Chapter 03 – Statutory Audits

1. Chapter 03 – Statutory Audits

2. Regulatory Framework • Depends on • Company Legislation • 1995 No 15 SL Acc & Aud Stds Act • Common regulations • Specific Acts (E.g. Environmental) • Corporate Governance requirements • SEC requirements • Industry specific regulations • International regulations • Other ICASL professional requirements and pronouncements (SLAPs, UITF, Code of Ethics etc.)

3. Corporate Governance • Definition: The system by which companies are directed and controlled (Cadbury Report) • Guidance mainly from US and Canada • Following reports/ statements are important for historical development • Cadbury report • Greenbury report • Higgs report • CISCO report • Combined code • Revised code by FRC

4. Sri Lankan Context • So far two reports have been issued as code of best practices • On Board of Directors • On Audit Committees • It is voluntary in Sri Lanka but compulsory for UK listed companies

5. Code of Best Practice on BOD – (Highlights) • Every public company should be headed by an effective board, which should lead the control of the company • A clear division of responsibilities should exist in running the company and the board • There should be a board balance between executive and non executive directors (1/3rd – Non executive element)

6. Code of Best Practice on Audit Committees – (Highlights) • Definition: A committee consisting primarily of non executive directors which is able to view a company's affairs in a detached and independent way and liaise effectively between the main board of directors and the external auditors • The main role of an audit committee is to oversee the financial reporting system of a company with a view to safeguard the interests of shareholders and all other stakeholders

7. Auditing & Company Legislation • 1982 No 17 Company Act specifies • The FS has to be audited • Appointment, removal, resignation and retirement of auditors • Rights, duties and necessary qualifications • The change of the role of the auditor • The primary role is to express an opinion on the true and fairness of the FS • Detecting and reporting on fraud is expected by the public

8. Auditing & Company Legislation • The change of the role of the auditor (contd..) • This leads to the concept of ‘expectation gap’ • The trend of international legislation is more towards the requirements of the users

9. Appointment of Auditors • 1982 No 17 Co Act specifies following provisions • Qualifications: • Public Ltd and Peoples Companies can be audited only by ICASL members who are having a practicing certificate • Private Ltd companies can be audited by following parties as well. • Members of the SL Accounting Service • Members of the SL Auditing Service • Bearers of the Higher Diploma certificate of Lanka Technical College • Retired assessors of the Inland Revenue Department • Members of the other accepted professional bodies

10. Appointment of Auditors • Disqualifications: Following parties are disqualified to act as a statutory auditor • An officer or servant of the company • A servant of an officer or partner of the company • A body corporate (legal person) • Why? 1 & 2 : Not independent 3 : Due to Limited liability

11. Provisions for Appointment/ Reappointment of Auditors under Co Act • The first auditors of a company can be appointed by the directors of such company • Such auditors will hold office till the first AGM • A new or the existing auditor may be reappointed by the members of the company • If no new auditor is appointed the existing auditor is automatically reappointed

12. Provisions for Appointment/ Reappointment of Auditors under Co Act • But, the existing auditor may not be reappointed in following situations • A resolution has been passed expressly stating that the existing auditor will not be reappointed • The existing auditor disqualifies himself to act as a statutory auditor • Existing auditor communicates in writing his non willingness to be reappointed • In case of resignation or death • The directors can fill the vacancy in case of resignation or death but the new auditor will hold office till the next AGM

13. Provisions for Removal of an Existing Auditor • A special notice is required to remove an existing auditor • A special notice is a notice which requires a notification prior to 28 days • The auditor also should be sent such notice simultaneously • The existing auditor can make representations against such removal notice and if such representations are given to the company prior to 14 days in writing, the company will have to send each member a copy of it.

14. Provisions for Removal of an Existing Auditor (Cotd..) • If the company received such notice after 14 days or the company failed to send such copies to its members the auditor is entitled (has a right to) make oral representations at the AGM • The Above Company Regulations are due to: • Protect the statutory auditor’s independence and objectivity so that the mgt cannot hire and fire auditors at their wish

15. Statutory Auditor’s Duties & Rights • The main duty (role) of a statutory auditor under Company Act is to submit a report (containing an opinion) on the matters specified in VII schedule of the Company Act • Rights of a Statutory Auditor • To verify books, accounts, vouchers and other repots as necessary and to obtain information and explanations from company officers • To receive notices, participate and make representations in any general meeting which matters relating to audit is discussed