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Published by Rishabh Gupta

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Published by: Rishabh Gupta on Nov 09, 2008
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05/09/2014

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o n e m o n th
o f in c o rp o ra tio n .
N ew
A u d it: E ith e r th e f ir s t a u d it of a c o m p a n y
0 1 - the subsequent audit of the com pany
b y
an e w
a u d ito r.
P a rtn e rs h ip A u d it:A udit of a partnership form
of business organisation by an
a p p o in te d a u d ito r.
S ta tu to ry A u d ito r:A n A u d ito r a p p o in te d a fte r th e f ir s t a u d ito r a t a n a n n u a l g e n e ra l
m e e tin g o f th e c o m p a n y .
S u b s e q u e n t A u d ito r:A u d ito r a p p o in te d a fte r th e firs t a u d ito r a t a n a n n u a l g e n e ra y
m e e tin g o f th e c o m p a n y .
T ru ea n dF a i r V ie w: T h e a u d ito r re p o rts w h e th e r th e fin a n c ia l s ta te m e n ts re p re s e n t
f a ir ly th e a c tu a l fin a n c ia l p o s itio n of th e c o m p a n y a s a t th ee n d ,o f th e a c c o u i~ tin g
p e rio d a n d th e p ro fit o r lo s s f o rth a t p e rio d .
S ta tu to ry A u d it:Ar e p o r t p re s e n te d b e fo re th e S ta tu to ry m e e tin g o f a c o m p a n y . It
c o n ta in s d e ta ile d in fo rm a tio n re la tin g to th efo rm a tio n ofth e c o m p a n y in c lu d in g sh a re s
a llo tte d re c e ip ts a n d d is b u rs e m e n ts , d ire c to rs , e tc .
ANSW ERST O
C H E C KY O U RP R O G R E S S
A
4
i )
F a ls e
i i )
F a ls e
i i i )
T ru e
iv )
F a ls e
v )
T ru e
B
l
i )
c
i i )
b
i i i )
a
'
iv )
d
I
8 .1 3
T E R M IN A L Q U E S T IO N S
-
1
D is c u s s th e p o s itio n o f a n a u d ito r in a c o m p a n y u n d e r th e p r o v is io n s o f th e
C o m p a n ie s A c t.
2
S ta teth e q u a lific a tio n s a n d d is q u d lific a tio n s of th e a u d ito r f o r a c o m p a n y .
3
E x p la in h o w
a n a u d ito r m aybe (a) appointed, (b) reappointed, and (c) rem oved in
a com pany.
4
W h a t is th e s ta tu s of th e a u d ito r in a c o m p a n y ? H o w
can be protect the rights of
the shareholders of the com pany?
5
B rie fly a n a ly s e th e p o w e rs a n d d u tie s o f c o m p a n y a u d ito rs .
6
W h a t a re th e s ta tu to ry d u tie s of a c o m p a n y a u d ito r? D is c u s s in d e ta il.
N ote:
T h e s e q u e s tf& n s w ill h e lp y o u to u n d e rs ta n d th e u n it b e tte r . T r y to w rite
answ ers for them . B ut do not subm it your answ ers to the U niversity. T hese
.
are for your practice only.
I
9 .3 .3
R o le o f C o m p a n y
9 .4
A u d it of S h a re C a p ita l
9 .4 .1
S h a re s Issu edfo r C ash
9 .4 .2
Shares Issued for C olisiperation O ther than Cash
9 .5
Shares Issued ata Prem ium
9 .6
Shares Issued at a D iscount
9 .7
A u d it of C a lls
'
9 .7 .1
C a lls in A rrears
9 .7 .2
C a lls in A d v a n c e
9 .8
F o rfe itu re a n d R e is s u e of S h a re s
9 .9
Issue and Redem ption of Preference Shares
9 1 0
Issue of Bonus Shares
9 .1I .
A lte ra tio n o f S h a re C a p ita l
9 .!2
R e d u c tio n o f S h a re C a p ita l
9 .1 3
'Issue ofS h a r e C ertificates
9 .1 4
Share Transfer A udit
9 .1 5
P re s e n ta tio n a n d D is c lo s u re o f S h a re C a p ita l
9 .1 6
L et U s S u m
U p
9 .1 7
K ey W o rd s
9 .1 8
Answers to Check Y our Progress
