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Dear Members and Students,

The Article mentioned below contained brief provisions about Company Audit. This file is very useful for quick reference and preparation for CA Final and PCC Company Audit. This Article is in continuation of my previous Article on same subject.

For part-I please follow the link below:

/articles/article_list_detail.asp?article_id=3101&article_title=CA%20Final%20and%20PCC%20Company%20Audit%20Part-I

Appointment of auditor by passing special resolution in certain cases [Section 224A]

As per Section 224A, if not less than 25% of the subscribed share capital of a company is held by specified institutions, whether singly or in any combination of others, appointment of auditors in such companies shall be made by a special resolution passed at the annual general meeting of the company. Specified Institutions means:—

(i) a public financial institution or a Government Company or Central Government or any State Government, or

(ii) any financial or other institution established by any Provincial or State Act, in which a State Government holds not less than 51% of the subscribed share capital, or

(iii) a nationalized bank or an insurance company carrying on general insurance business.

MATERIAL DATE FOR DETERMINATION OF THE 25% OF THE SUBSCRIBED SHARE CAPITAL

The Department has clarified by Circular No. 2 of 1976, dated 5-6-1976 that the material date for determination of the 25% of the subscribed share capital of the company is held by specified institutions, whether singly or in any combination of others will be the date of the annual general meeting at which the special resolution is required to be passed.

Generally, Articles of Association of companies provide for closure of the Register of members before annual general meeting during a period not exceeding thirty days at any one time, it is unlikely that the position regarding shareholding in the company will be different between the date or issue of notice and the date of the annual general meeting.

Course of Action where a change in the shareholding pattern occurred

In exceptional cases, where a change in the shareholding pattern in the company has taken place, between the date of issue of notice of the annual general meeting and the date of actual passing of the resolution regarding appointment of auditor, the company may either,—

(i) adjourn the meeting to another date, and later issue the required notice in accordance with law and thereafter pass the special resolution required to be passed u/s 224A of the Companies Act, 1956; or

(ii) omit or pass over the item on the agenda regarding appointment of auditor.

In the event of the company adopting the procedure at (ii) above, the situation would be then covered by section 224A (2) of the Act.

Important: Where any company referred to in section 224(1) omits or fails to pass at its annual general meeting any special resolution appointing an auditor or auditors, it shall be deemed that no auditor has been appointed by the company at its annual general meeting and then Regional Director shall have powers under section 224(3) for appointment of auditors.

The company shall file e-Form 23 read with Section 192 electronically along with certified copy of the special resolution & explanatory statement within 30 days of passing of resolution.

APPOINTMENT OTHER THAN A RETIRING AUDITOR [Section 225]

As per section 225 a special notice of a resolution to be moved at an annual general meeting for appointing an auditor other than the retiring auditor or removing of an existing auditor is given to the company in the manner as prescribed under the Act.

Requirement of special notice to the company

Section 225(1) provides that special notice shall be to be given by a member and such special notice must comply with the requirements of section 190. Following two types of resolutions or notice may be given under section 225 of the Act:—

(a) resolution at an annual general meeting for appointment of a person other than a retiring auditor as auditor; and

(b) resolution at an annual general meeting providing expressly that retiring auditor shall not be reappointed.

As per Department's Circular No. 5 of 1972, dated 21-2-1972 special notice shall be required for such resolution. Any non-compliance with the provisions of the said section would render such a resolution illegal and ineffective. Section 190 which provide a resolution requiring special notice applies to special notice under section 225.

Company’s duty on receipt of notice

1. It is duty of the company to intimate members on receipt of such notice immediately and where it is not possible, give notice to the members by advertisement in the newspaper circulating in the place of its registered office, not less than seven days before the meeting.

2.On receipt of notice under section 225(1) of the Act, for the removal of a retiring auditor the company shall send a copy of the notice to the retiring auditor forthwith. It is advisable to send the same by registered post with acknowledgement due.

Circulation of the retiring auditors' representation to all the members

On receipt of representation from auditor on the notice for their removal, the company shall circulate the same to all the members of the company, if possible.

Contravention of the provision of section 225 would attract penalty to the company under section 629A.

Acceptance of the position as auditor previously held by a retiring auditor without first communicating to the existing auditor shall be deemed to be guilty of professional misconduct as contemplated by clause (8) of the First Schedule to the Chartered Accountants Act, 1949.

Internal auditor cannot be appointed as statutory auditor(s)

Circular No. 29 of 1976, dated 27-8-1976 states that the internal auditor is appointed by the management and hence is in the position of an employee, whereas the statutory auditor is appointed by the company under section 224 and is required to perform the duties imposed on him under section 227 and the Rules/Orders issued thereunder.

Statutory Auditor cannot write books of account of the company

The acceptance of the book keeping work of the above nature is likely to place the statutory auditor in a vulnerable position in the matter of free expression of his professional opinion as an auditor on the annual accounts of the company. Such a practice deserves to be discouraged.

