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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
VU
Lesson 06
LEGAL CONSIDERATION REGARDING AUDITING
The Audit Requirement
 Not all limited companies are required to have their financial statements audited. Nor are all
companies required to produce financial statements in the same formats as many exemptions may
apply to small and medium sized companies.
 Broadly speaking, small companies are exempt from the audit requirement, small and medium sized
companies may file abbreviated accounts with the registrar of companies and small companies may
prepare accounts with reduced disclosures for their members.
Appointment, Duties, Rights and Liabilities of Auditor
Appointment:
First Auditors
a)
The first auditors of a company shall be appointed by the directors within 60 days of
incorporation of the company [252(3)]
b)
The first auditors will hold office till the first annual general meeting [252(3)].
c)
If the directors fail to appoint the first auditors, the members shall appoint the first
auditors, provided further that the auditors such appointed shall not be removed during
the tenure expect through a special resolution [(252(6)].
d)
Where the first auditors are not appointed either by the directors or by the members within
120 days of incorporation of the company, the Securities & Exchange Commission of
Pakistan (Commission) will appoint the auditor [252(6)].
Subsequent Auditors
(a) At each annual general meeting the company (members) shall appoint the auditors [252(1)].
(b) The auditors shall hold office from the conclusion of that meeting till the conclusion of
next annual general meeting [Section 252(1)].
(c) If no auditors are appointed at annual general meeting Commission shall appoint an auditor.
To exercise this power the company must give notice to Commission within one week of
these powers having become exercisable [252(7)].
Note: Provided that an auditor or auditors appointed in a general meeting may be removed before
conclusion of the next annual general meeting through a special resolution [252(1)].
Casual Vacancy
a)  Any casual vacancy shall be filled by directors. [Sec 252(4)].
b)  Auditors so appointed shall hold office till next annual general meeting.[Sec 252(5)]
c)  If directors do not appoint auditors to fill casual vacancy within 30 days, Commission may
appoint an auditor.[Sec 252(6)]
Commission's powers to appoint auditors [252(6)]
The Securities & Exchange Commission of Pakistan may appoint an auditor if the following situations arise:
a) First auditors are not appointed within 120 days from incorporation;
b) Subsequent auditors are not appointed in annual general meeting;
c) Casual vacancy is not filled within 30 days; and
d) Auditors appointed are unwilling to act as auditors.
To exercise this power, the company must give notice to Commission within one week of its powers
becoming exercisable.
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Fundamentals of Auditing ­ACC 311
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SUMMARY
Auditors
Time of
Appointing Term of
Appointing  Remarks
appointment
Authority
Office
Authority in
default
First 1st
Within 60 days
Directors
Till first
Members
Members shall appoint 1st
Auditors
of
AGM
auditors at a general meeting
Incorporation
within 120 days. After 120
days SECP may make the
appointment.
Subsequent AGM
Members
Till next
SECP
If auditors are not appointed
Auditors
AGM
in Auditors AGM. AGM,
SECP may appoint auditors.
Casual
Within 30 days
Directors
Till next
SECP
After 30 days of vacancy.
Vacancy
of the vacancy
AGM
Vacancy of the vacancy
AGM SECP may appoint
auditors.
Remuneration of Auditors [252(8)]
Fixation of remuneration of auditors depends upon the authority appointing the auditors, i.e.
i)
If auditors are appointed by directors, directors shall fix the remuneration.
ii)
If auditors are appointed by COMMISSION, COMMISSION shall fix remuneration.
iii)
In all other cases, the members (Company) shall fix the remuneration.
Note: Minimum hourly rates are also recommended by The Institute of Chartered Accountants of Pakistan
(ICAP) which is specified in members' Handbook Volume II (Part II ATR-14).
