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COMPANY AUDIT
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIRMENT
FOR
MCOM PART II SEM - IV
{2015-2016}
BY
MISS: RAJESHRI .D.GIRI
UNDER THE GUIDANCE OF MR NIKHIL KARKHANIS
UNIVERSITY OF MUMBAI
SHETH T.J.EDUCATION SOCIETYS
SHETH N.K.T.T COLLEGE OF COMMERCE &
SHETH J.T.T COLLEGE OF ARTS, THANE (WEST)
CERTIFICATE
OF M.COM PART
THE
PROJECT REPORT ON COMPANY AUDIT DURING THE ACEDEMIC YEAR 20152016 UNDER THE GUIDANCE OF MR NIKHIL KARKHANIS SUBMITTED ON
/ /
M.COM
PROJECT GUIDE
EXTERNAL EXAMINER
COURSE COORDINATTOR
PRINCIPAL
DECLEARATION
ACKNOWLEDGMENT
INDEX
Sr. No.
TOPIC
Pg. No.
1
INTRODUCTION.OF COMPANY AUDIT
1-16
1) HISTORY OF AUDIT
2) REQUIREMENTS OF COMPANY AUDIT.
3) GENERAL CONSIDERATION IN COMPANY
AUDIT.OBJECTIVES AND STD
2
17-18
ANNEXTURE TO THE AUDITORS REPORT
19-34
REVISED SCHEDULE III OF COMPANIES ACT 2013
1)CONCEPTS OMITTED
2) NEW CONCEPTS [ONE PERSON COMPANY]
CARO
35-42
43-47
STANDARD OF AUDITING 200A
48-52
STANDARD OF AUDITING 300
53
CONCLUSION
54
WEBLIEOGRAPHY
COMPANY AUDIT
INTRODUCTION
A company is said to be an artificial person created by law having a separate legal entity
distinct from its shareholders. It cannot be directly managed by its owners, i.e., shareholders,
because they are very large in number having small holding and also scattered over a wide
area. As such, the management and control of the affairs of the company is done by other
persons generally known as directors. Hence, it becomes essential for a company to appoint
an independent and qualified person, i.e., an auditor, to verily and certify the truth and
fairness of the financial statements.
HISTORY OF AUDIT
Clinical Audit was introduced by Florence Nightingale (1855) during the Crimea War (1853
1855) (Bull 1992). Although the Russians were defeated at the battle of the Alma River (20
September 1854), the Times newspaper criticized the British medical facilities. Sidney
Herbert, the British Secretary for War asked Florence Nightingale a mathematician to become
nursing administrator and oversee the introduction of nurses to military hospitals (Porter N.
Regional Audit Gleanings Issue 16 May 2005). Nightingale at the end of the war was able to
show positive outcomes from quality of care. Few other clinicians at this time used audit.
QUALIFICATIONS AND DISQUALIFICATIONS OF COMPANY AUDITOR:
(4) A person who is indebted to the company for an amount exceeding Rs.1,000 or
who has provided any security in connection with the indebtedness of any third
person (party) to the company for an amount exceeding Rs.1000 cannot be
appointed as an auditor.
(5) According to section-226(4) of Companies Act, if a person is disqualified with
relation to either a holding company or its sub - Sidiary Company, he shall be
disqualified for being an auditor of the first company.
If an auditor becomes the subject to any of the disqualification mentioned
above, after his appointment, he shall be deemed to have left his rank (position)
as an auditor. Besides provisions of Companies Act, according to the disqualifications shown
in section-8 of Charter Accountants Act 1949.
2.Accounting Policies
The specific policies and procedures used by a company to prepare its financial statements.
These include any methods, measurement systems and procedures for presenting disclosures.
Accounting policies differ from accounting principles in that the principles are the rules and
the policies are a company's way of adhering to the rules.
Accounting principles are lenient at times, so the policies of a company can be very
important. Looking into a specific company's accounting policies can signal whether
management is conservative or aggressive when reporting earnings. This should be taken into
account by investors when reviewing earnings reports. Also, outside accountants that are
hired to review a company's financial statements should check the company's policies to
ensure they conform to accounting principles.
3.Internal control
Internal control is under the Board of Director's responsibility. Internal control's function is,
for example, to ensure the efficiency and portability of operations, the reliability of
information, and adhering to rules and regulations. Internal control is a part of day-to-day
management and company administration.
An essential part of internal control is the Internal Audit, which operates as a separate unit
under the CEO and reports its observations to the Board of Directors. The Internal Audit
supports the Group's management in directing operations by inspecting and evaluating the
efficiency of business operations, risk management and internal control, and by producing
information and recommendations to enhance efficiency. Internal Audit also inspects the
processes of business operations and nancial reporting. Internal Audit's directive has been
approved by Stockmans Board of Directors. The operations of the Internal Audit are guided
by being risk-focused and emphasizing the development of business operations.
4.Audit Approach
The Audit Approach is a risk analysis methodology that focuses on the combined impact of
the environment in which a client operates, the client's management information and financial
results, and the effectiveness of the client's internal controls. It is based on a thorough, up-to-
date understanding of the client's business and industry, which is obtained through a
comprehensive analysis of the external and internal operating environments. It enables us to
design an audit programmed that includes the most effective and efficient combination of test
responsive to a client's unique circumstances. In addition, it provides a uniform method for
developing and documenting the basis for the audit programmed.
Our audit Audit Approach enables us to plan our effort to be proportionate to the risk of
material error in specific accounts and transactions. This provides the basis for planning the
minimum effort necessary to limit audit risk in each area to a low level. As a result, every
audit procedure has a specific purpose that is related to the company's particular situation
nothing is "routine" and hence potentially unnecessary. By following this approach we can
avoid over auditing and under auditing, and we can distribute work more evenly throughout
the year.
