Professional Documents
Culture Documents
CHAPTER 1
INTRODUCTION
A company is said to be an artificial person created by law having a separate legal entity distinct
from its shareholders. It cannot be directly managed by its owners, i.e., shareholders, because
they are very large in number having small holding and also scattered over a wide area. As such,
the management and control of the affairs of the company is done by other persons generally
known as directors. Hence, it becomes essential for a company to appoint an independent and
qualified person, i.e., an auditor, to verily and certify the truth and fairness of the financial
statements.
History of Audit
Clinical Audit was introduced by Florence Nightingale (1855) during the Crimea War (1853
1855) (Bull 1992). Although the Russians were defeated at the battle of the Alma River (20
September 1854), the Times newspaper criticized the British medical facilities. Sidney Herbert,
the British Secretary for War asked Florence Nightingale a mathematician to become nursing
administrator and oversee the introduction of nurses to military hospitals (Porter N. Regional
Audit Gleanings Issue 16 May 2005). Nightingale at the end of the war was able to show positive
outcomes from quality of care. Few other clinicians at this time used audit.
Qualifications and disqualifications of company auditor:
Auditors qualifications:
According to section-226 of Companies Act, person or firm having the following qualification
can be appointed as an auditor:
1. Person who is the member of Institute of Chartered Accountant.
2. Any firm whose all the partners are serving as chartered accountants in India.
3. A person holding a certificate under the restricted auditors certificate (part B. State)
rules, 1956 can be appointed as an auditor.
Disqualifications of an auditor:
(ii)
(iii)
capital.
PERSONAL EXPENSES MEET BY DIRECTOR 1) AUTORIZATION: check article
of association, service contract ,minutes of general meeting to check authorization of
such payment 2) S.227(1A): ensure and enquire that personal expenses are not
camouflaged in any other item as contemplated under section
227(1a)
Dividends:- The return on investment in share is called dividend. It is the part of the profit
earned by the company. Dividend rate approved in the general meeting by the shareholders.
Duties Of Auditor Relating To Dividends:- Following are the important duties of the auditor :
AUDIT OF LIABILITIES
Liabilities reorganization is the concession items made by a creditor in accordance with the
agreement made with a debtor in financial difficulty or rules of the court. There are four major
forms of liabilities reorganization:
CHAPTER 2
CONSIDERATION IN COMPANY AUDIT
Memorandum of association
2.
Articles of association
3.
Contracts entered into with vendors and other persons relating to purchase of property,
A company, before registration, cannot enter into contract also without obtaining Certificate of
Commencement of business from the registrar of Companies. Therefore, the auditor is required
to take into account his duty to examine the transactions entered into by the company; the dates
when these were entered into for confirming the validity. The auditor should be aware of the
authority structure of the company so as to carry out audit effectively. Section 291 empowers the
Board of Directors to exercise all such powers and undertake all such Acts, the company is
authorized to do. But, the auditor should see to it that the Board has not done any ultra-vires Acts
i.e. not exercised any power nor done any act which is not permitted by Memorandum or Articles
of the company.
3. BUY BACK OF SHARES
The provisions regulating buy back of shares are contained in Section 77A, 77AA and 77B of the
Companies Act,1956. These were inserted by the Companies (Amendment) Act,1999. The
Securities and Exchange Board of India (SEBI) framed the SEBI(Buy Back of Securities)
Regulations,1999 and the Department of Company Affairs framed the Private Limited Company
and Unlisted Public company (Buy Back of Securities) rules,1999 pursuant to Section 77A(2)(f)
and (g) respectively.
The repurchase of outstanding shares (repurchase) by a company in order to reduce the number
of shares on the market. Companies will buy back shares either to increase the value of shares
still available (reducing supply), or to eliminate any threats by shareholders who may be looking
for a controlling stake.
A buyback allows companies to invest in themselves. By reducing the number of shares
outstanding on the market, buybacks increase the proportion of shares a company owns.