SUMMARY
Appointing Authority Remuneration Fixed by
a)
Directors
Directors
b)
Commission
Commission
c)
In all other case Members (Company)
Procedure for Change of Subsequent Auditors/ Removal of Auditors / Appointment of New
Auditors (Section-253)
New auditors can be appointed in place of retiring auditors if the following requirements are fulfilled.
a)
Notice from a member is required for a resolution at the AGM (253(1)).
b)
The member shall give notice to the company at least 14 days before the AGM that he
intends to propose the appointment of another person as auditor (253(2)).
c)
On receipt of the notice the company shall send a copy of such notice to the:
i)
retiring auditor, forthwith
ii)
members, at least seven days before the AGM. (253(2))
d)
In case of a listed company, notice shall be published at least in one issue of an English
and an Urdu daily newspaper having circulation in the province where the stock
exchange(s) is situate on which the shares of the company are listed.
e)
The retiring auditor can make representations and the company shall send a copy of
representation to a member or it may be read at AGM.
Provided that the representation cannot be sent OR read at the AGM if the Registrar does not
permit so on the application of the company or any other person. (253 (3)).
f)
A company within 14 days after the AGM shall notify to the Registrar of the
i)
appointment of new auditors with their consent letter. 253(5).
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Fundamentals of Auditing ­ACC 311
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ii)
retirement or removal of auditors. Section 253(6)
Note: Under the Schedule-I Part-I of the Chartered Accountant Ordinance, 1961 new auditor accepting
the appointment without communicating with the previous auditor shall be deemed to be guilty of
professional misconduct. The Institute of Chartered Accountant of Pakistan has issued Auditing Technical
release (ATR-2) explaining what does the word "Communication" means. Therefore, it is necessary for the
new auditors to communicate with the previous auditors before accepting the appointment to ascertain that
he has no objection on professional grounds, regarding the appointment. Clause 7 of the Schedule requires
that incoming auditor should ensure before accepting the appointment, that requirements of the Companies
Ordinance, 1984 regarding his appointment have been fulfilled.
Change of Auditors - Checklist
Timing
Actions Required
Notice from a member from the date of AGM
At least 14 days
Send Copy of the notice to:
a)
The retiring auditor
forthwith
b)
Members
At least 7 days before
The date of AGM Publication of the fact in newspapers anytime before the AGM. That notice has been
received. Representation by auditors Sent to members before AGM or read at AGM.
Notification of the change to the Registrar within 14 days after the date of AGM.
Removal of Auditors
i)
First auditor appointed by the directors may be removed by the members in a general
meeting.
ii)
Another person nominated by a member shall be appointed in place of the outgoing
auditor.
iii)
The notice of nomination of the proposed auditor should be given to the member's at least
14 days before the general meeting and all the procedure stated above would be required to
be followed in this case also.
iv)
An auditor or auditors appointed in an annual general meeting may be removed before
conclusion of the next annual general meeting through a special resolution.
v)
In the above case, SECP may appoint the auditor(s) of the company.
Qualification & Disqualification of Auditors
Qualification 254(1)
For appointment as auditor of:
a)
a Public Company or
b)
a Private Company which is a subsidiary of a Public Company.
c)
a Private Company having paid up capital of three million rupees or more.
The person must be a Chartered Accountant within the meaning of the Chartered Accountants Ordinance,
1961.
Note: For listed companies an auditor must have a satisfactory QCR (quality control review) rating issued
by ICAP.
Disqualifications 254(3)
Following persons are not qualified to become auditors of a company:
i)
Present directors, other officer or employees of the company or who held these offices
during the last three years.
ii)
A partner or employee of a director, other officer or employee of the company.
iii)
A spouse of a director.
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Fundamentals of Auditing ­ACC 311
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iv)
A person who is indebted to the company.
v)
A body corporate.
vi)
A person or his spouse or minor children or in case of firm all partners of such firm who
holds any shares of an audit client or any of its associated companies.
Provided that if such a person holds shares prior to his appointment as auditors, whether as an individual or
a partner in a firm the fact shall be disclosed on his appointment as auditor and such person shall disinvest
such shares within ninety days of such appointment.
vii)
A person disqualified for appointment as an auditor due to above reasons is disqualified
from holding the office of auditor of another company which is a subsidiary or holding
company of that company 254(4).
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Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT