BCom 3rd Year Company Audit Notes Study Material

BCom 3rd Year Company Audit Notes Study Material

Bcom 3rd Year Company Audit Notes Study Material: We provide to all the students BCom 1st, 2nd, and 3rd Year Auditing Notes Study material, question answers, sample papers, mock test papers, and pdf. At gurujistudy.com you can easily get all these study materials and notes for free. Here in this post, we are happy to provide you with BCom 3rd Year Company Audit Notes Study Material.

BCom 3rd Year Company Audit Notes Study Material
BCom 3rd Year Company Audit Notes Study Material

BCom 3rd Year Company Audit Notes Study Material

In the preceding posts, an effort has been made to explain the basic principles of Audit which have been universally recognized for conducting audits of institutions of different natures and characters. Limited companies have their own constitution and, as such, they work under a different set of rules which are not applicable to the sole proprietary concerns and partnership firms. There are special rules and legal provisions to conduct audits of companies like banking, insurance, etc., a study of which is of dire necessity and importance for an auditor. (BCom 3rd Year Company Audit Notes Study Material)

Company Law

The Companies Act, 2013 has brought about various changes in the direction and administration of limited companies. A company auditor is expected to be familiar with all these provisions. (BCom 3rd Year Company Audit Notes Study Material)

The Company Law has distinctly defined the rights, powers, and duties of an auditor who cannot be relieved of his legal responsibilities. It is needless to state that the company form of organization is rather the most important form in the business world today.

Secondly, a company has a separate legal entity. Its owners, viz., shareholders are distributed over long distances and hence, they cannot know if their investments beings safe or otherwise unless the Directors duly inform them through their reports. This is why the audit of the accounts of a limited company is made compulsory by law. (BCom 3rd Year Company Audit Notes Study Material)

An auditor has to study the Company Law so as to familiarize himself with his rights and duties. There are provisions in the law in regard to the issue of Share Capital, preparation of Memorandum of Association and Articles of Association, the appointment of Directors, and Managing Directors, issue of Prospectus, and other important matters which an auditor has to study for the successful conduct of a company’s audit. (BCom 3rd Year Company Audit Notes Study Material)

AUDITING STANDARDS

Many scams have taken place in the past, where Chartered Accountants failed in their duty to point out irregularities and falsification of accounts by their clients. In the case of Satyam Computers, Ramalinga Raju showed inflated profits from the year 2003 to 2008 but the auditor failed to point out this in their audit reports.

The auditors of Punjab Nation Banks could not detect anything when Nirav Modi and Mehue Choksi during a period time took loans exceeding rupees thirteen thousand crores on the basis of bogasa documents with the connivance of the bank staff and ran away to foreign countries. are many more instances, of where the auditors failed in their work and were the negligent performance of their duties with care and diligence. (BCom 3rd Year Company Audit Notes Study Material)

A need, therefore, had always been felt that there should be some set of rules and procedures about doing audit work which is called ‘auditing standard’. These standards have been laid for maintaining the quality of audit work performed by Chartered accountants so that the financial statements give a true end fair view of the accounts organizations.

International Auditing and Assurance Standard Board (IAASB)

The International Auditing and Assurance Standard Board is an independent standard-setting body that serves the public interest by setting high-quality international standards for auditing, assurance, and other related areas, and by facilitating their adoption and implementation.

By doing so this organization enhances the quality and consistency of auditing practices throughout the world and strengthens public confidence in the global auditing and assurance profession.

IAASB’s standards are revised from time-to-time, to enhance the quality of auditors’ reports for investors and other users of financial statements.

Auditing and Assurance Standard Board of India

The Institute of Chartered Accountants of India has constituted ‘The auditing and Assurance Standard Board (AASB). The main function of this Board is to review existing auditing practices in India and to develop statements of Auditing’ (SA) which may be issued by this Institute from time to time.

The Auditing and Assurance Standard Board (of India) takes into account the international auditing guidelines issued by International Auditing and Assurance Standard Board and there are integrated with the conditions and practices being followed in India.

Objectives

The objectives of the Auditing and Assurance Standard Board of the Institute of Chartered Accountants of India are:

(1) To review the existing and emerging auditing practices worldwide and identify areas in which Standards and Statements on Auditing need to be developed.

