Entrepreneurs Guide to Audit of a Company

The audit is a fundamental feature of every Company whether it is a Private Limited Company, an LLP or a One Person Company. Irrespective of the share capital or the compliance requirements, each company under MCA (Ministry of Corporate Affairs) needs to get the books of account audited with every financial year.

Appointment of the First Auditor:

According to the Companies Act, all types of companies need to appoint an Auditor within 30 days after the incorporation of the Company. The principal members responsible for the appointment of the Auditor are the Board of Directors of the Company. If they fail to appoint the auditor then the responsibility is passed onto the shareholders/members of the Company, which is done in an exceptional General Meeting.

Rights and Liabilities of the Auditor

An Auditor is expected to be an autonomous person hired by the Company for stating an opinion on the financial statements that is prepared by the company. He is responsible for deciding, whether the accounts are free of material errors, cheating or mistake and the financial statements are in line with the Accounting Standards. The Books of Account and the financial statements are prepared by the Company. However, the Auditor enjoys the right to obtain the books of account and vouchers of the company. It also exercises the right to call for any information or documents which is needed for executing the duties of Auditor.

It is must for the Company Auditor to inquire into the following matters:

• whether the loans and advances made by the company have been secured
• Whether financial affairs of the company which are represented merely by book entries are biased to the interests of the company;
• Where the company not being an expense company or a banking company, whether so much of the company assets as consist of shares, debentures and other securities have been sold at a price less than that at which the company purchased them;
• Whether loans and advances made by the company have been shown as deposits;
• Whether personal investments have been charged to revenue account;
• Where it is stated in the books and documents of the company that any shares have been designated for cash, whether cash has actually been received in respect of such allotment. In case no cash has truly been so received, whether the position as stated in the account books and the balance sheet is accurate and not misleading:

Audit Report for Company

The Auditor will make a report to the members of the Company based on the company audit, stating whether the accounts of the company and the financial statements are a true and fair representation of the condition of the company’s affairs. The audit reports also include;

• Whether the Auditor has inquired and obtained all the information and statements which were necessary for generating the audit and if not, the details of such information need to be mentioned on the financial statements;
• Whether, in the evaluation of the Auditor, proper books of account as expected by law have been retained by the company so far as emerges from his examination of those books and appropriate returns adequate for his audit have been received from branches not visited by him;
• If the report on the accounts of a Company branch office audited by a person, who isn't the auditor/authorized personnel has been sent to the auditor.
• Whether the company’s balance sheet and profit and loss accounts are in agreement with the books of account and returns;
• Whether, according to the Auditor, the financial statements fit in with the accounting standards;
• The observations or comments of the auditors on financial transactions or matters which have an adverse effect on the functioning of the company;
• Whether any director is barred from being appointed as a director;
• Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;
• Whether the company has enough internal financial controls system in place and the working effectiveness of such limitations;

Restrictions on Statutory Auditors

The Board of Directors approve the Auditors of a Company who is the only authorized person to provide services to the Company. There are some cases where the Auditor of a Company is prohibited from providing the following services to the Company;

• Accounting or Book-Keeping Services
• Design and implementation of Financial Information System
• Internal Audit
• Actuarial Services
• Investment Banking Services
• Management Services
• Investment Advisory Services
• Rendering of Outsourced Financial Services