Appointment of auditors? rights and powers, educational?

APPOINTMENT OF COMPANY AUDITOR:

Qualifications for Appointment of Auditor:

•        Auditor should have passed the examination of the Institute of Chartered Accountants of India and be a member of the Institute of the Chartered Accountants : or

•        He should hold a certificate of practice under the Restricted Auditors Certificate (Part B States) Rules 1956.

•        If he does not possess either of the qualifications, he is not qualified to act as an auditor of a company.

Disqualifications

•        A body corporate;

•        An officer or an employee of the company. (Officer here means a director, managing director, manager or secretary);

•        A person who is a partner or who is in the employment or an officer or employee of the company;

•        A person who owes the company more that Rs. 1,000/- or who has given a guarantee of provided any security in connection with the indebtedness of any third person to the company amounting to more that Rs. 1,000/-.

•        A person who is disqualified for appointment as an auditor of the company’s subsidiary or holding company or a subsidiary of a holding company.

 

Appointment of auditors 

Under section 224 of the Act detailed provisions regarding appointment of statutory auditors have been laid down. This section [except sub-sections 224 (A) and 224 (1B)] is applicable to all kindsof companies. The Act has vested the power to appoint auditors with directors, shareholders, the Central Government and the Comptroller and Auditor General of India.

 

Appointment by directors

*        First Auditors (i) The board of directors shall appoint the first auditor(s) of a company within one month of the date of registration of the company by a valid resolution. (ii) The auditor so appointed shall hold office till the conclusion of first annual general meeting.

*        Casual Vacancy - The directors have been empowered to fill any casual vacancy in the office of the auditor, except one, which is caused by prior resignation of an auditor. Any auditor appointed in a casual vacancy shall hold office until the conclusion of next annual general meeting.

 

Appointment by shareholders

* First Auditors - In case the directors fail to appoint first auditor(s), the shareholders shall appoint the auditor at a general meeting by passing a resolution.

*Subsequent Auditors- (i)By ordinary resolution (ii) By special resolution

 

Appointment by the Central Government

(i)     If a company, at an annual general meeting, fails to appoint or re-appoint an auditor(s), the

Central Government may appoint a person to fill the vacancy under powers conferred upon it by section 224(3). 

(ii)   The said company has to give notice of the above fact to the Government and, if a company fails to give such notice within seven days of the annual general meeting, the company and every officer of the company who is in default shall be punishable with fine, which may extend up to five thousand rupees.

(iii)  The appointment by the Central Government is made from the panel of names suggested by the applicant company.

(iv)  It may be noted that if appointment of a person as an auditor is void ab initio, it should not be treated as a casual vacancy rather this would give rise to powers of the Central Government under section 224(3).

 

Appointment by the Comptroller and Auditor General

In case of Government companies, the Comptroller and Auditor General appoints or re-appoints the auditor(s).

 

RIGHTS AND POWERS OF AN AUDITOR

An auditor gets the following rights and powers from the companies Act, to enable him to discharge his duties as an Auditor in a faithful manner.

1.      Right to inspect books of accounts

2.      Right to ask for information and clarifications.

3.      Right to get notice of the general meeting and attend it.

4.      Right to make a statement in the meeting.

5.      Right to be indemnified.

6.      Right to visit the Branches.

7.      Right to take legal and technical advice.

8.      Right to ask for remuneration.

9.      Right to sign the audit report

10.   Right to correction of wrong statements.

 

DUTIES OF AN AUDITOR

Duties of an auditor can be stated under two heads: A. Duties under the Companies Act; and B. Duties as per the Legal Decisions. Let us see these duties under these heads separately.

 

A. Duties under the Companies Act

The auditor has the following duties under the Companies Act:

1. To make special enquiries and investigations in connection with the following matters

(i)     whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interest of the company of its members; 

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

(iii)  where the company is not an investment company within the meaning of Section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company ;

(iv)   whether loans and advances made by the company have been shown as deposits ; (v) whether personal expenses have been charged to revenue accounts ;

(vi) whether it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading.

2.    To make report to the shareholders.

The auditor of the company is duty bound to make report to the members of the company on the accounts examined by him and on every balance sheet, every profit and loss account laid before the company in the general meeting during his tenure of office. The auditor has to make a report to the members and not to the directors, though his appointment may have been made by the directors. The duty of the auditor is over as soon as he submits the report to the Secretary of the company. It is none of his concern to know whether the same has reached to the hands of the members of the company.

3.    Duty to state the reasons for the answers in negative.

In case of the answers to any of the points stated above are in negative, the auditor is required to explain the reason for the answer in his report.

4.    Duty to sign the audit report.

It is the duty of the auditor to sign the audit report before sending is to the secretary of the company.

5.    Duty to give a report upon the Prospectus

The auditor is required to give his report upon the Prospectus issued by an existing company. He should also give his report on the assets, liabilities and Profit and Loss of such company.

6.    Duty to certify the Statutory Report

7.    Duty to declare the solvency of the Directors,

8.    Duty to give a report upon the Profit and Loss Account and the Balance Sheet enclosed with the Declaration of Solvency.

9.    Duty to assist the Investigators

10.  Duty to assist the Advocate General.

 

B. Duties According to the Legal Decisions

1.    Duty to inform the members and shareholders about the contravention of the provisions of the company Law.

2.    Duty to enroll himself with the Institute of Chartered Accountants of India and to obtain a certificate to practice from it.

3.    Duty to acquaint himself with the provisions of the company law and also enquire from his predecessor about it in writing,

4.    Duty not to canvass for and also approach and press any member of the company for his appointment as an auditor of the company.

5.    Duty to enquire about the true and fair state of affairs of the company and submit his proper report.

6.    Duty to verify himself cash in hand and not to be negligent in his work.

7.    Duty to see the Debenture Trust Deed and verify whether the debentures issued by the company are according to the terms laid down in the trust Deed.

8.    Duty to verify the investments himself.

9.    Duty to perform his task with ability, care and skill.

10.  Duty to verify the inventories and the ledger accounts.

LIABILITIES OF AN AUDITOR

Liabilities of an auditor of a company differ from those appointed by a firm, The Companies Act has defined the duties of a company auditor and the liabilities arise on account of these duties. For the sake of convenience the liabilities are divided under the following headings:

A.  Civil Liability;

B.  Criminal Liability;

C.  Liability towards third parties;

D.  Liability for libel;

In all the four cases the auditor can be held liable for one or more causes given hereunder.

(a)  Liability for Negligence under the law of Agency;

(b) Liability for Misfeasance under the Statutes—Companies Act and Indian Penal Code.

 

A. Civil Liability

Liability for Negligence: Under the law of Agency the auditor is liable for negligence and in such a case has to pay damages to the aggrieved party or parties. If the company suffers a loss on account of the acts of the auditor, he has to make good this loss.

‘Negligence’ includes the following acts—

(a) Not to see the Articles of Association and not to object payment of dividends out of capital; (b) Not to get statements of accounts from the creditors and find out the errors and frauds.

(c) Not to verify Cash and Petty Cash;

(d) Not to report to the client about the insufficient provision for bad and doubtful debts, which results in inflating the profits for dividends, thus paying dividends out of capital.

Liabilities for Misfeasance : The term ‘misfeasance* implies a breach of trust or duty. Where the auditor performs his duties negligently and the company suffers a loss on this account, the auditor is held liable for Misfeasance and he has to indemnify the company for such loss.

B. Criminal Liability

1.      Under the Indian Penal Code : He is criminally liable, when he issues or signs a certificate required by law to be given or signed or relating to any fact for which such certificate is admissible as evidence, knowing or believing that such certificate is false in any material point. He shall be punishable in the same manner as if he has given false evidence.

2.      Under the Companies Act: He is criminally liable for the following acts— (a) for authorizing the issue of a false prospectus. 

(b) for fraudulently inducing persons to invest money by purchasing shares or debentures of the company. 

(c)  For falsification of books. 

(d) For rendering false statements either in the balance sheet or any other document or destroying or mutilating any voucher or document, the auditor shall be punishable.

3.      Under the Income tax Act: The auditor is criminally liable for encouraging or abetting his client to make a false statement or declaration regarding his taxable income.

 

4.      Under the Life Insurance Corporation Act: The auditor is criminally liable for making a false statement willfully on a material point relating to the return, report, balance sheet or any document.

5.      Under the Banking Companies Act: The auditor is criminally liable, if he makes a false statement knowingly relating to a return, report, balance sheet or any other document or conceals a fact.

6.      Under the Chartered Accountant Act, 1949 : the auditor is liable for misconduct, which is defined under section 122 of the Act. Cases of professional misconduct are dealt in the various schedules of the Act.

