Appointment, Remuneration, Rights and Duties of an Auditor Bcom Notes

Appointment Remuneration Rights and Duties of an Auditor Bcom Notes

Appointment, Remuneration, Rights and Duties of an Auditor Bcom Notes

Appointment, Remuneration, Rights and Duties of an Auditor Bcom Notes:- In this post, I am giving you the notes of Bcom 3rd Year auditing, which is going to be very useful in your examination and you should share this post to all friends and all your groups so that your friends also read this post. Could. Appointment Remuneration Rights Duties an Auditor

 

Appointment, Remuneration, Rights and Duties of an Auditor

 

Appointment of a Company Auditor

Section 224 of the Companies Act deals with the provisions regarding the appointment of auditor(s) of a company as follows:

(1) Appointment of First Auditor by Board of Directors: The first auditors of a company shall be appointed by the Board of Directors within one month of the date of registration of the company. Such auditor(s) shall hold office until the conclusion of the first annual general meeting.

If the first auditors are not appointed by the Board of Directors, they may be appointed by the company in a general meeting.

(2) Appointment by shareholders: Every company shall, at each annual general meeting, appoint auditor(s) to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting, and shall, within seven days of the appointment give intimation thereof to every auditor so appointed.

(3) Appointment of Auditors by Central Government: Where an auditor(s) is not appointed or re-appointed at the annual general meeting, the company must notify the fact to the Central Government within seven days thereafter and thereupon the Central Government will appoint a person to fill the vacancy.

(4) Appointment by special resolution: In the case of a company, in which not less than 25% of the subscribed share capital is singly or jointly held by:

(a) a public financial institution or a Government company, or the Central Government, or any State Government; or

(b) any financial or other institution in which a State Government holds not less than 51% of the subscribed share capital; or

(c) a nationalised bank, or an insurance company carrying on general insurance business.

The appointment or reappointment (at each annual general meeting) of an auditor(s) shall be made by a special resolution.

(5) Appointment of auditors of Government Companies: The auditor of a Government company shall be appointed or reappointed by the comptroller and Auditor General of India only.

Appointment Remuneration Rights Duties

Removal of Auditors

(1) Removal after the Expiry of Term: After the expiry of term, an auditor can be removed in the annual general meeting by passing an ordinary resolution.

(2) Removal before Expiry of Term: An auditor can be removed before expiry of term as follows:

(i) In Case of First Auditor : The first auditor who is appointed by the Board of Directors to hold office till the conclusion of the first annual meeting, can be removed before the expiry of term at the general meeting even without the prior approval of the Central Government. However, a special notice of at least 14 days is required for the appointment of another auditor in his place.

(ii) In case of other Auditors: Auditor appointed by the members can be removed before the expiry of his term by the company only at a general meeting, after obtaining prior approval of the Central Government and after giving a due notice to the auditor. Remuneration of the Company Auditor

The person or persons who are authorised to appoint an auditor are considered fully competent to fix the auditor’s remuneration. It is provided in Section 224 (8) of the Companies Act that:

(i) If an auditor is appointed by the Board of Directors or by the Central Government, his remuneration is to be fixed by the Board or Central Government as the case may be.

(ii) In other cases, the remuneration of the auditor shall be fixed by the company in the annual general meeting or in such a manner as the company in general meeting determine.

(iii) The remuneration is inclusive of all expenses allowed to him and he is not entitled to any other payment.

(iv) In the case of a retiring auditor who is re-appointed as an auditor in the general meeting, the amount fixed for the previous year is considered as the remuneration for the current year unless a resolution is passed, refixing his remuneration.

(v) In case where an auditor renders extra work over and above his audit work, he is entitled to receive extra remuneration in addition to normal fee for the audit.

Appointment Remuneration Rights Duties

Qualifications of an Auditor

Section 226 of the Companies Act prescribes the qualifications and disqualifications of company auditor. Accordingly, only the following persons will be competant to be appointed as an auditor of a company:

(i) If he is a chartered accountant within the meaning of the Chartered Accountants Act of 1949.

(ii) Partnership firm as auditor: In the case of a firm, if all its partners practising in India are qualified for appointment as auditors, it may be appointed by its firm name to be auditor of a company. In such a case, any of its practising partners can act in the name of the firm.

(iii) Certified auditors: Apart from the practising chartered accountants, a person holding a certificate under the Restricted Auditor’s Certificate (Part B States) Rules, 1956, is also qualified to be appointed as auditor of a company.

