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Submitted In Partial Fulfillment of the requirements For the Award of Degree of Masters of Commerce - Accounts By Malvika Pande (Roll number 33) University of Mumbai SIES college of science arts and commerce, Nerul
CERTIFICATE
This is to certify that Malvika Pande of M.Com Accounts Semester IV (2013-14) has successfully completed the project of Company Audit under the guidance of Ms Nalini Tiwari
Principal
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Project guide
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Internal Examiner
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External Examiner
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DECLARATION
I Malvika Pande a student of M.com Accounts Semester IV (2013-14) hereby declare that I have completed the project on Company audit. The information submitted is true and original to the best of my knowledge.
ACKNOWLEGEMENT
I would sincerely like to give my heartfelt acknowledgement and thanks to my parents. Any amount of thanks given to them will never be sufficient. I would like to thank the University of Mumbai, for introducing MCOM (Accounts), thereby giving the student a platform to abreast with changing business scenario, with the help of theory as a base and practical as a solution. I would sincerely like to thank our Principal Mrs. Rita Basu. I would also like to thank my project guide Mr. Nalini Tiwari for her valuable support and guidance whenever needed. I also feel heartiest sense of obligation my library staff members & seniors who helped in collection of Data and materials and also in this processing as well as in drafting manuscript. Last, but not the least, I would like to thank my friends & colleagues for always being there.
Malvika Pande
SR.NO 1 2 3
INDEX GENERAL CONSIDERATION IN COMPANY AUDIT CONSTITUTIONAL DOCUMENTS BUY BACK OF SHARES a) Objectives of Buy Back: b) Resources of Buy Back c) Conditions of Buy Back d) Disclosures in the explanatory statement e) Sources from where the shares will be purchased f) Register of Securities Bought Back g) Issue of further shares after Buy back h) Filing of return with the Regulator i) Prohibition of Buy Back j) Procedure for buy back k) Penalty
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TRANSMISSION OF SHARES SA 200 Overall objectives of the independent auditor and the conduct of an audit in accordance with SA a) Scope of this SA: b) Overall Objectives of the Auditor: c) Requirements
SA 200 A Objective and scope of Audit of Financial Statements a) Preparation of the Financial Statements b) Ethical Requirements Relating to an Audit of Financial Statements c) Professional Skepticism
SA 230 Audit Documentation a) Scope of this SA b) Nature and Purposes of Audit Documentation c) Audit documentation serves a number of additional purposes d) Effective Date e) Objective f) Definitions g) Requirements
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COMPANY AUDIT
1. GENERAL CONSIDERATION IN COMPANY AUDIT
These have to be determined on a consideration of : (a) objectives of audit; (b) various provisions in the Companies Act, 1956, especially those concerning accounts and audit; and (c) the scope of the report that the auditor of a company is required to make in pursuance of the provisions contained in section 227 of the Act.
The objectives of an audit are : (i) Verification of statements of account so as to express an opinion; (ii) Detection of errors and frauds; and (iii) Prevention of occurrence of errors and frauds. Detection and prevention of frauds and errors were originally regarded as the main objectives of an audit. While conducting the audit, the auditor is expected to bear in mind the possibility of existence of a fraud or other irregularity in accounts. Nonetheless, he is not
expected to conduct the audit with the objective of discovering all frauds or irregularities, for if that is to be done, the audit would take an unduly long time and the cost of it would be quite out of proportion to its benefit. Nevertheless, it is expected that the auditor would be vigilant and watchful and whenever he comes across a circumstance which arouses his suspicion, he should find out whether a fraud, or irregularity, in fact does exist and, if so, whether it is sufficiently material to necessitate qualifications of the audit report. It is generally accepted that the auditor is not an insurer and does not guarantee that the books of account truly reflect the companys affairs. The auditor, thus, is principally responsible for carrying out his duties by exercising due care and skill in consonance with the professional standards. If, despite the fact, any fraud or irregularity in accounts remains undetected, he cannot be held liable for the failure to detect it. Moreover, since the management is primarily responsible for safeguarding the assets and property of the company, the auditor, while framing his audit program, is entitled to rely upon the internal controls in this regard instituted by the management based on a proper evaluation. It would be observed that Companies Act, 1956 also does not contemplate that an auditor is responsible for the detection of errors and frauds, except when they are so material as to vitiate the opinion expressed by him that statements of account exhibit a true and fair state of affairs. The auditor is required to verify the final statements of account; also to check or verify all the matters affecting them so as to ensure fully that they exhibit a true and fair state of affairs of the business of the company. For the purpose, he may either carry out a detailed examination of the books or relying on the internal
control measures in operation, after testing their strength, merely test the accuracy of transaction recorded therein. It is permissible for an auditor to verify the accuracy of transactions recorded in the books of account by the application of test checks, if he is satisfied that the system of internal control, in operation, is adequate and satisfactory.
