AUDITING ANSWERS FOR COMPANY AUDIT 1 & 2 TEST group 2

AUDITING ANSWERS FOR COMPANY AUDIT 1 & 2 TEST

1) 

a) Incorrect- Stores and Spares should be disclosed under Inventories and not under Fixed Assets.

b) Partly Correct / Incorrect - For Prescribed Class of Companies, longer Useful Life can be permitted if justification thereof is given. However, for other Companies, Longer Useful Life is not permissible.

c)  Incorrect- According to Sec 142 of companies Act 2013, the Remuneration of Subsequent auditor of the company shall be fixed in its general meeting or in such manner as may be determined therein.

d) Incorrect – As per Sec 143 (12) of companies Act 2013, If the auditor of the Company, in the course of performing his duties as an Auditor, has the reason to believe that an offence involving fraud is being or has been committed against company by officers or employees of the company, he shall immediately report the matter to the Central Government within 60 days of his knowledge and after following the prescribed procedure.

e) Correct – According to Sec 139(6) of companies Act 2013, in case of failure of the Board to appoint the first auditor, it shall inform the members of the company.

f) Incorrect: As per section 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor shall be filled by the Board of Directors within 30 days. However, if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting.

g) Incorrect: As per section 141(3) of the Companies Act, 2013, a person shall not be eligible for appointment as an auditor of a company whose relative is a Director or is in the employment of the company as a Director or Key Managerial Personnel.

h) Incorrect: As per section 181 of the Companies Act, 2013, the Board of Directors of a company may contribute to bona fide charitable and other funds. However, prior permission of the company in general meeting is required in case any amount the aggregate of which, in any financial year, exceeds 5 per cent of its average net profits for the three immediately preceding financial years.

i) Incorrect: As per the Companies (Cost Records and Audit) Rules, 2014, the requirement for cost audit shall not be applicable to a company whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue; or which is operating from a special economic zone.

j) Incorrect: Section 68 of the Companies Act, 2013 permits companies to buyback their own shares and other specified securities only out of its free reserves; or the securities premium account; or the proceeds of the issue of any shares or other specified securities.

2)

a) Disclosure Requirements of Reserves and Surplus: Schedule III to the Companies Act, 2013 requires that company shall disclose “Reserves and Surplus” in notes to accounts as follows-

Reserves and Surplus shall be classified as:

(i) Capital Reserves;

(ii) Capital Redemption Reserve;

(iii) Securities Premium Reserve;

(iv) Debenture Redemption Reserve;

(v) Revaluation Reserve;

(vi) Share Options Outstanding Account;

(vii) Other Reserves – (specify the nature and purpose of each reserve and the amount in respect thereof);

b) Accounting Treatment of Government Grants: As per AS 12 “Accounting for Government Grants”, accounting treatment of any grants or subsidy depends on nature of grants or receipts. Grants related to specific fixed assets are government grants whose primary condition is that an enterprise qualifying for them should purchase, construct or otherwise acquire such assets. There are two method of accounting.

Under one method, the grant is shown as a deduction from the gross value of the assets concerned in arriving at its book value. Depreciation is charged on reduced value of fixed assets. Under other method, grants related to depreciable assets are treated as deferred income which is recognized in the Statement of Profit and Loss on a systematic and rational basis over the useful life of the assets.

c) Applicability of CARO, 2015: The CARO, 2015 specifically exempts a private limited company with a paid up capital and reserves not more than Rs. 50 lakh and which does not have loan outstanding exceeding Rs. 25 lakh from any bank or financial institution and does not have a turnover exceeding Rs. 5 crore at any point of time during the financial year.

For determining the applicability of the CARO to a private limited company, both capital as well as the revenue reserves shall be taken into consideration while computing the limit of Rs. 50 lakh prescribed for paid up capital and reserves. Revaluation reserve, if any, should also be taken into consideration while determining the figure of reserves for the limited purpose of determining the applicability of the Order. The credit balance in the profit and loss account should also be considered as a part of reserve since the balance in the profit and loss account is available for general purposes like declaration of dividend. The debit balance in the profit and loss account, if any, should be reduced from the figure of revenue reserves only. If the company does not have revenue reserves, debit balance of profit and loss account cannot be reduced from the figures of paid up capital, capital reserve and revaluation reserve.