POWERS AND DUTIES OF AUDITORS

Powers of auditors to access books of accounts and to require information and explanations

Following are the rights of an auditor as per section 227(1) of the Companies Act, 1956:—

(i) Right of access at all times to the books and accounts and vouchers of the company.

(ii) Entitlement to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as an auditor.

(iii) Powers to receive all notices of general meetings and to attend it. [Section 231]

Default in the provisions of sections 225 to 231 makes the company and every officer of the company who is in default punishable with fine which may extend to Rs. 5,000. [Section 232]

Duties of auditors to enquire and make report

Sections 227(1A) and 227(4A) lay down certain important duties of the auditors. The auditor has mandatory duties to inquire and report the following:—

(a) whether loans and advances made by the company are properly secured and on terms which are not prejudicial to the interests of the company or its members;

(b) whether transactions which are represented merely by book entries are not prejudicial to the interests of the company;

(c) In case of a non-investment or a banking company, whether so much of the assets of the company as consist of shares & debentures have been sold at a price less than purchase price;

(d) whether loans and advances made by the company have been shown as deposits;

(e) whether personal expenses have been charged to revenue account;

The auditor shall make a report to the members of the company on the accounts examined by him, and on every other document declared by Companies Act to be part of or annexed to the balance sheet or profit and loss account. The auditor has duty to state in his report that whether in his opinion the accounts give the requisite information and give true and fair view.

Duties towards comments on the compliance of the Accounting Standards

Section 227(2)(d) requires that the auditor to make comments whether the profit and loss account and balance sheet complied with the Accounting Standards u/s 211(3C).

Duties to report disqualification of directors in certain cases

It is an obligation on the auditors to make comments in his report whether any director is disqualified from being appointed as director under section 274(1)(g) of the Act.

QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITORS [Section 226]

Section 226 of the Companies Act, 1956 contains provisions as regards qualifications and disqualifications of auditors for all types of companies, whether public or private including section 25 company and a Government Company.

Must be a Chartered Accountant for appointment as auditor

A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the Chartered Accountants Act, 1949.

A Chartered Accountant's firm may be appointed as auditor

A firm whereof all the partners are practicing chartered accountants in India are qualified for appointment as auditor, may be appointed by its firm name to be auditor of a company, and partner so practicing may act in the name of the firm.

Whereas the appointment of a proprietary concern as auditor shall be made in the name of the individual i.e., the proprietor. [Vide Circular No. 8/229/56-PR, dated 20-3-1957] 

Certain category of persons not qualified for appointment as auditor

Section 226(3) states that none of the following persons shall be qualified for appointment as auditor of a company:—

(a) a body corporate;

(b) an officer or employee of the 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 an amount exceeding 1000, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees;

(e) a person holding any security of that company after a period of one year from the date of commencement of the Companies (Amendment) Act, 2000 i.e. 13th December, 2000;

For the purposes of section 226, "security" means an instrument, which carries voting rights;

(g) a person if he is, by virtue of section 226(3), disqualified for appointment as auditor of any other body corporate which is that company's subsidiary or holding company or subsidiary of that company's holding company. [Section 226(4)]

Appointment of a relative of a director as an auditor should not be made

In the legal sense a relative of a director of a company is not disqualified for appointment as an auditor. However, the council of the ICAI has suggested that a CA shall not accept the audit of a company where he is relative of the company's MD or WTD and he believes that he would not be in a position to express his independent opinion.

Deemed vacation of office of an auditor in case of disqualifications

As per section 226(5), if an auditor becomes subject, after appointment, to any of the disqualifications specified in sections 226(3) and 226(4), he shall be deemed to have vacated his office.

COST AUDIT [Section 233B]

Requirement to maintain cost records

Section 209(1)(d) states that if the company pertains to any class of companies engaged in production, processing, manufacturing or mining activities and the class of companies is required by the Central Government to include such particulars in the Books of accounts shall keep at its registered office proper Books of accounts with respect to utilisation of material or labour or to other items of cost as may be prescribed by the Central Government.

Requirement for audit of cost accounts in certain cases

Section 233B deals with the cost audit. Accordingly, the Central Government may, by order, direct that an audit of cost accounts of the company shall be conducted in the specified manner by an auditor who shall be a Cost Accountant within the meaning of the Cost and Works Accountants Act, 1959.

However, if the CG is of the opinion that sufficient number of qualified cost accountants are not available, the CG may, by notification direct that for such period as may be specified in the said notification, such CA may also conduct the audit of cost accounts of companies and thereupon a chartered accountant may be appointed to audit the cost accounts of the company.