 

C. Liabilities Towards Third Parties

Auditor is not liable to third party or parties as a general rule. He is liable to his employer only. However, if the third parties are able to prove the following points he shall be liable towards them too—

(a)  that the statement was untrue in fact;

(b) that the person making it knew that it was untrue or was recklessly can consciously ignorant whether it was true or not;

(c)  that the statement was made with the intention that the third party should act upon it; (d) that the third party did act on the faith of the statement in the prospectus.

D. Liability for Libel

A libelous or slanderous statement made by an auditor will not hold him liable if he has made such statement bonafide and without any malice. But if he has made such a statement outside the scope of his duties, he shall be held liable.

 

 

AUDITOR’S REPORT –STANDARD REPORT AND QUALIFIED

The audit report is the report that contains the audit’s opinion which is issued by independence auditors after their examination on the entity’s financial statements and related reports.

Four Types of Audit Reports:

There are four types of audit reports issued by auditors on financial statements. Each type of report contains different meaning and massages from auditors to users of financial statements. Those audit reports included Unqualified Audit Report (Clean Audit Report), Qualified Audit Report, Disclaimer Audit Report, and Adverse Audit Report. The following are the detail of audit reports.

 

#1 Unqualified Audit Report (Clean Audit Report):

Unqualified Audit Report issued by the auditor to financial statements when auditor found no material misstatements after their testing. This report contains the unqualified opinion from an independent auditor. The report showed that the entity financial statements are prepared and present true and fair and complying with accounting framework being used.

#2 Qualified Audit Report:

The qualified Audit report is the report that issue by auditors to the financial statements that found material misstatements on them. But those material misstatements are not pervasive.

#3 Adverse Audit Report:

Adverse Audit Report is a type of audit report that issued to the financial statements when auditors found that there are material misstatements in the financial statements.

#4 Disclaimer Audit Report:

The disclaimer audit report is the report that issues to the financial statements where there is matter to auditor’s independence and those mater cause auditor not be able to obtain sufficient audit evidence to support their opinion.

 

Advantages of Audit Reports:

•        Provide assurance on Financial Statements. Audit reports issued by a professional and independence auditor which is operational independence from management of the entity. The report issued from them could help the users of the financial statement to assure that financial information is correct or not.

•        Prove management integrity on their shareholders. As auditor is independence from management, the report could prove whether managements are honest to their shareholders or not. This is related to principle and agency theory.

•        It is the requirement of law and regulation. Most of the countries required the entities which have the specific criteria to have their financial statements audited by independent auditors. Those criteria like annual turnover, the value of assets, and the number of employees. The auditor is the evidence that could prove to the government that the entity is complying with the law.

•        It is the requirement of shareholders. Most of the corporate shareholders want their entity’s financial statements to be audited. This report is examined by the experts and express into the easy words that could be understood by most of the shareholders who do not have financial or audit background.

•        Parent company’s requirement. Many parent companies that have subsidiaries operating in other countries or even in the same country normally required their subsidiaries’ financial statements to be audited. This report could help them manage the subsidiary even more effectively.

•        Help stakeholders to understand about entity’s financial and operational situation. This is probably the most important point. The auditor is required to state the auditor report whether the entity has any going concern problem or not. This includes financial and non-financial problems that could lead the entity to face bankruptcy in the next foreseeable period from the audit report date.

Limitation of Audit Reports:

•        Scope of audit might be limited by management. This is a popular discussion about audit’ issues. In the audit standard, auditors should have full right to access any kind of information that could help them to obtain audit evidence to express their opinion. However, in practice, management might try their best to prevent auditors to obtain some sensitive information. These are probably the management don’t fully trust auditors ethic related to confidentiality or management themselves have integrity problems. These problems might prevent auditors to provide the best quality of audit opinion that it should be.

•        Time too constraints for auditors. In practice, auditor normally faces time constraints which do not provide them enough time to perform their testing as they should be.

•        Auditors’ Independence. Code of ethic required auditors to stay independence from their audit client. This is to make sure that auditors do not bias when they perform their works as well as when they issue audit opinion.

•        Risks that might not detect by auditors: Inherent Risks and Fraud Risks. Audit standard requires auditors to have proper audit planning as well as risks assessment. This is to make sure that the auditing quality is maintained, and audit risks are identified and minimize. However, these things could not auditor to eliminate all kind of risks of material misstatement from financial statements. For example, inherent risks and fraud risks.