(3)
For the purposes of sub-sections (1) and (2), proper books of account shall not be
(a) if there are not kept such books as are necessary to give a true and fair view of the
state of affairs of the company or branch office, as the case may be, and to explain
its transactions; and
(b) if such books are not kept on accrual basis and according to the double entry
system of accounting.
(4) The books of account and other books and papers shall be open to inspection by any
director during business hours.
4A) The books of account together with vouchers relevant to any entry made therein for a
period of not less than eight years immediately preceding the current year shall be preserved
by the company in good order.
(5) If any of the persons referred to in sub-section (6), fails to take reasonable steps to
secure compliance with the requirements of law aforementioned or by a wilful act causes any
default by the company, he shall be punishable for each offence with imprisonment for a term
which may extend to six months or a fine which may extend to ` 10000 or with both. But he
may be relieved from such a liability if he can show that he has reasonable ground to believe
that a competent and responsible person was charged with the duty of seeing that these
requirements were complied with and he was in a position to discharge that duty.
(6) Where the company has a managing director or manager, such managing director or
manager and all officers and other employees of the company; and where the company
has neither a managing director nor manager, every director of the company.
(7) If a person, not being a person referred to in the foregoing paragraph, who has been
charged with the duty of seeing that requirements of law in regard to the books of
account is complied with, makes a default in doing so, he shall, in respect of each offence, be
punishable with a fine which may extend to ` 10,000.
AUDIT OF PAYMENT
Managerial Remuneration
The term remuneration covers the following types of expenditure incurred by the company
for its Director or his family
Rent free accommodation;
Any benefit or amenity in respect of accommodation free of charge;
Any other benefit or amenity free of charge at a concessional rate;
Any personal obligation; and
Insurance on the life of, or to provide any pension, annuity or gratuity for, any of the director
or his /her spouse or child.
But the definition is inclusive one. It covers every amount that the company pays or spends
for or for the benefit of a Director, in whatever form and by whatever name.
Applicability:
Section 198 and 309 deals with the provisions relating to managerial remuneration. The term
managerial remuneration mentioned in section 198 and 309 covers the remuneration of all
Directors and also its manager. It is applicable to all public companies and private company
which is a subsidiary of public company. Provisions of the above mentioned section are not
applicable on government companies (within the meaning of section 619 of the Act).
DIRECTOR COMMISION
:- 1)A/A: see the article of association of company and note the rules regarding the payment
of commission
2) Agreement : examine the terms and condition of the agreement to find out the rate of
commission payable
3) Compliance: check section 198 and 309 also see calculation as per section 349,350 and
351 of the act
4) calculation :vouch calculation of commission paid and verify with receipt
DIVIDENDS :The return on investment in share is called dividend. It is the part of the profit earned by the
company.
Dividend rate approved in the general meeting by the shareholders.
DUTIES OF AUDITOR RELATING TO DIVIDENDS :Following are the important duties of the auditor :
1. Rules Of Company :The auditor should check the rules of a company. He should examine that articles of
association and companies ordinance allow the management to propose dividends out of
revenue profits.
2. Rate Of Dividend :The auditor should check that rate of dividend must not be above the rate of profit. It should
also not exceed the market rate.
3. Reasonable Profit :The auditor should check that amount of revenue profits is reasonable. If it is not reasonable
then dividend should not be paid.
4. Account :Dividend amount is payable with in the days. The auditor should check that dividend account
is opened in the bank or not. The amount equal to dividend must be deposited.
5. Tax :It is also the duty of the auditor that he should check the tax payable or dividend is paid to the
Govt. or not ? The payment of tax is a legal formality.
6. Not Collected :Sometimes shareholders fail to collect the amount from the banks. The auditor should check
such amount because it is stated in the balance sheet as liability.
7. Profit & Loss Account :The profit and loss appropriation account must be checked by the auditor. He should note the
amount of dividend recorded in it.
8. Account Statement :The auditor examines that amount of dividend paid and due prepares reconciliation statement
of dividend account. He should make detailed checking in case of discrepancy. The errors can
be detected.
9. Warrant :To register the shareholder management issues dividend warrants. Such amount can be
claimed by the shareholders from the bank. The auditor should check these warrants has been
issued or not?
(b)reserves (c) total assets (d) total liabilities (e) details of investment
(f) turnover
taxation (h) provision for taxation (i) profit after taxation (j) proposed dividend;
(v) The holding company shall undertake in its annual report that annual accounts of the
subsidiary companies and the related detailed information shall be made available
to shareholders of the holding and subsidiary companies seeking such information at
any point of time. The annual accounts of the subsidiary companies shall also be
kept for inspection by any shareholders in the head office of the holding company
and of the subsidiary companies concerned and a note to the above effect will be
included in the annual report of the holding company. The holding company shall
furnish a hard copy of details of accounts of subsidiaries to any shareholder on
demand;
(vi) The holding as well as subsidiary companies in question shall regularly file such data to
the various regulatory and Government authorities as may be required by them;
(vii) The company shall give Indian rupee equivalent of the figures given in foreign
currency appearing in the accounts of the subsidiary companies along with exchange rate as
on closing day of the financial year;
(Note: Students may note that as per section 227 of the Act, the duty of the auditor
extends to expressing an opinion on balance sheet and profit and loss account and all
other documents annexed thereto. Since section 212 requires that particulars of
subsidiary company are required to be attached to balance sheet of holding company, the
same shall not be covered by auditors report. Also refer to section 222 which deals with
construction of references to documents annexed to accounts. The Boards Report under
section 217 is also attached to every balance sheet of a company.