9 .1 9
T e n n in a l Q u e s tio n s
9 .0
O B JE C T IV E S
-
A fte r s tu d y in gth is u n it, y o u
should be able to:
d is tin g u is h b e tw e e n p a rtn e rs h ip a u d it a n d c o m p a n y a u d it
describe th e audit procedure of shares issued for cash or f
th a nc a s h
'
explain rules for issue of shares at a prem ium
and issue o
d e sc rib e t'h e a u d it p ro c e d u re fo r c a lls in a rre a rsa n d v e rifi
.
*
qplain ,audit of issue and redem ption of preferences h a r e s
0
explain the audit of alteration of share capitd
o
list ste p s in v o lv e d in s h a te tra n s fe r a u d it'
describe the m anner .of presentation and disclosure of shar
s ta te m e n ts o f th e c o m p a n y .
9 .1
IN T R O D U C T IO N
.
L
.
A
4 --,
IIYh i t8 y o u le a rn t a b o u tth e q u a lific a tio n s , a p p o in tm e n t a n d s
'a ls o a b o u t h is rig h ts q n d d u tie s . I n th is u n it y o u w ill l e m
fk st
c o m m e n c e m e n t o f t h e a u d i!
o fb c o @ a n y ,.th e ,
a u d it&
m ust fulf
.*> ''
s fe p s . P a rtic u la d y , th e a u d ito r m u s ta c q u a in t h im k 1 .fw i +
(i) art
o f a ~ s o c ia tio nto 'v e rifyth e c o n s titu tio n a n d p o w &
y d e t w h ic h
(ii) sy srC rn o f in te rn a l c b n tro l,a n d( i i i ) o @ r
& k .v F n & p m v is iw s
9 .2
D IF F E R E N C EB E T W E E N P A R T N E R S H IP A U D IT
i
I
A N D
COM PANY A U D IT
Before w e take up the prelim inaries before com m encem ent of the audit of a com pany
a n d th e a u d it o f s h a re c a p ita l a n d d iv is ib le p ro fits e tc . le t u s u n d e r s ta n d
th ed iffe re n c e
b e tw e e n
the partnership audit and com pany audit.
T he difference betw een the tw o types of audit is as follow s:
1
COM PANY A U D IT
P A R T N E R S H IPA U D IT
I
It is legally com pulsory for every
It is not necessary
for af i r m
to get
lim ite d c o m p a n y to g e t its a c c o u n ts
its a c c o u n ts a u d ite d .
audited every year.
2
T he purpose is to satisfy the inform ation
ILi s m a i n l y
to avoid differences,or
needs of the shareholders ofth c com pany
disputes am ongst the partners.
o n w h o s e b e h a lf a u d it is c o n d u c te d .
3
T h e A c t d e fin e s th e q u a lific a tio n s ,
T hef i r m
m a y h a v e its o w n d e c is io n
d is q u a lific a tio n s , d u tie s , p o w e rs
in th e a p p o in tm e n t o f a u d ito r, an d
a n d p ro c e s s o f a p p o in tm e n t o f a u d ito r.
in d e te rm in in gb is q u a lific a tio n ,
H i s s ta tu to ry p o w e rs c a n n o t b e lim ite d
d u tie s a n d p o w e r s .
or taken aw ay by directors or shareholders
4
T he audit fee for the year m ust be show n
It is not essential for the firm
in the Profit and Loss A ccount of
to disclose the am ount of audit
the com pany
fee paid
to auditors.
5
T h e A c t g u id e s th e a u d ito r in re s p e c t
T h e a u d ito r h a s tor e f c r Lo t h e
of the principles and processes of
d iffe re n t c la u s e s o f th eP a rtn e rs h jp
a c c o u n tin g to
be follow ed by
D eed
w ith r e g a r d
lo the
the com pany and the form
o f re p o rtin g
respo~lsibilityfor m aintaining
to be adopted by him .
accounts, m ethodso f a c c o u n tin g ,
profit-sharing ratio of partners, term s
of b o rro w in g
a n d
th e ty p e o f a u d it
re p o rtin g re le v a n t to th e nature of
th e a s s ig n m e n t
6
T h e a u d ito r i s to e n s u re th a t th e

