Chapter 6 : Compliance with Legal Requirements

Question 1

Which companies in Pakistan are required to have an audit of their annual financial statements?

Answer 1

All companies are required except private companies with a paid‑up capital of Rs. 1 million or less.

Question 2

Who is responsible for appointing the first auditor and within what timeframe?

Answer 2

The Board of Directors must appoint the first auditor within 90 days of incorporation; if they fail, the SECP Commission may appoint one.

Question 3

How is the subsequent auditor appointed?

Answer 3

The subsequent auditor is appointed by the members at each AGM. If the members fail to do so, the Commission may appoint the auditor.

Question 4

What is a casual vacancy and how should it be addressed?

Answer 4

A casual vacancy (e.g. due to the death of a sole proprietor or disqualification during audit) must be filled by the directors within 30 days; if not, the Commission may appoint an auditor.

Question 5

What is the procedure if an auditor is removed before the expiry of their term?

Answer 5

The Board of Directors must appoint a new auditor with the prior approval of the Commission.

Question 6

What happens if a disqualified person is appointed as an auditor?

Answer 6

The appointment is void, and the Commission will appoint a qualified auditor in his place.

Question 7

What should be done if the appointed auditor is unwilling to act?

Answer 7

If the appointed auditor is unwilling to act, the Commission shall appoint an auditor who is willing to act.

Question 8

What is the tenure of an auditor?

Answer 8

An auditor’s tenure begins on the date of appointment and continues until the conclusion of the next AGM.

Question 9

How is an auditor removed at the AGM?

Answer 9

At the AGM, the auditor is considered retired, and a new appointment is made for the next period.

Question 10

How can an auditor be removed before the end of their term?

Answer 10

An auditor can be removed mid-term if the members pass a special resolution.

Question 11

Who fixes the remuneration of the auditor?

Answer 11

Remuneration is fixed either by the members or by the board/Commission, depending on who appointed the auditor.

Question 12

What are the signing requirements for an auditor’s report?

Answer 12

For an individual auditor, the report must be signed by him personally; for a partnership firm, a partner signs on behalf of the firm and the engagement partner’s name is also mentioned.

Question 13

How is a new auditor formally appointed at the AGM?

Answer 13

A new auditor is appointed by passing a resolution at the AGM.

Question 14

What must the Board of Directors do when recommending an auditor?

Answer 14

They must obtain the proposed auditor’s consent, recommend the auditor, and send a notice of recommendation to the members and the retiring auditor along with the AGM notice. (The retiring auditor may also be recommended for reappointment.)

Question 15

How can members propose an auditor?

Answer 15

Members holding 10% or more of the company’s shares can propose an auditor if they have obtained the proposed auditor’s consent and sent a notice for a resolution to change the auditor at least 7 days before the AGM. The company must forward this notice to the retiring auditor and post it on its website.

Question 16

What right does the retiring auditor have before the AGM?

Answer 16

The retiring auditor may submit a written representation at least 2 days before the AGM, which must be read out at the meeting; the auditor or an authorized representative must attend the AGM.

Question 17

What occurs during the AGM regarding auditor appointment?

Answer 17

The members discuss the proposals and pass a resolution to appoint an auditor from the list of proposed candidates.

Question 18

What post-appointment notification must be made by the company?

Answer 18

The company must send a notice of the auditor’s appointment, along with the auditor’s written consent, to the Registrar within 14 days.

Question 19

What are the ethical responsibilities of the outgoing auditor?

Answer 19

The outgoing auditor must reply promptly to the incoming auditor’s Professional Clearance Letter (with client permission), file any written representation with ICAP, and if it is a mid-term removal, immediately file a ‘Statement of Facts/Circumstances’ with ICAP.

Question 20

What are the ethical responsibilities of the incoming auditor?

Answer 20

The incoming auditor must send a Professional Clearance Letter to the outgoing auditor (with client permission), obtain a copy of any written representation by the retiring auditor, and in case of mid-term removal, inform ICAP and only accept the appointment after receiving prior clearance (usually within 15 days).

Question 21

What should candidates note when answering exam questions regarding auditor change?

Answer 21

They should determine whether the question relates to legal or ethical procedures, whether the change occurs during the auditor’s tenure or at its end, and whether it concerns the incoming or outgoing auditor.