Profit and loss account to be annexed and auditors report to be attached to balance sheet The profit and loss account shall be annexed to the balance sheet and the auditors report
including the auditors separate, special or supplementary report, if any shall be attached
thereto.
take into account, while examining the transaction entered into by the company, the dates
when these were entered into for confirming the validity.
With a view to carrying out the audit effectively, it is necessary that the auditor should know
the authority structure of the company. Under Section 291 of the Act, the Board of Directors
of a company are entitled to exercise all such powers, and to do all such acts and things, as
the
company is authorised to do. However, the Board shall not exercise any power or do any act
or thing which is directed or required by any legislation (including the Companies Act) or by
the memorandum or articles of the company, to be exercised or done by the company, in
general meeting.
Section 292 specifies six types of decisions that can be taken by the Board of Directors only
in Boards meetings. These relate to :
(i)
(ii)
issue of debentures,
(iii)
Some of the matters which only the shareholders can sanction at a general meeting :
(a)
Appointment and fixation of remuneration of auditors in the annual general meeting
-Section 224.
(b)
(c)
Appointment of relatives of directors etc. to an office or place of profit in the
company under Section 314 of the Act.
(d)
part
Loans to directors by a company other than a banking or a finance company (Section 295).
For verifying the foregoing transactions and others authorised by the directors or
shareholders, the auditor should refer to the minutes of the meeting at which these have
been considered. Further, for judging the validity or otherwise of section accorded, the
relevant provision of law must be referred to. A few such instances are given below :
(a) Appointment of Directors (Section 256).
(b) Disqualifications of Directors (Section 274).
(c) Conduct of Board Meeting (Sections 285-290).
(d) General powers of Board (Section 291).
(e) Powers which the Board must exercise only at a meeting (Section 292).
(f)
Restriction on powers of the Board regarding disposal of the undertaking or part of it
etc. (Section 293).
(g) Prohibitions and restrictions regarding political contributions (Section 293A).
(h) Power of Board and other persons to make contributions to the National Defence
Fund, etc. (Section 293B).
(i)
(j)
Restriction on a Director or his relative, a firm in which a director or relative is a
partner; or any other partner of the firm or a private company of which such a director is a
member or director to enter into a contract of sale or purchase of goods except with the
sanction of the Board of Directors (Section 297).
(k)
(l)
(m) Register of contracts, Companies or firms in which directors are inspected (Section 301)
(n) Remuneration of directors (Section 309).
(o) Restraint on a directors holding offices or places of profit (Section 314).
(p) Restraint on payment of compensation for loss of office to a director (Sections 318 to
321).
(q) Restriction on loans, etc., to companies under the same management (Section 370).
(r) Regulation of inter-corporate loans and investments (Section 372A).
AUDIT OF LIABILITIES
Liabilities reorganization is the concession items made by a creditor in accordance with the
agreement made with a debtor in financial difficulty or rules of the court. There are four
major forms of liabilities reorganization:
To confirm whether the date of liabilities reorganization is accurately defined. The fair market
price of assets varies from date to date, the amount of liabilities payable with interest also
varies from each other. Consequently, the profits and losses of liabilities reorganization and
the relevant records of assets and liabilities recognized in different dates vary from each
other. In addition, the date of liabilities reorganization is also the basis for defining the
accounting period. No matter when the assets transactions were conducted, the reorganization
date should be the accounting cut-off date. Auditors, in carrying out auditing, shall obtain the
asset reorganization agreement files in the first place to identify the date of reorganization.
They should then review the accounting information to check whether the valuation of the
assets and liabilities are based on the reorganization date and the accounting information
prepared are within the corresponding accounting period.
To check whether the accounting of the liabilities reorganization is proper. Major tool of such
auditing is to examine on a sample basis the accounting vouchers of liabilities reorganization.
These vouchers are verified against relevant agreement to make sure (1) relevant assets,
liabilities and capital items are consistent with the agreement,- (2) proper accounting items
have been applied and (3) accurate amounts have been recorded. Special attention shall be
paid to see if the capital received and the capital reserve have been classified accurately, if the
bad debt provision of the creditor has been written off and if contingent expenditures have
been given due consideration?
To check whether the calculation and recognition of the profits and losses of liabilities
reorganization has been conducted in accordance with relevant requirements. Review of the
calculation of the profits and losses of liabilities reorganization is done through consulting
and examining such information as the reorganization agreement, information provided by
intermediary institutions and market information, the book value of debtor's liabilities, book
value of assets, fair value of assets, fair value of shareholder's equity, future payables, the
creditor's net credit value, future receivables. The calculation of the profits and losses of the
enterprise is then reviewed to make sure data has been applied correctly and correct
calculation has been conducted. Special attention shall be paid to see if the fair market value
of assets, shareholder's equity and the amount of contingent liabilities have been accurately
defined on proper basis and, whether the accounting period of the profits and losses is
appropriate.
To audit whether the disclosure of reorganization is sufficient. Accounting standards require
that liabilities reorganization be disclosed in the footnotes of the financial statements at the
end of an accounting period, explaining the contents and impact of the reorganization. Such
disclosure aims to make the user of financial statements better informed of the financial
condition of the enterprise. The user of the financial statements will not be able to understand
the full impact of the reorganization on the assets and liabilities, profits and losses of the
enterprise, nor can they study the value for money of the enterprise correctly if the disclosure
is not properly made. It is therefore necessary to observe carefully if complete disclosure has
been made by the enterprise through examining the disclosure of the process of liabilities
reorganization.
7. Team had broadly reviewed the books of account and records maintained by the Company
in respect of malted foods, pursuant to the order made by the Central Government for the
maintenance of cost records under Section 209(1)(d) of the Companies Act, 1956 and are of
the opinion that, prima facie, the prescribed accounts and records have been made and
maintained.
