Chapter 6: Compliance with Legal Requirements

Question 1

Under Companies Act, who appoints first Auditor.

Answer 1

 First auditor is appointed by Board of Directors within** 90 days** of incorporation of company.
 If directors fail to appoint the first auditor within 90 days of incorporation, Commission may appoint auditor.

[Chapter 6: LO 1]

Question 2

Under Companies Act, who appoints Subsequent Auditor.

Answer 2

 Subsequent auditor is appointed by members at each AGM.
 If the members fail to appoint subsequent auditor at an AGM, Commission may appoint auditor.

[Chapter 6: LO 1]

Question 3

Under Companies Act, who fills casual vacancy.

Answer 3

 Casual vacancy (i.e. death of sole-proprietor or disqualification during audit) is filled by directors within 30 days of its occurrence.
 If the directors fail to fill casual vacancy within 30 days of occurrence of the vacancy, Commission may appoint auditor.

[Chapter 6: LO 1]

Question 4

Under Companies Act, what happens if a disqualified person is appointed as auditor?.

Answer 4

If a disqualified person is appointed as auditor, this appointment shall be void and Commission will appoint qualified auditor in his place.

[Chapter 6: LO 1]

Question 5

Under Companies Act, how can an auditor be removed mid-term?

Answer 5

 An auditor can be removed before expiry of his term by members by passing** Special Resolution.**
 If auditor is removed before expiry of his term, board of directors shall appoint the auditor with prior approval of the Commission.

[Chapter 6: LO 1]

Question 6

Under Companies Act, what happens if appointed auditor is unwilling to act.

Answer 6

If appointed auditor is unwilling to act as auditor, Commission shall appoint auditor.

[Chapter 6: LO 1]

Question 7

Under Companies Act, what is the Tenure of Auditor.

Answer 7

Tenure of an auditor is from date of appointment till the conclusion of next AGM.

[Chapter 6: LO 1]

Question 8

Under Companies Act, who determines remuneration of auditor.

Answer 8

The remuneration of the auditor shall be fixed:
(a) by the members; or
(b) by the board or Commission, if the auditor is appointed by the board or Commission, as the case may be.

[Chapter 6: LO 1]

Question 9

Under Companies Act, who signs audit report.

Answer 9

If auditor is an individual, report shall be signed by him.

If auditor is a partnership firm, report shall be signed:
 by a partner of the firm.
 in the name of the** firm**. Name of engagement partner shall also be mentioned in report.

[Chapter 6: LO 1]

Question 10

Under Companies Act, how can directors recommend an Auditor?

Answer 10

Board of Directors shall recommend an auditor, after obtaining consent of proposed auditor. A notice of recommendation shall be sent to members, and retiring auditor alongwith the notice of AGM. (retiring auditor may also be recommended for re-appointment)

[Chapter 6: LO 2]

Question 11

Under Companies Act, how can members recommend a new Auditor, and company’s responsibility in this regard?

Answer 11

A member or members having 10% or more shareholding in company, can also propose an auditor, provided:
a. consent of proposed auditor has been obtained by member, and
b. member has sent a notice for resolution of change of auditor, to company atleast 7 days before AGM.

Company shall forthwith send copy of this notice to retiring auditor and shall also post on its website.

[Chapter 6: LO 2]

Question 12

Under Companies Act, what is the right of representation of retiring auditor, and company’s responsibility in this regard?

Answer 12

Retiring auditor has a right to make a representation in writing to company. This representation shall be made atleast 02 days before the date of AGM.

If such a representation in writing is made by retiring auditor:
c. it shall be read out at AGM before taking up the agenda for appointment of the auditor.
d. it shall be compulsory for the auditor or a person authorized by him in writing to attend the general meeting.

Question 13

Under Companies Act, who is required to be informed after appointment of Auditor?

Answer 13

Company shall send notice of appointment of auditor (alongwith auditor’s written consent) to Registrar within 14 days of appointment.

[Chapter 6: LO 2]

Question 14

List down Ethical Responsibilities of Outgoing (Existing/Predecessor) Auditor.

Answer 14

1. To reply promptly to incoming auditor’s Professional Clearance Letter with permission of client.
2. Outgoing auditor will file with ICAP a copy of Representation in writing (if made).
3. In case of mid-term removal, predecessor auditor must immediately file with ICAP a “Statement of Facts/Circumstances”.

[Chapter 6: LO 2]

Question 15

List down Ethical Responsibilities of Incoming (Proposed/Successor) Auditor.

Answer 15

1. Incoming auditor shall send** Professional Clearance Letter** to outgoing auditor with permission of client.
2. Incoming auditor shall obtain a copy of the Representation in writing (if made by retiring auditor).
3. In case of mid-term removal, Incoming auditor shall also inform ICAP about the offer, and shall not accept offer of appointment without prior clearance from ICAP. ICAP usually gives clearance within 15 days.

[Chapter 6: LO 2]

Question 16

What are statutory rights of auditor with regard to Access to Information/Explanation?

