10. Company Audit Flashcards
Who can audit the accounts of the branch office?
Where a company has a branch office, the accounts of that office shall be audited by -
i) The auditor appointed for the company (herein referred to as the company’s auditor) under this Act; or
ii) Any other person qualified for appointment as an auditor of the company under this Act and appointed as such under section 139; or
Where the branch office is situated in a country outside India, the accounts of the branch office shall be audited by -
i) The company’s auditor; or
ii) An accountant; or
iii) Any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country.
Duties and Power of company’s auditor with reference to the audit of branch and the branch auditor.
Duties and powers of the company’s auditor with reference to the audit of the branch and the branch auditor, if any, shall be such as may be prescribed:
i) It may be noted that the branch auditor shall prepare a report on the accounts of the branch examined by him and send it to the auditor of the company who shall deal with it in his report in such manner as he considers necessary.
ii) Further as per rule 12 of the Companies (Audit and Auditors) Rules, 2014, the branch auditor shall submit his report to the company’s auditor and reporting of fraud by the auditor shall also extend to such branch auditor to the extent it relates to the concerned branch.
What is Joint Audit?
Joint audit basically implies pooling together the resources and expertise of more than one firm of auditors to render an expert job in a given time period which may be difficult to accomplish acting individually.
It essentially involves sharing of the total work.
This is by itself a great advantage.
Advantages of Joint Audit
In specific terms the advantages that flow may be the following:
i) Sharing of expertise.
ii) Advantage of mutual consultation.
ii) Lower workload.
iv) Better quality of performance.
v) Improved service to the client.
vi) Displacement of the auditor of a company taken over in a take-over is often prevented.
vii) In respect of multi-national companies, the work can be spread using the expertise of the local firms which are in a better position to deal with detailed work and the local laws and regulations.
viii) Lower staff development costs.
ix) Lower costs to carry out the work.
x) A sense of healthy competition towards a better performance.
Disadvantages of Joint Audit
The general disadvantages may be the following:
i) The fees being shared.
ii) Psychological problem where firms of different standing are associated in the joint audit.
iii) General superiority complex of some auditors.
iv) Problems of co-ordination of the work.
v) Areas of work of common concern being neglected.
vi) Uncertainty about the liability for the work done.
Reporting requirement relating to matters stated in section 143(1)
Under section 143(1), auditor shall inquire into following matters given as under: -
a) 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 prejudicial to the interests of the company or its members;
b) whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;
c) where the company not being an investment company 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:
d) whether loans and advances made by the company have been shown as deposits;
e) whether personal expenses have been charged to revenue account;
f) where it is stated in the books and documents 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.
However, the auditor is not required to report on the matters specified in sub-section (1) unless he has any special comments make on any of the items referred to therein.
If he is satisfied as a result of the inquiries, he has no further duty to report that he is so satisfied.
Reporting on frauds as per Section 143(12)
Reporting to the Central Government-
As per section 143(12) of the Companies Act, 2013 read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of ? 1 crore or above, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such a manner as prescribed.
Reporting to the Audit Committee or Board-
In case of a fraud involving lesser than the specified amount [i.e. less than 1 crore], the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as prescribed.
CARO 2020 - Applicability
It shall apply to every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013 (18 of 2013) [hereinafter referred to as the Companies Act], except
i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
ii) an insurance company as defined under the Insurance Act, 1938 (4 of 1938);
iii) a company licensed to operate under section 8 of the Companies Act;
iv) a) a One Person Company as defined in clause (62) of section 2 of the Companies Act; and
b) a small company as defined in clause (85) of section 2 of the Companies Act; and
v) a private limited company, not being a subsidiary or holding company of a public company, having -
a) a paid up capital and reserves and surplus not more than one crore rupees as on the balance sheet date; and
b) which does not have total borrowings exceeding one crore rupees from any bank or financial institution at any point of time during the financial year; and
c) which does not have a total revenue as disclosed in Scheduled Ill to the Companies Act (including revenue from discontinuing operations) exceeding ten crore rupees during the financial year as per the financial statements.
[MT:- One Person got his Samsung S8 insured from a Private Bank]
CARO 2020 - Matters to be included in the auditor’s report - PPE/Intangible assets.
(i)
a) A) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment;
B) whether the company is maintaining proper records showing full particulars of intangible assets;
b) whether these Property, Plant and Equipment 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 has been properly dealt with in the books of account;
c) whether the title deeds of all the immovable properties (other than properties where the company is the lessee and the lease agreements are duly executed in favour of the lessee) disclosed in the financial statements are held in the name of the company, if not, provide the details thereof in the format below:-
[In table format]
i) Description of property
ii) Gross carrying value
iii) Held in name of
iv) Period held - indicate range, where appropriate
v) Reason for not being held in name of company* *also indicate if in dispute.
d) whether the company has revalued its Property, Plant and Equipment (including Right of Use assets) or intangible assets or both during the year and, if so, whether the revaluation is based on the valuation by a Registered Valuer; specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets;
e) whether any proceedings have been initiated or are pending against the company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made thereunder, if so, whether the company has appropriately disclosed the details in its financial statements;
CARO 2020 - Matters to be included in the auditor’s report - Inventory.