2. CONSTITUTIONAL DOCUMENTS
The auditor, before commencing a company audit, shall undertake Verification of the constitution and powers. This he can verify from various documents, decisions taken in board meeting, decisions in shareholders meeting etc. Any companys functions and powers are limited to the documents on the basis of which it has been registered. Prospectus is the most important document that the company requires to raise capital from public. The auditor also needs to check various transactions taken place before commencement of business eg, any property purchased etc. thus, prior to setting any audit, the auditor shall examine following constitutional documents : 1. Memorandum of association 2. Articles of association 3. Contracts entered into with vendors and other persons relating to purchase of property, payment of commission etc. 4. Certificate of commencement by business 5. Certificate of registration etc.
A company, before registration, cannot enter into contract also without obtaining Certificate of Commencement of business from the registrar of Companies. Therefore, the auditor is required to take into account his duty to examine the transactions entered into by the company; the dates when these were entered into for confirming the validity. The auditor should be aware of the authority structure of the company so as to carry out audit effectively. Section 291 empowers the Board of Directors to exercise all such powers and undertake all such Acts, the company is authorized to do. But, the auditor should see to it that the Board has not done any ultra-vires Acts i.e. not exercised any power nor done any act which is not permitted by Memorandum or Articles of the company.
A buyback allows companies to invest in themselves. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares a company owns. Buybacks can be carried out in two ways: 1. Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them. 2. Companies buy back shares on the open market over an extended period of time.
Infact the best strategy to maintain the share price in a bear run is to buy back the shares from the open market at a premium over the prevailing market price.
(d)
The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back;
(e)
There has been no default in any of the following i. ii. iii. In repayment of deposit or interest payable thereon, Redemption of debentures, or preference shares or Payment of dividend, if declared, to all shareholders within the stipulated time of 30 days from the date of declaration of dividend or iv. Repayment of any term loan or interest payable thereon to any financial institution or bank;
(f)
There has been no default in complying with the provisions of filing of Annual Return, Payment of Dividend, and form and contents of Annual Accounts;
(g) (h)
All the shares or other specified securities for buy-back are fully paid-up; The buy-back of the shares or other specified securities listed on any recognised stock exchange shall be in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; and
(i)
The buy-back in respect of shares or other specified securities of private and closely held companies is in accordance with the guidelines as may be prescribed.
(c) odd lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or
(d) purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.
Where a company buys-back its own securities, it shall extinguish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back.
3.11) Penalty
If a company makes default in complying with the provisions the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both. The offences are, of course compoundable under Section 621A of the Companies Act,1956.
4) TRANSMISSION OF SHARES
Share transmission is a mechanism by which the title to shares is devolved other than by transfer. This is typically applicable for: Devolution by death Succession Inheritance Bankruptcy Marriage
Ownership: On registration of the transmission of shares, the person entitled to transmission of shares becomes the shareholder of the company and is entitled to all rights and subject to all liabilities as such shareholder.
Method: While transfer of shares is brought about by delivery of a proper instrument of transfer (viz, transfer deed) duly stamped and executed, transmission of shares is done by forwarding the necessary documents (such as a notarised copy of death certificate) to the company.
