PRINCIPLE AND PRACTICE OF AUDITING III B.

Com (NEP)

UNIT 4
COMPANY AUDIT AND AUDIT OF OTHER ENTITIES

Company Auditor is an individual appointed for preparing an independent audit report of the
company. They can be either appointed by the company’s Board of Directors, Shareholders,
Central Government or Comptroller and Auditor General of India (C&AG) accordingly. An individual
must have expert knowledge and a practicing certificate from the Indian Institute of Chartered
Accountants for becoming a company auditor.
1. Appointment of first auditor
Every company shall appoint first auditor who hold the office till the conclusion of first annual
general meeting. This appointment is classified below for Government or Non-Government
Company:
• In Government company:
The first auditor is appointed by Comptroller and Auditor General of India (C&AG) in case of
Government Company. The time-period for the appointment of first auditor is 180 days from the
commencement of every financial year.
• In Non-Government Company:
The first auditor is appointed by Board of Directors (BOD) within 30 days of incorporation of a
company. If Board of Directors is not liable in appointment then they informs the members about
their failure and after that members shall appoint first director within 90 days from the date when
BOD informs the members about their failure.
2. Appointment of Subsequent Auditor
Every company shall appoint subsequent auditor who hold the office from the date of first annual
general meeting till the conclusion of sixth annual general meeting. This appointment is classified
below for Government or Non- Government Company:
• In Government Company:
The subsequent auditor is appointed by C&AG within 180 days from the commencement of every
financial year who shall hold the office till the conclusion of sixth annual general meeting.
• In Non- Government Company:
The appointment of subsequent auditor is done by the members of a company who shall hold office
till the conclusion of sixth annual general meeting. He shall be appointed in first annual general
meeting.
Before the appointment of subsequent auditor, company shall take written consent from the
auditor and containing a certificate.
Manner of auditor’s appointment
The manner of auditors’ appointment typically depends on the type of audit and the legal and
regulatory requirements in a specific jurisdiction. Here are some common ways auditors are
appointed:
1. Appointment by Shareholders:
In many publicly traded companies, shareholders have the authority to appoint auditors during the
Annual General Meeting (AGM) or Extraordinary General Meeting (EGM).
2. Appointment by the Board of Directors:
In some cases, especially in smaller private companies, the board of directors may appoint auditors.
This is more common when there are no specific legal requirements for shareholder involvement in
the appointment process.
3. Appointment by Regulatory Authorities:

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In certain industries or jurisdictions, regulatory authorities may have the power to appoint
auditors or require specific audit firms to conduct audits to ensure compliance with industry or
regulatory standards.
4. Rotation Requirements:
Some countries and regulatory bodies have imposed mandatory audit firm rotation requirements.
This means that companies are required to change their audit firm after a certain number of years,
typically to maintain auditor independence and objectivity.
5. Tendering Process:
In some cases, companies may use a competitive tendering process to select their auditors. They
invite audit firms to submit proposals, and a selection committee reviews these proposals before
making a final appointment.
6. Regulatory Compliance:
Companies are often required to comply with specific regulations and standards regarding auditor
appointment. These regulations may dictate the qualifications and independence requirements of
auditors.
7. Special Purpose Audits:
For specific audits, such as forensic audits or internal audits, auditors may be appointed based on
the needs of the organization or the situation at hand.
8. Appointment in Government Entities:
In government entities and public institutions, auditors are often appointed through a competitive
process or by government officials responsible for financial oversight.

QUALIFICATIONS
For becoming a company auditor one should have any one of the following qualifications:
1. Chartered Accountant
• According to Sec 141(1) of the Companies Act an individual holding a practicing certificate of
being a certified chartered accountant from the ICAI (Indian Institute of Chartered
Accountancy) is qualified for being an auditor of a company.
• Chartered accountancy firm where all partners are practicing in India is also qualified for
being a company’s auditors. However, any partner of the firm acting on behalf of their firm
can work as company auditor.
2. Confined State Auditor
The certificate holder issued by the law entitling him to act as a company’s auditor
in India holds the right to become an auditor of a company.

DUTIES OF AN AUDITOR
1. Provide an Audit Report
The fundamental duty of a company’s auditor is to make a report regarding accounts and financial
statements examined by him and present the same to the members of the company.

