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M. V. Kali Prasad

M. V. Kali Prasad puts together solutions to the latest PE II auditing.

1. As an auditor, comment on the following situations/statements:

a) Z Ltd. Had the following items under the head of reserves and surplus in the balance sheet as on March 31, 2004

The company had accumulated a loss of Rs 40 lakh on the same date, which it has disclosed under the head "profit and loss account" on the assets side of the balance sheet.

The debit balance in the profit and loss Account has to be netted off from the credit balance of the uncommitted reserves. General reserve is an uncommitted reserve.

In the given case, the Company shows debit balance of profit and loss account under the head "profit and loss Account" on the assets side of the Balance sheet in spite of having a credit of Rs 90 lakh to the credit of general reserve.

Such a disclosure made by the Company is against the provisions of law. Instead, the Company should disclose general reserve at the net value of Rs 50 lakh. Other balances to securities premium account and capital reserve account standing at Rs 80 lakh and 60 lakh need not be disturbed.

b) A. ltd has its registered office at New Delhi. During the current accounting year, it has shifted its head office to Indore though it has retained the registered office at New Delhi. The Managing director of the company, wants to shift its books of accounts to Indore from New Delhi, as he feels there is no legal bar in doing so.

S.209(1) requires that the books of account of the Company should only be maintained at its registered office. By proviso, If the board of directors decide to maintain books of account at any other place in India, the Company should inform the registrar of Companies within seven days of such decision about change in the place of maintaining the books of account.

In the given case, A ltd shifts its corporate head office to Indore while retaining its registered office at New Delhi. By operation of law, the books of account should only be maintained at its registered office at New Delhi and the Company has to inform the Registrar of Companies within 7 days of deciding to shift its books of account to Indore. The managing director is not right in his thinking.

c) The board of directors have filed a complaint with the Institute of Chartered Accountants of India against their Statutory Auditors for their failing to attend the Annual General Meeting of the Share holders in which audited Accounts were considered;

S.230 states that the auditors report shall be read before the company in AGM. S.231 gives a statutory right to the auditor to receive notices of and to attend any meeting of the shareholders of company but no duty is cast upon the auditor to attend the AGM.

In the given case the board of directors lodged a complaint with the institute against the auditor for his failure in attending the AGM .

This complaint is not tenable since there is no lapse on the part of the auditor.

d) The auditor of a company wanted to see the minutes book of the Directors meetings. The chairman of the Company refused for the same on the ground that matters of a confidential nature were contained therein.

One of the statutory rights of the auditor under 226 is to right to seek any information from the management, which in his opinion is necessary for the purpose of audit.

He also has a right to inspect books of account and other records to substantiate the transactions. AAS1 states confidentiality as one of the basic principles of audit, which prohibits an auditor from divulging any information of confidential nature to the third party without a specific authority unless he is legally or professionally required so to do.

In the given case, the chairman of the company refuses to allow the auditor to see the minutes books on the grounds of confidentiality.

It is essential for the auditor to inspect the minutes book of the board of directors as well as that of the members to substantiate the authenticity of certain transactions. The auditor is well within his rights to ask for the minutes book.

Such an act of chairman is not warranted since it is restricting the statutory rights of an auditor. These rights are given by statute and management or shareholders of the company cannot restrict these statutory rights.

The chairman need not be apprehensive of confidentiality since the auditors are governed by confidentiality, which is one of the basic principles governing an audit.

2. a) Give your comments on the following:

(1) The Central Government has appointed Mr. Sushil, a retired Finance director of a reputed Company, a non-practising member of ICAI as a special auditor of MM Ltd., on the ground that the Company was not being managed on sound business principles. Mr. Ajay, the MD of MM Ltd., feels that the appointment of Mr. Sushil is not valid as he does not hold a certificate of practice.

S.233 A (1) empowers the Central Government to appoint auditors to carry out Special Audit where, among other things, the central Government is of the opinion that the affairs of the Company are not being conducted on sound business principles. Such a special auditor need not be holding a certificate of practice.

In the given question, Mr Ajay feels that the appointment of Mr Sushil as special auditor is not valid since he does not hold a certificate of practice.

As per S. 233 A (1), the special auditor need not be holding a certificate of practice. Therefore, the opinion of Mr Ajay is ill founded.

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