Buybacks can be carried out in two ways:
1. Shareholders may be presented with a tender offer whereby they have the option to submit (or
tender) a portion or all of their shares within a certain time frame and at a premium to the current
market price. This premium compensates investors for tendering their shares rather than holding
on to them.
2. Companies buy back shares on the open market over an extended period of time.
ii.
iii.
Rationalise the capital structure by writing off capital not represented by available assets.
iv.
v.
vi.
Infact the best strategy to maintain the share price in a bear run is to buy back the shares from the
open market at a premium over the prevailing market price.
3.2) Resources of Buy Back
A Company can purchase its own shares from
(i)
Free reserves; Where a company purchases its own shares out of free reserves, then a
sum equal to the nominal value of the share so purchased shall be transferred to the capital
redemption reserve and details of such transfer shall be disclosed in the balance-sheet or
(ii)
(iii)
Proceeds of any shares or other specified securities. A Company cannot buyback its
shares or other specified securities out of the proceeds of an earlier issue of the same kind of
shares or specified securities.
(b)
A special resolution has been passed in the general meeting of the company authorising
the buy-back. In the case of a listed company, this approval is required by means of a postal
ballot. Also, the shares for buy back should be free from lock in period/non transferability. The
The buy-back is of less than twenty-five per cent of the total paid-up capital and fee
reserves of the company and that the buy-back of equity shares in any financial year shall not
exceed twenty-five per cent of its total paid-up equity capital in that financial year;
(d)
The ratio of the debt owed by the company is not more than twice the capital and its free
i.
ii.
iii.
Payment of dividend, if declared, to all shareholders within the stipulated time of 30 days
Repayment of any term loan or interest payable thereon to any financial institution or
bank;
(f)
There has been no default in complying with the provisions of filing of Annual Return,
All the shares or other specified securities for buy-back are fully paid-up;
(h)
The buy-back of the shares or other specified securities listed on any recognised stock
exchange shall be in accordance with the regulations made by the Securities and Exchange Board
of India in this behalf; and
(i)
The buy-back in respect of shares or other specified securities of private and closely held
ii.
stock exchanges or
(c) odd lots, that is to say, where the lot of securities of a public company, whose shares are listed
on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the
stock exchange; or
(d) purchasing the securities issued to employees of the company pursuant to a scheme of stock
option or sweat equity.
3.6) Register of Securities Bought Back
After completion of buyback, a company shall maintain a register of the securities/shares so
bought and enter therein the following particulars
a.
b.
c.
d.
Where a company buys-back its own securities, it shall extinguish and physically destroy the
securities so bought-back within seven days of the last date of completion of buy-back.
(b)
Where a company proposes to buy back its shares, it shall, after passing of the
special/Board resolution make a public announcement at least one English National Daily, one
Hindi National daily and Regional Language Daily at the place where the registered office of the
company is situated.
The public announcement shall specify a date, which shall be specified date for the
purpose of determining the names of shareholders to whom the letter of offer has to be sent.
c.
SEBI regulations.
d.
A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of
A copy of the Board resolution authorising the buy back shall be filed with the SEBI and
stock exchanges.
f.
The date of opening of the offer shall not be earlier than seven days or later than 30 days
The buy back offer shall remain open for a period of not less than 15 days and not more
than 30 days.
h.
A company opting for buy back through the public offer or tender offer shall open an
escrow Account.
3.11) Penalty
If a company makes default in complying with the provisions the company or any officer of the
company who is in default shall be punishable with imprisonment for a term which may extend
to two years, or with fine which may extend to fifty thousand rupees, or with both. The offences
are, of course compoundable under Section 621A of the Companies Act,1956.
4) TRANSMISSION OF SHARES
Share transmission is a mechanism by which the title to shares is devolved other than by transfer.
