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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.

There are two terms ‘Procedure and techniques’, which are often used interchangeably, in fact, however a distinction does exist. “Procedure may comprise a number of techniques and represents the broad frame of the manner of handling the audit work. Techniques stands for the methods employed for carrying out the procedure.” For example procedure Known as vouching which would involve techniques of inspection and checking computation of documentary evidence.

Audit Procedures:

As per AAS-1 on basic principles governing an audit states, the auditor should obtain sufficient appropriate audit evidence through the performance of compliance and substantive procedure to enable him to draw reasonable conclusions there from on which to base his opinion on the financial information. Therefore, audit procedure is broadly classified in two categories compliance; procedure and substantive procedure.

1) Compliance procedure are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect. In obtaining audit evidence from compliance. Procedures, the auditor is concerned with assertions that the control exists, the control is operating effectively and the control has so operated through the period of intended reliance. So the auditor is concerned with the existence effective and continuity of the control system.

2) Substantive procedure are tests designed to obtain evidence as to the competences, accuracy and validity of the data produced by accounting system. They are of two types:

a) Tests of details of transactions and balances.

b) Analysis of significant ratios and trends including the resulting investigation of unusual fluctuations and items.

Audit Techniques:

Audit techniques on the other hand refers to collection and accumulation of audit evidence some of the techniques commonly adopted by the auditors are the following:

• Posting checking
• Casting checking
• Physical examination and count
• Confirmation
• Inquiry
• Year-end scrutiny
• Re-computation
• Tracing in subsequent period bank reconciliation.

Special Audit Techniques:

In an absence of audit trail, the auditor needs the assurance that the programmes are functioning correctly in respect of specific items by using special audit techniques. The absence of input documents or the lack of visible audit trail may require the use of computer assisted audit techniques (CAATs) i.e. using the computers an audit tool. The auditor can use the computer to test.

• The logic and controls existing within the system.
• The records produced by the system.

Depending upon the complexity of the application system being audited, the approach may be fairly simple or require extensive technical competence on the part of the auditor. The effectiveness and efficiency of auditing. Procedure may be enhanced through the use of CAATs. Properly two common types of CAATs are in vogue, viz, test pack or test data and audit software or computer audit programmes.

EDP means (Electronic Data Processing) for the audit or a computer-based systems. For audit process of enterprise.

General EDP Controls: The purpose of general EDP controls is to establish a framework of overall control over the EDP activities and to provide a reasonable level of assurance that the overall objectives of internal control are achieved.

Organization and management control are designed to establish an organizational framework over EDP activities, including:

• Policies and procedures relating to control functional.
• Appropriate segregation of incompatible functions.

Application systems development and maintenance controls are designed to establish control over:

• Testing, conversion, implementation and documentation of new or revised system.
• Changes to application systems.
• Access to system documentation
• Acquisition of application systems from third parties

Computer operation controls are designed to control the operation of the systems and to provide reasonable assurance that:

• The systems are used for authorized purposes only
• Access to computer operations is restricted to authorized personnel.
• Only authorized programs are used.
• Processing errors are detected and corrected.

Systems Software Controls include:

• Authorization, approval, testing, implementation and documentation of new systems software and systems software modifications.
• Restrictions of access to systems software and documentation to authorize.

Data entry and program controls are designed to provide reasonable assurance that:

• An authorization structure is established over transactions being entered into the system.
• Access to data and programmes is restricted to authorized personal.
• Offsite back-up of data and computer programmes.
• Recovery procedures for use in the event of theft, loss or international or accidental destruction.
• Provision for offsite forecasting in the event of disaster.

Vouching of cash receipts (debit side of cash book)

(i) Opening Balance of Cash Book

Opening balance of cash book represents cash in hand at the start of the year and should verified from the balance sheet of last financial year.

(ii) Cash Received from Debtors

Consider the following points for verification of cash received from debtors:

• The carbon copies or counterfoils of cash receipt book should be verified.
• Cash receipt should be serially numbered.
• Cash received should be entered on the same date when the cash is actually received.
• The discount allowed to customers should be properly authorized by a responsible officer.
• Correspondence with customer and ledger account should be tallied.

Following are the different ways used for misappropriation of cash:

• Cash received from customer not recorded in books and no cash receipt may be issued.
• Issuance of receipt for lesser amounts than amount actually received.
• Using teeming and lading method; it is a very common method to misappropriate the money, in which the cash received from any customer not recorded in the books and the cash received from same customer at a later instance or another customer recorded in the books and so on.

(iii) Repayment of Loan by Others

Repayment of loan by others may be verified in the following ways:

• Calculation of interest received and interest should be credited to interest received account.
• Verification from bank statement if directly deposited by party into bank.
• Checking of carbon copies or counterfoils of cash receipts.
• To ensure that there should be no violation of Income Tax rules as payment of loan exceeding Rs. 20,000/- cannot be repaid in cash. It should be through Cheques, Demand Draft, NEFT, RTGS or any other available banking channels.

(iv) Rent Received

• To check rental agreement or lease deed
• In case where the rental income is received from more than one property, separate account for each property should be maintained.
• The Auditor should verify that the rent for all the twelve month is received or not.
• The amount of rent should be verified from the rent deed or the lease deed.
• If TDS (Tax Deducted at Source) is deducted by the party, there should be proper accounting of TDS.

