • If anything comes to the knowledge of auditor after signing audit report, it is advisable for the auditor to attend the meeting with a view to bring the facts in the notice of the shareholders.

8. Right of Lien • Lien refers to the right of a person for lawful possession of somebody’s else property on which he has worked. Right of lien is exercised for non-payment of his due for the work done. • The auditor’s can exercise right of lien on the client’s books and documents in his possession for non-payment of fees by the client, for the work done on the books and documents.

9. Right of Lien To exercise the lien, following conditions must be satisfied: • Documents must belong to the client who owes the money, • These documents must come to the possession of the auditor on the client’s authority. • The auditor can retain such documents, only if he has done work on such documents, on which fees have not been paid.

10. DUTIES OF AUDITORS

11. Inquiring and Reporting – Sec. 227(1A) Auditor is required to enquire the followings: • whether loans and advances made by the company on the basis of security have been properly secured • whether the terms on which loans & advances have been made are not prejudicial to the interests of the company or its members; • whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company;

12. Inquiring and Reporting – Sec. 227(1A) • In respect of non investment & non 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; • whether loans and advances made by the company have been shown as deposits; • whether personal expenses have been charged to revenue account;

13. Inquiring and Reporting – Sec. 227(1A) • 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.

14. Reporting on Books of Accounts & Financial Statements Sec. 227 (2) provides that the auditor shall make a report to the members of the company - • on the accounts examined by him, and • on every Balance Sheet & P & L Account, and • on every other document declared by this Act to be part of or annexed to the balance sheet or P & L A/c which are laid before the company in general meeting during his tenure of office.

15. Contents of Auditor Report – Sec. 227 (2) Sec. 227(2) provides that auditor’s report shall state whether, in his opinion & to the best of his information and according to the explanations given to him - (a) the said accounts give the information required by this Act in the manner so required; and (b) give a true and fair view – - of the state of the company's affairs as at the end of its financial year; and - of the profit or loss for its financial year.

16. Contents of Auditor Report – Sec. 227 (3) • whether he has obtained all the necessary information & explanations required for the purposes of his audit; • whether proper books of account as required by law have been kept by the company; • whether the report on the accounts of any branch office audited u/s 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; • 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;

17. Contents of Auditor Report – Sec. 227 (3) • whether, in his opinion, the profit and loss account and balance sheet complied with the AS referred in Sec. 211(3C). • in thick type or in italics the observations or comments of the auditors which have any adverse effect on the functioning of the company; • whether any director is disqualified from being appointed as director u/s 274(1)(g). • whether the cess payable u/s 441A has been paid and if not, the details of amount of cess not paid.

18. Reasons for Negative Remarks – Sec. 227 (4) Where any of the matters referred in Sec. 227(2) or 227(3) is answered in the negative or with a qualification, the auditor's report shall state the reason for the answer.

19. Reporting on CARO. 2004 The auditor’s report shall also include a statement on such matters as may be specified in order issued by Central Government in case of such companies as specified in the order

20. Signing of Audit Report – Sec. 229 The person appointed as auditor of the company, or where a firm is so appointed, only a partner in the firm practising in India, may sign the auditor's report, or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.

21. Practical Questions

22. Nov. 02 (5 Marks) Q. No. 1: Mr. Rajendra, a fellow member of the Institute of Chartered Accountants of India, working as Manager of Shrivastav and Co., a Chartered Accountant firm, signed the audit report of Om Ltd. on behalf of Shrivastav & Co.

23. May 03 (3 Marks) Q. No. 2: Give your comments on the following: The auditors were requested by the management to accept the draft minutes of Board, since the minutes book has been misplaced.

24. Nov. 03 (3 Marks) Q. No. 3: As an auditor, comment on the following: The auditor of Trilok Ltd. did not report on the matters specified in sub-section (1A) of Section 227 of the companies Act, 1956, as he was satisfied that no comment is required.

25. Nov. 03 (3 Marks) Q. No. 4: As an auditor, comment on the following: The members of C. Ltd. preferred a complaint against the auditor stating that he has failed to send the auditors report to them.

26. Nov. 03 (3 Marks)] Q. No. 5: As an auditor, comment on the following: One of the directors of Hitech Ltd. is attracted by the disqualification under Section 274(1)(g).

27. May 05 (5 Marks) Q. No. 6: As an auditor, comment on the following situations/statements: The Board of Directors of a company have filed a complaint with the Institute of Chartered Accountants of India against their statutory auditors for their failing to attend the AGM of the Shareholders in which audited accounts were considered.

28. May 05 (5 Marks) Q. No. 7: As an auditor, comment on the following situations/statements: The auditor of a company wanted to see the minutes book of Directors meetings. The Chairman of the company refused for the same on the ground that matters of confidential nature were contained therein.

29. Nov. 05 (5 Marks) Q. No. 8: Give your comments on the following: The auditors of ABC Ltd. Issued a qualified opinion about the truth and fairness of the accounts of the company for the year ended 31.3.2005. They typed out the matters of qualifications in a bold font so as to invite the attention of the readers to them. The Board objected to it and required them to be typed out in the same normal font as other paragraphs of the report appear.

30. May 06 (5 Marks) Q. No. 9: As an auditor, comment on the following situations/statements: Travelling expenses of Rs. 2.25 lakhs shown in Profit and Loss Account of X Ltd., including a sum of Rs. 1.10 lakhs spent by a Director on his foreign travel for company’s business accompanied by his mother for her medical treatment.

31. May 06 (5 Marks) Q. No. 10: Give your comments on the following: Mr. X, a Director of M/s KP Private Ltd., is also a Director of another company viz., M/s GP Private Ltd., which has not filed the annual accounts and annual return for last three years 2002-03 to 2004-05. Mr. X is of the opinion that he is not disqualified u/s 274(1)(g) of the Companies Act, 1956, and auditor should not mention disqualification remark in his audit report.

32. Nov. 07 (4 Marks) Q. No. 11: Comment on the following: “AB & Associates” the Auditor of Ajanta Ltd. refused to deliver the Books of account of the company, which were given to them for the purpose of audit, as the audit fees is not paid to them in full.

33. Questions asked in PCC May 07 Auditor’s lien on his client’s books and record is not unconditional. Nov. 08 An auditor of a company is entitled to attend any general meting of the company as his duty.