Some Questions of Audit
Q. No. 1: Give your comment on “The Central Government has appointed Mr. Sushil, a retired Finance Director of a reputed company, a non-practising member of ICAI, as a special auditor of MM Ltd., on the ground that the company was not being managed on sound business principles. Mr. Ajay, MD of MM Ltd. feels, that the appointment of Mr. Sushil is not valid as he does not hold a certificate of practice”.
Answer: Appointment of Special Auditor: Section 233A of the Companies Act, 1956, under the
circumstances as specified in the section, empowers the Central Government that it may issue
directions to the effect that a special audit of the company’s accounts for the specified period shall be conducted. Amongst others, one of the circumstances specified is in case a company is not being managed in accordance with some business principles or prudent commercial practices. Further the said section also provides that for the purpose, it may appoint a chartered accountant, whether or not the chartered accountant is in practice, or the company’s auditor itself to conduct such special audit. Therefore, the appointment of Mr. Sushil, a non-practising member of Institute of Chartered Accountants of India is within the provisions of law and, accordingly, the contention of Mr. Ajay M.D. is not correct.
Q. No. 2: As a company auditor how would you react to the following situation: Rs. 5 lakhs paid by a pharma company to the legal advisor defending the patent of a product treated as capital expenditure.
Answer: Expenditure made by a pharma company to the legal advisor Expenses of Rs. 5 lakhs made by a pharma company to the legal advisor are legal expenses. Such expenses are incurred for defending the patent of a product of the pharma company is a revenue expenditure relating to the asset because it neither enhance the capacity of the asset nor any endurable benefit is obtained in future in addition to what is available at present. The legal fees paid is normally an expenditure in the revenue nature irrespective of the amount unless it is incurred for bringing any new assets in existence. Therefore, it is not correct to treat the expenditure as capital expenditure. It would result in the overstatement of assets value and profit and calls for qualification in the audit report.
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