Accordingly the profit and loss account (Dr. balance) of Rs. 2 lakh cannot be deducted. Therefore, the sum total of paid up capital and reserves shall be Rs. 51 lakh and hence CARO, 2015 shall be applicable to the Company.

 d) Rotation of Auditor: The provisions related to rotation of auditors are applicable to those companies which are prescribed in Companies (Audit and Auditors) Rules, 2014, which prescribes the following classes of companies excluding one person companies and small companies, namely:-

(i) all unlisted public companies having paid up share capital of Rs. 10 crore or more;

(ii) all private limited companies having paid up share capital of Rs. 20 crore or more;

(iii) all companies having paid up share capital of below threshold limit mentioned above, but having public borrowings from financial institutions, banks or public deposits of Rs. 50 crores or more.

As per section 139(2) of the Companies Act, 2013, no listed company or a company belonging to such class or classes of companies as mentioned above, shall appoint or re-appoint an individual as auditor for more than one term of five consecutive years.

In the given case, XYZ Ltd. is an unlisted public company having paid up share capital of Rs. 5 crore and public deposits of Rs. 100 crore. The company appointed CA. Ananya as the statutory auditor in its AGM held at the end of September, 2015 for 6 years.

The provisions relating to rotation of auditor will be applicable as the public deposits exceeds Rs. 50 crore. Therefore, XYZ Ltd. can appoint CA. Ananya as an auditor of the company for not more than one term of five consecutive years and CA. Ananya will hold office of auditor from the conclusion of this meeting upto conclusion of sixth AGM i.e. AGM to be held in the year 2020. As a result, the appointment of CA. Ananya made by XYZ Ltd. for 6 years is void.

Cooling-Off Period: As per the proviso to section 139(2) of the Companies Act, 2013 an individual auditor who has completed his respective term shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term.

Therefore, CA. Ananya shall not be re-appointed as auditor in XYZ Ltd. for further term of five years i.e. she cannot be appointed as auditor upto year 2025.

e) Audit Enquiry under Section 143(1) of the Companies Act, 2013: Auditor is required to make an enquiry and report under section 143(1) of the Companies Act, 2013, if he is not satisfied in respect of the following matters-

(i) 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 are prejudicial to the interests of the company or its members;

(ii) whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;

(iii) where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;           

(iv) whether loans and advances made by the company have been shown as deposits;

(v) whether personal expenses have been charged to revenue account;

(vi) where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the Balance Sheet is correct, regular and not misleading.

3)

a) Removal of Auditor Before Expiry of Term: According to section 140(1) of the Companies Act, 2013, the auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf as per rule 7 of Companies (Audit and Auditors) Rules, 2014-

(i) The application to the Central Government for removal of auditor shall be made in Form ADT-2 and shall be accompanied with fees as provided for this purpose under the Companies (Registration Offices and Fees) Rules, 2014.

(ii) The application shall be made to the Central Government within 30 days of the resolution passed by the Board.

(iii) The company shall hold the general meeting within 60 days of receipt of approval of the Central Government for passing the special resolution.

It is important to note that before taking any action for removal before expiry of terms, the auditor concerned shall be given a reasonable opportunity of being heard.

b) Disclosure Requirements for Bank Balance: As per Part I of Schedule III to the Companies Act, 2013, the disclosure of bank balances is under the head “Cash and Cash Equivalents” in Current Assets as-

(i) Balances with Banks.

(ii) Earmarked balances with banks (for example, for unpaid dividend).

(iii) Balances with banks to the extent held as margin money or security against borrowings, guarantees, other commitments.

