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Case Studies for Company Audit -1 (CA-IPCC)

Anurag 
on 17 September 2013

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At the AGM of ICI Ltd., Mr X was appointed as the statutory auditor.  He, however, resigned after 3 months since he wanted to give up practice and join industry. State, how the new auditor will be appointed by ICI Ltd.

Specify provisions of Section 224(6) provisions- Appointment of auditor caused due to casual vacancy

Casual vacancy arises when an auditor ceases to act after a valid appointment due to death, disqualification, resignation, etc.

Call an extra-ordinary general meeting (EGM) and appoint another auditor as Board cannot fill vacancy caused by resignation of auditor and only the company in a general meeting can do that

Rules applicable for the appointment of an auditor in place of a retiring auditor would apply:

(i) Section 225(1): Special notice for a resolution as in an AGM for appointing as auditor a person other than a retiring auditor.

(ii) Section 190(2): Special notice is to be sent to all members of the company at least 7 days before the date of the AGM.

(iii) Section 225(2): On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.

(iv) Section 225(3): Representation if any, received from the retiring auditor should be sent to the members of the company.

(v)  Section 224A: Special resolution as required under this section should be duly passed.

(vi) Section 224(1B): Before any appointment or reappointment of auditors is made at an annual general meeting, a written certificate from the auditor about adherence to limits specified in Section 224(1B).

(vii) The incoming auditor should also satisfy himself that the notice provided for under Sections 224 and 225 has been effectively served on the outgoing auditor.

At the Annual General Meeting of CU Ltd., Mr. L is appointed as the auditor which later is held to be void ab initio.  The company holds another general meeting and appoints a new auditor.

Rules for appointment of an auditor mentioned in Section 224, also comply with requirements of Section 224A w.r.t special resolution or in Section 224(1B) for ceiling on number of audits etc.  

If statutory provisions are not complied, appointment as auditor at AGM is void ab initio. 

If company failed to appoint an auditor, only Central Government can appoint u/s 224(3).

Accordingly, appointment of a new auditor at the subsequent general meeting ≠ valid.

In case the existing auditor(s) appointed at the Annual General Meeting refused to accept the appointment, whether the Board of Directors could fill up the vacancy.

Appointment of an auditor = complete only on the acceptance of the offer by the auditor.

Non-acceptance of appointment by the auditor ≠ casual vacancy

Board can fill casual vacancy arising only in case of death, resignation, etc.

Central Government can fill vacancy if no auditors are appointed or re-appointed at AGM.

Appointment only by shareholders at general meeting.

K, a chartered accountant, was appointed as auditor of Y Ltd. in the 12th AGM of the company in September, 2008.  In June, 2009 the company removed him through a resolution in the general meeting and appointed Ram as its auditor.   

Specify provisions of Section 224(7) - Removal of auditor before the expiry of the term.

Auditor may be removed from office before the expiry of his term, by company only in a general meeting+ prior Central Govt approval (except for removal of first auditor)

Since prior approval of the Central Government has not been obtained, the removal of K is not valid and, therefore, K continues to be the auditor. The appointment of Ram in his place is void.

At an Annual General Meeting, Mr. R a retiring auditor claims that he has been reappointed automatically, as the intended resolution of which a notice had been given to appoint Mr. P, could not be proceeded with, due to Mr. P's death.

U/s 224(2), a retiring auditor, by whatsoever authority appointed, shall be re-appointed unless, inter alia:

"Where notice has been given of an intended resolution to appoint some person or persons in the place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person or of all those persons, as the case may be, the resolution cannot be proceeded with."

Even for re-appointment of a retiring auditor, the passing of a resolution is essential; in the absence of a resolution, the retiring auditor is not re-appointed automatically.

Thus, the claim of Mr R would not hold good.

KBC & Co. a firm of Chartered Accountants has three partners, K, B & C; K is also in whole time employment elsewhere.  The firm is offered the audit of ABC Ltd. and its twenty branches.  The firm already holds audit of 40 companies including audit of one foreign company.

Specify provisions of Section 224(1B) - Ceiling on Number of Company Audits

K is in whole-time employment elsewhere, thus excluded for calculation of the limit for the firm 

If B and C do not hold any audits in their personal capacity/as partners of other firms, the total number of company audits to be accepted by KBC & Co., is 40 ( ≠ more than 20 with paid-up share capital of Rs 25 lacs or more

Branch audit and audit of foreign companies excluded from the limit

Thus acceptance of audit of ABC Ltd. and its 20 branches will accordingly be within specified limits.

PBS & Associates, a firm of Chartered Accountants, has three partners P, B and S. The firm is already having audit of 60 companies, which includes 2 branch audits of a company. The firm is offered 3 company audits, out of which one is a private company, other is a foreign company and the third one is a public company. Decide and advise whether PBS & Associates will exceed the ceiling prescribed under Section 224(1B) by accepting the above audit assignments?  