(ii) To formula to Engagement Standards, on Quality Control and Statements on Auditing so that these may be issued under the authority of the council of the Institute of Chartered Accountants of India.

(iii) To review the existing standards and Statements on Auditing, to assess their relevance in the changed conditions, and to undertake their revision, if necessary.

(iv) To develop Guidance Notes on issues arising out of any Standard of auditing issues pertaining to any specific industry or on generic issues, so that those may be issued under the authority of the Council of The Institute.

To review the existing Guiding Notes to assess their relevance in present-day environments.

Preparation by the Auditor before the Audit

The auditor should go through the following preliminaries before he begins his actual work:

  1. To see that his appointment is in order;
  2. Inspection of documents, books, and registers;
  3. Inspection of contracts;
  4. Study of the previous year’s Balance Sheet and Auditor’s Report;
  5. Obtain a schedule of books and persons handling them;
  6. Study of internal check system; and
  7. Certificate of incorporation and commencement of business.

1. To see that his Appointment is in Order

(a) If he is appointed as the first auditor (newly appointed) of the company by the Board of Directors, he should ask for a copy of the resolution by the Directors authorizing his appointment. (BCom 3rd Year Company Audit Notes Study Material)

(b) If he is appointed in place of a retiring auditor, he should enquire from the retiring auditor whether due notice was served and whether the provisions of section 140 about removal were complied with or not. It would be a breach of professional etiquette if he does not enquire from him in writing about the circumstances which led to his removal. (BCom 3rd Year Company Audit Notes Study Material)

(c) If he is appointed by the shareholders at the Annual General Meeting, he should obtain a copy of the resolution. He should inform the Registrar within 30 days of the receipt of the appointment letter in writing that he has accepted or refused to accept the appointment. He should ensure that proper notice of nomination was given, otherwise, his appointment will be invalid.

The auditor should correspond in writing with the previous auditor, informing the latter of the fact of his appointment. -B.N. Mohan vs. K.C. Satyawadi

(d) If he is appointed to fill a casual vacancy caused by the death of the previous auditor, he should obtain a copy of the resolution passed by the Directors so as to ensure that his appointment is valid.

(e) A General Meeting of the shareholders should be called to appoint a new auditor in place of the auditor who has resigned. Thus, the vacancy caused by the resignation has to be filled by the company in a General Meeting and not by the Board of Directors. The auditor should see that his appointment is regular under such circumstances. He should, however, enquire from the auditor who has resigned, about the circumstances in which he has resigned and then decide whether he should accept the appointment or not.

  1. Inspection of Documents, Books, and Registers

Documents

The auditor should study the under-mentioned documents carefully:

Memorandum

(1) Under the provisions of section 4 of the Companies Act, 2013 the Memorandum of every company shall state:

(a) the name of the company with ‘Limited’ as the last word of the name in the case of a public limited company with ‘Private Limited’ as the last word of the name in the case of a private limited company and ‘OPC’ in the case of one person company.

(b) the State in which the registered office of the company is to be situated;

(2) The objects for which the company is proposed to be incorporated and any matter considered in the furtherance thereof.

(3) The Memorandum of a company limited by shares or by guarantee shall also state that the liability of its members is limited.

(4) The Memorandum of a company limited by guarantee shall also state that each member undertakes to contribute to the assets of the company in the event of its being wound up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company, or of such debts and liabilities of the company as may have been contracted before he ceases to be a member, as the case may be, and of the costs, charges and expenses of winding up, and for adjustment of the rights of the contributors among themselves, such amount as may be required, not exceeding a specified amount.

(5) In the case of a company having a share capital:

(a) unless the company is an unlimited company, the Memorandum shall also state the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount;

(b) no subscriber of the Memorandum shall take less than one share; and

(c) each subscriber of the Memorandum shall write against his name the number of shares he takes.

Alteration of Memorandum

17. (1) A company may, by special resolution, alter the provisions of its memorandum so as to change the name or place of its registered office from one state to another. The change should be approved by the Central Government.