(ii)
a) whether physical verification of inventory has been conducted at reasonable intervals by the management and
whether, in the opinion of the auditor, the coverage and procedure of such verification by the management is appropriate;
whether any discrepancies of 10% or more in the aggregate for each class of inventory were noticed and if so, whether they have been properly dealt with in the books of account;
b) whether during any point of time of the year, the company has been sanctioned working capital limits in excess of five crore rupees, in aggregate, from banks or financial institutions on the basis of security of current assets;
whether the quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the books of account of the Company, if not, give details;
CARO 2020 - Matters to be included in the auditor’s report - Loans/Investment/Guarantee/Security/Advances in naute of loans.
(iii)
whether during the year the company has made investments in, provided any guarantee or security or granted any loans or advances in the nature of loans, secured or unsecured, to companies, firms, Limited Liability Partnerships or any other parties, if so,
a) whether during the year the company has provided loans or provided advances in the nature of loans, or stood guarantee, or provided security to any other entity [not applicable to companies whose principal business is to give loans], if so, indicate
A) the aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to subsidiaries, joint ventures and associates;
B) the aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to parties other than subsidiaries, joint ventures and associates;
b) whether the investments made, guarantees provided, security given and the terms and conditions of the grant of all loans and advances in the nature of loans and guarantees provided are not prejudicial to the company’s interest;
c) in respect of loans and advances in the nature of loans, whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular;
d) if the amount is overdue, state the total amount overdue for more than ninety days, and whether reasonable steps have been taken by the company for recovery of the principal and interest;
e) whether any loan or advance in the nature of loan granted which has fallen due during the year, has been renewed or extended or fresh loans granted to settle the overdues of existing loans given to the same parties, if so, specify -
- the aggregate amount of such dues renewed or extended or settled by fresh loans and
- the percentage of the aggregate to the total loans or advances in the nature of loans granted during the year [not applicable to companies whose principal business is to give loans];
f) whether the company has granted any loans or advances in the nature of loans either repayable on demand or without specifying any terms or period of repayment, if so, specify -
- the aggregate amount,
- percentage thereof to the total loans granted,
- aggregate amount of loans granted to Promoters, related parties as defined in clause (76) of section 2 of the Companies Act, 2013;
(iv)
in respect of loans, investments, guarantees, and security, whether provisions of sections 185 and 186 of the Companies Act have been complied with, if not, provide the details thereof;
CARO 2020 - Matters to be included in the auditor’s report - Statutory Dues.
(vii)
a) whether the company is regular in depositing undisputed statutory dues including
Goods and Services Tax, provident fund, employees’ state insurance, income tax, sales-tax, service tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues to the appropriate authorities and
if not, the extent of the arrears of outstanding statutory dues as on the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated;
b) where statutory dues referred to in sub-clause (a) have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned (a mere representation to the concerned Department shall not be treated as a dispute):
CARO 2020 - Matters to be included in the auditor’s report - Unrecorded transactions.
(vii)
whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assess ments under the Income Tax Act, 1961 (43 of 1961),
if so, whether the previously unrecorded income has been properly recorded in the books of account during the year;
CARO 2020 - Matters to be included in the auditor’s report - Repayment of Loans.
(ix)
a) whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender, if yes, the period and the amount of default to be reported as per the format below:
[In table format]
i) Nature of borrowing, including debt securities
ii) Name of lender
iii) Amount not paid on the due date
iv) Whether principal or interest
v) No. of days delay or unpaid
vi) Remarks, if any.
b) whether the company is a declared wilful defaulter by any bank or financial institution or other lender;
c) whether term loans were applied for the purpose for which the loans were obtained;
if not, the amount of loan so diverted and the purpose for which it is used may be reported;
d) whether funds raised on a short term basis have been utilised for long term purposes,
if yes, the nature and amount to be indicated;
e) whether the company has taken any funds from any entity or person on account of or to meet the obligations of its subsidiaries, associates or joint ventures,
if so, details thereof with the nature of such transactions and the amount in each case;
f) whether the company has raised loans during the year on the pledge of securities held in its subsidiaries, joint ventures or associate companies,
if so, give details thereof and also report if the company has defaulted in repayment of such loans raised;
CARO 2020 - Matters to be included in the auditor’s report - IPO/FPO/Debt Finance.
(x)
a) whether moneys raised by way of initial public offer or further public offer (including debt instruments) during the year were applied for the purposes for which those are raised,
if not, the details together with delays or default and subsequent rectification, if any, as may be applicable, be reported;
b) whether the company has made any preferential allotment or private placement of shares or convertible debentures (fully, partially or optionally convertible) during the year and
if so, whether the requirements of section 42 and section 62 of the Companies Act, 2013 have been complied with and
the funds raised have been used for the purposes for which the funds were raised, if not, provide details in respect of amount involved and nature of noncompliance;