2. Make Proper Enquiry

It is the duty of every auditor to seek access to books of accounts, vouchers and other information
and explanation from the company. Furthermore, an auditor can also inquire information regarding
the company affairs.
3. Assist in Branch Audit
The accounts of a branch office can be audited by:
• a company’s auditor
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• any individual appointed as the branch auditor as per the act

• company’s auditor or accountant or any competent person appointed as per the laws of
the foreign country in case of a foreign branch
4. Compliance With Auditing Standards
The central government establishes the auditing standards in consultation with the ICAI and
National Financial Reporting Authority (NFRA). These standards help the auditors to examine the
books of accounts effectively and with great accuracy. Thus, every auditor must comply with the
established auditing standards while examining a company’s books of accounts.
5. Reporting of Frauds
A company’s auditor while performing his duties might encounter fraudulent situations. In such
circumstances, the auditor may believe that an offence equivalent to a fraud has been committed
against the company.
6. Provide Assistance in Investigation
Investigation refers to checking of specific records of a business systematically and critically.
Such an examination is conducted when a fault on the part of the company already exists and the
intent of the investigation is to find out a reason and person involved in such an activity.
7. Adhere Principles of Auditing
One of the basic principles that govern an audit is confidentiality. Thus, the auditor should maintain
confidentiality of information acquired while performing his duties as an auditor.
He should not disclose the client information without his prior permission. Furthermore, the
auditor must be honest, sincere, impartial and free from biasness.
8. Provide Negative Opinion
The auditor needs to give his opinion in the auditor’s report. Such an opinion can be qualified or
unqualified.
An unqualified opinion is the one that concludes that the company’s financial statements present its
affairs fairly in almost all the important aspects.
A qualified opinion, on the other hand, concludes that the company has dealt with most of the
issues except for the few ones. Under this, it is the duty of the auditor to give even an adverse
opinion regarding the company’s financial statements.

LIABILITIES OF AN AUDITOR
An auditor to audit the accounts of a public limited company is appointed under the provisions of
the Indian Companies Act. His duties and liabilities are also laid down in this Act. If he fails to
perform his duties in accordance with the provisions of the Companies Act, he is held liable. The
liabilities of professional accountants broadly falls under the following heads:

I. Civil Liability
Civil Liability of an auditor arises where it is proved that certain financial losses have actually been
suffered by the company and the company auditor is liable for those losses. The civil liability of a
company auditor may be studied on the following lines:
(i) Liability for Negligence: Negligence means acting carelessly or failing to perform a duty
enjoined upon a person. An auditor is appointed by the shareholders and he is expected to
safeguard the interests of them. He is an agent of the shareholders and therefore he should exercise
reasonable degree of skill and care in the performance of his duties. If he fails to do so and his client
have suffered a loss due to his professional negligence, he will be held liable to make good that loss
on an action being taken against him by the party.
(ii) Liability for Misfeasance: The term ‘misfeasance’ means breach of trust or breach of duty
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imposed by law or negligence in the performance of duties, which has resulted in some loss or
damage to a company or its property. If the auditor does something wrongfully in the performance
of his duties resulting in a financial loss to the company, he is guilty of misfeasance.

II. Criminal Liability

Under the Companies Act, an auditor of a company may be found guilty of criminal offences if he
willfully makes a false statement in any report, return, certificate or balance sheet etc.
The criminal liabilities of a company auditor under different sections of the Act are as follows:
1. Making default in report willfully, Section 233: If the auditor willfully makes a default in
making his report to the share holders according to the provisions of Sections 227 and 229.
If his default is proved wilful, he will be punishable with fine which may extend to Rs. 1,000.
2. Not helping the Inspector, Section 240: The auditor of a company is required to help an
inspector appointed by the Central Government to investigate the affairs of the company. If
the auditor does not do so he is punishable with the imprisonment upto six months or with
fine upto Rs. 3,000 or with both.
3. In case of not returning the documents, Section 277: In the course of winding up of a
company, the auditor is required to return to the court any documents in his possession. If
the auditor fails to appear before the court, he can be arrested.
4. Falsifications in Accounts, Section 539: If the auditor is found guilty of destruction,
mutilation, alteration, falsification or secreting of any books, papers or securities, he may be
held responsible. Further, if the auditor makes any false or fraudulent entry in any register,
books of accounts or documents of the company, he will be liable for punishment with
imprisonment up to seven years and shall also be liable to a fine.