A company shall file with the Registrar (a) a special resolution passed by a company within one month from the date of such resolution. (b) a certified copy of the order of the Tribunal made confirming the alteration, within three months from the date of order, together with a printed copy of the memorandum as altered and the Registrar shall register the same and certify the registration under his hand within one month from the date of filing of such documents. (BCom 3rd Year Company Audit Notes Study Material)

Where the alteration involves a transfer of the registered office from one state to another approval of the Central Government is necessary. A certified copy of the order shall be filed by the company with the Registrar of each of the States and the Registrar of each such State shall register the same and shall certify under his hand the registration thereof and the Registrar of the State from which such office is transferred shall send to the Registrar of the other State all documents filed in his office. (BCom 3rd Year Company Audit Notes Study Material)

Auditor’s Duty. The auditor should proceed in the following way in examining the Memorandum of Association:

(1) He should very carefully examine the ‘Object Clause of the Memorandum to ensure that the company is carrying on the work as specified.

(2) He should check the ‘Capital Clause’ and see that the issue of share capital is within the ‘Authorized Capital’.

(3) If the Authorized Capital has been increased according to law, it should be verified and traced out.

(4) If the Memorandum has been altered, it should be seen that such an alteration has been made within the provisions of Section 13 of the Companies Act.

Articles of Association

A public company limited by shares, an unlimited company or company limited by guarantee, or a private company limited by shares has to register its articles of association signed by the subscribers of the memorandum, prescribing regulations for the company. The Articles of Association of a company limited by shares may adopt all or any of the regulations of Table F in Schedule I.

The Articles of Association contain regulations to control the internal administration of the company, viz., regulation for day-to-day work, relationship between its members, their rights and responsibilities, etc. Since the Articles of Association are framed by the company for its use, they may be altered by a special resolution as and when necessary, subject to the provisions of the Companies Act and to the conditions contained in its Memorandum. (BCom 3rd Year Company Audit Notes Study Material)

The Articles shall be printed and divided into paragraphs numbered consecutively and signed by each subscriber of the Memorandum of Association (who shall add his address, description, and occupation, if any) in the presence of at least one witness who shall attest the signature and shall likewise add his address, description, and occupation if any.

It is provided that no alteration made in the articles has the effect of converting a public company into a private company, shall have effect unless such alteration has been approved by the Company Law Tribunal.

A printed copy of the Articles should be filed by the Registrar within 15 days of the date of receipt of the order of approval.

Thus, the Memorandum of the company, its articles, if any, and the agreement, any, which the company proposes to enter into with any individual for appointment as its managing or whole-time director or manager, shall be presented to the Registrar of State in which the registered office of the company is situated.

Memorandum and Article shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member and contained covenants on its and his part to observe all the provisions of the Memorandum and of the Articles. All money payable by any member to the company under the Memorandum or Articles shall be a debt due from him to the company. (BCom 3rd Year Company Audit Notes Study Material)

Auditor’s Duty. The auditor should examine the Articles of Association of the company for the following matters:

(i) Issue of share capital.

(ii) Calls on shares.

(iii) Calls in advance.

(iv) Calls in arrear.

(v) Forfeiture and re-issue of shares.

(vi) Transmission of shares.

(vii) Payment of commission on shares.

(viii) Rights of various classes of shareholders.

(ix) Appointment, remuneration, rights, and duties of Managing Director or Manager.

(x) Appointment, remuneration, qualification shares, rights, and duties of Directors.

(xi) Alteration of share capital.

(xii) Dividends and reserves.

(xiii) Borrowing powers of the company and directors, etc.

(xiv) Appointment, rights, and duties of an auditor.

(xv) Accounts and audit of the company.

(xvi) Underwriting of shares.

(xvii) Meetings and their procedure.

(xviii) How to inform shareholders.

(xix) Voting powers of the shareholders.

(xx) Payment of interest out of capital.

(xxi) How far Table F has been followed in framing the Articles of Association?

The auditor should go through the Articles very carefully and see especially that the regulations contained are in accordance with the law. He should further see that for alteration of the Articles, proper procedure has been followed. It is to be noted that if a company has not adopted its own Articles. (BCom 3rd Year Company Audit Notes Study Material)

In the case of Leeds Estate Building and Investment Society Ltd. vs. Shepherd (1887), it was held that an auditor has no defense with him to say that he could not see the Articles of Association when he knew of their existence.