The auditing team, however, not made a detailed examination of the records with a view to
determining whether they are accurate or complete. To the best of the knowledge and
according to the information and explanations given to them, the Central Government has not
prescribed the maintenance of cost records for any other product of the Company.
8. Statutory and other dues: According to the information and explanations given to them,
the Company has generally been regular in depositing undisputed statutory dues, including
Provident Fund, Investor Education and Protection Fund, Employees State Insurance,
Income-tax, Service Tax, Sales-tax, Wealth Tax, Custom Duty, Excise Duty and any other
material statutory dues with the appropriate authorities during the year.
9. According to the information and explanations given to them, the teams are of the opinion
that the Company has not defaulted in the repayment of dues to financial institutions / banks.
10. According to the cash flow statement and other records examined by them and the
information and explanations given to them, on an overall basis, funds raised on short-term
basis have, prima facie, not been used during the year for long-term investment.
11. to the best of our knowledge and belief and according to the information and
explanations given to company, no material fraud on or by the Company was noticed or
reported during the year.
Expansion and growth of the Indian economy increasing the options and avenues for
more international business opportunities and investments, and
Sustaining this growth by putting in place a modern legal framework that would
enable the Indian corporate sector to operate in an environment of best international
practices in a globally competitive manner, while promoting a positive environment
for investment and growth enhancement of a vibrant corporate sector and business
environment.
While keeping in view the said need, the Government had also kept in view the following
while proposing the new Company Legislation :1
Bringing about compactness by deleting the provisions that had become redundant
over time and by regrouping the scattered provisions relating to specific subjects.
Delinking the procedural aspects from the substantive law and provide greater
flexibility in rule making to enable adaptation to the changing economic and technical
environment.
Reports of various expert Committees have proposed extensively in formulation of the new
law keeping in view the various provisions and best practices across the world. Thereafter,
the Bill was drawn up by the Government and then through comprehensive consultative
processes with all relevant stakeholders, the proposals have been examined by the Standing
Committee on Finance of Parliament, twice, initially for the Companies Bill 2009 and then its
replacement, the Companies Bill 2011.
The Bill of 2011 was ultimately elaborately debated and passed as the Bill of 2012 by the Lok
Sabha on 18th December 2012 and after that passed by the Rajya Sabha on 8th August 2013
which subsequently received the assent of the President of India on 29th August 2013,
and the new Companies Act 2013 is being notified in Gazette of India in phases starting
from 12th September 2013, 27th February 2014 and recently on 26th March 2014 {w.e.f. 1st
April 2014} . Thus, till date out of total 470 sections of the new Act , 283 sections{fully or
partly} have been notified & 187 sections are yet to be notified. All the six Schedules have
also been notified.
The drafts of the relevant rules through which many sections of the new Law had to be
implemented had been put in public domain by the Government for public response. The
same have been finalized by the Government and notified and made effective w.e.f. 1st
April 2014. Since then a number of clarifications have also been issued by the Government.
The clarifications continue to be issued which many times alter the position of understanding
the new law.
The new Companies Act 2013 is a progressive piece of legislation having far reaching
implications and is also forward looking which promises improved corporate governance and
is in a position to significantly change the manner in which corporate operates in India. It is
anticipated to be fully implemented in months to come.
With this new Law in the statute book, the interpretations, understandings and the
compliances by companies and others will have to start afresh with a new outlook. Wherever
possible the erstwhile law of 1956 and its interpretation could be the guiding factor for the
fresh interpretation.
PURPOSE/OBJECTIVE F THE ACT
The Act broadly seeks to achieve the following objectives:
a. To promote the development of the economy by encouraging entrepreneurship and
enterprise efficiency and creating flexibility and simplicity in the formation and
maintenance of companies;
b. To encourage transparency, accountability and high standards of corporate governance;
c. To recognize various new concepts and procedures facilitating ease of doing business
while protecting interests of all the stakeholders;
d. To enforce stricter action against fraud and gross non-compliance with company law
provisions;
e. To set up institutional structure in the form of various authorities, bodies and panels as
well as by including recognition of various roles for professionals and other experts; and
f. To cater to the need for more effective and time bound approvals and compliance
Money raised through a prospectus cannot be used for dealing in equity shares of another
company. If a company changes terms of the prospectus or objects for which money is
raised, it shall provide dissenting shareholders an exit opportunity.
Shares, other than Sweat Equity Shares, cannot be issued at a discount. It means the
practice of issuing shares at a discount with the approval of CLB, as provided in Section
79 of Companies Act, 1956, has been discontinued.
Public companies can accept deposit from public on complying with certain conditions
like credit rating.
Management & Administration
All companies to follow uniform financial year, running from April to March.
Exceptions to be made only for certain companies with the approval of NCLT.
First Annual General Meeting of the Company shall be held within 9 months from the
closure of its first financial year instead of 18 months from the date of incorporation, as
provided in the Companies Act, 1956.
Quorum of general meeting for a public company will now depend upon the numbers of
the company. For companies with up to 1000 members, 5 members personally present;
for companies with members more than 1000 but up to 5000, 15 members personally
present; and for companies with more than 5000 members, 30 members personally
present, shall be the quorum. The Companies Act, 1956 prescribes a fixed quorum of 5
members personally present.
Postal Ballot to be applicable to all the companies, whether listed or unlisted.
The National Advisory Committee on Accounting Standards renamed as The National
Financial Reporting Authority (NFRA).
Auditors & Financial Statements
Every company is required at its first annual general meeting (AGM) to appoint an
individual or a firm as an auditor. The auditor shall hold office from the conclusion of
that meeting till the conclusion of its 6th AGM and thereafter till the conclusion of every
6th meeting. The appointment of the auditor is to be ratified at every AGM.