(v) Sale of Investments

• To check bank statement if the sales proceeds have reached the bank account.
• To verify broker commission, note or debit note, if investments are sold through broker.
• To ensure separate accounting is being done for capital receipts and revenue receipts. Dividend or profit or loss on sale of investment is a revenue receipt and the sales proceeds of the investment cost should be booked as capital receipt.

(vi) Subscription

Subscriptions are received from the members of a club and the following points need to be considered by the Auditor while vouching subscription:

• Subscription register should be verified.
• Verification of subscription received during the year and the subscription receivable.
• Counterfoil of cash receipt should be verified.

(vii) Sale of Fixed Assets

• To check minutes of the meetings of the Board of Directors.
• Sale agreement or sale contract.
• Verification of agent account if sale is made through an agent.
• Profit or Loss on sale of fixed assets should be booked to revenue account.
• Authorization of sale of fixed assets.
• Sale proceed of fixed assets should be credited to fixed assets account after deducting expenses on sale of fixed assets if any.

(viii) Interest and Dividend Received

• Verification of the dividend warrant letter along with the covering letter for verification of dividends in case of dividends received through cheque.
• Verification of bank statement, if the dividend is directly credited to the bank account
• Interest on security can be vouched from the securities schedule.
• Interest on fixed deposit can be verified from bank statement and TDS certificates
• Interest received from outsiders to whom company has granted loan could be verified from statement of account of party along with TDS certificates.
• Provision should be made for interest accrued but not due
• All interest received and accrued should be properly accounted for in the books of accounts

(ix) Commission Received

• Verification of agreement on the basis of which the commission is received
• Calculation of the commission receivable
• The commission received should be verified from counterfoils, bank statements, cash receipts, etc. and the provision for commission receivable should be rightly accounted for in the books of accounts
• Commission receivable on “sale of goods sent on consignment” should be verified from sale account

(x) Installments Received on Hire-Purchase Sale

• Study of the Hire-Purchase agreement for hire-purchase-sale price, number of installment, rate of interest etc.
• Segregation of principle amount and interest amount should be done and both should separately account for
• Profit on sale on hire-purchase should be duly calculated on the basis of installment received during the year

Vouching of cash payments (credit side of cash book)

All the payment made to creditors, expenses incurred in cash and all other payments done appear on the credit side of cash book and the Auditor is required to vouch cash payments because chances of cash misappropriation are very high.

Following points need to be considered for different types of cash payment:

(i) Opening Balance

The opening balance of cash book can never be credited because cash of company cannot be in negative but the credit bank balance represents the overdraft account from bank or utilization of cash credit limit as sanctioned from bank.

(ii) Payment to Creditors

Payment to creditors may be examined by the following:

• Receipt issued by the creditors
• If the creditor is paid amount as full and final settlement, the balance amount, if any stands in the ledger account of the creditor; this amount should be credited to discount received
• If any advance payment is made to creditor that should be clearly mention
• Statement of account of creditor

(iii) Payment of Salaries

Depending upon the adequacy of internal control system in an organization Auditor will decide his audit Program. It is very important for Auditor to check the following:

• Attendance record of employee and salary register
• Appointment letter of new employees
• Comparison of current month salary with last month’s salary and if there is any abnormal change in amount, Auditor should verify the same
• Alteration in amount of deductions on account of advance, loan, fine, funds, insurance, TDS, etc.

(iv) Payment of Wages

At the time of vouching of wages paid, the Auditor should verify the following points to avoid misappropriation of cash:

• Adequacy of Internal Control System
• Payment of wages at higher rate than allowed
• Payment shown to ex-workers in the current month
• Lower or non-deduction of advance or other deductions due
• Payment to fictitious workers
• Payment to workers who were absent from duty
• Wages sheet should compare with wages register
• Comparison of current month wages with last month’s wages and proper verification should be there for extra ordinary changes
• Detailed verification for payment to casual workers
• Vouching and verification of treatment accounting treatment for unpaid wages

(v) Purchase of Plant and Machinery

The Auditor should pay attention to the following:

• Purchase invoice of machinery
• Freight inward charges, installation charges, erection and commissioning charges should be capitalized
• Treatment of Excise duty according to the excise rules

(vi) Purchase of Land & Building

Purchase of Land and Building can be vouched as follows:

• Study of Lease hold agreement, if land is purchased on lease hold basis
• Payment should be as per lease term
• All the expenses incurred to acquire lease hold property should be debited to respective property account
• Auditor should study the conveyance deeds in case property is purchased under free hold basis
• For verification of payment, the Auditor can check the payment receipt and the conveyance deed

(vii) Rent Paid                   

Consider the following points for the verification of rent by the auditor:

• Rent Deed
• Rent receipt from Land lord
• Provision for unpaid rent at the end of the year

(viii) Insurance Premium

Consider the following points for the verification of Insurance Premium:

• Insurance policy issued by the Insurance Company
• Insurance premium receipt
• Insurance premium should not be related to any official of the company

(ix) Income Tax

Consider the following for the verification of Income:

• Advance Tax Challan
• Self-Assessment Tax challan
• Income Tax demand notice
• Assessment order

(x) Excise Duty

Consider the following for the verification of Excise Duty:

• Rate of Excise Duty
• Excise records and sale invoice for verification of excise duty