PROSPECTUS

Matters to be stated and reports to be set out in Prospectus are given in Section 26 of the Companies Act. A Prospectus is issued with the objective of inviting the public to purchase the securities of the company. Ordinarily, all matters dealt with above in the Articles of Association are found in the Prospectus.

Under section 26, every prospectus issued (a) by or on behalf of a company, or (b) by or on behalf of any person who is or has been engaged or interested in the formation of a company, shall state the matters as required under section 26.

No one shall issue any form of application for shares or debentures or any security of a company unless the form is accompanied by information containing such salient features of a prospectus as may be prescribed which complies with the requirements of section 26.

Provided that a copy of the prospectus shall on a request being made by any person before the closing of the subscription list be furnished to him.

Provided further that this rule shall not apply if it is shown that the form of application was issued either:

(a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to the shares or debentures, or

(b) in relation to shares or debentures which were not offered to the public.

A director or other person responsible for the prospectus shall not incur any liability by reason of any non-compliance with, or contravention of, any of the requirements of this section, if :

(a) as regards any matter not disclosed, he proves that he had no knowledge thereof; or

(b) he proves that the non-compliance or contravention arose from an honest mistake of fact on his part; or

(c) the non-compliance or contravention was in respect of matters which in the opinion of the court dealing with the case were immaterial or was otherwise such as ought in the opinion of that court, having regard to all the circumstances of the case, reasonably to be excused.

Auditor’s Duty. The auditor should examine the Prospectus for the following matters:

(i) Amount of capital to be issued, classification of shares, and rights of shareholders attached therewith,

(ii) Amount payable on allotment and calls, (iii) Amount of minimum subscription,

(iv) Particulars of any contract entered into with the vendors for the purchase of a business,

(v) Amount payable for underwriting commission on shares or debentures,

(vi) Amount of preliminary expenses paid or payable,

(vii) Qualifications, remuneration, etc. of Directors,

(viii) Appointment, remuneration, etc. of Managers,

(ix) Particulars of any material contracts entered into within two years of the date of issue of the Prospectus.

Books and Registers

Every company has to prepare and keep at its registered office books of accounts and other relevant books and papers and financial statements for every financial year which give a true and fair view of the state of the affairs of the company, including that of its branch office or other offices. The transactions have to be explained also. (BCom 3rd Year Company Audit Notes Study Material)

Such books shall be kept on an accrual basis and according to the double entry system of accounting as per the Accounting and Auditing Standards of the Institute of Chartered Accountants of India and laid by the Government of India.

The company can keep its books of account or other relevant papers in electronic mode in such manner as may be prescribed.

There should be a proper system of storage, retrieval, display, or printout of electronic records and such records should not be disposed of or rendered unusable unless permitted by law.

It is provided that all or any of the Books of Accounts may be kept at such other place in India as the Board of Directors may decide. When the Board of Directors so decides the company shall, within seven days of the decision, file with the Registrar a notice in writing giving the full address of that other place.

Where a company has a Branch Office, whether in or outside India, the company shall be deemed to have complied with the provisions given above if proper Books of Account relating to the transactions affected at the Branch Office are kept at that office and properly summarized returns, made up to dates at intervals of not more than three months, are sent by the Branch Office to the company at the registered office or the other place referred to earlier.

Violation. Proper books of account shall not be deemed to be kept with respect to the matters specified therein:

(a) if such books are not kept 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 an accrual basis and according to the double entry system of accounting.

The Books of Account and other books and papers shall be open to inspection by any Auditor during business hours.

The Books of Account of every company relating to a period of not less than eight years immediately proceeding the current year shall be preserved in good order. In the case of a company incorporated less than eight years before the current year, the Books of Account for the entire period proceeding the current year shall be preserved. (BCom 3rd Year Company Audit Notes Study Material)

The Managing Director or Manager is made responsible for maintaining and preserving the Books of Account. The Board of Directors of the company, if there is no Managing Director or Manager, will be responsible for maintaining the books. In default, anyone responsible will be punished with imprisonment for a term which may extend to one year or with a fine which may extend from fifty thousand rupees to five lakh rupees or both.