the directors of the com pany p r e s e n t to t h e s h a r e h o l d e r s a true and fairjie w

of the state
of affairs of the business
th ro u g h th e fin a n c ia l s ta te m e n ts
o f th e c o m p a n y
7
It is statutory responsibility
o f
a s p e c ifie d a n d d e fin ite n a tu re
T h e s c o p e o f e x a m in a tio n a n d
o b je c ts o f a u d it a r e tom e e t th e
re q u ire m e n ts of the term s of
agreem ent between
th e a u d ito r
a n d
th efirm .
T he responsibility of the auditor is
fle x ib le ; h e g e ts c le a r in stru c tio n s
F ro m
th efirin n w i t h r e g a r d
to thc
'
n a tu re a n d e x te n t o f h is w o rk .
A s s o c ia tio n .
9 .3
COM M ENCEM ENTO FA U D IT
C om m encc~ne~~t
o f a u d it o f a c o ln p a n y
in v o lv e s tw o s ta g
1
W hen
a new
com pany
c o m e s in to e x is le n c z a n d th e
2
W hen
th e c o m p a n y is a lre a d y e s ta b lis h e d , b u t a n e w
o ld a u d ito ri s s u b s titu te d
by a new
a u d ito r) f o r th e
com pany.
In th e firs t c a s e , th e a u d ito ro f' a n e w
com pany
has to be
h im se lf c o n v e r s a n t w ith th e a c c o u n tin g s y s te m
and the ru
th e c o m p a n y .
I11 t h e s e c o n d c a s e , t h e n e w
a u d ito r h a s to fo llo w
th e p ro
consent of the retiring auditor befor;
a c c e p tin g h is a p p o in
is o ld , th e a u d ito r is n e w
to th a t c o m p a n y . H e s h o u ld , th e
a s w o u ld
have been necessary
in the case of the first aud
C o n sid e ra tio n re q u ire d
at the com m encem ent of a new
a u
a )
to ensure that the com pany
h a s fo llo w e d
the statuto
re g is tra tio n , in c o rp o ra tio n ,a l l o t m e ~ i t a n d
com m encem
b )
to re fe r to th e re le v a n t re g u la tio n s o f th e c o m p a n y .c
~nem orandumor prospectus; and.
c )
to confirm
th a t h i s a p p o in tm e n t is in c o n fo rm ity w it
9 .3 .1
L ettero f E ngagem ent

O n c e th e a p p o in tm e n t h a s b e e n a c c e p te d , it isa n o rm a l p r engagem ent to the com pany specifying the term s and cond a u d ito r s h o u ld in c o rp o ra te in

th e le tte r th e p re c is e s c o p e o
be perfoim ed
b y
h im
in th e c o m p a n y . A
le tte r o f e n g a g e m
c o n firm a tio n o f a c c e p ta n c e o f o ffe r m a d e b y th e c o m p a n y
T h e p rin c ip a l c o n te n ts o f a le tte r o f e n g a g e m e n t a re :
a )
T h en a t u r e o f th eassignm ent-
in the case of a st
re q u ire m e n ts im p o s e d b y th e A c t w h ic h c a n n o t b e c h
o r a u d ito r a n dth e s ig n ific a n c e o f th e a u d it re p o rt;
b )
th e w a y t h e a u d ito r w o u ld
n o rm a lly a p p ro a c h th e jo b
c o o p e r a tio n
w hich he expects from
th e c o m p a n y ; a n
c )
th ea u d itf e e s to
be charged for the purpose.
A

c o p y0 1 th e le tte r o f e n g a g e m e n t is a ls o s e n t toth e c o m acknow ledgem ent of agreem ent as to tenns. It is then retur re c o rd s .

a u d it re p o rt.
9
E x a m in e th e s y s te m
o fa c c o u n tin g fo llo w e d by th e c o m p a n y a n d p o in t o u t th e
w eaknesses, if any.
6
G et a list of books m aintained in the com pany, persons responsible for
m a in ta in in g th e m
and their specim en signatures.
7
C o lle c ta lis to f o ffic e rs of th e c o m p a n y w ith th e ir p o w e rs , d u tie s a n d s p e c im e n
s ig n a tu re s .
8 .
.F a m ilia ris e w ith th e te c h n ic a l k n o w le d g e a b o u t th e c o m p a n y .
9
E n q u ire ib o u t th e sy ste m o f in te r n a l c o n tr o l'in p ra c tic e a n d e v a lu a te its
,
e ffe c tiv e n e s s ..
1 0
A sk for a copy of the audited balance sheet and auditor's
report of the com pany
for the previous year.
1 1-
A d v is e th e c o m p a n y to c o m p ie te th e a c c o u n tin g r e c o r d s , b a la n c e th e b o o k s
prepare the final accounts,arrange the vouchers serially', and prepare schedules of
different categories of debtors and creditors.
1 2
Id e n tify th e e v e n ts a n d tra n s a c tio n s lik e ly to h a v e a s ig n ific a n t e ffe c t o n
th e
fin a n c ia l s ta te m e n ts o f th e c o m p a n y .
1 3
D e s ig n ,th e n a tu re a n d e x te n t o f a u d i t te s ts a p p ro p ria te to th e c o m p a n y .
A lth o u g h th e e x a c t m a n n e r of c o n d u c tin g a u d it la rg e ly d e p e n d s u p o n th e s iz e a n d n a tu re
o f th e c o m p a n y , a s y s te m a tic a p p ro a c h is e s s e n tia l to a c h ie v e th e a u d it o b je c tiv e s .
M o re o v e r, th e d iffe re n t a sp e c ts o f a u d it w o rk a re c lo se ly in te rre la te d . H e n c e , it isu s e f u l
to distinguish betw een the essential phases through w hich the audit w ork proceeds and
a
progtesses in the com pany.
. . -
9 .3 .3
R ole of C om pany
*