Individual auditors are to be compulsorily rotated every 5 years and audit firm every 10
years in listed companies & certain other classes of companies, as may be prescribed.
A companys auditor shall not provide, directly or indirectly, the specified services to the
company, its holding and subsidiary company
Directors
Prescribed class or classes of companies are required to appoint at least one woman
director (Woman Director).
At least one director should be a person who has stayed in India for a total period of not
less than 182 days in the previous calendar year (Resident Director).
At least one-third of the total number of director of a listed public company should be
independent directors. Government may prescribe requirement of Independent Directors
CONCEPTS OMITTED
MAJOR OMISSION /DELETIONS
Sr. No.
1
2
Section of
Companies
Act, 1956
43A
44
58AA
58AAA
120
121
153A
165
224A
10
233A
11
258
12
270
13
294AA
14
417
.
NEW CONCEPTS
ONE PERSON COMPANY
Companies Act, 2013 defines One Person Company (OPC) as Company which has only one
person as member. Further, Section 3 of the Act provides that a company may be formed for
any lawful purpose by one person. One person Company is a Private Company formed by
subscribing the name of such one person to the Memorandum and complying with the
requirements of the Act in respect of registration. As regards the name of a One Person
Company, the Act provides that the words One Person Company or OPC shall be
mentioned in brackets below the name of such Company, wherever its name is printed,
affixed or engraved.
The concept of OPC provides a more flexible and less compliance structure of a
company.
Independent Directors
With a view to add transparency, fairness and independence in decision making to safeguard
of stakeholders interest, the concept of Independent Directors was introduced. While the
concept was till date applicable on Listed Public Companies, the New Company Law
proposes to introduce the same upon big Public Companies as well. It is much likely that
rationalism and objectivity would be inducted in the processes of the Company with this
initiative.
Dormant Company
Dormant Company means a company which is not carrying on any significant accounting
transaction for a period of two years. It can apply to Registrar of Companies for getting
declared itself as Dormant Companies. It may be noted that ROC may, suo moto, also declare
a company as a Dormant Company. In todays economic environment, a lot of Companies are
formed for the purpose of holding any assets particularly real assets or any IPR or for a future
project and such Company just keeps on complying with the laws even if no actual business
is being done or transacted.
Class Action
Class action is a right to members or deposit holders or representative of such members or
deposit holders to file an application before National Company Law Tribunal (NCLT) for
restraining the Company from some specified acts. The most important part of such class
action is that such members as prescribed can claim damages or compensation against
Company, Directors, Auditors, Experts, Advisors for wrongful conduct of them.
specific time frame to ensure independence of Auditor and strengthen diligence in their role
an conduct. Compulsory rotation of audit partners is a global practice prevailing in developed
countries also like USA.
Secretarial Audit
The Companies Act, 2013 provides for compulsory Secretarial Audit by certain class of
companies and annexing of audit report with Board Report, which is circulated to all the
shareholders. The present Companies Act, 1956 provides for Compliance Certificate to be
issued by a Company Secretary in practice and annexed to Board Report by certain class of
Companies. The government must be thinking of widening the scope of such Compliance
Certificate so introduced the concept of Secretarial Audit. The Board of Directors also has to
explain in its Board Report to every qualification, reservation or adverse remark or disclaimer
made by the Company Secretary in his Secretarial Audit Report.
(a) Declaration of Compliance at the time of Incorporation (Section 7)
A company secretary in practice engaged for the incorporation of a company shall be
competent to give a declaration that all requirements of the Act and rules in respect of
registration and the matters precedent or incidental thereto have been complied with.
(b) Annual Return (Section 92)
Under the Companies Act of 1956, the annual returns of listed companies are required to
be signed by company secretary in practice. Section 92 of the Act has further widened
this requirement by providing that annual return of certain other unlisted companies shall
also be required to be certified by a company secretary in practice.
(c) Secretarial Standards (Section 118)
Till date, the Secretarial Standards are recommendatory in nature. The Act gives statutory
recognition to the Secretarial Standards specified by the ICSI. Section 118(10) mandates
that every company shall observe Secretarial Standards with respect to general and board
meetings as specified by the ICSI and approved by the Central Government.
(d) Appointment of Whole-time Key Managerial Personnel (Section 203)
Section 203 provides for compulsory appointment of whole-time Key Managerial
Personnel (KMP) in respect of certain class of companies to be prescribed by Central
Government. A company secretary is covered under the term whole-time KMP. Thus,
the appointment of company secretary will become mandatory in certain companies.
In addition to the areas listed above, company secretaries can also play a key role in the fields
of valuation, corporate restructuring, winding up and in certification of areas of compliances
specified in the Act
In view of the above, it can be said that the Companies Act, 2013 shall, to a large extent,
Widen the scope of profession of Company Secretaries
Sr.
No.
1
Category
Compliance
Companys Stationery
including Letter Head
I.
II.
III.
IV.
2
Director
Section 2(85)-Small
Company
I.
II.
-
Section 139Appointment of
auditors
10
Corporate Social
Responsibility
C)
-
11
12
13
14
Exemptions withdrawn -
15
Depreciations
Asset
Rate of
Deprecia
tion1956 Act
Rate
convert
ed to
years1956
Act
Useful
Life2013
Act
5.28 %
18
25
4%
4.75 %
20
15
(5)
6.66 %
6.33 %
15
10
(5)
10 %
7%
13.57
(5.57)
12.5 %
16.21 %
5.86
(2.86)
33.33 %
9.5 %
10
(2)
12.5 %
1.63 %
61.35
30.00
(31.35)
3.33 %
Bridges
1.63 %
61.35
30.00
(31.35)
3.33 %
CARO
Longe Rate of
r life/ Depreciat
ion- 2013
(Short Act
er life)
In an agency relationship, turnover is the amount of commission earned by the agent and
not the aggregate
amount for which sales are affected or services rendered.
