Company Audit and

Audit of Other Entities

By
Lt. Santhosh P. MBA,. M.Com,. PGD in Yoga., KSET.,
Faculty and NCC Officer
Department of Commerce and Management.
Acharya Tulsi National College of Commerce. Shivamogga.
Introduction
• Company is the artificial being which
separate entity from the owner or
management. At the end of the period the
auditor must submit company’s financial
statement to the user after proper
examination.
• When an auditor apply auditing activities to
examine the statement in order to give
expert opinion their on such types of
auditing activities are called company
audit.
Company Auditor
• An auditor is a person who makes an
independent report to a company's
shareholders ('members') to show whether
the company has prepared its financial
statements according to company law and
other financial reporting rules.
• A company audit is an internal or external
inspection of the company's finances. It is
an independent inspection of the finances
only. The audit is conducted for a company
irrespective of whether it's profit-oriented
or not.
Definition
• Company audit : under the sec 183(3) of
the company act 1994: company audit
means “ the balance sheet and profit and
loss account or income or expenditure
account, cash flow statement of a
company shall be caused to be audited by
the auditor of the company as in the
company act provided.
QUALIFICATION OF AN
AUDITOR
• 1. A person can be appointed as an auditor
of a company only if he is a Chartered
Accountant within the meaning of the
Chartered Accountants Act of 1949.
• 2. In case a firm is appointed as an auditor
of a company, all the partners of the firm
must be Chartered Accountants.
• 3. One holder of a certificate under the
Restricted Auditors Certificate Rules 1956
is also qualified to Act as an auditor of a
company.
 DISQUALIFICATION OF
AUDITORS - sec 226(3)s
• According to Provisions of Section 141(3) of
the Companies Act, 2013, following persons
shall not be eligible as auditor of the company:
‐
• (a) “a body corporate other than a limited liability
partnership (LLP) registered under the Limited
Liability Partnership Act, 2008”;
• (b) an officer or employee of the company;
• (c) a person who is a partner, or who is in the
employment(employee),of an officer or employee of
the company;
APPOINTMENT OF
AUDITOR (Section 226)
• A.APPOINTMENT BY DIRECTORS
• FIRST AUDITORS :
• The board of directors shall appoint the first
auditor(s) of the company within One Month of
the Date Of Registration of the company.
• CASUAL VACANCY:
• The directors have been empowered to fill any
casual vacancy in the office of an auditor,
except which is caused by prior resignation of
an auditor.
B. APPOINTMENT BY SHAREHOLDERS

