Tag: Corporate Governance Osmania University b.com Notes

ICAI is the highest accounting body in the country. And the ASB is a committee of the ICAI. But to ensure maximum transparency and independence, the ASB is a completely independent body.

The ASB formulates all the accounting standards for the Indian companies. This process is fully transparent, very thorough and completely independent of any government involvement. While framing the standards the ASB will try and incorporate the IFRS and its principles in the Indian standards. While India does not plan to adopt the IFRS, this process will help the convergence of the two standards. So, the ASB will modify the IFRS to suit the laws, customs and common usage in the country.

The ASB is composed of various members. There are representatives of industries like the FICCI and ASSOCHAM. There are also certain government officials, a few academics, and regulators from various departments. The idea is to make the ASB as inclusive and representative as possible.

ICAI has issued 43 Engagement and Quality Control Standards (formerly known as Auditing and Assurance Standards) covering various topics relating to auditing and other engagements. All Chartered Accountants in India are required to adhere to all these standards. If a Chartered Accountant is found not to follow the said standards he is deemed guilty of professional misconduct. These standards are fully compatible with the International Standards on Auditing (ISA) issued by the IAASB of the IFAC except for two standards SA 600 and SA 299, where corresponding provisions do not exist in ISA.

Objectives and Functions of The Auditing and Assurance Standards Board (AASB)

The following are the objectives and Functions of the Auditing and Assurance Standards Board (AASB):

1. To review the existing and emerging auditing practices worldwide and identify areas in which Standards on Quality Control, Engagement Standards and Statement on Auditing need to be developed.
2. To formulate Engagement Standards, Standards on Quality Control and Statement on Auditing so that these may be issued under the authority of the Council of the Institute.
3. To review the existing Standards and Statements on Auditing to assess their relevance in the changed conditions and to undertake their revision, if necessary.
4. To develop guidance notes on issues arising out of any Standard, 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.
5. To review the existing Guidance Notes to access their relevance in the changed circumstances and to undertake their revision, if necessary.
6. To formulate General Clarifications, where necessary, on issues arising from Standards.
7. To formulate and issue Technical Guides, Practice Manuals, Studies and other papers under its own authority for guidance of professional accountants in the cases felt appropriate by the Board.

Procedure for Formulation of Accounting Standards

• At First, the ASB will identify areas where the formulation of accounting standards may be needed
• Then the ASB will constitute study groups and panels to discuss and study the topic at hand. Such panels will prepare a draft of the standards. The draft normally includes the definition of important terms, the objective of the standard, its scope, measurement principles and the representation of said data in the financial statements.
• The ASB then carries out deliberations of the said draft of the standard. If necessary, changes and revisions are made.
• Then this preliminary draft is circulated to all concerned authorities. This will generally include the members of the ICAI, and any other concerned authority like the Department of Company Affairs (DCA), the SEBI, the CBDT, Standing Conference of Public Enterprises (SCPE), Comptroller and Auditor General of India etc. These members and departments are invited to give their comments.
• Then the ASB arranges meetings with these representatives to discuss their views and concerns about the draft and its provisions
• The exposure draft is then finalized and presented to the public for their review and comments
• The comments by the public on the exposure draft will be reviewed. Then a final draft will be prepared for the review and consideration of the ICAI
• The Council of the ICAI will then review and consider the final draft of the standard. If necessary they may suggest a few modifications.
• Finally, the Accounting Standard is issued. In the case of standard for non-corporate entities, the ICAI will issue the standard. And if the relevant subject relates to a corporate entity the Central Government will issue the standard.

The standards on auditing, review, other assurance, quality control and related services are aimed towards delivery of high-quality audits by improving the quality of practice by professional accountants and ultimately increase public confidence in financial reporting.