PROFESSIONAL ETHICS OF AN AUDITOR

1. Integrity
A professional accountant should be straightforward and honest in all professional and
business relationships.
2. Objectivity
A professional accountant should not allow bias, conflict of interest, or undue influence of
others to override professional or business judgments.
3. Professional Competence and Due Care
A professional accountant must maintain professional knowledge and skill at the level
required to ensure that a client or employer receives competent professional service based
on current developments in practice, legislation, and techniques.
4. Confidentiality
A professional accountant should respect the confidentiality of information acquired from
professional and business relationships and should not disclose any such information to
third parties without proper and specific authority unless there is a legal or professional
right or duty to disclose it.
5. Professional Behavior
A professional accountant should comply with relevant laws and regulations and avoid any
action that discredits the profession.

THE AUDIT PROCEDURE FOR NGO

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The NGO carries out its social activities with the help of donations, and so an NGO needs to prepare
the financial accounts and statements to showcase the authenticity of its performance and efforts to
the general public. When an independent CA audits the accounts, it sums up its validity in the eyes
of the public. The procedure for auditing is as follows:
1. Auditor first checks the books with the previous data, accounts and trial balance.
2. Auditor then checks the receipt and payment accounts and also the income and
expenditure accounts.
3. Then the auditor checks the total amount the NGO has received and its expenses. He
also checks the nature of expenses.
4. The auditor, at last, prepares the audit report after thoroughly verifying and checking all
the financial statements.

THE AUDIT PROCEDURE FOR CHARITABLE INSTITUTION

1. In relation to subscriptions and donations, the auditor may evaluate the internal check
relating to the accounting of amount collected.
2. He shall examine all the receipt books used during the period under audit and apply
special care while verifying the cancelled receipts.
3. He may test check the counterfoils with cash book.
4. He should also confirm that the total amount collected in the form of subscriptions
and donations, as shown by the statements, agrees with the books.
5. He should ensure that the unused receipt books are under the custody of a responsible
person.
6. In the case of Legacies and grants, the auditor should examine the correspondence, minute’s
books and other available information.
7. While verifying the income from investment, the auditor may vouch all the receipts, and
examine the schedule of investments to confirm that all income &om the investments are
duly accounted. While verifying interest, the rates and calculation of interest are to be
checked.
8. The rent received account is to be vouched with the counterfoils of rent receipts and
counter checked with the entries in the cash book. The auditor should also examine the
tenancy agreement to find out the amount of rent to be collected and the due dates, on
which the rents become due.

THE AUDIT PROCEDURE FOR EDUCATIONAL INSTITUTION

1. That the admission fees are credited to capital fund A/c.
2. That the fines and penalties are collected after due authorization and accounted properly.
3. That a separate register is maintained for caution deposit received from students and the
refund due out of caution deposit is refunded to the students.
4. That long outstanding tuition fees, hostel fees etc., are periodically reviewed and reported to
the management for further action.
5. That the funds created for specific purpose are maintained separately, the investments.
6. That the amounts that are refundable to the students are shown as liability in the Balance
sheet.
7. That all the capital expenditure are approved by the managing committee.
8. That the internal control procedure relating to purchase of stationery, provisions, clothing
and other items are effective and chances of pilferage and fraud are minimum.
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The auditor may verify all the expenditure in the usual manner and examine the payment out of
funds created for specific purpose thoroughly and ensure that the receipts and payments out of
this funds are accounted and presented separately in the Balance Sheet.

AUDIT PROGRAMME FOR LOCAL BODIES

(i) The Local Fund Audit Wing of the State Govt. is generally in-charge of the audit of municipal
accounts. Sometimes bigger municipal corporations e.g. Delhi, Mumbai etc have power to
appoint their own auditors for regular external audit. So the auditor should ensure his
appointment.
(ii) The auditor while auditing the local bodies should report on the fairness of the contents
and presentation of financial statements, the strengths and weaknesses of system of financial
control, the adherence to legal and/or administrative requirements; whether value is being
fully received on money spent. His objective should be to detect errors and fraud and misuse of
resources.
(iii) The auditor should ensure that the expenditure incurred conforms to the relevant
provisions of the law and is in accordance with the financial rules and regulations framed by the
competent authority.
(iv) He should ensure that all types of sanctions, either special or general, accorded by the
competent authority.
(v) He should ensure that there is a provision of funds and the expenditure is incurred from the
provision and the same has been authorized by the competent authority.
(vi) The auditor should check that the different schemes, programmes and projects, where large
financial expenditure has been incurred, are running economically and getting the expected
results.