• FIRST AUDITORS :
• In case the directors fail to appoint the first
auditor(s), the shareholders shall do so at a general
meeting by passing a resolution.
• SUBSEQUENT AUDITORS:
• Every subsequent auditor is appointed every year
at every annual general meeting by the
shareholders.
• A subsequent auditor appointed by the
shareholders at any annual general meeting will
hold office till the conclusion of the next annual
general meeting.
• The company shall within 7 days give intimation to
the auditor so appointed. The auditor shall inform in
writing to the Registrar of Companies within 30
days of his appointment.
• CASUAL VACANCY:
• If a casual vacancy in the office of an auditor
arises by his resignation, such vacancy should
only be filled by the company in a General
Meeting.
 C. APPOINTMENT BY
CENTRAL GOVERNMENT
• If a company, at an annual general
meeting, fails to appoint or re- appoint an
auditor, the Central Government may
appoint a person to fill the vacancy.
• The company has to give notice of the
above fact to the Government within 7 days
of the Annual General Meeting.
• The appointment by the Central
Government is made from the panel of
names suggested by the applicant
company.
 D. APPOINTMENT BY THE
COMPTROLLER AND AUDITOR
GENERAL
• In case of Government Companies, the
Comptroller and Auditor General appoints
or re-appoints the auditor.
RIGHTS OF A COMPANY AUDITOR
• 1.Right of access to books of account of
Vouchers:
An auditor of a company has a right of
access to the books of accounts and
vouchers of the company whether they
are kept at the head office of the
company or elsewhere.
• 2)Right to examine the cost records:
An auditor of a company has a right to
examine the cost records along with the
quantitative records relating to
production, sales, stocks etc.
• 3) Right to obtain information
&explanations:
An auditor of a company has a right to obtain
information from the directors and officers of the
company such information and explanation as he
may think necessary for the performance of his
duties as an auditor.
• 4.Right to correct any wrong statement:
An auditor of a company has a right to
correct any wrong statement made by the
Directors relating to the accounts to be laid
before the company in the general meeting.
• 5) Right to comment on the inadequacy of
the accounting system in his report:
If the system of maintaining accounts is
inadequate, he can advise the directors to
amend the system of accounting.
• 6.Right to visit branches:
The auditor of the company can visit the
branch and examine the books and accounts and
vouchers at the branch.
• 7) Right to receive notice and other
communications of general meeting: -
An auditor of a company has a right to
receive notice and other communications
relating to any general meeting, in the same way
as a member of the company.
• 8) Right to attend the general meeting of
the shareholders:
An auditor has the right to attend every
general meeting of the shareholders.
• 9) Right to speak at the general meeting: -
An auditor of a company has a right to speak
at a general meeting where his certified
accounts are discussed
• 10)Right to sign the audit report: -
An auditor has the right to sign the audit report
• 11) Right to report to the members of the
company: -
An auditor has a right to report to the members
of the company, if the accounts audited by him
show an unsatisfactory state of affairs.
• 12) Right to receive any remuneration for his audit
work:
An auditor of a company has a right to
receive remuneration for his audit work provided he
has completed the work which he undertook
Duties of Company Auditor
• 1 Duty to submit report
• It is an important duty of the auditor to make a
report to the members of the company on the
account examined by him. The report should
contain the following information.
• Whether in his opinion, the profit and loss account
referred to in his report shows a true and fair view of
the profit or loss.
• Whether in his opinion, the balance sheet referred to
in his report is properly drawn up so as to show true
and fair view of the state of affairs of the business.
 • Whether in his opinion proper books of
accounts as required by law have been kept by
the company so far as appear from his
examination of those books..
• 2 Duties to enquire into the affairs of the
company
• Loans and Advances
• He has to see whether loans and advances
made by the company on the basis of security
have been properly secured and whether the
terms on which they have been made.
• Transactions represented merely by book
entries.
• He must see that transaction which are not
supported by any fact or evidence. Through recorded
in the books.
• Sale of investment at less than Purchase Price
• The auditor is required to see whether it has sold
any shares, debentures or other securities at a price
which is lower than their price purchases.
• 3 Duty to sign report
• It is the duty of the auditor to sign the report
prepared by him.
• 4. Duty as to prospectus
• It is the duty of the auditor to certify information
given in the prospectus with regards to certain
matters.
• 5. Duty as to report under voluntary winding up
• If a company goes into voluntary winding up, the
directors are required to file a declaration of
solvency. Thus it is the duty of the auditor to give a
report about such declaration.
• 6. Duty to assist investigation
• Where an inspector is appointed to investigate
the affairs of the company, it is the duty of the
auditor to assist investigator in connection with
the investigation.
• 7. Duty to do branch audit.
• Where a company has a branch office, the
accounts of that office shall be audited either
by the auditor appointed for the company or by
any other person qualified for appointment as
an auditor of the company.
• 8. Duty to check auditing standards
• Every auditor shall comply with the auditing
standards. The central government shall notify
these standards in consultation with National
Financial Reporting Authority.
• 9. winding up
• As per section 305, at the time of voluntary
winding up of a company it is mandatory
requirement that auditor should attach the copy
of the audits of the company prepared by him.
Types of the Liabilities of an
Auditor
• A. Civil Liabilities
• Liability for Negligence
• Negligence means breach of duty. He should take
care and skill in performance of his duties. If he fails
to do so liability for negligence arises.
• Liability for Misfeasance
• Misfeasance means breach of trust. If an auditor
does something wrongfully in the performance of his
duties resulting in a financial loss to the company, he
is guilty of misfeasance.
• B. Liabilities under Companies Act
• Liability for Misstatements in the prospectus
• An auditor shall be held liable to compensate every
person who subscribes for any shares or debentures of
a company on the faith of the prospectus containing an
untrue statement made by him as an expert.
• C. Criminal Liability of auditor under companies
act
• Untrue statement in prospectus
• The auditor is liable when he authorizes a false or
untrue prospectus. When a prospectus includes any
untrue statement, every person who authorizes the
issue of prospectus shall be imprisoned for a period
of six months to 10 years or with a fine, which may
be three times the amount involved.
• Non Compliance by auditor
• If the auditor does not comply regarding making
his report or signing or authorization of any
document and makes willful negligence on his
part he shall be punishable with imprisonment
upto 12 months or with a fine not less than 25000
upto 500000
• Failure to assist investigation
• When central govt appoints an inspector to
investigate the affairs of the company, it is duty
of an auditor to produce all books, documents
and prove assistance to the inspector. If auditor
fails to do so he shall be punishable with
imprisonment upto 1 year and fine upto Rs
100000.
• Failure to return property, books or papers
• When a company is wound up the auditor is
suppose to be present and subject himself to
private examination by the court and is also
liable to return to the court any property, books
or papers relating to the company. If auditor
does not comply, he may be imprisoned.
D. Criminal liability under
Indian Penal Code
• Liability under income tax act
• For tax evasion exceeds Rs 100000, rigorous
imprisonment of six months to seven years.
 E. Liability for professional
misconduct
• The chartered accountant act,1949
mentions number of acts and omissions
that comprise professional misconduct in
relation to audit practice. The council of
ICAI may remove the auditors name for five
years or more, if he finds guilty of
professional misconduct
F. Liability towards third
parties
• Liability for negligence
• It has been held in the court that auditor is not liable
to third parties, as there is no contract between
auditor and third parties.
• Liability for frauds
• The third parties can hold the auditor liable, if there
is fraud on the part of auditors even if there Is no
contractual relationship between auditor and third
parties.
Professional ethics
• Professional ethics in auditing are the
moral and ethical principles that guide
auditors' behavior and decision-making.
• They are the foundation of the auditing
profession and are essential for
maintaining the public's trust in the
auditing process and financial reporting.
The Ethics and Professional
Standards of Auditing in
Accounting
• 1. Ethical Principles
• a. Integrity: Auditors should be honest and
straightforward in all their professional and business
relationships. They must act in good faith, without
deception or misrepresentation, and avoid conflicts of
interest.
• b. Objectivity: Auditors must approach their work with
impartiality and independence, free from any bias,
personal beliefs, or undue influence. They must evaluate
evidence and form conclusions based solely on the facts
and professional judgment.
• c. Confidentiality: Auditors are entrusted with sensitive
information and must respect the confidentiality of the
information obtained during the course of their work.
They should only disclose such information when
authorized or legally obligated to do so.
• d. Professional Competence and Due
Care: Auditors should maintain the knowledge,
skills, and expertise necessary to perform their
duties competently. They must continually
develop their professional knowledge, act
diligently, and exercise sound judgment in
applying auditing standards.

• e. Professional Behavior: Auditors must

conduct themselves in a manner that reflects
positively on the profession, complying with
relevant laws and regulations, and avoiding any
conduct that discredits the profession.
2. Professional Standards
• a. International Standards on Auditing (ISAs): The ISAs, issued by
the International Auditing and Assurance Standards Board
(IAASB), provide a globally recognized framework for conducting
high-quality financial statement audits. The ISAs cover various
aspects of the audit process, such as risk assessment, materiality,
evidence gathering, and reporting.

• b. Generally Accepted Auditing Standards (GAAS): GAAS are a set

of auditing standards established by the American Institute of
Certified Public Accountants (AICPA) that provide a framework for
conducting audits in the United States. GAAS consists of ten
standards that cover general standards, standards of fieldwork,
and standards of reporting.

• c. International Ethics Standards Board for Accountants (IESBA)

Code of Ethics: The IESBA Code of Ethics sets out the fundamental
ethical principles and requirements for professional accountants,
including auditors. The Code provides guidance on ethical issues
such as independence, conflicts of interest, and confidentiality.
• 3. Maintaining Ethical Standards in Practice
• a. Ongoing professional development: Auditors should
participate in continuous learning and professional
development programs to stay current with the latest
auditing standards, ethical requirements, and industry
developments.
• b. Quality control systems: Audit firms should establish
robust quality control systems that promote adherence
to ethical principles and professional standards,
including monitoring, training, and performance
evaluations.

• c. Ethical decision-making frameworks: Auditors

should develop and utilize ethical decision-making
frameworks to help navigate complex ethical dilemmas
and make informed, ethical choices in their work.
• d. Independent oversight: Regulatory bodies,
professional organizations, and peer review
mechanisms can provide independent
oversight and guidance to ensure that auditors
maintain the
• highest ethical standards and comply with
professional requirements.