(i) Standards on Quality Control (SQC): To be in applied in ensuring quality by firms that performs audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements. SQC requires that the firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards, regulatory, legal requirements, and that reports issued by the firm or engagement partner(s) are appropriate in the circumstances. SQC, therefore sets the tone for enhancing the quality of audit. [Number of Standards: 1]

(ii) Standards on Auditing (SAs): To be applied in the audit of historical financial information. [Number of Standards: 38]

(iii) Standards on Review Engagements (SREs): To be applied in the review of historical financial information. [Number of Standards: 2]

(iv) Standards on Assurance Engagements (SAEs): To be applied in assurance engagements, other than audits and reviews of historical financial information. [Number of Standards: 3]

(v) Standards on Related Services (SRSs): To be applied to engagements involving application of agreed- upon procedures to information, compilation engagements, and other related services engagements, as may be specified by the ICAI. [Number of Standards: 2]

Standards on Auditing

The Standards on Auditing (SAs) issued by ICAI are based on International Standards on Auditing (ISAs) issued by International Federations of Accountants (IFAC). These Standards are issued by the AASB under the authority of the council of the ICAI. Section 143 (2) of the Companies Act 2013 requires the auditor to ensure compliance with these standards on auditing

The standards on auditing have been divided into 38 standards presently grouped into 6 categories as detailed below.

• 100-199: Introductory Matters (Nil Standard)
• 200-299: General Principles & Responsibilities (9 Standards)
• 300-499: Risk Assessment and Response to Assessed Risks (6 Standards)
• 500-599: Audit Evidence (11 Standards)
• 600-699: Using Work of Others (3 Standards)
• 700-799: Audit Conclusions & Reporting (6 Standards)
• 800-899: Specialised Areas (3 Standards)

Each Standard has a uniform structure which includes the following:

• Introduction
• Objective
• Definitions
• Requirements
• Application and other explanatory material

The number given to SA is similar to the numbering system followed for International Standards on Auditing formulated by IAASB.

• Standards on Assurance Engagements (SAEs) for assurance engagements other than the audits and reviews of financial information.
• Standards on Review Engagements (SREs) for reviewing historical financial information.
• Standards on Related Services (SRSs) for all engagements about the application of agreed procedures to information, compilation engagements, and other related services engagements.

Audit tick marks are abbreviated notations used on audit work papers to denote auditing actions taken. These tick marks are useful from the audit manager’s perspective, to see which activities have been completed. They are also useful as evidence, to show which audit steps were completed to support the audit opinion for the financial statements of a client. In addition, the use of tick marks compresses the space required to describe audit actions taken, which improves the usability of the audit documentation. Examples of auditing activities for which tick marks may be used include:

• The totals in the report were manually added and matched to the grand total shown (cross footed).
• The numbers in the column were manually added and matched to the total shown (footed).
• The computation on the report was independently verified.
• Supporting documents were examined.
• A cancelled check was examined.
• The amount was traced to the ledger balance.
• An asset was physically confirmed.

Audit tick marks are not standardized across the industry. Instead, a common set of tick marks is used within each audit firm, with some variation across the industry. Tick marks may just as easily be used within an internal audit department as by outside auditors, and may be unique to each department.

When used, a tick mark should be sufficiently distinct that it cannot be confused with another type of tick mark. Also, an audit firm should internally publish a listing of “official” tick marks used and what each one means, so that they are used by the staff in a consistent manner across all audits.

Customized tick marks were more heavily used when auditing was done primarily on paper documents. When used in that manner, tick marks are more likely to be recorded with a colored pencil, such as in red. Since the advent of auditing software, tick marks can be designated and standardized within the software.

Engagement letter is a sent by an auditor to his client, after the receipt of communication regarding his appointment, but preferably before the commencement of engagement, spewing out the extent of his responsibilities in order to avoid any misunderstanding with respect to his engagement and documents and confirming the acceptance of appointment, the objectives and scope of audit, the extent of responsibilities and the form of reports to be made to the client.

It is in the interest of both client and auditor that the auditor sends an engagement letter, preferably before the commencement of the engagement, to help in avoiding misunderstandings with respect to the engagement. The engagement letter documents and confirms the auditor’s acceptance of the appointment, the objective and scope of the audit, the extent of the auditor’s responsibilities to the client and the form of any reports.

