Doubts in company audit

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26 January 2012 Doubts in COMPANY AUDIT:
1. If there are partners not holding COP in the firm, will it affect the eligibility for appointment?
2. A partnership firm has 4 practicing CA partners of which 2 are working and 2 are dormant. Is the firm eligible for accepting audit of public company?
3. A partnership firm having 3 practicing partners and 2 partners not having COP where a partner not having COP is indebted to the company for Rs. 2500. Is the firm eligible for appointment?
4. A practicing CA holds redeemable pref shares in a company. Is he eligible for appointment? What if the pref shares were convertible pref shares?
5. As per sec 224(1B), branch audit is to be excluded from computing the ceiling limits. However as per ICAI notif, it is to be included. But in what sense to be included, as an audit of a company or just one audit assignment?
An auditor has 10 public companies having paid up cap greater than 25 lakhs. He got an offer of audit of 5 branches of a public ltd having share capital 30 lakhs. Can he accept? In other words will it be 1 audit assignment (unit count) or a one company audit?

PRACHI AGARWAL

PRACHI AGARWAL (Expert)
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08 February 2012 226. Qualifications and disqualifications of auditors.—

(1) A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949):

Provided that a firm whereof all the partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company, in which case any partner so practising may act in the name of the firm.

(3) None of the following persons shall be qualified for appointment as auditor of a company—

(a) a body corporate;

(b) an officer or employee of the company;

(c) a person who is a partner, or who is in the employment, of an officer or employee of the company;

(d) a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees;

5[(e) a person holding any security of that company after a period of one year from the date of commencement of the Companies (Amendment) Act, 2000.

Explanation.—For the purpose of this section, “security” means an instrument which carries voting rights.]

Explanation.—References in this sub-section to an officer or employee shall be construed as not including references to an auditor.

(4) A person shall also not be qualified for appointment as auditor of a company if he is, by virtue of sub-section (3), disqualified for appointment as auditor of any other body corporate which is that company‘s subsidiary or holding company or a subsidiary of that company’s holding company, or would be so disqualified if the body corporate were a company.

(5) If an auditor becomes subject, after his appointment, to any of the disqualifications specified in sub-sections (3) and (4), he shall be deemed to have vacated his office as such.

On the basis of above section it can be said that:
1: If there are partners not holding Cop then niether the firm nor the partners are eligible to be appointed as an auditor , as sub section 1 of section 226 clearly provides that only a practising chartered accountant willbe eligible for appointment
2: however if all the partners of a C.A firm hold COP than the firm is eligible to be appointed as an auditor no matter whether some of the partners are dormant, section 226 does not make any reference to that.
3:same as answer to point no:1 and the firm is disqualified to be appointed as an auditor by vitue of section 226(3) also, as 2 partners have been indebted to company for an amount of RS 2500.
4:section 226(3)(e)provides that any person holding any security i.e. security carrying voting rights shall be ineligible for appointment as an auditor, however in this case C.A holds prefrence shares of the company , which do not carry any voting rights therefore , he/she is eligible to be appointed as an auditor

Section 224(1B)
The expression 'specified number' means—
(i) in the case of a person or firm holding appointment as auditor of a number of companies each of which has a paid-up share capital of less than rupees twenty-five lakhs, twenty such companies;

(ii) in any other case, twenty companies, out of which not more than ten shall be companies each of which has a paid-up share capital of rupees twenty-five lakhs or more.

In computing the specified number of companies in respect of which or any part of which any person or firm has been appointed as an auditor, whether singly or in combination with any other person or firm, shall be taken into account in computing the specified number as defined in Explanation I of section 224(1C).

The following types of companies shall be excluded from reckoning specified limits, in terms of share capital:—

(a) Guarantee companies (Department's Letter No. 8/12/(224)/74-CL-V, dated 28-9-74)

(b) Foreign companies (Circular No. 21 of TSF No. 35/3/75-CL-III, dated 24-9-1975)
As mentioned above, as per the Companies (Amendment) Act, 2000 private companies will not be taken into account for counting the 20 number of companies audit as specified as per sub-section (1B) of section 224.

(c) Branch audit of the Indian Companies not counted for calculating the specified number.

The Department is of the view that the branch auditor appointed under section 228 of the Act audits the accounts of the particular branch only and forwards his report to the auditor appointed u/s 224 of the Act and hence he cannot be equated with the company auditor appointed u/s 224 of the Act who has to report to the AGM on the accounts of the company as a whole including the branches audited by a branch auditor. Hence the branch audits are not to be included while calculating the specified number of 20 units.

(d) Foreign Company

Foreign companies are outside the scope of section 224 since the definition of the company u/s 3 of the Companies Act, 1956 does not include a foreign company. Hence the audit of the accounts of foreign companies is also not to be included within the specified number of 20 as laid down under Explanation I to sub-section (1C) of section 224 of the Act. [Circular No. 21 of 1975, dated 24 September, 1975]

1

Explanation II.—In computing the specified number, the number of companies in respect of which or any part of which any person or firm has been appointed as an auditor, whether singly or in combination with any other person or firm, shall be taken into account.]

on the basis of above C.A. can accept theappointment