Income received by way of rent or dividend or interest would not form part of turnover.
However if
principal business of the company is letting out of property or it is an investment company,
the rent or
dividend/interest would constitute turnover.
Sales Tax/Excise Duty charged separately in invoice does not form part of turnover.
Sales returns (even belong to prior years) should be deducted.
Trade Discount should be deducted from the figure of turnover.
Commission to third parties will not be deducted.
PARA 2. Auditor's report to contain matters specified in paragraphs 3 and 4: Every report
made by the auditor u/s
143 of the Companies Act, on the accounts of every company examined by him to which this
Order applies for the
financial year commencing on or after 1st April, 2014, shall contain the matters specified in
paragraphs 3
PARA 3.
CLAUSE (I) FIXED ASSETS
(a) Adequacy of Records: Whether the company is maintaining proper records showing full
particulars,
including quantitative details and situation of fixed assets.
Records should also contain particulars in respect of those items of FA that have been fully
depreciated or amortized or have been retired from active use and held for disposal. Records
should also contain necessary particular in respect of item of FA that have been fully impaired
during the period covered by the AR.
(b)
Physical Verifications: Whether these fixed assets have been physically verified by the
management
at reasonable intervals; whether any material discrepancies were noticed on such verification
and
if so, whether the same have been properly dealt with in the books of account.
Physical verification by Management and not by the auditor.
Verification can also be made by outside agencies engaged by the management.
Auditor should obtain MRL confirming that FAs are physically verified by the company as
per
policy of the company. MRL should also include the details of the material discrepancies
noticed
during the physical verification of the fixed assets. If no discrepancies were noticed, then this
A loan is considered to be overdue when the payment has not been made or received on the
due date as per the lending arrangements.
In such cases, the auditor has to examine the steps, if any, taken for recovery of this amount.
It is not necessary that steps to be taken must necessarily be legal steps.
Depending upon the circumstances, issue of reminders or the sending of an advocates or
solicitors notice, may amount to reasonable steps even though no legal action is taken.
CLAUSE (IV) INTERNAL CONTROL SYSTEM
Is there an adequate internal control system commensurate with the size of the company and
the nature of its business, for the
purchase of inventory and fixed assets and
for the sale of goods and services.
Whether there is a continuing failure to correct major weaknesses in internal control system.
Reference may also be made to SA 315 and SA 330.
The auditor should review the reports of internal auditor.
In case there is a continuing failure on the part of the company to correct major weakness in
the internal control system, the auditor should make a re-assessment of the control risk.
CLAUSE (V) DEPOSIT
in case the company has accepted deposits, whether the directives issued by the Reserve
Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the
Companies Act and the rules framed there under, where applicable, have been complied
with? If not, the nature of contraventions should be stated;
If an order has been passed by Company Law Board or National Company Law Tribunal or
Reserve Bank of India or any court or any other tribunal, whether the same has been
complied
with or not?
CLAUSE (VI) COST RECORDS
Where maintenance of cost records has been specified by the Central Government u/s 148 (1)
of
the Companies Act, Whether such accounts and records have been made and maintained.
The auditor should obtain a written representation (WR) from the management.
The auditor should, conduct a general review of the cost records to ensure that records as
prescribed are made and maintained. Clause (VII) Statutory Dues
(a)
Undisputed Statutory dues: is the company regular in depositing undisputed statutory dues
including provident fund, ESI, income-tax, sales-tax, wealth tax, service tax, duty of customs,
duty
of excise, value added tax cess and any other statutory dues with the appropriate authorities
and if
not, the extent of the arrears of outstanding statutory dues as at the last day of the FY
concerned
for a period of more than 6 months from the date they became payable, shall be indicated by
the
auditor.
(b)
Disputed Statutory dues: in case dues of income tax or sales tax or wealth tax or service tax
or duty
of customs or duty of excise or value added tax or cess have not been deposited on account of
any
dispute, then the amount involved and the forum where dispute is pending shall be
mentioned.
A mere representation to the concerned Department shall not constitute a dispute.
(c)
Transferred to investor education and protection fund: Whether the amount required to be
transferred to investor education and protection fund in accordance with the relevant
provisions
of the Companies Act, 1956 (1 of 1956) and rules made there under have been transferred to
such
fund within time.
CLAUSE (VIII) ACCUMULATED LOSSES
Whether in case of a company which has been registered for a period not less than 5 years,
its
accumulated losses at the end of FY are not less than 50 % of its net worth; and
Whether it has incurred cash losses in such FY and in the immediately preceding FY.
This clause is applicable to all the companies that are in existence for five years or more
from
the date of registration till the last day of the FY covered by the AR. This clause requires the
auditor to report:
Whether the accumulated losses at the end of the FY are > 50% of its net worth; and
Whether the company has incurred cash losses during the period covered by the report and
in the FY immediately preceding the period covered by the AR.
The term loss should be constructed to mean the net profit/loss shown by the P&L A/c of
the
company as adjusted after taking into account qualifications in the AR.
Net Worth is sum total of the paid-up capital and free reserves after deducting the
provisions or expenses as may be prescribed The figure of cash loss of the company for the
FY covered by the AR and the immediately
preceding FY should also be adjusted for the effect of qualifications in the respective AR.
CLAUSE (IX) DEFAULT OF LOAN
auditor having regard to the terms of the engagement, the requirements of relevant legislation
and the pronouncements of the Institute. The terms of engagement cannot, however, restrict
the scope of an audit in relation to matters which are prescribed by legislation or by the
pronouncements of the Institute. The audit should be organized to cover adequately all
aspects of the enterprise as far as they are relevant to the financial statements being audited.
