AUDIT AND INSPECTION

An auditor

• An auditor is a person who is assigned the job to audit the financial statements of a company in accordance with the provisions of law and auditing standards as applicable in Pakistan. Appointment of an auditor is mandatory by every company, as required under the provisions of Section 252 of the Companies Ordinance (the ‘Ordinance’).

• The preparation and presentation of financial statements is the responsibility of management of the company and auditor is only responsible for audit of financial statements and giving an opinion on the fairness of the financial statements.

Audit

• An audit is an unbiased examination and valuation of the financial statements of an organization to form an independent opinion.

• The objective of audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

APPOINTMENTFirst Auditors1. the first auditors of a company shall be appointed by the

directors within 60 days of incorporation of the company[252(3)].

2. The first auditors will hold office till the first annual general meeting[252(3)].

3. If the directors failed to appoint the first auditors the members shall appoint the first auditors, provided further that the auditors such appointed shall not be removed during their tenure except through a special resolution [252(6)].

4. Where the first auditors are not appointed either by the directors or by the members with in 120 days of incorporation of the company, the security and exchange commission of Pakistan will appoint the auditors [252(6)].

Subsequent auditors

1. at each annual general meeting of the company (members) shall appoint the auditors [252(1)].

2. The auditors shall hold office from the conclusion of that meeting till the conclusion of next AGM [252(1)].

3. If no auditors are appointed at annual general meeting , the commission shall appoint an auditor, to exercise this power, the company shall give notice to the commission with in one week of these powers having become exercisable [252(7)].

Casual Vacancy

• A vacancy in the office of the auditor of the company before the term has expired is a casual vacancy.

• A casual vacancy may arise due to a host of reasons: • Death of the auditor• Resignation of the auditor• Contracting disqualifications• incapacity to contract• Ceasing to be a member• Change in status of the auditor

Casual vacancy 1. Casual vacancy of the auditor is filled by the directors but

the surviving auditor may continue to hold office till vacancy is filled.

2. Auditors so appointed shall hold office till next annual general meeting [252(5)].

3. If directors do not appoint auditors to fill casual vacancy with in 30 days the commission may appoint an auditor to fill the vacancy [252(6)] .

Commission powers to appoint auditors [252(6)].

The SECP may appoint an auditor if the following situations arise.1. First auditors are not appointed within 120 days from

incorporation.2. Subsequent auditors are not appointed in annual general

meeting .3. Casual vacancy is not filled with in 30 days, and4. Auditors appointed are unwilling to act as auditors.To exercise this power , the company shall give notice to the

commission within one week of its powers becoming exercisable.

AUDITORS TIME OF APPOINTMENT

APPOINTING AUTHORITY

TERM OF OFFICE

APPOINTING AUTHORITY IN DEFAULT

REMARKS

First auditors

Within 60 days of incorporation

directors Till first AGM

members Members shall appoint first auditors at a

general meeting with 120 days

Subsequent auditors

AGM members Till next AGM

commission If auditors are not appointed in

AGM, SECP may appoint auditors

Casual vacancy

Within 30 days of vacancy

directors Till next AGM

commission After 30 days of vacancy ,

commission may appoint auditors

Remuneration of auditors[252(8)]Fixation of remuneration of auditors depends upon the authority appointing the auditors i.e.

1. If auditors are appointed by directors , directors shall fix the remuneration.

2. If the auditors are appointed by commission, commission shall fix the remuneration.

3. In all other cases, the members shall fix the remuneration.

Procedure for change of subsequent auditors/ removal of auditors/ appointment of new auditors [253].

1. Notice from a member is required for a resolution at the AGM [253(1)].

2. The member shall give notice to the company at least 14 days before the AGM that he intend to propose the appointment of an other person as auditor [253(2)].

3. On receipt of the notice, the company shall send a copy of such notice to the:

i. Retiring auditors, forth withii. Members, at least 7 days before the AGM [253(2)].

Continue…4. In the case of listed company , noticed shall be published

at least in one issue of an English an Urdu daily newspaper having circulation in province where the stock exchange is situate on which the shares of the company are listed.

5.The retiring auditor can make representations and the company shall send a copy of representation of every member or it maybe read at AGM.

6. A company within 14 days after the AGM shall notify to the registrar of the

i. Appointment of new auditors with their consent letters[253(5)].

ii. Retirement or removal of auditors [253(6)].

Change of auditors-checklist

Actions required Timing

Notice from a member from the date of AGM.

At least 14 days.

Send copy of notice to:a) The retiring auditorsb) members

Forth withAt least 7 days before date of AGM

Publication of the fact in the newspaper that notice has been received

Any time before the AGM

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.

How can an auditor be removed?

How can an auditor be removed? • Members may remove an auditor from office

during their tenure through passing special resolution in a general meeting. There should be a proper justification for removing the auditor in compliance with Section 253(3) of the Ordinance.

• A company is also required to send intimation thereof to the registrar concerned, on Form-29, under section 205 of the Ordinance within fourteen days from the date of removal.

Removal of auditors 1. First auditor appointed by the directors maybe removed by

the members in a general meeting.2. Another person nominated by a member shall be appointed

in place of the outgoing auditors.3. The notice of nomination of the proposed auditors should

be given to the members at least 14 days before the general meeting and all the procedure stated above would be required to be followed in this case also.

4. An auditor or auditors appointed in an annual general meeting maybe removed before conclusion of the next annual general meeting through a special resolution.