Answer 16

An auditor of a company has a right:
 of access to the company‘s books, accounts and vouchers (in whatever form they are held).
 of access to such copies of books and accounts of the branch as have been transmitted to principal office of the company.
 to require such information and explanation as he thinks necessary for the purpose of audit:
o from any director, officer or employee of the company, or
o from any subsidiary of company (or its director, officer or employees).
o from any person who holds any of company’s books, accounts or vouchers.

[Chapter 6: LO 3]

Question 17

What are statutory rights of auditor with regard to General Meeting?

Answer 17

1. Right to receive all notices of any general meetings which members of company are entitled to receive.
2. Right to attend general meetings.
   However, in case of listed company (or if representation in writing is made by retiring auditor), it is duty of auditor or a person authorized by him in writing to attend AGM.
3. Right to speak at general meetings on audit related matters.
4. Right to make representation in writing if change of auditor is proposed.

[Chapter 6: LO 3]

Question 18

What are statutory duties of auditor?

Answer 18

Auditor shall examine and report:
1. whether he has obtained all the information and explanations which, to the best of his knowledge and belief, were necessary for the purposes of the audit.
2. whether proper books of accounts have been kept by the Company as required by the Companies Act, 2017.
3. whether financial statements have been drawn up in conformity with the Companies Act, 2017, and are in agreement with the books of account and returns.
4. whether financial statements conform with the accounting and reporting standards as applicable in Pakistan and give the information required by the Companies Act, 2017 and give true and fair view.
5. whether investments made, expenditure incurred and guarantees extended during the year were for the purpose of the Company’s business.
6. whether** zakat** deductible at source under the Zakat and Ushr Ordinance, 1980, was deducted by the company and deposited in the Central Zakat Fund.

[Chapter 6: LO 3]

Question 19

Which persons are Qualified for appointment as Statutory Auditor in Pakistan?

Answer 19

Statutory Audit of:
1. a Public Company, or
2. a Private company which is subsidiary of a public company, or
3. a Private company with paid up capital of 03 million or more.
, shall be conducted by a chartered Accountant or a firm of chartered accountants (having valid certificate of practice from ICAP).

Statutory Audit of other companies shall be conducted by:
 a chartered Accountant or a firm of chartered accountants (having valid certificate of practice from ICAP), or
 a cost and management accountant or firm of cost and management accountants (having valid certificate of practice from ICMAP)

[Chapter 6: LO 4]

Question 20

Which persons are Disqualified for appointment as Statutory Auditor in Pakistan?

Answer 20

A person (or a firm) cannot be appointed as statutory auditor of a company:
1. If he or his spouse or minor child holds any shares in the audit client or any of its associated company.
However, if such a person holds shares at time of appointment, he can be appointed if he discloses the fact at time of appointment and dispose shares within** 90 days** of appointment.
2. If he is** indebted** to the audit client (other than ordinary course of business of such entity)
In following cases auditor will not be considered indebted:
 If sum payable to a credit card issuer does not exceed Rs. 1 million, or
 If sum payable to a utility company remains unpaid upto 90 days.
3. If he has business relationship with the audit client (other than in the ordinary course of business of such entities).
4. If he** is** or was an employee (or officer or director) of the audit client in last 3 years (from date of appointment).
5. If he is an employee/partner of an employee (or officer or director) of the audit client.
6. If his spouse is a director in audit client.
7. If he is a Body corporate.
8. If he has given** guarantee** or security to company for indebtedness of third person.
9. If he has been convicted by a Court of an offence involving fraud in last 10 years.
10. If he is not eligible for appointment as auditor under Code of Ethics by ICAP/ICMAP.

[Chapter 6: LO 4]

Question 21

Can a person disqualified for one company is also disqualified for other companies?

Answer 21

If a person is disqualified for a company, he is also disqualified for** its holding, subsidiaries**, and holding’s other subsidiaries.

[Chapter 6: LO 4]

Question 22

Who is authorized to conduct audit of Cost Accounting Records of a company, and what are his powers?

Answer 22

Person authorized to conduct audit of cost accounting records:
Audit of cost accounts shall be conducted by an auditor who is a:
 Chartered accountant within the meaning of the Chartered Accountant Ordinance, 1961, or
 Cost and management accountant within the meaning of the Cost and Management Accountants Act, 1966.

Such auditor shall have the same powers, duties and liabilities as an auditor of the company and such other powers, duties and liabilities as may be prescribed.

Question 22

Which Cost Accounting Records are required to be maintained by a manufacturing company?

Answer 22

A company engaged in production, processing, manufacturing or mining activities is required to keep prescribed particulars relating to following cost accounting records:
1. Utilisation of Material,
2. Utilisation of Labour,
3. Utilisation of Other inputs or items of cost.

[Chapter 6: LO 5]

Question 22

When Audit of Cost Accounting Records is conducted?

Answer 22

Where a company is required to keep Cost Accounting records, Commission may direct (subject to the recommendation of the regulatory authority supervising the business of relevant sector) that an audit of cost accounts of the company shall be conducted in the manner as may be specified in the order.

[Chapter 6: LO 5]