5) SA 200 Overall Objectives of the Independent Auditor and The Conduct of an Audit in Accordance with Standard s on Auditing
5.3) Requirements
i) Ethical Requirements Relating to an Audit of FS The auditor shall comply with relevant ethical requirements, including those pertaining to independence, relating to financial statement audit engagements. Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the Institute of Chartered Accountants of India. The Code establishes the following as the fundamental principles of professional ethics relevant to the auditor (a) Integrity; (b) Objectivity; (c) Independence (d) Professional competence and due care (e) Confidentiality; and (f) Professional behavior.
ii) Professional Skepticism (a)The auditor shall plan and perform an audit with professional skepticism recognising that circumstances may exist that cause the financial statements to be materially misstated. (b) Professional skepticism includes being alert to, for example Audit evidence that contradicts other audit evidence obtained. Conditions that may indicate possible fraud.
iii) Professional Judgment The auditor shall exercise professional judgment in planning and performing an audit of financial statements. Professional judgment is essential to the proper conduct of an audit. Professional judgment is necessary in particular regarding decisions about: Materiality and audit risk. The nature, timing, and extent of audit procedures used to meet the requirements of the SAs and gather audit evidence. Evaluating whether sufficient appropriate audit evidence has been obtained.
iv) Sufficient Appropriate Audit Evidence and Audit Risk To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the uditor to draw reasonable conclusions on which to base the auditors opinion. a)Audit evidence is necessary to support the auditors opinion and report. It is cumulative in nature and is primarily obtained from audit procedures performed during the course of the audit. b)The sufficiency and appropriateness of audit evidence are interrelated. Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence needed is affected by the auditors assessment of the risks of misstatement (the higher the assessed risks, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be required). Obtaining more audit evidence, however, may not compensate for its poor quality. c)Appropriateness is the measure of the quality of audit evidence;that is, its r elevance and its reliability in providing support for the conclusions on which the auditors opinion is based. The reliability of evidence is influenced by it source and by its nature, and is dependent on the individual circumstances under which it is obtained. d)Whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level, and thereby enable the auditor to draw reasonable conclusions on which to base the auditors opinion, is a matter of professional judgment. a
v) Conduct Of an Audit in accordance with SAs 1. Complying with SAs Relevant to the Audit a.The auditor shall comply with all SAs relevant to the audit. An SA is relevant to the audit when the SA is in effect and the circumstances address by the SA exist. b.The auditor shall have an understanding of the entire text of an SA, including its application and other explanatory material, to understand its objectives and to apply its requirements properly. c.The auditor shall not represent compliance with SAs in the auditors report unless the auditor has complied with the requirements of this SA and all other SAs relevant to the audit.
2. Objectives Stated in IndividuaI SAs To achieve the overall objectives of the auditor, the auditor shall use the Objectives stated in relevant SAs in planning and performing the audit, having regard to the interrelationships among the SAs, (a) Determine whether any audit procedures in addition to those required by the SAs are necessary in pursuance of the objectives stated in the SAs; and (b)Evaluate whether sufficient appropriate audit evidence has been obtained.
3. Complying with Relevant Requirements The auditor shall comply with requirement of an SA unless, in the circumstances of the audit: (a) The entire SA is not relevant; or (b)The requirement is not relevant because it is conditional and the condition does not exist.
4. Failure to Achieve an Objective If an objective in a relevant SA cannot be achieved, the auditor shall evaluate whether this prevents the auditor from achieving the overall objectives of the audit or and thereby requires the auditor, in accordance with the SAs, to modify the auditors opinion or withdraw frm the engagement. Failure to achieve an objective represents a significant matter requiring documentation in accordance with SA 230
presentation of financial statements that are free from material misstatement, whether due to fraud or error; and (b) To provide the auditor with: (i) All information, such as records and documentation, and other matters that are relevant to the preparation and presentation of the financial statements; (ii) Any additional information that the auditor may request from management and, where appropriate, those charged with governance; and (iii) Unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence.
As part of their responsibility for the preparation and presentation of the financial statements, management and, where appropriate, those charged with governance are responsible for: The identification of the applicable financial reporting framework, in the context of any relevant laws or regulations. The preparation and presentation of the financial statements in accordance with that framework. An adequate description of that framework in the financial statements.
The preparation of the financial statements requires management to exercise judgment in making accounting estimates that are reasonable in the circumstances, as well as to select and apply appropriate accounting policies. These judgments are made in the context of the applicable financial reporting framework.
The auditor is subject to relevant ethical requirements, including those pertaining to independence, relating to financial statement audit engagements. Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the Institute of Chartered Accountants of India.