Contents

• The objective of the audit of financial statements;
• Management’s responsibility for the financial statements;
• The scope of the audit, including reference to applicable legislation, regulations, or pronouncements of professional bodies to which the auditor adheres;
• The form of any reports or other communication of results of the engagement;
• The fact that because of the test nature and other inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that even some material misstatement may remain undiscovered;
• Unrestricted access to whatever records, documentation and other information requested in connection with the audit; and
• Management’s responsibility for establishing and maintaining effective internal control.

The auditor may also wish to include the following in the letter:

• Arrangements regarding the planning and performance of the audit.
• Expectation of receiving from management written confirmation concerning representations made in connection with the audit.
• Request for the client to confirm the terms of the engagement by acknowledging receipt of the engagement letter.
• Description of any other letters or reports the auditor expects to issue to the client.
• Basis on which fees are computed and any billing arrangements.

Qualification

According to Provisions of Section 141(1) of the Companies Act, 2013 “a person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant within the meaning of Chartered Accountants Act, 1949 and holds a valid Certificate of Practice.

It has been further provided that the firm shall also considered to appointed by its firm name whereof majority of partners practising in India are qualified for appointment as auditor of a company.

According to Provisions of Section 141(2) of the Companies Act, 2013, a firm including limited liability partnership who are chartered accountants shall be authorised to act as auditor and sign on behalf of the such limited liability partnership or firm.

A person holding a certificate issued by central govt. under restricted state auditors’ rules prior to the enactment of part B state laws 1951 can also be auditor of the co.

The central government in empowered to frame rules relating to granting renewals, suspension or cancellation of such certificates.

Disqualification of Auditor

According to Provisions of Section 141(3) of the Companies Act, 2013 , following persons shall not be eligible as auditor of the company:

a) A body corporate other than LLP registered under the LLP Act, 2008

b) An officer or employee of the company. 

c) A person who is partner or who in the employment, of an officer or employee of the company.

d) A person who or his relative or partner

(i) Is holding any security/interest in the company or its subsidiary or of its holding or associate company or subsidiary of such holding company. It has been further provided that an relative may hold security or interest in the company of face value not exceeding one lac rupees.

 (ii) Is indebted to the company or its subsidiary, or its holding or associate company or subsidiary of such holding company, in excess of Rs. 5 lacs rupees

 (iii) Has given guarantee or provide any security in connection with the indebtness of any third person to the company or its subsidiary, or its holding or associate company or a subsidiary of such holding company for value in excess of Rs. 1 lacs.

e) A person or a firm who (whether directly or indirectly) has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company.

Here the business relationship shall be construed as any transactions enter into for a commercial purpose except:

• Commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm by the professional bodies regulated such members.
• Commercial transactions which are in ordinary course of business of the company at arm’s length price as customer.

f) A person who’s relative is a director or is in the employment of the company as director or key managerial personnel.

g) A person

• Who is in full time employment elsewhere.
• A person or a partner holding appointment as its auditor is at the date of such appointment or reappointment holding appointment as auditor for more than 20 companies.

h) A person who has been convicted by a court of an offence involving fraud and a period often years has not elapsed fromthe date ofsuch conviction.

i) Any person whose subsidiary or associate company or any other form of entity is engaged as on the date of appointment in consulting or specialised services in reference to provision of Section 144 of the Companies Act, 2013.

Further According to Provisions of Section 141(4) of the Companies Act, 2013, where a person appointed as auditor of the company incurs any of the disqualification mentioned in Section 141(3) of the Companies Act, 2013 after his appointment, he shall vacate his office as such auditor and such vacancy shall be deemed to be casual vacancy in the officer of the auditor.

It must be noted that the aforesaid provisions are applicable to all types of auditors i.e. cost auditors, statutory auditors and secretarial auditors.

The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein:

• Provided that the Board may fix remuneration of the first auditor appointed by it.
• The remuneration under sub-section (1) shall, in addition to the fee payable to an auditor, include the expenses, if any, incurred by the auditor in connection with the audit of the company and any facility extended to him but does not include any remuneration paid to him for any other service rendered by him at the request of the company.