 

Disqualifications of auditors

The following persons shall not be qualified for appointment as auditors of a company:

(i) A body corporate.

(ii) An officer or employee of the company.

(iii) A person who is a partner or who is in the employment of any officer or employee of the company.

(iv) A person who is indebted to the company for an amount exceeding Rs. 1,000.

(v) any other body corporate which is:

(a) a subsidiary of that company; or

(b) the holding company of that company; or

(c) a subsidiary of that company’s holding company

(vi) Further, if the auditor already holds appointment as auditor in the specified number of companies, he will be disqualified for further appointment as auditor of any other company.

(vii) Where an auditor incurs any of the above disqualifications after his appointment, he will be deemed to have vacated his office.

Statutory Rights of a Company Auditor Some important legal rights or powers of a company auditor are as follows:

(1) Right to access books of Accounts and Vouchers: The auditor has a right of access at all times to the books and vouchers of the company whether kept at the head office or elsewhere. At all times means at any time during the business hours. The auditor may pay a surprise visit when he suspects any irregularity in the accounts or wishes to verify the cash balances, etc.

(2) Right to receive Information and Explanations: A company auditor has a right to receive from the directors and responsible officers of the company any information or explanation as he may think necessary.

(3) Right to receive Particulars: The auditor has a right to get from an officer or other person any particular or information required to be given to the Balance Sheet or Profit and Loss Account of a company or in any document required to be annexed or attached thereon.

(4) Right to receive notice and attend General Meetings: The auditor has a right to receive notices and other communications relating to general meeting in the same way as a member of the company. He can speak in the meeting in which accounts are discussed.

(5) Right to visit Branches: The auditor has a right to visit the branch office of the company, if any, if the accounts of the company branch have not been audited by a duly qualified auditor.

(6) Right to seek opinion from Experts: The auditor has a right to seek opinions of experts in different fields whenever he feels it necessary as he is not expert in all the areas.

(7) Right to receive remuneration: The auditor is entitled to demand his remuneration from his client after he has completed the work of auditing. Even if he is dismissed in the middle, he has a right to get full remuneration of the year.

Appointment Remuneration Rights Duties

Duties of Company Auditor

(1) Duty to Submit Report: It is an important duty of the auditor to make a report to the members of the company on the accounts examined by him. The report should contain the following information:

(i) Whether in his opinion, the Profit and Loss Account referred to in his report shows a true and fair view of the profit or loss.

(ii) Whether in his opinion, the Balance sheet referred to in his report is properly drawn up so as to show a true and fair view of the state of affairs of the business.

(iii) Whether the auditor has obtained all the informations and explanation which to the best of his knowledge and belief were necessary for the purpose of his audit.

(iv) Whether in his opinion proper books of accounts as required by law have been kept by the company so far as appear from his examination of those books.

(v) Whether the report on the accounts of any Branch office audited under section 228 by a person other than the Company’s auditor has been forwarded to him and how he had dealt with the same in preparing the auditor’s report.

(vi) Whether the Company’s Balance Sheet and Profit and Loss Account dealt with by the report are in agreement with the books of accounts and return.

(2) Auditors duties to enquire into the affairs of the Company:

(i) Loans and Advances: He has to see 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 interests of the company or its members.

(ii) Transactions represented merely by book entries: He must see that transactions which are not supported by any facts or evidence, though recorded in the books, are not prejudicial to the interests of the company.

(iii) Sale of investments at less than purchase price: Where the company is not an investment company or a banking company, the auditor is required to see whether it has sold any shares, debentures or other securities at a price which is lower than their price purchase.

(iv) Loans and advances shown as deposits: He has to see whether loans and advances made by the company have not been shown as deposits, so as to avoid scrutiny by the members or others.

(v) Personal expenses: He should enquire whether any personal expenses have been charged to revenue accounts of the company, so as to improperly utilise the funds of the company for the individual benefit of any person directly or indirectly in control of the affairs of the company.

(vi) Allotment of shares for cash: Where it is stated in the books and papers of the company that any shares have been allotted for cash, the auditor must enquire whether cash has actually been received in respect of such allotment, and if no cash has actually been received, whether the position as stated in the account books and the Balance Sheet is correct and regular.

(3) Duty to sign report: It is the duty of the auditor to sign the report prepared by him. In case the auditor is a firm, only a partner of the firm practising in India may sign the report.

