Audit of Joint Stock Company

Q.1 Explain in brief qualifications & appointment of auditor in a Joint Stock Company
Ans Under Indian companies Act 1956, audit is statutory and each company has to get its accounts audited by a qualified auditor. Besides provision of Indian companies Act, the provisions of Chartered Accounts Act are also applicable on audit. Further, auditor has also to ensure that accounting principles and accounting standards have been followed in the company.
Appointment of an auditor:- As per section 226(i) & 226(ii) of Indian Companies Act, only a qualified auditor can be appointed as a statutory auditor in a company.
Qualified auditor means one who possesses at least one of the following two qualifications.
1- He is a chartered Accountant (CA)
2- He is a certified Auditor.
A Chartered Accountant is a person who is a member of Institute of Chartered Accountants of India (ICAI) Even a firm of chartered accountants can be appointed as statutory auditor provided that all partners of this firm are practicing in India and qualified for such appointment.
Certified auditor is an auditor who has been issued a certificate by central/state govt. to act as certified auditor. The central govt. has the power to frame rules for granting, renewal, suspension or cancellation of certificate of certified auditors.
Disqualification of a company auditor:-
As per section 226(3) & 226(4) following cannot be appointed as statutory auditor of a company.
(i) A body corporate i.e. a company
(ii) An officer or employee of company
(iii) A partner of an officer of the company

(iv) An employee of an officer of the company
(v) A partner of an officer of the company
(vi) An employee of an employee of the company
(vii) A Debtor or guarantor of more than Rs.1000/-
Q.2 Who can appoint auditor in a company?
Ans
Auditor of a company can be appointed by:-
(1) Board of Director:- Appointment of first auditor till AGM. If board fails, the first auditor would be appointed in GM. Further board can appoint auditor in case of casual vacancy which may occur due to any reason.
(2) By share holders through GM :- first auditor if board fails as given above. Regular appointment of auditor through AGM. Reappointment of audit would also be done in AGM.
(3) Appointment of auditor by central govt. :-
- In a non-govt. company, auditor will be appointed if board or AGM fails to appoint auditor.
- In Govt. companies, appointment of auditor on the advice of CAG of India.
- Appoint of special auditors by central govt. if a company is -
 Not being managed on sound business principles & practices.
 Being run causing serious injury or damage to industry, trade & business
 The financial position of a company in danger & may lead to insolvency.


Q.3 How an auditor can be removed in a Joint Stock Company?
Ans Removal of Audit
 Removal of first auditor by special resolution in AGM
 Removal of other auditors before tenure by GM with prior permission of govt.
 Removal under CA Act. in case of death or cancellation of membership due to non-payment of fee or acquiring some disqualification under CA Act.
Rights of Company Auditor:- Statutory rights are as follows :-
(i) Access to books, accounts, vouchers

(a) As all times without any prior information during working hours.
(b) All books maintained including vouchers, minutes book and all other books maintained.
(c) Right to access can be restricted by a company and court can’t extend this rights.
(d) Rights of access in H.O. /Branch or elsewhere.
(ii) Rights to seek information and explanation relating to audit work. If the auditor has not received any information or explanation, he should mention the same in audit report
(iii) Right to receive notice and other information about general body meeting: - right to attend meeting and right of being heard if the meeting.
(iv) Right pertaining to the branch of the company -: visiting branch, right to access on book of branch.
(v) Right to the indemnified (As per section 201 of Indian companies Act.
Q.4 What important points are to be seen in Memorandum of Association & Articles of Association in a company audit?
Ans Audit of various items
Auditor should first of all see memorandum of association which contains details about:-
- name
- registered office
- objectives
- liability clause
- capital clause
- Association and subscription Claus.
2. He should see the Articles of Association: - which provides internal rules of company framed under Indian companies act. These internal rules may be regarding:-
- Share capital
- Auditor
- Management of company
- Regarding P&L A/c
- Other matters such as advancement of loans and minutes of company's proceedings.

3. Auditor should himself acquaint with nature of business and management of company.
4. Obtain list of books and accounts maintained and accounting year.
5. Obtain list of employees and their job description.
6. Obtain full knowledge of internal control mechanism in use.
7. Obtain previous year final accounts and audit report.


Q.5 What important points should be seen by an auditor while checking share capital, debenture, managerial remuneration?
Ans:Audit of Share Capital
Points to be seen:-
1. Capital structure is as per memorandum of association.
2. Issue/pricing/allotment/refund of money of share capital is as per guideline of SEBI.
3. He has to see calls in arrears.
4. Examination of underwriting commission & brokerage.
5. Checking of issue of shares at premium.
6. Checking of issue of shares at discount.
7. Presentation of share capital in balance sheet.
8. Checking of forfeiture of shares.
9. Transfer of shares and buy back of shares.
Audit of Debentures
A debenture is an acceptance of a debt given by a company under its seal. In this, contract is made of repayment of principal amount on a certain date and payment of half yearly interest or a certain date. Debentures may have a charge on the assets of company. Different types of debentures can be issued by a company such as mortgaged debentures naked, perpetual & redeemable, registered or bearer, convertible and non-convertible, Zero interest debentures etc. In audit of debentures, following points should be seen by auditor:-
- Checking articles of association to find out provisions about debentures and accepting loans.
- Checking of commission paid
- Provision of section 293 of Indian comp. Act. have not been violated which prescribes restrictions on borrowings.