The Schedule VI of the Companies Act requires disclosure of the audit fees in the following format; Amount Received

• As an Auditor
• As an Advisor in the matters of taxation, management and company law
• Another amount as specified.
• Any sum paid by the company to meet the expenses of the auditors will be included in the word ‘remuneration’.
• When an auditor is appointed by the Board of Directors, (First auditors and Casual vacancy), the remuneration is fixed by the board of directors.
• If a retiring auditor is reappointed, his remuneration continues to became unless it is decided otherwise in the general meeting.
• Shareholders also fix the remuneration of an auditor in the following two circumstances.
• When the auditor is appointed in the annual general meeting.
• When the auditor is appointed by Comptroller and Auditor General.
• When an auditor is appointed by the Central Government, the Central government fixes the remuneration.
• In addition to remuneration for audit, an auditor may receive separate remuneration for rendering consultancy services and for attending to cases pertaining to Income-tax. Such fees do not require the approval of the general meeting. To prevent undue influence and dependence on an audit client, Companies (Amendment) Act 2003, prescribes a limit for the remuneration of auditor.

Removal

1. Special notice: The shareholder who intends to remove the auditor, shall give 14 days’ notice (Special notice) to the company, informing his intention to remove the auditor by passing a resolution in the general meeting.
2. Communication to the retiring auditor: The company on receipt of such notice, should send a copy to the retiring auditor.

3. Representation by retiring auditor: The retiring auditor can make a written representation, not exceeding a reasonable length, to the company, regarding his proposed removal. He may also request the company to circulate his representation to the members. The company should send a copy of the representation of the auditor to the shareholders, either along with the notice to meeting or subsequently. The company is required to send the representation to the shareholders only if the representation is made by the auditor within a reasonable time.

4. Representation to be read: If the representation is not circulated to the shareholders, the auditor may require that his representation be read out in the general meeting.
5. Right to attend the meeting: The auditor who is proposed to be removed has an inherent right to attend the general meeting. He can also make an oral statement at the meeting as to his proposed removal.
6. Not to abuse the right: The above privileges are extended to the auditor to protect his independence and to prevent his unjust removal. However, if the Company Law Board is satisfied that his right to make a representation is likely to be abused by him by way of seeking unwarranted publicity for a defamatory matter, the CLB may order that the representation may not be read out or circulated to the shareholders. In this regard, the company or any other aggrieved party may apply to Company Law Board seeking the direction of the Company Law Board.

Removal of Auditor after expiry of term

After the expiry of the term of office, an auditor, is usually automatically reappointed. However, if the company decides not to re-appoint the existing auditor, the following procedure has to be followed.

Removal of other Statutory auditors

The auditors can be removed, before the expiry of their term, by the company in a general meeting only with the prior approval of the Central Government. This provision prevents unjust removal of auditors.

Removal of first auditors

We know that the first auditors are appointed by the Board of Directors. To remove the first auditors, an ordinary resolution is to be passed at the shareholders meeting. If another person is proposed to be appointed in his place, at least 14 days notice is required.

Auditor Rights

An auditor is a party that examines a client’s financial statements with the objective of presenting their opinion. Auditors are financial professionals qualified to conduct an entity’s audit. Usually, they are a member or associate of an accounting body. Auditors evaluate the validity of an entity’s financial statements and the information provided within them.

Right to have Legal and Technical Advice:

He has a right to seek the opinion of the experts and, thus, take legal and technical advice. This is necessary to give his opinion in his report. He has a right to receive his remuneration provided he has completed the work which he undertook to do.

Right to receive Notice and other Communications relating to General Meeting and attend them:

Under section 231 an auditor of a company has a right to receive notices and other communications relating to General Meeting in the same way as a member of the company. He is also entitled to attend any General Meeting which he attends or any part of the business which concerns him as an auditor.

According to the power of the auditor, he may make any statement or explanation with regard to the accounts as he may desire. He need not, however, answer any questions.

Ordinarily, it is not necessary for the auditor to attend every General Meeting, but it will be good for him to attend meetings in the following circumstances:

(a) When his report contains important qualifications directly affecting the management, so that his remarks may not be misunderstood or misinterpreted.

(b) When he has received a notice from the company that someone else is going to be proposed for appointment as auditor of the company at the Annual General Meeting.

(c) When he has been specially asked by the management to be present.