(4) Duty as to statutory report: It is the duty of an auditor to certify statutory report as correct to the extent it relates to:

(i) Shares alloted by the company,

(ii) Cash received in respect of such shares and

(iii) Receipts and payments of the company.

(5) Duty as to prospectus: It is the duty of the auditor to certify informations given in the prospectus with regards to certain matters.

(6) Duty as to report under voluntary winding up: If a company goes into voluntary winding up, the directors are required to file a declaration of solvency. Thus, it is the duty of the auditor to give a report about such declaration.

(7) Duty to assist investigation: Where an inspector is appointed to investigate the affairs of the company, it is the duty of the auditor to assist investigator in connection with the investigation.

(8) Duty of care and caution: The auditor holds himself out as an expert and must act honestly and exercise due care and caution in the performance of his engagement. As an expert, he cannot set up ignorance as a defence. He must prove that in the course of his audit he has employed skills that would reasonably be applied by any other auditor.

Appointment Remuneration Rights Duties

“An Auditor is a watch dog and not a blood hound.”

Justice Lopes in Kingston Cotton Mills Company Ltd. (1986) case had stated that ‘an auditor is a watch dog and not a blood hound’. There are two important things in the statement that classifies auditor’s duty regarding detection and prevention of errors and frauds. First important thing is that, ‘an auditor is a watch dog’ and second is that ‘an auditor is not a blood hound’.

An Auditor is a watch dog: A watch dog is a kind of dog that does not allow any person to create any harm to its owner and whenever somebody tries to do so he barks and informs the owner about that. A watch dog neither cries nor barks on each and every person. He only by seeing and smelling the person, makes a pre-estimation whether the person is genuine or not. He barks only upon that person who has come to create anything that is against its owner’s interest. He remain faithful to his owner and discharge his duties effeciently and effectively. An auditor in the same way is appointed to look after the interest of those who happen to be owners of the business. He must take due care in detecting errors and frauds so that he can protect the interest of his clients honestly and tactfully. Thus it is his duty to discharge his responsibilities towards his employer faithfully, carefully and efficiently. While discharging his duties he has to do the following acts:

(a) On having any doubt he must gather necessary information and explanation from the concerned officers.

(b) He must state those facts in his audit report which he thinks, would adversely effect the interest of his clients.

An Auditor is not a blood hound: A blood hound is a kind of dog that see every person who comes near to his owner with suspicion and treats him as an enemy. He not only barks but also tries to injure him and if possible tears him into pieces. An auditor should not act like a blood hound. If an auditor, like blood hound, views every person with suspicion, presumes every accounts to be wrong, gives weightage to minor mistakes, does not behave in good and proper manner during audit period, all the employees will be afraid of him during audit work and hesitate in co-operating him. As a result, he will be unable to conduct his audit work properly.

The work of watch dog is to guard the house. In the same way, the work of auditor is to protect the interest of owners/shareholders by observing whether final accounts show true and fair view of state of affairs and Profit & Loss of the company. If the watch dog does his work of keeping the house safe in proper way and even if, theft is committed, the watch dog cannot be held guilty. In the same way, if the auditor does his work efficiently and with proper skill and intelligence and unable to detect errors and fraud he may not be held guilty.

Justice Lopes remarked that it is the duty of an auditor to bring to bear on the work he has to perform, that skill, care and caution which a reasonable, competent, careful and cautious auditor would use.

“What is reasonable skill, care and caution, must depend on the particular circumstances of each case. An auditor is not bound to be a detective, nor to approach his work with suspicion or with a forgeone conclusion that there is something wrong. He is a watch-dog, but not a blood-hound. He is justified in believing tried servants of the company in whom confidence is placed by the company. He is entitled to assume that they are honest and to rely upon their representations, provided he takes reasonable care. If there is anything calculated to exite suspicion he should probe it to the bottom, but in the absence of anything of that kind, he is only bound to be reasonable cautious and careful. Auditors must not be made liable for not tracking out ingenious and carefully laid schemes of fraud, when there is nothing to arouse their suspicion and when those frauds are perpetrated by tried servants of the company and are undetected for years by the directors. So to hold him responsible would make the position of an auditor intolerable.”

 

Appointment Remuneration Rights Duties

Appointment, Remuneration, Rights and Duties of an Auditor Bcom Notes
Appointment, Remuneration, Rights and Duties of an Auditor Bcom Notes

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