The Code establishes the following as the fundamental principles of professional ethics relevant to the auditor when conducting an audit of financial statements and provides a conceptual framework for applying those principles; (a) Integrity; (b) Objectivity; (c) Professional competence and due care; (d) Confidentiality; and (e) Professional behavior.
In the case of an audit engagement it is in the public interest and, therefore, required by the Code of Ethics, that the auditor be independent of the entity subject to the audit. The Code describes independence as comprising both independence of mind and independence in appearance. The auditors independence from the entity safeguards the auditors ability to form an audit opinion without being affected by influences that might compromise that opinion. Independence enhances the auditors ability to act with integrity, to be objective and to maintain an attitude of professional skepticism.
Professional skepticism includes being alert to, for example: Audit evidence that contradicts other audit evidence obtained. Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence. Conditions that may indicate possible fraud. Circumstances that suggest the need for audit procedures in addition to those required by the SAs.
Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to reduce the risks of: Overlooking unusual circumstances. Over generalising when drawing conclusions from audit observations. Using inappropriate assumptions in determining the nature, timing, and extent of the audit procedures and evaluating the results thereof.
Professional skepticism is necessary to the critical assessment of audit evidence. This includes questioning contradictory audit evidence and the reliability of documents and responses to inquiries and other information obtained from management and those charged with governance. It also includes consideration of the sufficiency and appropriateness of audit evidence obtained in the light of the circumstances, for example in the case where fraud risk factors exist and a single document, of a nature that is susceptible to fraud, is the sole supporting evidence for a material financial statement amount.
7.3) Audit documentation serves a number of additional purposes, including the following:
Assisting the engagement team to plan and perform the audit. Assisting members of the engagement team responsible for supervision to direct and supervise the audit work, and to discharge their review responsibilities in accordance with Proposed SA 220 (Revised)1.
Enabling the engagement team to be accountable for its work. Retaining a record of matters of continuing significance to future audits. Enabling the conduct of quality control reviews and inspections in accordance with SQC 1. Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements.
7.5) Objective
The objective of the auditor is to prepare documentation that provides: (a) A sufficient and appropriate record of the basis for the auditors report; and (b) Evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements.
7.6) Definitions
For purposes of the SAs, the following terms have the meanings attributed below: (a) Audit documentation The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as working papers or workpapers are also sometimes used). (b) Audit file One or more folders or other storage media, in physical or electronic form, containing the records that comprise the audit documentation for a specific engagement.
(c) Experienced auditor An individual (whether internal or external to the firm) who has practical audit experience, and a reasonable understanding of: (i) Audit processes; (ii) SAs and applicable legal and regulatory requirements; (iii) The business environment in which the entity operates; and (iv) Auditing and financial reporting issues relevant to the entitys industry.
7.7) Requirements
1) Timely Preparation of Audit Documentation The auditor shall prepare audit documentation on a timely basis.
2) Form, Content and Extent of Audit Documentation The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand: (a) The nature, timing, and extent of the audit procedures performed to comply with the SAs and applicable legal and regulatory requirements; (b) The results of the audit procedures performed, and the audit evidence obtained; and (c) Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions.
3) Departure from a Relevant Requirement If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant requirement in a SA, the auditor shall document how the alternative audit procedures performed achieve the aim of that requirement, and the reasons for the departure.
4) Matters Arising after the Date of the Auditors Report If, in exceptional circumstances, the auditor performs new or additional audit procedures or draws new conclusions after the date of the auditors report, the auditor shall document: (a) The circumstances encountered; (b) The new or additional audit procedures performed, audit evidence obtained, and conclusions reached, and their effect on the auditors report; and (c) When and by whom the resulting changes to audit documentation were made and reviewed.
5) Assembly of the Final Audit File The auditor shall assemble the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis after the date of the auditors report. After the assembly of the final audit file has been completed, the auditor shall not delete or discard audit documentation of any nature before the end of its retention period. In circumstances other than those envisaged in paragraph 13 where the auditor finds it necessary to modify existing audit documentation or add new audit documentation after the assembly of the final audit file has been completed, the auditor shall, regardless of the nature of the modifications or additions, document: (a) The specific reasons for making them; and (b) When and by whom they were made and reviewed.
REFERENCES