APPOINTMENT OF COST AUDITOR

Appointment of cost auditors shall be made with the previous approval of the CG

On receipt of an order from the CG, the cost auditor shall be appointed by the Board of directors with the previous approval of the Central Government. [Section 233B(2)]

The Board shall obtain a certificate of eligibility from the cost auditor to the effect that the appointment, if made, will be in accordance with the provisions of sub-section (1B) of section 224.

Application for approval of the Central Government

The company shall make an application to the Central Government electronically in e-Form 23C.  Cost audit shall be in addition to the statutory audit. Further it is an obligation on a company to provide facilities for conducting cost audit. [Section 233B(6)]

Cost auditor shall have same powers and duties as of the statutory auditors and he is required report to the Central Government. [Section 233B(4)]

Cost auditor will not be appointed as internal auditor of a company

Circular No. 1/83, dated 20-1-1983 =The Department is of the view that the cost auditor should not also be the internal auditor of a company for the period for which he is conducting the cost audit.

BRANCH AUDIT [Section 228]

Vide Circular F. No. 8/16(1)/61-PR, the term "branch office" includes any establishment engaged in any production, processing or manufacture. Branch Office of a company registered under the Companies Act, 1956 may be located in India or elsewhere.

Appointment of auditor for branch office in India

Where a company has a branch office, the accounts of that office shall be audited by the company's auditor appointed under section 224 or by a person qualified for appointment as auditor of the company under section 226.

Appointment of auditor of branch office situated outside India

In case a company has a branch office and branch office is situated outside India, the accounts of such office shall be audited by any of the following persons:—

(a) company's auditor, or

(b) a person qualified for appointment as auditor of the company under section 226, or

(c) an accountant duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of the country.

Right of company's auditor in relation to branch audit

Where the accounts of any branch office are audited by a person other than the company's auditor, the company's auditor—

(a) shall be entitled to visit the branch office, if he deems it necessary to do so for the performance of his duties as auditor; and

(b) shall have a right of access at all times to the books and accounts and vouchers of the company maintained at the branch office.

Members in general meeting may appoint separate branch auditor

Where a company in GM decides to have the accounts of a branch office audited otherwise than by the company's auditor, the company in that meeting shall appoint a person qualified for appointment as auditor of the company under section 226 or authorise the Board of directors to appoint such a person in consultation with the company's auditor. [Section 228(3)(a)]

Branch auditor shall have the same powers and duties as the company's auditor

The person appointed as branch auditor shall have the same powers and duties in respect of audit of the accounts of the branch office as the company's auditor has in respect of the same. [Section 228(3)(b)]

Report of branch auditor

Vide Circular No. 10(l)-CL-VI/6l, dated 27-4-1961, the branch/internal auditor shall forward his report on the accounts of the branch direct to the statutory auditor.

Remuneration of branch auditor

The branch auditor shall receive such remuneration as may be fixed either by the company in GM or by the Board of directors of so authorised by the company in GM. [Section 228(3)(d)]

SPECIAL AUDIT [Section 233A]

Central Government's order for a special audit

The Central Government may order for a special audit, if it is of the opinion:—

(a) that the affairs of any company are not being managed in accordance with sound business principles or prudent commercial practices; or

(b) that any company is being managed in a manner likely to cause serious injury or damage to the interests of the trade or business to which it pertains;

(c) that the financial position of any company is such as to endanger its solvency;

Who may conduct special audit

The Central Government may, by the same or different order, appoint either a CA or the company's auditor himself to conduct such special audit under section 233A. Further, the aforesaid CA may or may not be a CA in practice within the meaning of the CA Act, 1949.

Powers and duties of special auditors

The special auditor shall have the same powers and duties in relation to the special audit as an auditor of a company has under section 227. [Section 233A(3)]

Contents of report by the special auditor

The report of the special auditor shall, as far as may be, include all the matters required to be included in an auditor's report under section 227 and, if the Central Government so directs, shall also include a statement on any other matter which may be referred to him by that Government. [Section 233A(4)]

Report by the special auditors to the Central Government

The special auditor shall, instead of making his report to the members of the company, make the same to the Central Government. [Proviso to section 233A(3)]

Action by the Central Government on report of special auditor

On receipt of the report of the special auditor, the Central Government may take such action on the report as it considers necessary in accordance with the provisions of this Act "or any other law for the time being in force": [Section 233A(6)]

Central Government's powers to direct for furnishing information to the special auditor

The Central Government may, by order, direct any person specified in the order to furnish to the special auditor within specified time such information or additional information as may be required by the special auditor in connection with the special audit and on failure to comply with such order such person shall be punishable with fine which may extend to five thousand rupees. [Section 233A(5)]

Expenses in connection with special audit shall be determined by the Central Government

The expenses of, and incidental to, any special audit under section 233A (including the remuneration of the special auditor) shall be determined by the Central Government (which determination shall be final) and paid by the company and in default of such payment shall be recoverable from the company as arrears of land revenue.

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