Entrepreneurs Guide To Audit Of A Company

Private Limited Company, One Person Company and Limited Company registered under the Companies Act, whether publicly or privately held and whether having share capital or not are required to maintain proper book of accounts and get the books of accounts audited each year. In this article, we look at all aspects of audit of a Company.

Appointing the First Auditor of the Company

All types of companies, except a Government company are required to appoint an Auditor within 30 days of date of incorporation of the Company. The Board of Directors of the Company is responsible for the appointment by conducting a meeting of the Board of Directors.

In case the Board of Directors of the Company does not appoint the first Auditor(s) of the Company within 30 days of incorporation of the Company, then the shareholders/members of the Company can appoint the first Auditors of the Company by conducting an extraordinary general meeting.

Power and Duties of Auditor of the Company

An Auditor of the Company must be an independent person engaged by the Company for the purpose of expressing an opinion on whether the financial statements prepared by the company are free of material misstatements, fraud or error and inline with the Accounting Standards. It is important to note that it is the responsibility of the Company to maintain book of accounts and prepare financial statements of the Company. The Auditor of the Company cannot maintain the Book of Accounts of the Company or prepare financial statements of the Company, as it would impair his/her independence.

Overview of the Audit Function

The Auditor of a company has the right to access the books of account and vouchers of the company, and has the power to call for any information or documents that is required for performing the duties of Auditor. Further, the Auditor of the Company is mandatorily required to inquire into the following matters:

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;
Whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;
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;
Whether loans and advances made by the company have been shown as deposits;
Whether personal expenses have been charged to revenue account;
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:

Audit Report for Company

Based on the Audit of the Company, the auditor will make a report to the members of the company stating whether to the best of his/her information and knowledge, the accounts of the company an financial statements give a true and fair view of the state of the company’s affairs. Further, the audit report must also include:

Whether he/she (Auditor) has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements;
Whether, in his/her (Auditor) opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;
Whether the report on the accounts of any branch office of the company audited by a person other than the company’s auditor has been sent to him/her (Auditor).
Whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;
Whether, in his/her (Auditor) opinion, the financial statements comply with the accounting standards;
The observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;
Whether any director is disqualified 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 adequate internal financial controls system in place and the operating effectiveness of such controls;

Restrictions on Statutory Auditors

The Auditors of a Company can only provide services which are approved by the Board of Director or Audit Committee of the Company. Further, under any case, the Auditor of a Company is prohibited from providing the following services "directly or indirectly" to the Company or its holding company or subsidiary company to maintain independence of the Auditor:

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

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Frequently Asked Questions

Common questions about Company Audit Services for Financial Compliance.

An auditor is an independent person engaged by the company to express an opinion on whether the financial statements prepared by the company are free of material misstatements, fraud, or error and in line with the accounting standards. The auditor's primary responsibility is to audit the company's books of accounts and provide an unbiased assessment of the financial statements' accuracy and fairness.

All companies, except government companies, are required to appoint an auditor within 30 days of their incorporation date. The Board of Directors of the company is responsible for appointing the first auditor by conducting a board meeting. If the Board fails to appoint the first auditor within 30 days, the shareholders/members of the company can appoint the first auditor by conducting an extraordinary general meeting.

The auditor has the right to access the company's books of accounts and vouchers and can call for any information or documents required for performing their duties. The auditor is mandatorily required to inquire into various matters, such as whether loans and advances made by the company are properly secured, whether transactions are prejudicial to the company's interests, and whether personal expenses have been charged to the revenue account.

An audit report should state whether, in the auditor's opinion, the company's financial statements give a true and fair view of its affairs. It should also include observations on the maintenance of proper books of accounts, compliance with accounting standards, the effectiveness of internal financial controls, and any qualifications, reservations, or adverse remarks related to the accounts.

Auditors are prohibited from providing certain services "directly or indirectly" to the company or its holding or subsidiary companies to maintain their independence. These services include accounting or bookkeeping services, internal audit, design and implementation of financial information systems, actuarial services, investment advisory services, investment banking services, and management services.

As per the article, all companies, whether publicly or privately held, and whether having share capital or not, are required to maintain proper books of accounts and get their books of accounts audited each year.

The article states that it is the responsibility of the company to maintain books of accounts and prepare financial statements. The auditor cannot maintain the company's books of accounts or prepare its financial statements, as it would impair their independence.

No, if the auditor has not received all the information and explanations they believe were necessary for the audit purpose, they must mention this in the audit report and detail the effect of such missing information on the financial statements.

The auditor is required to express an opinion on whether the company has adequate internal financial controls in place and comment on the operating effectiveness of such controls in the audit report.

No, auditors are prohibited from rendering outsourced financial services to the company they are auditing or its holding or subsidiary companies, as it would impair their independence.