5. In the above case (4) SECP may appoint the auditors of the company.

Qualification & Disqualification Of Auditors

Qualification 245(1)for appointment as auditors of:1. a public company2. A private company which is a subsidiary of a public

company.3. 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.

Disqualifications 245(3)Following persons are not qualified to become auditors of a

company :i. Present director other officer or employee of the company or

who held this office 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.iv. A person who is indebted to the company , provided that a

person who owes: a) A sum of money not exceeding five hundred thousand rupees to a

credit card issuer Orb) A sum to a utility company in form of unpaid dues for a period not

exceeding 90 days, shall not be deemed to be indebted to the company.

Continued…v. A body corporate.vi. A person or his spouse or minor children or in case of firm

all partners of such firm who hold 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, weather 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 245(4).

Unqualified person as AUDITOR

• The appointment as auditor of a company of an unqualified person, or of a person who is subject to any disqualifications to act as such, shall be void. An auditor shall deem to have vacated his office as an auditor with effect from the date on which he becomes so disqualified.

Powers/rights of an auditor(255)1. Right of access to books ,papers, accounts and

vouchers[255(1)]2. Right to receive information and explanation3. Right to access to books and papers of branch if the

company has a branch.4. Right to receive notices of general meeting and to attend

those meetings.5. Right to make representation where another person is

being appointed as auditor.

Duties Of an auditor a) Duties of auditor under section [255(3)]

I. To give a report to the members on the accounts, books of account, balance sheet and profit and loss account examined by him [255(3)]

II. Where any matter reported upon is answered in the negative or with a qualification the report shall include reasons for such qualifications with factual position.

III. To include in the report of the company such matters as directed by the commission

IV. To attend those general meeting of a listed company, either himself or through authorized person, in which the balance sheet, profit and loss account and the auditors report are to be considered.

Continued…

b) To make report for inclusion in prospectus c) To certify receipts and payments account in the statutory

report.d) To make report on declaration of solvency in case of

voluntary winding up.e) To exercise reasonable care and skill in caring out his

duties and make such inquiries as considered necessary.

Reading and inspection of auditors report(section-256)

Auditors report shall be read in general meeting and shall be open to inspection by the members.

Signature & date on auditors report

1. The person appointed as auditors of a company shall sign the auditors report or other document required under the law to be signed by the auditors.

2. The report should indicate the date and place.

Audit of cost accounts (section-258)

Where a company is required to maintain any records relating to its costs of production etc. it will also get these

accounts audited. The auditor in this case shall be a charted accountant or a cost and management accountant.

Auditors liabilitiesa. Civil liabilitiesCivil liabilities means the disputes over losses causedTo one party by acts of another. The civil liabilities of an auditor can be for:-1. Negligence 2. Misfeasance

Misfeasance

• With regards to performance on a contract, misfeasance is engaging in a proper action or duty, but failing to perform the duty correctly. Misfeasance often occurs in the business world when management does not comply with rules and procedures, not out of intent to harm, but to perhaps create a shortcut.

NEGLIGENCE

Definition• A failure to behave with the level of care that someone of

ordinary prudence would have exercised under the same circumstances. The behavior usually consists of actions, but can also consist of omissions when there is some duty to act.

• Negligence is a 'legal cause' of damage if it directly and in natural and continuous sequence produces or contributes substantially to producing such damage, so it can reasonably be said that if not for the negligence, the loss, injury or damage would not have occurred.

Liability for negligence (under law of agency)

• Auditor being agent of the shareholders, is required to carry out his duties with reasonable care and skill. If he fails to do so, he is liable to make good any loss caused to the third party.

Major legal decisions1. Arthur E. green & company Vs central advance &

discount corporation ltd.(1920)It was held that auditor is guilty of negligence. Auditor

accepted the schedule of bad debts furnished by the client, though it was apparent that debts were not recoverable.

Continued….2. The London oil storage co. Ltd Vs sear hasluck & co.In this case auditors were held liable for negligence. Auditors

failed to verify the physical existence of cash in hand . Cash balance as per books did not agree with the physical balance, difference was misappropriated by the cashier .

3. Irish woolen co. ltd. Vs Tyson and others in this case auditors were held liable for negligence. Profits

were overstate by not recording purchase invoices. He was held liable for having failed to exercise reasonable care and skill.

Continued…• 4. Kingston cotton mills co. ltdIn this case auditors were not held for negligence. It was held

that it is not the duty of auditors to take stock, if they accept certificate in the absence of an suspension, he has carried out reasonable caring and skill.

ii) Liability for misfeasance

• The term misfeasance means breach of duty. If auditor does something wrong in the performance of his duties resulting in a financial loss to the company , he is guilty of misfeasance.

• For example , auditors duties are laid down in section 255 of the company ordinance 1984. if auditors does not perform his duties properly and the company suffers loss he is liable for misfeasance.

Criminal liabilities• Section • 260 if auditors fails to comply with the requirements of

section 157, 255 or 257 he shall be punishable with fine up to Rs. 100,000/-. If he knowingly makes a false report for profit to himself or to put another person to a disadvantage or loss for a material consideration, he shall also be punishable with imprisonment for period of one year .

• 417 If charges of forgery are brought against an auditor he maybe liable to imprisonment for a term which maybe extended to two years or fine up to Rs. 20,000/- or both.

Continued…• 492 If any report the auditor make a

false or incorrect statement he shall be liable to fine not exceeding Rs. 50,000/-.