 

AUDIT OF EDUCATIONAL INSTITUTIONS

 

Audit of books of educational institutions i.e. Schools, Colleges, Universities etc is known as audit of educational institutions. This type of audit comes under the category of special audit. Generally, the procedures for auditing is same like other audit even auditor need to follow other steps.

•        Study of the trust deed or regulations.  

•        Examine the previous financial statements.  

•        Noting of provisions applicable.  

•        Evaluation of internal control system.  

•        Examine the minute of the meeting and resolution.  

•        Verification of students fee register.  

•        Authorization for fee concessions.  

•        Verification of cashbook with respect of counterfoils of receipts and payments.

•        Examination of capital fund regarding admission fees.  

•        Verify free studentship and concessions .

•        Confirmation of fines for late payment or absence.  

•        Check hostel dues recovery.  

•        Verification of rental income or expenses.  

•        Examine the bank pass book of different nature.  

•        Verification of investment register and also ask about any interest and dividend from investment if any.  

•        Verify grants from any local bodies or Government with reference to memo or sanction letter.  

•        Reporting of any arrears.  

•        Vouch counterfoils of receipts taken from donors.  

•        Confirmation of any deposits and caution money and its treatment.  

•        Examination of expenses for library books and sports equipments.  

•        Checking of acknowledgement letter if any with regards to scholarship.  

•        Examination of payments with respect to prizes if any.  

•        Examine the salary register.  

•        Verify the Provident Fund Register.  

•        Check annual report with accurate supporting documents.  

•        Vouching of all establishment expenses.  

•        Vouch payment for electricity and water bill.  

•        Examination of payment for hostel maintenance and any other miscellaneous expenses.

•        Inspection of facilities given to students under any schemes associated with Government.  

•        Verification of Fixed Assets Register.  

•        Verify ownership and existence of Fixed Assets.  

•        Confirmation of statutory compliance i.e. P.F., Income Tax etc.  

•        Verification of separate statements of accounts for different funds.  

•        Checking of calculation of salary payable and deductions.  

 

AUDIT OF INSURANCE COMPANIES

The Insurance auditors shall examine policy and liability procedures, risk valuation, tax documents, and various other financial records of insurance. It is to ensure that proper insurance rates and premiums are implemented and regulators laws are being followed by insurance companies. Claims and commissions are also the core areas to verify during the course of insurance audits. In addition to these responsibilities, insurance auditors might be expected to maintain quality control between insurance companies and policyholders.

Four Important Audit Points in Insurance Company Profit & Loss Account

The premium collections are credited to a separate bank account and no withdrawals are normally permitted from that account for meeting the general expenditure. As per the policy of the insurance company, the collections are transferred to the Regional Office or Head Office. No Risk shall be assumed by the insurer without receipt of premium according to section 64VB of the Insurance Act, 1938. Verification of premium is of utmost importance to an auditor because Insurance premium is collected upon issuing policies. It is the consideration for bearing the risk by the insurance company. The auditor should apply the following procedures: –

 • Before commencing verification of premium income, the auditor should look into the internal controls and compliance which are laid down for collection and recording of the premiums. 

• Cover notes should be serially numbered 

• The auditor should check whether Premium Registers have been maintained chronologically, giving full particulars including GST charged as per acceptance advice on a day -to-day basis. 

• The auditor should verify whether the figures of premium mentioned in the register tally with those in General Ledger. 

• The auditor should verify whether instalments falling due on or before the balance sheet date, whether received or not, have been accounted for as premium income as for the year under audit.

2. VERIFICATION OF CLAIMS

The auditor should obtain from the divisions/branches, the information for each class of business. The auditor should determine the total number of documents to be checked giving due importance to claim provisions of higher value. The claims under policies comprise the claims paid for losses incurred, and those estimated or anticipated claims pending settlements under the policies. Settlement cost of claims includes surveyor fee, legal expenses, etc. The Claim Account is debited with all the payments including repair charges, fire fighting expenses, police report fees, survey fees, amount decreed by the Courts, travel expenses, photograph charges, etc. The auditor should-

•  Check whether provision has been made for all unsettled claims

•  Check whether provision has been made for only such claims for which the company is legally liable.

•  Check whether provision made is normally not in excess of the amount insured.

•  check in case of co-insurance arrangements, the company has made provisions only in respect of its own share of anticipated liability.