To form an opinion on the financial statements, the auditor should be reasonably satisfied as
to whether the information contained in the underlying accounting records and other source
data is reliable and sufficient as the basis for the preparation of the financial statements. In
forming his opinion, the auditor should also decide whether the relevant information is
properly disclosed in the financial statements subject to statutory requirements, where
applicable. The auditor assesses the reliability and sufficiency of the information contained
in the underlying accounting records and other source data by: (a) making a study and
evaluation of accounting systems and internal controls on which he wishes to rely and testing
those internal controls to determine the nature, extent and timing of other auditing
procedures; and (b) carrying out such other tests, enquiries and other verification procedures
of accounting transactions and account balances as he considers appropriate in the particular
circumstances. 8. The auditor determines whether the relevant information is properly
disclosed in the financial statements by: (a) comparing the financial statements with the
underlying accounting records and other source data to see whether they properly summaries
the transactions and events recorded therein; and (b) considering the judgements that
management has made in preparing
the financial statements; accordingly, the auditor assesses the selectionand consistent
application of accounting policies, the manner in whichthe information has been classified,
and the adequacy of disclosure. The auditors work involves exercise of judgement, for
example, indeciding the extent of audit procedures and in assessing the reasonableness of the
judgements and estimates made by management in preparing the financial statements.
Furthermore, much of the evidence available to the auditor can enable him to draw only
reasonable conclusions therefrom. Because of these factors, absolute certainty in auditing is
rarely attainable.
SA 200A IV-10
10. In forming his opinion on the financial statements, the auditor follows procedures
designed to satisfy himself that the financial statements reflect a true and fair view of the
financial position and operating results of the enterprise. The auditor recognizes that because
of the test nature and other inherent limitations of an audit, together with the inherent
limitations of any system of internal control, there is an unavoidable risk that some material
misstatement may remain undiscovered. While in many situations the discovery of a material
misstatement by management may often arise during the conduct of the audit, such discovery
is not the main objective of audit nor is the auditors programme of work specifically
designed for such discovery. The audit cannot, therefore, be relied upon to ensure the
discovery of all frauds or errors but where the auditor has any indication that some fraud or
error may have occurred which could result in material misstatement, the auditor should
extend his procedures to confirm or dispel his suspicions. . The auditor is primarily concerned
with items which either individually or as a group are material in relation to the affairs of an
enterprise. However, it is difficult to lay down any definite standard by which materiality can
be judged. Material items are those which might influence the decisions of the
user of the financial statements3. It is a matter in which a decision is arrived
at on the basis of the auditors professional experience and judgment. The auditor is not
expected to perform duties which fall outside the scope of his competence. For example, the
professional skill required of an auditor does not include that of a technical expert for
determining physical condition of certain assets. Constraints on the scope of the audit of
financial statements that impair the auditors ability to express an unqualified opinion on such
financial statements should be set out in his report, and a qualified opinion or disclaimer of
opinion should be expressed, as appropriate.
Effective Date
This Standard on Auditing becomes operative for all audits relating to accounting periods
beginning on or after April 1, 1985.
How the auditor should determine the scope and extent of auditing
The auditor should consider the following:
Terms of engagements.
Requirements of law: If the audit client is a company registered under the Companies
Act, 1956, requirement of Schedule VI is to be compiled with. If it is insurance
company, then Insurance Act, 1938 and IRDA requirements and so on.
Pronouncements of ICAI: Accounting Standards, Guidance Notes on various
accounting subjects and Auditing Standards.
Can terms of engagements restrict the scope of audit?
Terms of engagements prescribing the scope of the audit are determined by the appointing
authority of the auditor. However, the appointing authority cannot restrict the scope of an
audit in relation to matters prescribed by law and any pronouncements on the subject by the
ICAI.
How audit should be organized?
Audit should be organized in such a way that:
It covers all aspect of enterprise.
It ensures that accounting records on which basis financial statements are prepared are
reliable and sufficient.
Statutory requirements of disclosure are compile with in preparation of financial
statements.
3.6-1- How to assess the reliability and sufficiency of accounting records
The same can be done by:
Study and evaluation of accounting system and internal control.
Carrying out test checking, and enquiries and confirmation, etc, of accounting records
and balances.
Assessment of accounting policies followed.
Forming an opinion by the auditor
3.7 Auditor has to report whether the financial statements reflects the true and fair view of the
financial position and operating result of the enterprise. For forming such an opinion auditor
follows a procedure to satisfy himself.
Management
Trade creditors
Investors
Government
Others
Management:
Management of the firm would be interested in every aspect of the financial analysis.
It is their overall responsibility to see that the resources of the firm are used most effectively
and efficiently and that the firms condition is sound.
Trade Creditors:
The trade creditors are to be paid in a short term solvency of the concern. The current
ratio and acid test ratio will enable the creditors to assets the short term solvency position of
the concern.
Investors:
The Investors are interested their money in the firms shares, are not concerned about
the firms earnings. They restore more confidence in those firms that show steady growth in
earnings. As such, they concentrate on the analysis of the firms present and future
profitability. They are also interested in the firms financial structure to the extent it
influences the firms earning ability and risk.
Government:
The financial statements are used to asses tax liability of business enterprise. These
statements enable the government to find out whether the business is following various
regulations or not.
Others:
Trade associations, stock exchange and public at may also analyze the financial
statements to judge the financial position of different concerns.
Definition
According to Myres Financial statement analysis is largely is a study of the
Relationship among the various financial factors in a business as disclose by a single set of
statement and a study of the trend of these factors as show in a series of statements.