Specify provisions of Section 224(1B) - Ceiling on Number of Company Audits

If Mr. P, B and S don’t hold any audits in their personal capacity/as partners of other firms, eligible audits = 20*3= 60, But as branch audit, audit of foreign company and private company are to be excluded, firm can accept the audit of above three companies of which one is a public company

M/s ANC & Co., a Chartered Accountant firm, has three partners, A, N and C who have no interest in any other partnership firm. The firm has a total of 50 company audits, of which 22 are public companies having paid up Share capital of above ` 25 lakhs. Mr. A retires on 31st August, 2009. The reconstituted firm accepts an audit of private company on 2nd September, 2009

Specify provisions of Section 224(1B) - Ceiling on Number of Company Audits

After retirement of Mr. A, the firm shall hold audit of 50 companies of which 22 will be public companies having paid up share capital of ` 25 lakhs and more.

The ceiling as per requirement of the Council of ICAI will be 60 audit assignments (30 x 2 = 60 audits)

However, the aggregate ceiling for audit of public companies having paid up share capital of Rs.25 lakhs or more is 20 (10 x 2 partners = 20 audits) in the given case

As the firm exceeds the ceiling for audit of public companies having paid up share capital of ` 25 lakhs or more, the firm must resign from 2 such companies.

At the AGM of the Company, a resolution was passed by the entire body of shareholders restricting some of the powers of the Statutory Auditors. Whether powers of the Statutory Auditors can be restricted?  

U/s 227, the auditor has:

· Right of access at all times to books, accounts and vouchers etc. (Maintained at Head office as well as Branch office)

· Right to require information and explanation from officers

These rights are conferred by the statute to enable effective discharge of duties and cannot be curtailed by shareholders/Board

Newton vs. Birmingham Small Arms Co               

While conducting the audit of a limited company for the year ended 31st March, 2010, the auditor wanted to refer to the Minute Books.  The Board of Directors refused to show the Minute Books to the auditor

Auditor entitled u/s 227 to access, at all times, to the books and account including all statutory records such as minute books, fixed assets register, etc

Decisions of the shareholders and/or the directors of the company need to be checked to verify/vouch certain transactions such as sale of undertaking

The auditor may consider extending the audit procedure as also consider qualifying his report

Y, is the auditor of X Pvt. Ltd. In which there are four shareholders only, who are also the Directors of the company.  On account of bad trade and for reducing the expenses in all directions, the directors asked Y to accept a reduced fee and for that he has been offered not to carry out such full audit as he has done in the past.  Y accepted the suggestions of the directors.

No concept of full or part audit u/s 227

His duties as a company auditor are laid down by law and no restrictions can be placed by director or even by the entire body shareholders. 

Remuneration of an auditor fixed by the company in general meeting or in such manner as the company in general meeting may determine u/s 224(8)

Even if Y accepts the suggestions of the directors regarding the scope of work to be done, responsibility as an auditor under the law ≠ reduced

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.

Specify provisions of Section 227(1A) - Duties of an auditors requiring auditor to make an enquiry in respect of specified matters

Law requires the auditor to make an enquiry; the Institute opined that auditor not required to report on the matters specified in sub-section (1A) unless he has any special comments

The auditor of Trilok Ltd. is correct in non-reporting on the matters specified in Section 227(1A)

One of the directors of Hitech Ltd. is attracted by the disqualification under Section 274(1) (g).

Auditor must ensure that written representation obtained by Board from each director that one is not hit by Section 274(1) (g).

Since in this case, one of the directors is attracted by disqualification u/s 274(g) of the Act, the auditor shall state in his report u/s 227 about the disqualification of the particular director

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 2006-07 to 2008-09. 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.

u/s 274(1)(g), if director = director of a “public company” which has not filed the annual accounts/annual returns for any continuous 3 financial years , then ≠ eligible to be appointed as a director of any other public company.

Since Mr X is a director of Private Ltd. Company, provisions of section 274(1) (g) are not applicable to him and as such he is not disqualified from directorship of both the companies

The members of C. Ltd. preferred a complaint against the auditor stating that he has failed to send the auditor’s report to them

Section 227 deals with powers and duties of auditors

Auditor’s duty ends when he signs the audit report as annexure to B/S and sends to the Company Secretary

Secretary/director must convene a general meeting and send the B/S and auditor report to the members

Re Allen Graig and Company (London) Ltd., 1934

Profile

CA. Anurag Singal secured All India Ranks 25 and 22 in CA inter and Final. He has authored the book “Auditing Mantras’ for CA IPCC. He can be mailed at anurag@auditingmantras.com


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