•  Check claimed paid should be duly sanctioned by the authority concerned

3. VERIFICATION OF COMMISSION

The remuneration of an agent is paid by way of commission which is calculated by applying a percentage to the premium collected by him. Commission is payable to the agents for the business procured and is debited to Commission on Direct Business Account. An insurance business is solicited by insurance agents. The auditor should verify- • Voucher disbursement entries with reference to the disbursement vouchers with copies of commission bills and commission statements.

•  Check whether the vouchers are authorized by the officers- in –charge as per rules and income tax is deducted at source, as applicable.

•  Test check correctness of amounts of commission allowed.

•  To check whether commission outgo for the period under audit been duly accounted or not.

4. VERIFICATION OF OPERATING EXPENSES   

All the administrative expenses in an insurance company are broadly classified under 13 heads as mentioned in Schedule IV.

The auditor should check-

•  Expenses in excess of Rs.5 Lakhs or 1% of net premium, whichever is higher, should be shown separately; and

•  Expenses not directly relating to insurance business should be shown separately for example, expenses relating to investment department, bank charges etc.

Three Important Audit Points in Insurance Company Balance Sheet 1. INVESTMENTS

The auditor should keep in mind the following provisions related to Investments  of the Insurance Act, 1938 while examining the investments-of an insurance company-

a. An insurance company can only invest in approved securities. However, it can invest otherwise than in approved securities if the following conditions are satisfied.

•  Such investments should not exceed 25% of the total investments; and

•  Such investments are made with the consent of board of directors.

b. An insurer should not invest in shares or debentures of insurance or Investment Company in excess of least of the following:

•  10% of its own total assets;

•  2% of the investee’s subscribed share capital or debentures.

c. An insurer company should not invest in shares or debentures of a company other than insurance or investment company in excess of least of the following

•  10% of its own total assets;

•  10% of investee’s subscribed share capital or debentures.

d. An insurance company cannot invest in shares and debentures of a private company.

e.  The insurance companies cannot invest the funds of its policy holders outside India.

2. CASH AND BANK BALANCES

•  Bank reconciliation statements shall be prepared.

•  The auditor should obtain confirmation of Bank Balances for all operative and inoperative accounts.

•  The auditor should physically verify Term Deposit Receipts issued by bankers. Generally all cash at year end deposited as term deposit with the bank

•  The auditor should verify the deposits and withdrawals transactions at random and check whether the Account is operated by authorized persons only.

•  In case of funds, in -transit, he should verify that the same are properly reflected in a reconciliation statement.

3. OUTSTANDING PREMIUM AND AGENTS’ BALANCE

The audit procedures, which may be followed with regards to agent’s balance, are as follows:

 a. Verify whether agent’s balances and outstanding balances in outstanding premium account have been listed, analyzed and reconciled for the purposes of audit.

 b. Verify whether recoveries of large outstanding have been made in post audit period.

 c. Verify whether there is any old outstanding debit or credit balances as at the yearend which require adjustment. A written explanation may be obtained from the management is to their nature. d. Verify that agent’s balances do not include employees’ balances and balances of other insurance companies.

 e. Verify that no credit of commission is given to agents for businesses directly procured by it.  

Audit Committee in insurance companies

Every Insurer shall constitute an Audit Committee as per Section 177 of the Companies Act, 2013. The committee should oversee the financial statements, financial reporting, statement of cash flow and disclosure processes both on an annual and quarterly basis. The Chairperson of the Audit Committee should be an Independent Director of the Board with an accounting /finance /audit experience and may be a Chartered Accountant or a person with a strong financial analysis background. The association of the CEO in the Audit Committee should be limited to occasions where the Audit Committee requires eliciting any specific information concerning audit findings. As required under Section 177 of the Companies Act, 2013, the Audit Committee shall comprise of a minimum of three directors, majority of whom shall be Independent Directors. The Audit Committee will oversee the efficient functioning of the internal audit department and review its reports. The Committee will additionally monitor the progress made in rectification of irregularities and changes in processes wherever deficiencies have come to notice. The Audit Committee shall have the oversight on the procedures and processes established to look after the issues relating to maintenance of books of account, administration procedures, transactions and other matters having a bearing on the financial position of the insurer, whether raised by the auditors or by any other person. The Audit Committee shall discuss with the statutory auditors before the audit commences, about the nature and scope of audit as well as have post-audit discussions to address areas of concern.