1.
Profitability
2.
Financial Soundness
(b)
On the basis of materials used. According to this basis financial analysis can be of two types.
a) External Analysis
Those who are outsider for the business do this analysis. The outsiders include
investors, credit agencies. government agencies and other creditors who have no access to the
internal records of the company. These persons mainly depends upon, the published financial
statements. Their analysis serves only a limited purpose. The position of this analysis has
improved in recent times on account of increased governmental control over companies and
governmental regulations regulations requiring more detailed disclosures of information by
the companies in their financial statements.
b) Internal analysis:
This analysis is done by persons who have access to the books of account and other
information to the books of accounts related to the business., Executives and employees of
the organization or by officers appointed for this purpose by the government or the court
under powers vested in them can therefore do such an analysis. The analysis in done
depending upon the objective to be active depending upon the objective to be achieved
through this analysis.
On the basis of modus operandi according to this, financial analysis can also be two
types.
a) Horizontal Analysis
In case of this type of analysis financial statements for a number of years are reviewed
and analyzed. The current years figures are compared with the standard or base year. The
analysis statement usually contains figures for too or more years and the changes are shown
regarding each item from the base year usually in the form of percentages. such as analysis
given the management considerable insight into levels and areas of strength and weakness.
Since this type of analysis is based on the date from year to year rather than on one date, it is
also termed as Dynamic Analysis?
b) Vertical Analysis:
In case of this type of analysis a study is made of the quantitative relationship of the
various items in the financial statements on a particular type, such an analysis is useful in
comparing the performance of servral companies in the same group, or divisions or
departments in the same company. Since this analysis depends on the data for one period, is
nor very conductive financial position. It is also called Static Analysis as it frequently used
to ratios developed on one date or for one accounting period. Tools or Techniques used for
Analysis:
1. Ratio Analysis
2. Method of least Squares (Trend Values)
3. Comparative statement Analysis.
These are explained in bring as follows.
1. Ratio Analysis:
Ratio Analysis is widely used tool of financial analysis. It is defined as the systematic
use of ratio to interpret the financial statements so that the strength and weakness of a firm as
well as its historical performance and current financial condition can be determined. The term
ratio refers to the numerical or quantitative relationship between two items/ Variable. This
relation can be expressed as.
a. Percentages
b. Fractions
c. Proportion of numbers.
Accounting ratios showed the relationship in mathematical terms between two
interrelated accounting figures. This is the most important tool available to financial analysis
for their work.
Ratio analysis is a process of identifying the financial strengths and weakness of the
firm. This may be accomplished either through a trend analysis of the firms ratios over a
period of time or through a comparison of the firms ratios with its nearest competitors and
with the industry averages. The four most important financial dimensions which a firm would
like to analyze are: liquidity, Leverage, Activity and Profitability.
Nature of Ratio Analysis:
A Financial ratio is a relationship between tow accounting numbers. ratios help to
make a qualitative judgment about the firms financial performance.
Financial Ratio:
Financial Ratio is a relationship between two financial variables. It helps to ascertain
the financial condition of a firm.
Types of financial Ratios:
Liquidity ratios
Leverages ratios
Activity ratios
Profitability ratios
Liquidity Ratio:
Liquidity Ratio measure the firms ability to meet current obligations, and are
calculated by establishing relationships between current assets and current liabilities.
Leverage ratio:
Leverage ratios measures the proportion of outsiders capital in financing the firms
assets, and is calculated by establishing relationships between borrowed capital and equity
capital.
Activity Ratio:
Activity ratio reflects the firms efficiency in utilizing its assets in generating sales and
is calculated by establishing relationships between sales and assets.
Profitability Ratio:
Profitability ratios measure the overall performance of the firm by deterring the
effectiveness of the firm ingenerating profit, and are calculated by establishing relationships
between profit figures on the one hard, and sales and assets on the other.
Utility of Ratio Analysis
Assessment of the firms financial conditions and capabilities.
Diagnosis of the firs problems, weakness and strengths.
Credit analysis
Comparative analysis
Time series analysis
Cautions in using ratio analysis
Standards of comparisons
Company differences
Prices level
Different definition
Changing situations
Past data
Standard of Comparison:
Time series analysis
Inter-firm analysis
Industry analysis
Preformed financial statement analysis
Advantages of Ratio Analysis:
1. It helps in analysis of the situation i.e. analysis on the financial situation and performance.
2. Inter-firm and Intra -firm comparison is both possible on the basis of accounting ratio
3. Accounting Ratio not only indicates the present position but they also indicate the cause
leading up to the position of a large extent
4. It helps in obtaining best result when ratios for a number of years are put in tabular form
so that the figure for one year can be easily compared with those of other year
5. It indicates the trend of the change, which helps in preparation of estimates for the future.
WEBLIOGRAPHY
i.
ii.
iii.
iv.
v.
www.knowledgebible.com
www.icaiknowledgegateway.org
www.investopedia.com
www.google.co.in
www.icaias.blogspot.in
Conclusion:
Every Company registered under Companies Act 1956; need to do its audit every year, which
is known as statutory audit. During the company audit, the auditor discusses his observations
with those charged with governance, such as the audit committee of the company, before
finalizing the report. The auditor should be firm in his opinion, and exercise his independence
at this level. This part of the audit is critical, and calls for resilience on the part of the auditor.
An audit report, being a public document, should be drafted skillfully. The code of conduct
prohibits an auditor from divulging any information received by him in the course of his
professional assignment, unless legally required so to do.
Therefore, the auditor shouldn't hesitate to take the help of a legal expert on whether to
include certain comments in his report. And at last he submit the reports with adverse,
modified or with qualified opinion.