AUDIT PROCEDURE FOR HOSPITAL

(1) Register of Patients: Vouch the Register of patients with copies of bills issued to them.
Verify bills for a selected period with the patients’ attendance record to see that the bills have
been correctly prepared. Also see that bills have been issued to all patients from whom an
amount was recoverable according to the rules of the hospital.
(2) Collection of Cash: Check cash collections as entered in the Cash Book with the receipts,
counterfoils and other evidence for example, copies of patients bills, counterfoils of dividend
and other interest warrants, copies of rent bills, etc.
(3) Income from Investments, Rent etc: See by reference to the property and Investment
Register that all income that should have been received by way of rent on properties, dividends,
and interest on securities have been collected.
(4) Reconciliation of Subscriptions: Trace all collections of subscription and donations from
the Cash Book to the respective Registers. Reconcile the total subscriptions due (as shown by
the Subscription Register and the amount collected and that still outstanding).
(5) Authorization and Sanctions: Vouch all purchases and expenses and verify that the capital
expenditure was incurred only with the prior sanction of the Trustees or the Managing
Committee and that appointments and increments to staff have been duly authorized.
(6) Budgets: Compare the totals of various items of expenditure and income with the amount
budgeted for them and report to the Trustees or the Managing Committee, significant variations
which have taken place.
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(7) Internal Check: Examine the internal check as regards the receipt and issue of stores;
medicines, linen, apparatus, clothing, instruments, etc. so as to insure that purchases have been
properly recorded in the Inventory Register and that issues have been made only against
proper authorization.
(8) Depreciation: See that depreciation has been written off against all the assets at the
appropriate rates.
(9) Inventories: Obtain inventories, especially of stocks and stores as at the end of the year
and check a percentage of the items physically; also compare their total values with respective
ledger balances.
(10) Management Representation and Certificate: Get proper Management Representation
and Certificate with respect to various aspects covered during the course of audit.

AUDIT PROCEDURE FOR CLUB

(1) Vouch the receipt on account of entrance fees with members’ applications, counterfoils
issued to them, as well as on a reference to minutes of the Managing Committee.
(2) Vouch members’ subscriptions with the counterfoils of receipt issued to them, trace receipts
for a selected period to the Register of Members; also reconcile the amount of total
subscriptions due with the amount collected and that outstanding.
(3) Ensure that arrears of subscriptions for the previous year have been correctly brought over
and arrears for the year under audit and subscriptions received in advance have been correctly
adjusted.
(4) Check totals of various columns of the Register of members and tally them across.
(5) See the Register of Members to ascertain the Member’s dues which are in arrear and enquire
whether necessary steps have been taken for their recovery; the amount considered
irrecoverable should be mentioned in the Audit Report.
(6) Verify the internal check as regards members being charged with the price of foodstuff s and
drinks provided to them and their guests, as well as, with the fees chargeable for the special
services rendered, such as billiards, tennis, etc.
(7)Trace debits for a selected period from subsidiary registers maintained in respect of supplies
and services to members to confirm that the account of every member has been debited with
amounts recoverable from him.
(8) Vouch purchase of sports items, furniture, crockery, etc. and trace their entries into the
respective inventory registers.
(9)Vouch purchases of foodstuff s, cigars, wines, etc., and test their sale price so as to confirm
that the normal rates of gross profit have been earned on their sales. The inventory of unsold
provisions and stores, at the end of year, should be verified physically and its valuation checked.
(10) Check the inventory of furniture, sports material and other assets physically with the
respective inventory registers or inventories prepared at the end of the year.
(11) Inspect the share scripts and bonds in respect of investments, check their current values
for disclosure in final accounts; also ascertain that the arrangements for their safe custody are
satisfactory.
(12) Examine the financial powers of the secretary and, if these have been exceeded, report
specific case for confirmation by the Managing Committee

AUDIT PROCEDURE FOR HOTELS

(1) Internal Controls - Pilfering is one of the greatest problems in any hotel and the importance
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of internal control cannot be undermined. It is the responsibility of management to intro duce

controls which will minimize the leakage as far as possible. Evidence of their success is
provided by the preparation of regular perhaps weekly, trading accounts for each sales point
and a detailed scrutiny of the resulting profit percentages, with any deviation from the
anticipated form being investigated.
(2) Room Sales - The charge for room sales is normally posted to guest bills by the
receptionist/ front office or in the case of large hotels by the night auditor. The source of these
entries is invariably the guest register and audit tests should be carried out to ensure that the
correct numbers of guests are charged for the correct period.
(3) Inventories - The inventories in any hotel are both readily portable and saleable
particularly the food and beverage inventories. It is therefore extremely important that all
movements and transfers of such inventories should be properly documented to enable
control to be exercised over each.

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