Question 22

What rights does an auditor have regarding access to company information?

Answer 22

The auditor has the right to access all books, accounts, and vouchers (in any form) and can request necessary information and explanations from directors, officers, employees, or any custodian of the company’s records.

Question 23

What rights does an auditor have in relation to general meetings?

Answer 23

The auditor has the right to receive all general meeting notices, attend the meetings, speak on audit-related matters, and submit a written representation if a change of auditor is proposed. For listed companies (or when a written representation is submitted), attendance is mandatory.

Question 24

What are the key statutory duties of an auditor?

Answer 24

The auditor must verify that all necessary information has been obtained; proper books are maintained; financial statements are prepared in accordance with the Companies Act, 2017 and are consistent with the books; statements conform to applicable accounting and reporting standards; transactions are for business purposes; and zakat is duly deducted and deposited.

Question 25

Who is eligible to conduct a statutory audit?

Answer 25

For public companies, private companies that are subsidiaries of public companies, or private companies with a paid‑up capital of Rs. 3 million or more, the audit must be conducted by a chartered accountant or firm of chartered accountants (with a valid ICAP certificate). Other companies may be audited by either a chartered accountant or a cost and management accountant with the appropriate certification.

Question 26

What are the initial disqualification criteria for a statutory auditor?

Answer 26

A person or firm is disqualified if they, or their spouse or minor child, hold shares in the audit client or its associated companies (unless disclosed and disposed of within 90 days), if they are indebted to the audit client (with specified exceptions), or if they have a business relationship outside the ordinary course of business.

Question 27

What additional disqualifications apply to statutory auditors?

Answer 27

Disqualifications include having been an employee, officer, or director of the audit client within the last 3 years; being an employee or partner of an employee of the audit client; having a spouse serving as a director; being a body corporate; having provided a guarantee or security for a third party’s indebtedness; having a conviction for fraud in the last 10 years; or not meeting eligibility under the Code of Ethics by ICAP/ICMAP.

Question 28

Who is considered an auditor in legal terms?

Answer 28

Only the sole proprietors or partners of an audit firm are considered auditors; other employees do not qualify.

Question 29

What is the impact if one partner in an audit firm is disqualified?

Answer 29

If one partner is disqualified, the entire firm is disqualified from acting as the auditor.

Question 30

When do the disqualification criteria apply?

Answer 30

They apply both at the time of appointment and throughout the term of the appointment.

Question 31

How can you identify a company type by its name?

Answer 31

The term 'Limited' indicates that the organization is a company, while 'Private' indicates it is a private company.

Question 32

Which companies are required to maintain cost accounting records and what details must be recorded?

Answer 32

Companies involved in production, processing, manufacturing, or mining must maintain records detailing the utilization of material, labour, and other cost items.

Question 33

Under what circumstances is an audit of cost accounting records conducted and who is authorized to perform it?

Answer 33

If cost accounting records are required, the Commission (subject to the regulatory authority’s recommendation) may direct an audit. The audit must be conducted by an auditor who is either a chartered accountant or a cost and management accountant, with the same powers and any additional prescribed responsibilities.

Question 34

What penalty applies if a non‑qualified or disqualified person acts as an auditor?

Answer 34

A Level 2 penalty of Rs. 1,000 per day, up to a maximum of Rs. 500,000, is imposed.

Question 35

What penalty is imposed for an auditor’s report made with the intent to profit or disadvantage another party?

Answer 35

A Level 2 penalty of Rs. 1,000 per day (up to Rs. 500,000) applies, along with potential imprisonment of up to two years and a penalty of up to 1 million rupees.

Question 36

What are the penalties if a company or its officer obstructs the auditor’s duties?

Answer 36

A Level 3 penalty of Rs. 500,000 per day, subject to a maximum of Rs. 100 million, applies if the auditor is denied access to books, information, or meeting notices, or is otherwise obstructed.

Question 37

Is an auditor penalized for failing to detect misstatements due to inherent audit limitations?

Answer 37

No, there is no penalty if misstatements go undetected due to inherent limitations of the audit process.

Question 38

What imprisonment risk does an auditor face for making a malicious audit report?

Answer 38

The auditor can face imprisonment for up to two years and a penalty of up to 1 million rupees if the report is made with malicious intent.