The extract of the Schedule III, under Companies Act, 2013 regarding disclosure requirements is given below:

[General Instructions for Current Assets under Schedule III to the Companies Act, 2013]:

• Cash and cash equivalents:

1. Cash and cash equivalents shall be classified as:

    (a) Balances with banks;

    (b) Cheques, drafts on hand;

    (c) Cash on hand;

    (d) Others (specify nature).

2. Earmarked balances with banks (for example, for unpaid dividend) shall be separately stated;

3. Balances with banks to the extent held as margin money or security against the borrowings, guarantees, other commitments shall be disclosed separately;

4. Repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated;

5. Bank deposits with more than 12 months maturity shall be disclosed separately.

c) Verification of Issue of Shares for Consideration Other Than Cash

(i) Study of the contract pursuant to which the issue is made to determine how many shares are agreed to be issued and for what value and the nature and other details of the consideration.

(ii) Examination of the prospectus to see the substance of the contract and the relevant terms of the issue including the mode of payment of the purchase consideration in case of an issue to a vendor of the business or pay-ability of commission to the underwriters or pay-ability of the preliminary expenses.

(iii) Examination of the Board’s minutes to see the adoption of the relevant contract, the decision to issue shares for a consideration other than cash and the actual allotment of shares.

(iv) Ensuring that proper accounting entry has been passed to record the acquisition of the assets or the business or payment of the expenses (any of these may constitute the consideration) on the one hand and the issue of shares on the other. Incidentally, if any premium or discount is involved, ensure that appropriate adjustment entry has been passed therefore.

Sometimes, in view of the nature of transaction, it may be difficult to know whether an allotment is for cash or for a consideration other than cash, for instance, allotment of shares in adjustment of a debt owed by the company. In such a case, if the allotment is made in adjustment of a bonafide debt payable in money at once, the allotment should be considered as against cash.

This position should be kept in view when inquiring into matters stated in section 143(1) of the Companies Act, 2013. Again if the shares are allotted on a cash basis, though the amount is actually paid later, it should constitute an allotment against cash.

4)

a) Reporting for Disqualification of a Director: Section 143(3)(g) of the Companies Act, 2013 imposes a specific duty on the auditor to report whether any director is disqualified from being appointed as a director under section 164(2) of the Companies Act, 2013. As per provisions of section 164(2) of the said Act, if a director is already holding a directorship of a company which has not filed the financial statements or annual returns for any continuous period of three financial years shall not be eligible to be reappointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

In this case, Mr. A is a director of X Pvt. Ltd. as well as of Y Pvt. Ltd., and, Y Pvt. Ltd. has not filed the financial statements and annual return for last three years. Hence, the provisions of section 164(2) are applicable to him and as such he is disqualified from directorship of both the companies. Therefore, the auditor shall report about the disqualification under section 143(3)(g) of the Companies Act, 2013.

b) Purchase of Goods on Credit by the Auditor: Section 141(3)(d)(ii) of the Companies Act, 2013 specifies that a person shall be disqualified to act as an auditor if he is indebted to the company for an amount exceeding five lakh rupees.

Where an auditor purchases goods or services from a company audited by him on credit, he is definitely indebted to the company and if the amount outstanding exceeds rupees five lakh, he is disqualified for appointment as an auditor of the company.

It will not make any difference if the company allows him the same period of credit as it allows to other customers on the normal terms and conditions of the business.

The auditor cannot argue that he is enjoying only the normal credit period allowed to other customers. In fact, in such a case he has become indebted to the company and consequently he has deemed to have vacated his office.

c)  Board's Powers to Appoint an Auditor: As per Section 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor shall-

    (i) In the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within 30 days.

If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting;

    (ii) In the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within 30 days.

It may be noted that in case the Comptroller and Auditor-General of India does not fill the vacancy within he said period the Board of Directors shall fill the vacancy within next 30 days.

In the given case, the Board of directors of X Ltd. has appointed CA. Hari as the auditor due to resignation of the existing auditor(s). The appointment made by the Board is correct, however, such appointment should be approved by the company at a general meeting convened within 3 months of the recommendation of the Board and newly appointed auditor shall hold office till the conclusion of the next annual general meeting.