This is typically applicable for:
Devolution by death
Succession
Inheritance
Bankruptcy
Marriage
5.1) Scope of this SA: This Standard on Auditing (SA) establishes the independent auditors
overall
Specifically, it sets out the overall objectives of the independent auditor, and
expains the
nature and scope of an audit designed to enable the independent auditor to meet those.
pertaining to
Relevant ethical
requirements ordinarily comprise the Code of Ethics issued by the Institute of Chartered
Accountants of India. The Code establishes the following as the fundamental principles of
professional ethics relevant to the auditor
(a) Integrity;
(b) Objectivity;
(c) Independence
(d) Professional competence and due care
(e) Confidentiality; and
(f) Professional behavior.
ii) Professional Skepticism
(a)The auditor shall plan and perform an audit with professional skepticism
recognising
that circumstances may exist that cause the financial statements to be materially misstated.
(b) Professional skepticism includes being alert to, for example
Audit evidence that contradicts other audit evidence obtained.
Conditions that may indicate possible fraud.
iii) Professional Judgment
The auditor shall exercise professional judgment in planning and performing an audit of financial
statements. Professional judgment is essential to the proper conduct of an audit. Professional
judgment is necessary in particular regarding
decisions about:
CHAPTER 3
CONDUCT OF AN AUDIT IN ACCORDANCE WITH SAS
1. Complying with SAs Relevant to the Audit
a.The auditor shall comply with all SAs relevant to the audit. An SA is relevant to the audit when
the SA is in effect and the circumstances address by the SA exist.
whether this
prevents the auditor from achieving the overall objectives of the auditor and thereby requires the
auditor, in accordance with the SAs, to modify the
The identification of the applicable financial reporting framework, in the context of any
framework.
An adequate description of that framework in the financial statements.
The preparation of the financial statements requires management to exercise judgment in making
accounting estimates that are reasonable in the circumstances, as well as to select and apply
appropriate accounting policies. These judgments are made in the context of the applicable
financial reporting framework.
6.2) Ethical Requirements Relating to an Audit of Financial Statements
The Code establishes the following as the fundamental principles of professional ethics relevant
to the auditor when conducting an audit of financial statements and provides a conceptual
framework for applying those principles;
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
responses to inquiries to
Professional skepticism is necessary to the critical assessment of audit evidence. This includes
questioning contradictory audit evidence and the reliability of documents and responses to
inquiries and other information obtained from management and those charged with governance.
CHAPTER 4
7. SA 230(REVISED): AUDIT DOCUMENTATION
7.6) Definitions
For purposes of the SAs, the following terms have the meanings attributed below:
(a) Audit documentation The record of audit procedures performed, relevant audit evidence
obtained, and conclusions the auditor reached (terms such as working papers or workpapers
are also sometimes used).
(b) Audit file One or more folders or other storage media, in physical or electronic form,
containing the records that comprise the audit documentation for a specific engagement.
(c) Experienced auditor An individual (whether internal or external to the firm) who has
practical audit experience, and a reasonable understanding of:
(i) Audit processes;
(ii) SAs and applicable legal and regulatory requirements;
(iii) The business environment in which the entity operates; and
(iv) Auditing and financial reporting issues relevant to the entitys industry.
7.7) Requirements
1) Timely Preparation of Audit Documentation
The auditor shall prepare audit documentation on a timely basis.
2) Form, Content and Extent of Audit Documentation
The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor,
having no previous connection with the audit, to understand:
(a) The nature, timing, and extent of the audit procedures performed to comply with the SAs and
applicable legal and regulatory requirements;
CONCLUSION
Every Company registered under Companies Act 1956, need to do its audit every year, which is
known as statutory audit. During the company audit, the auditor discusses his observations with
those charged with governance, such as the audit committee of the company, before finalising the
report. The auditor should be firm in his opinion, and exercise his independence at this level.
This part of the audit is critical, and calls for resilience on the part of the auditor. An audit report,
being a public document, should be drafted skilfully. The code of conduct prohibits an auditor
from divulging any information received by him in the course of his professional assignment,
unless legally required so to do. Therefore, the auditor shouldn't hesitate to take the help of a
BIBLIOGRAPHY
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