• e. Whistleblowing policies: Audit firms should

establish clear and effective whistleblowing
policies that encourage employees to report
unethical behavior or non-compliance with
professional standards without fear of
retaliation.
AUDIT PROCEDURE OF NGOs
• Non-Governmental Organizations (NGOs)
play a vital role in the process of social and
economic development of the economy.
With passing time, there can be said to be a
substantial increase in the activities of the
Indian NGOs. The Ministry of Corporate
Affairs brought a uniform accounting and
reporting framework for NGOs
 What is the Task to be performed
by an Auditor while Conducting
NGO Audit
• Since the NGO has its own memorandum the
Auditor while conducting NGO Audit must have
few insights about the company.
• The Auditor, while conducting NGO Audit, must
investigate about the amount received as
subscription ratifying with counterfoils of the
receipts.
• The Auditor during an NGO Audit must evaluate
the decisions taken by the executives.
• The Auditor must make physical verification of
assets ratifying with store ledger.
• The Auditor shall check the liabilities and also that
its assets during NGO Audit and whether its
transfer is proper or not.
• NGOs receives grant from foreign institutions
as well. So it is the duty of the Auditor to check
whether it is accepted as per the provision of
financial rules and regulations of the nation or
not.
• The Auditor during the NGO Audit should
check the use of Government grants. It should
also look if the accounts are adequately
maintained or not for recording the grants.
• In case such an institution has received the
donation from any individual or organization,
an auditor should check accounting of such
amount and its use.
Audit of Charitable
Institutions
• Charitable Institutions refer to those
organizations which are constituted and
worked for the purpose of public charity. It
may be a trust registered under respective
act or a company registered under section
8 of the Companies Act, 2013 (or section
25 of the Companies Act, 1956) for the
cause of social wellbeing.
AUDIT PROCEDURE
• Constitution of Charitable Institution under
which it has been set up and their scope.
• Examine the laws which is properly followed or
not by the institution.
• Verify the Accounting of collections under
Internal Check System.
• Proper utilization of income and their
supporting where they used.
• Subscriptions and donations are the important
source of Income which must be accounted
properly.
• Examine the frequency or movement of life
membership subscription during the year.
• Verification of official receipts.
• Control check over unused receipt books.
• Verify the sequence of all receipt books.
• Give proper attention on counterfoils of
Cash book.
• Examine the source of subscriptions &
donation as well as their list of names.
• Check the total subscriptions and donations
with the books & tally with figures.
• Examine the process of Cash management
and their accounting with books.
• Examine the available resource and verify
them in figures with amounts received.
• Grants play a key role in the income of any
charitable Institutions because as per Income
Tax Act there is a provision to use the grant for
their purpose. So, it must be check carefully.
Audit of educational
Institutions
• An audit of educational institutions is a
thorough examination and assessment of
their financial records, operations, and
compliance with relevant regulations and
standards. It aims to ensure transparency,
accountability, and efficiency in the
institution's financial and administrative
practices.
The steps for audit of educational
institutions are as follows:-
• Study of the trust deed or regulations.
• Examine the previous financial statements.
• Evaluation of internal control system.
• Examine the minute of the meeting and
resolution.
• Verification of students fee register.
• Authorization for fee concessions .
• Verification of cashbook with respect of
counterfoils of receipts and payments.
• Examination of capital fund regarding
admission fees.
• Verify free studentship and concessions .
• Confirmation of fines for late payment or
absence.
• Check hostel dues recovery.
• Verification of rental income or expenses.
• Examine the bank pass book of different
nature.
• Verification of investment register and also
ask about any interest and dividend from
investment if any.
• Verify grants from any local bodies or
Government with reference to memo or
sanction letter.
• Reporting of any arrears.
• Vouch counterfoils of receipts taken from
donors.
• Confirmation of any deposits and caution
money and its treatment.
• Examination of expenses for library books
and sports equipment's.
• Checking of acknowledgement letter if any
with regards to scholarship.
• Examination of payments with respect to
prizes if any.
• Examine the salary register.
Audit of Government
• Audit of Government companies
is governed by Section 619 of the
Companies Act, 1956. The accounts of
Government companies are audited by
Statutory Auditors appointed
by Comptroller and Auditor General of
India (CAG).
Objectives / Procedure of
Government Audit
• 1. To make sure that the expenditure is
incurred out of the fund, which the
competent authority has sanctioned.
• 2. To verify that the expenditure of the
government department is sanctioned as
per the rules and regulations of the
department concerned.
• 3. To see that the expenditure already
sanctioned has been incurred by an officer
who is authorized to do so.
• 4. To ensure that the payments have been
made to the right persons and they are duly
entered in the books on the basis of receipts
received from them.
• 5. To see that the payments have been
properly classified into capital and revenue.
• 6. To check the existence of stock and stores
and their proper valuation.
• 7. To ensure that expenditures have been
incurred in the interest of public.
• 8. To ensure that stocktaking is done
periodically and stock registers are
maintained up-to-date.
Audit of Local Bodies
• The act articles 243 J and 243 Z dealing
with the provision for maintenance of
accounts and audit of local bodies merely
said “ the legislature of state may, by law,
make provisions with respect to the
maintenance of accounts by the
panchayats, municipalities and
corporation.
Audit Procedure
• Audit of receipts and expenditure from the
consolidated fund of India and of the state
and union territories
• Transactions relating to the contingent
funds and public accounts.
• Trading, manufacturing, profit and loss
accounts and balance sheet and other
subsidiary accounts kept in any
government department.
• Accounts of stores and stock kept in
government offices or departments.
• Authorities and bodies substantially
financed from consolidated funds.
• Grants and loans given by government to
bodies and authorities for specific
purposes.