  1. Register of Charges. Under section 85 every company is required to keep at its registered office, a Register of Charges and enter therein all charges on the undertaking or on any property of the company giving in each case:

(i) a short description of the property charged,

(ii) the amount of the charge, and

(iii) except in the case of securities to bearer, the names of the persons entitled to the charges.

If a company fails to keep such a register it shall be punishable with a fine ranging from Rs.1 lakh to Rs.10 lakh. Every officer of the company who is in default will be punished with imprisonment for a term extending to six months or with a fine which may range from twenty-five thousand to one lakh. (BCom 3rd Year Company Audit Notes Study Material)

  1. Minute Books. According to Section 118, every company shall cause minutes of all proceedings of every general meeting and of all proceedings of every meeting of its Board of Directors or of every Committee of the Board, to be kept by making within thirty days of the conclusion of every such meeting concerned, entries thereof in Minute Books with their pages consecutively numbered. Minute Books are statutory books, and are of three types:

(i) Shareholders’ Minute Books to record the proceedings of Shareholders’ Meetings.

(ii) Directors’ Minute Books to record the proceedings of the Meetings of the Board of Directors.

(iii) Committees’ Minute Books to record the proceedings of the meetings of the committees appointed by the Board of Directors.

As was held in the case of Hearts of Oak Insurance Co. Ltd. vs. Flower, 1935, the Minute Books should be in the form of a bound book and not loose sheets which can be removed or substituted. The Minutes recorded in the Minute Books have to be certified by the Chairman of the meetings concerned.

In no case, the minutes of proceedings of a meeting shall be attached to any other book by pasting or otherwise.

The Chairman shall exercise absolute discretion in regard to the inclusion or non-inclusion of any matter in the minutes on the grounds specified.

If the default is made in complying with the provisions of this Section, a fine of Rs.25,000 can be imposed on the company and every officer of the company who is in default shall be punishable with a fine which may extend to Rs.5,000.

The auditor must inspect the Shareholders’ Minute Book to examine the following matters:

(i) Issue of Redeemable Preference Shares;

(ii) Issue of further shares to persons other than the existing equity shareholders:

(iii) Alteration of Share Capital;

(iv) Adoption of Annual Accounts;

(v) Declaration of Dividends;

(vi) Appointment and Remuneration of Auditors;

(vii) Appointment and Remuneration of Directors;

(viii) Increasing the powers of the Board of Directors;

(ix) Increasing the remuneration of Directors, with the sanction of the Central Government;

(x) Investments in Shares and Debentures of other companies;

(xi) Reduction of Shares Capital;

(xii) Payment of interest out of capital;

(xiii) Authorizing remuneration to an ordinary Director on the basis of a percentage of the net profits;

(xiv) Appointing a Director, his relative, or associate to an office of profit under the company:

(xv) Granting any loans, etc., to a company under the same management; etc.

The Directors’ Minute Book will be examined by the auditor to obtain confirmation of the following:

(i) Issue of capital and allotment of shares;

(ii) Calls made by the company;

(iii) Forfeiture of shares;

(iv) Approval of contracts;

(v) Adoption of Annual Accounts;

(vi) Appointment, remuneration, rights, and duties, etc. of Managers, Auditors, etc.;

(vii) Sanction of borrowing powers;

(viii) Exercising of borrowing powers;

(ix) Declaration of interim dividend and recommendation for final dividend;

(x) Purchase of Fixed Assets;

(xi) Transfer to General Reserve and other Reserves;

(xii) Alteration of Articles;

(xiii) Payment of traveling expenses to officials and Directors of the company:

(xiv) Redemption of Debentures; etc.

  1. Register of Directors, etc. Under section 170 of the Companies Act, 2013 every company is required to keep at its registered office a register of its Directors, Managing Director, Manager, and Secretary containing prescribed details including the details of securities held by them.

The company has to send to the Registrar a return in duplicate in the prescribed form within a period of thirty days from the appointment of the first directors of the company. The notification of a change is to be sent within thirty days of the happening thereof.

If the default is made in complying with the provisions of this Section, the company and every officer of the company who is in default shall be punishable with a fine which may range from Rs.50,000 to Rs.5 lakh.