- Maintenance of debenture registers as per section 152 of companies act.
- Auditor should see charge register if charge has been created on assets.
- Transfer of debenture is according to provisions of companies Act.
- Creation and maintenance of debenture redemption fund as per section 117c of companies Act.
- Procedure of issue of debentures is in accordance with guide lines of SEBI in this regard.
Audit of Managerial Remuneration
There are various provisions prescribing restriction on payment of remuneration to director/managing director of a company under companies Act. and their compliance is to be seen/ensured by auditor.
- Overall maximum remuneration to its directors and manger in a financial year shall not exceed 11% of net profit.
- If only one managerial person, not more than 5% of net profit.
- If managerial person are more than one, not more than 10%
For the purpose of paying remuneration to managerial persons, net profit of a company is computed as per section 349 of the companies Act. which clearly states which provisions and expenses are to be adjusted in arriving at net profit.
Audit for the Purpose of Statutory Report
It is legal compulsion for the auditor to mention following items in the statutory report.
i- Total number of shares allotted
ii- Total cash received on allotted shares
iii- Abstract of receipts and payments consisting of the following.
- Total cash receipt on shares, debentures & other sources.
- Payment made by the company against receipts
- Amount of preliminary expenses.
- Name and occupation of directors, managers, secretary
- Extent to which contract of underwriting has not been fulfilled.

- Commission, brokerage paid & payable to directors/managers on issue of shares and debentures.
Certification: - Statutory report shall be certified by two directors and one of them should be managing director if there is any. Besides reports, auditor has to certify amount received on shares & receipt and payment of the company after careful examination.


Q.6 Explain in brief whole process of audit of Government Companies.
Ans Audit of Govt. Companies
Under Section 619 of companies Act.
According to section 617, a govt. company is a company in which of least 51% shares capital is owned by central govt. / state govt. / state governments. Section 619 says that audit of govt. companies would be conducted by a charted accountant to be appointed by the central govt. on the advice of comptroller and Auditor General of India.
Auditor so appointed shall have all rights & duties as in case of statutory audit of a company under various sections of company's Act.
Special Directions under section 619(3) of companies Act. for govt. company audit.
Auditor has to examine, point out deficiencies and suggest remedial measures in respect of following:
1. System of accounts.
2. System of Financial control
3. Assets and investments
4. Liabilities and loans.
5. Profit and loss account
6. Inventory and contracting
7. Preparation of cost accounting & cost sheet
8. Internal audit in operation, its adequacy
9. Audit committee of board and comments upon its functions.

Time schedule for submitting report under section 619(3) (a) by auditors.
Branch Auditors: - To prepare report within two weeks from signing the report and send the same to:-
1- Statutory auditors consolidating the accounts of the company.
2- The concerted principal director commercial audit
3- The Board of Director of the company.
Statutory Auditor: - To prepare consolidated report within 3 weeks of singing the report and send the same to:-
(1) In case of a central govt. undertaking to
a) Chairman Audit Board & Dy. Controller & Auditor general.
b) Concerned Principal director commercial audit
2) In case of state govt. undertaking
a) Additional Dy. Controller and Auditor general (Commercial Audit)
b) Accountant general (commercial audit) of state
3) The board of directors of the company.
Where there is more than one statutory audit, the report under section 619(3) (a) will be prepared jointly by all the statutory auditors and signed by all of them.

Q.7 What do you understand by the term supplementary Audit & Test Audit?
Ans Supplementary or Test Audit
Under section 619(3)(b) of companies act, the Comptroller and Auditor general of India is authorized to perform supplementary or test audit of accounts of companies which is also known as efficiency -cum-propriety -audit to see following points :-
(a) To examine the decision of board of directors that they were in the best interest of company.
(b) The extent to which directors worked in accordance with accepted principles of financial propriety.
(c) Whether the chief Executives exercised their power properly
(d) To examine the cost accounts where necessary to find and that.
- The undertaking is run efficiently and economically.

- Its costing and performance are better than other undertakings of the same type.
Under section 619(4) of the Companies Act. an auditor of a govt. company is obliged to submit one copy of the report to CAG who shall have the power to make his comments on it and give a supplementary report on it generally on financial position, capital structure, reserves and surplus, liquidity and solvency, working capital, sources and uses of funds, working results cost trends, production performance, inventory and production, sundry debtors and turn over etc.
Under section 619(a) it is the responsibility of a govt. company to put up Annual Report on the working of company before the parliament, state assembly