Right to visit Branches:

According to section 228, if a company has a branch office, the accounts of the office shall be audited by the company’s auditor appointed under section 224 or by a person qualified for appointment as auditor of the company under section 226.

Where the Branch Accounts are not audited by a duly qualified auditor, the auditor has a right of access at all time to the books, accounts and vouchers of the company and thus, may visit the branch, if he deems it necessary.

Right to obtain Information and Explanations:

He has a right to obtain from the Directors and officers of the company any information and explanation as he thinks necessary for the performance of his duties as an auditor.

This is another important power in the hands of the auditor. He will, however, decide as to which information or explanations he thinks necessary to obtain. It the Directors or officers of the company refuse to supply some information on the ground that in their opinion it is not necessary to furnish it, he has a right to mention the fact in his report.

Right of being indemnified:

Under section 633, an auditor (being an officer of a company), has a right to be indemnified out of the assets of the company against any liability incurred by him defending himself against any civil and criminal proceedings by the company if it is proved that the auditor has acted honestly or the judgement delivered is in his favour.

Right to Signature on Audit Report:

Under section 229, only the person appointed as auditor of the company, or where a firm is so appointed, only a partner in the firm practicing in India, may sign the auditor’s report, or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.

Right to Correct any Wrong Statement:

The auditor is required to make a report to the members of the company on the accounts examined by him and on every Balance Sheet and Profit and Loss Account and on every other document declared by this Act to be part of or annexed to the Balance Sheet or Profit and Loss Account which are laid before the company in General Meeting during his tenure of office. The Directors have a duty to prepare them and present them to the auditor.

The auditor cannot require but advise the Directors to amend their system of maintaining accounts if it is faulty. If his suggestions are not carried out, he has a right to refer the matter to the members. If the method of accounting is inadequate, he must state the fact in his report that proper books of accounts have not been kept by the company.

Right of Access to Books of Accounts:

Every auditor of a Company has a right of access at all times to the books of accounts and vouchers of the company whether kept at the head office of the company or elsewhere.

Thus, the auditor may consult all the books, vouchers and documents whenever he so likes. This is his statutory right. He may pay a surprise visit without informing the Directors in advance but in practice, the auditors inform the Directors before they pay their visits.

Duties

Duties towards Government:

• Assist the Investigation u/s 237: It is duty of auditor to assist the investigation ordered by the CG u/s 237.
• CARO-2003: The auditor has to report para-wise that the company has fulfilled all the requirements of CARO-2003.

Duties towards Company:

• Statutory Report: Section 165 requires that the auditor has to certify the statutory report.
• Prospectus: According to Sec 56, the auditor is required to certify profits or losses, assets & Liabilities and dividend paid etc in the prospectus.
• Public Deposits: Section 58AA requires the auditor to report about whether the company has followed all rules and guideline of RBI in regard to public deposits or not.
• Insolvency (Section 488): If the company wants itself to be declared insolvent, it is duty of auditor to prepare profit and loss a/c for the current period.
• Signature on Audit Report: Section 229: It is duty of auditor to sign on his report.

Duties towards General Public:

• He should reveal all material information regarding the state of affairs of the company to the company as well as to the general public.
• His office is of confidence and faith. He must be reliable in all respects.
• While issuing prospectus u/s 56, he should see that the prospectus does not include any misleading information or material.

Duties towards the shareholders:

• State that balance sheet and profit and loss a/c give all information required by law.
• Report shareholders about true and fair state of affairs of the company.
• State that balance sheet and profit and loss a/c agree with the books of account.
• State that he has obtained all the necessary information.
• State that balance sheet and profit and loss a/c agree with accounting standards.
• State whether the company has maintained all books as required by law
• State the reasons of qualification in his report.
• State that he has received the audit report on the branch accounts audited by other auditor and how he has dealt with the same in preparing his report
• Auditor shall state in his report whether:

a) The loans taken are properly secured and the terms of loans are not against the interests of the company.

b) Loans given are shown as fixed deposits and the terms of loans are not against the interests of the company.

• Transactions recorded as book entry are not against the interests of the company
• Personal expenses of directors have not been charged to revenue a/c of company;
• The company fulfills the requirements of CARO 2003.