  1. Register of Contracts, Companies, and Firms in which Directors are interested. According to section 189, every company is required to keep one or more registers in which separate particulars of all contracts or arrangements, e.g., dates of contract or arrangement, names of the parties, principal terms, and conditions, and the date of the meeting of the Board of Directors on which the contract is considered, will be entered.

Auditor has to see whether the register is kept as per the requirements of the Act and is in order.

  1. Register of Members, etc. (Sec. 88) Every company shall keep and maintain the following registers in such form and in such manner as may be prescribed, namely:

(a) register of members indicating separately for each class of equity and preference shares held by each member residing in or outside India:

(b) register of debenture-holders; and

(c) register of any other security holders.

Every register shall include in the index the names included therein.

The register and index of beneficial owners maintained by a depository under section 11 of the Depositories Act, 1996 (22 of 1996), shall be deemed to be the corresponding register and index for the purpose of this Act.

A company may if so authorized by its articles, keep in any country outside India, in such manner as may be prescribed, a part of the register called “foreign register” containing the names and particulars of the members, debenture holders, other security holders or beneficial owners residing outside India.

If a company does not maintain a register of members or debenture-holders or other security holders, the company and every officer of the company who is in default shall be punishable with a fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees and where the failure is a continuing one, with a further fine which may extend to one thousand rupees for every day, after the first during which the failure continues. (BCom 3rd Year Company Audit Notes Study Material)

  1. Register of Loans. According to section 186(9) of the Companies Act, every lending company shall keep a register in respect of loan made, guarantee given, the date on which the loan has been made and the date on which the guarantee has been given or security has been provided in connection with a loan made by any other person to, or to any other person by, any body corporate or firm together with the name of the person, body corporate or firm.

If the default is made in complying with the provisions, the company may be fined from Rs.25,000 to Rs.5 lakh and every officer of the company who is in default, shall be punishable with imprisonment for up to two years and fined Rs.25,000 to Rs.one lakh.

  1. Register of Investments. Section 187 of the Companies Act, it is provided that “all investments of a company shall be made and held in its own name.” If the company’s nominee or director becomes on its behalf a director in another company and is required to hold qualification shares, they may be held jointly in the name of the company and such person. A separate register shall be maintained by the company for its investments. (BCom 3rd Year Company Audit Notes Study Material)
  2. Foreign Register of Members and Debenture holders. Under section 88(4), if it is authorized by the Articles of Association, a company may keep a register of members and debenture holders in the state or country outside India where they are resident. The such register is kept in that state or country as a branch register. It is known as Foreign Register.
  3. Inspection of Contracts. The auditor should examine the contracts which have been entered into between the company and other parties, e.g.,

(i) Contracts with the vendors of any property.

(ii) Contracts with the brokers and underwriters.

(iii) Contracts with the promoters for the preliminary expenses, etc.

Usually, brief particulars about such contracts are given in the Prospectus of a Company. The auditor should see that the statement of particulars is correct and transactions relating to such contracts have been properly recorded in the books of accounts.

  1. Study of the Previous Year’s Balance Sheet and Auditor’s Report. When the auditor is appointed in place of the retiring auditor, he should examine the Balance Sheet of the last year and also the report of the auditor appointed last year to be familiar with any relevant matter raised by the previous auditor. He should ensure that the objections or qualifications raised in the previous audit report have been duly met by the company.

Besides this, he may also examine the Directors’ Report to the members containing the recommendations of the Directors in respect of the appropriation of profits made last year. This is very important. (BCom 3rd Year Company Audit Notes Study Material)

  1. Obtaining a Schedule of Books and Persons Handling them. The auditor should, then, get a list of the persons employed to maintain accounts of the company and also of books maintained by them. This will help him in the successful conduct of the audit whenever he needs some information and explanations, difficulties can, thus, be met easily.
  2. Study of Internal Check System. This is another significant part of an auditor’s duty to obtain a detailed statement from the Directors of the Company about the system of the internal check-in operation. This will enable him to note down the shortcomings of the accounting system and the procedure followed by the company. (BCom 3rd Year Company Audit Notes Study Material)

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