A t th 'k t i m e o f c o t k e n c e m e n t o f a u d i t , t h e c o m p a n y h u s t a l s o b e r e a d y t o e x t e n d i t s c o p p e ra tio n to th e a u d ito r. B e s id e s o th e r a rra n g e m e n t, th e c o m p a n y 's a p p ro a c h to a u d it s h o u ld b e o n th e fo llo w in g lin e s :

,
(1,
1
,
g eepa Correct record.of the day-to-day transactions of the business.
2
* M a in ta in d o c u n ie n ta ry a n d o th e r e v id e n c e s in s u p p o rt o f th e tra n s a c tio n s in p ro p e r
,
I
s e q u e n c e to fa c ilita te th e ir a u d it re fe re n c e .
3
O b ta in b a n k s ta te m e n ts p e rio d ic a lly a n d re c o n c ile th e m
w ith the cash records of
th ecom pany.
'
4
:$
com pilea list of debtors and ureditors of different categories show ing thea ..:;~ n t
.. .
h .,i&
Tespect of each.
-rf
&:
5
.
R e c o rd a ll im p o rta n t d e c isio n s p e rta in in g to fin a n c ia l m a tte rs , p re fe ra b ly i n th e
--
-
fo rm
o f r? s o lu tio n s .
. .
-
'
'b ',
...
';A rra n g e
.
a ll re lq q a n t c o m m u n ic a tio n s is s u e d o r re c e iv e d b y th e c o m p a n y a ffe c tin g
'
+ a c c o u n t i n gr e o r d s .
I
'
c o m p a n y ra is e s s h a re c a p ita l im m e d ia te ly a fte r in c o rp o ra tio n a
la te r y e a rs w h e n
it decides to further raise itss h a re c a p ita l.I i r
auditor may perform
ro u tin e c h e c k s to v e rify a u th o ris e d , is s u e
c a p ita l.

An issue ofs h y e c a p ita l in v o lv e s th re e s ta g e s , n a m e ly , th e a p a llo tm e n t s ta g e a n d th e c a ll s ta g e . H o w e v e r, a c o m p a n y is a ls o a num ber of requirem ents before actually

g o in g fo r p u b lic s u b
th e a u d ito r s h o u ld :
1

S tu d y th e c o n d itio n s o f is s u e c o n ta in e d in th e M e m o ra n d A s s o c ia tio n , P ro s p e c tu s o r S ta te m e n t in lie u o f P ro s p e c tu a ll o fth e 1 1 1 h a v e f u l l y b e e n

c o m p lie d w ith .
2

V e rify th a t th e firs t a llo tm e n t h a d n o t b e e n m a d e u n til th subscription stated in the Prospectus had been subscribed arnoht received

w a s k e p t d e p o s ite d in a s c h e d u le d b a n k
3
C o n firm th a t th e b ro k e ra g e a n d u n d e rw ritin g c o m tn is s io n
the rates authorised by
th e p ro s p e c tu s o r th e A rtic le s of
4

V e rify th a t p re lim in a s y c o n tra c ts , if a n y , fo r p u rc h a s e o f fo r c re a tin g a n o rg a n is a tio n f o r m a n a g e m e n t o f th e c o m p out strictly according to the term s stated in the prospectu

5

E n s u re th a t th c c o m p a n y in te n d in g to o ffe r s h a re s to th e the,issue of a prospectus had, before such issue, m ade an m ore recognised stock exchanges for perm issioii for the o ffe re d w ith in th e s to c k e x c h a n g e s o r e a c h e x c h a n g e .

6
C o n firm
th a t th e g u id e lin e s is s u e d b y
th e S e c u ritie s a n d
(S E B I) h a d b e e n d u ly fo llo w e d .
H a v in g ta k e n th e a b o v e s te p s , th e a u d ito r m a y s p e c ific a lly e x a
i )
shares issued for cash and
i i )
shares issued for consideration other than cash,i f any.
9 .4 .1
SharesI s s u e dfo r C ash

As stated earlier, there are three stagcs in the issue of shares f s ta g e , a llo tm e n t s ta g e a n d c a lls s ta g e . E a c h s ta g e h a s its o w n p th e fo llo w in g s te p s f o r th e ir a u d it.

A p p lic a tio n S ta g e
i )
C h e c k e n trie s in th e A p p lic a tio n a n d A llo tm e n t S h e e ts w
-a p p lic a tio n s ;
.ii)
C h e c k e n trie s in th e A p p lic a tio n a n d th e A llo tm e n t s h e e t
h o n e y , re c e iv e d w ith th e a p p lic a tio n s , w ith th o s e in th e
i i i )
C h e c k th a t th e a p p lic a tio n m o n e y w a s d e p o s ite d 'ina s c h
'o f th e ,'C e rtific a te to C o m m e n c e B u s in e s s '.

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