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Audit of Accounts of Joint Stock Company
Companies formed and registered under the Companies Act, 1956 have to compulsorily audit its books of accounts as the owners (shareholders) and the management of the company is different. The company auditor’s rights, duties, appointment, remuneration etc. are governed by the provisions of the Companies Act. This type of audit is called as Statutory Audit and the person who conducts the audit is called as Statutory Auditor.
The main objective of external or statutory audit is to examine the accuracy that the financial statements reflect a true and fair view of the state of affairs of the business. In other words, the company auditor has to verify that the books of accounts and certify that the books of accounts and financial statements exhibit a true and fair view of the state of affairs of the business concern in the form of a report to the shareholders of the company.
1. The main objective of external or statutory audit is to examine the accuracy that the financial statements reflect a true and fair view of the state of affairs of the business.
2. The scope of work is determined by the Companies Act and the auditor possesses an independent status and the management has no control over the auditor.
3. Auditor should be a qualified Chartered Accountant as laid down in the provisions of the Companies Act.
4. Statutory auditor is appointed and removed by the shareholders of the company.
5. The powers and duties of statutory audit are determined by the Companies Act.
6. Statutory or Company auditor is liable both to shareholders and to the third parties.
7. After audit of accounts of a company, auditor has to submit a audit report to the shareholders at annual general meeting in prescribed format.
8. Company or statutory auditor is responsible to shareholders and acts as a watch-dog for the shareholders.
The following are the advantages of auditing the accounts of a Joint Stock Company.
1. Verification of Accuracy of Books of Accounts: Audit of accounts helps to verify the correctness of the financial transaction and accuracy of books of accounts.
2. Detection and Prevention of Errors and Frauds: Audit helps in detecting and preventing both errors and frauds and also exhibits a true and fair view of state of affairs of the company to the shareholders who are the owners of the company.
3. Moral Check on the Management: Audit of accounts enables to have a moral check on the management in order to protect the interest of the shareholders.
4. Safeguards Interest of Shareholders: When accounts are audited by an independent and a qualified auditor, the interest of the shareholders and third parties are protected and safeguarded against any frauds committed by the directors, promoters or managers.
5. Valuable Suggestions: Besides the above advantages, auditor who is in touch with the company operations can provide valuable suggestions.
A company is an artificial judicial person and has separate legal entity. The share holders of the company are interested to know the financial position of the company. Hence, the audit of books of accounts for the limited company is compulsory. The auditor has to produce a report on the books examined by him and express a true and fair view of the profit and loss account prepared by the client. Before commencing the audit work, the auditor has to undertake certain preliminary steps. They are:
1. Examining the validity of his appointment
2. Inspection of Documents, Contracts and Registers
3. Other Information.
The auditor has to check that his appointment has been made as per the provisions of Companies Act. He has to ensure that his appointment has been validly made based on the different provisions for the appointment of auditor under Companies Act. The following are the various circumstances of appointment of auditor:
· Where he is appointed as first auditor, get a copy of the resolution by the directors about his appointment;
· Where he is appointed in the place of retiring auditor, he should enquire from the retiring auditor in writing, whether due notice was given to him and also the circumstances under which he retired, and also if the retiring auditor has any objection to his accepting the appointment. Failure on the part the auditor shall be treated as a breach of professional ethics.
· Where his appointment is made by the shareholders in annual general meeting, he should procure a copy of the shareholders resolution regarding his appointment, and inform the Registrar within 30 days whether he is accepting the appointment.
· Where he is appointed in a casual vacancy, by the directors, he should obtain a copy of the director’s resolution to this effect.
He should obtain a certified list of all the books used in the company and examine the records, documents and registers with reference to the following:
(A) Memorandum of Association: The Memorandum of Association is the basic document of the company.
It authorizes a company to engage in specific activities. Therefore, it is necessary for the auditor to examine the scope and powers of the company. The auditor should have a complete study of Memorandum of Association in the following aspects:
· Whether the transactions carried by the company is subject to the clauses in the Memorandum of Association, if not the transactions of the company become ultravires.
· The auditor has to check the share capital issued is within the authorized capital.
· He should scrutinize the object clause and borrowing powers of the company.
· He has to check other provisions, which are likely to affect the accounts of the company.
(b) Articles of Association: The Articles of Association deals with rules and regulations of the internal management of the company. The auditor has to examine the following particulars in the Articles of Association:
· Issue, allotment and forfeiture of shares and declaration of dividend.
· Appointment and removal of directors and officers of the company and the provisions relating thereto.
· Provisions regarding meeting and voting rights of share holders.
· Borrowing powers of company.
· Payment of interest on capital, under writing commission and brokerage.
· The auditor has to make thorough study of the Articles of Association and he has to apply his skill and knowledge on various transactions of the company.
(c) Prospectus: A Prospectus is an invitation to the public to subscribe for shares and debentures of the company. It holds all the rules and regulations for the issue of shares. Normally all the matters which are in the articles of association are also found in the prospectus. The auditor should make a detail study in the following matters:
· He should verify the name, addresses, remuneration of directors and other statutory officers whose particulars are specified in the prospectus.
· He should see that all the statements made in the prospectus are true.
· He should examine in the prospectus that the amount payable at the time of allotment and call.
· He has to examine that any material contract made by the company within two years from the date of issue of prospectus.
(d) List of Books: Auditor should ask the company to submit a list of all the books of accounts, statistical and statutory books maintained by the company. Important books are kept at the Registered Office of the company.
(e) Contracts: The auditor has to check the date of agreement or contracts made by the company with other parties, like, vendors, underwriters, promoters or brokers etc. Further, the auditor should verify whether the agreements are made by the authorized person of the company. He should see that entries relating to contracts are recorded correctly.
(f) Minutes Book: Every company has to maintain a book in order to record the proceedings in the general meetings, meetings of board of directors and committee of the board. They are in the form of a bound note book. The auditor has to verify that the chairman has certified the minutes book with date and signature. The audit of the Minutes Book helps the auditor in vouching various transactions e.g., adoption of the annual accounts, calls on shares, directors fees and expenses, appointment of first auditor and his remuneration and authorization of capital expenditure etc.
(g) Certificate of Incorporation: Certificate of Incorporation is an important document which brings the company into legal existence.
The auditor has to check that all legal official procedures have been fulfilled subject to the provisions of the Companies Act.
(h) Certificate of Commencement of Business: A public company has to get Certificate of Commencement of business before it commences its business. The auditor should examine the Certificate of Commencement of business in case of a public company.
(i) Previous Year Balance Sheet, Profit and Loss Account and Audit Report: The auditor has to verify the last year Balance Sheet and ensure that the balances are correctly recorded in the current books. He has to check the minutes book of the share holders about the adoption of the accounts. Moreover, he has to get the copies of last year’s Profit and Loss Account and Balance Sheet which is required for conduct of his audit work. He should ensure that the objections or qualifications raised in the previous audit report have been duly met by the company. He should examine the Directors report to the members containing the recommendations of the Directors in respect of the appropriations of profits made last year.
(a) System of Accounting: The auditor has to study the accounting system followed in the company and has to observe the inefficiencies.
(b) List of Officers: The auditor has to obtain the list of officers in the company with their specimen signature.
(c) Evaluation of Internal Check and Control System: The auditor has to obtain detailed information about the internal check and internal control system in the company. This will enable him to identify the defects in the accounting system. Further, he has to verify the recommendations, if any, made in the last year audit report.
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