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CO Audit-help!!

sneha (CA) (96 Points)

23 March 2011

Dear Friends

Please answer

Should an auditor go through the resolution passed appointing him as auditor?If he has to then will it be contradictory to the doctrine of indoor management ; wherein its stated that auditor need not look into the internal affairs.he can assume that resolution is passed?

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Vineet Kumar Singh (Accounts Officer in Bihar State Power (Holding) Co Ltd) (264 Points)
Replied 25 March 2011

According to this doctrine “persons dealing with the company are entitled to presume that internal requirements prescribed in memorandum and articles have been properly observed”. A transaction has two aspects, namely, substantive and procedural. An outsider dealing with the company can only find out the substantive aspect by reading the memorandum and articles. Even though he may find out the procedural aspect, he cannot find out whether the procedure has been followed or not. For example, a company may have borrowing powers by passing a resolution according to its memorandum and articles. An outsider can only found out the borrowing powers of the company. But he cannot find out whether the resolution has in fact been passed or not. The outsiders dealing with the company are presumed to have read and understood the memorandum and articles and to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the memorandum and articles. They can presume that all is being done regularly.

Similarly in your question the Auditor can assume that all the internal proceeding hace being done..Further in the case of Royal British Bank v. Turquand, the directors of a company had issued a bond to Turquand. They had the power under the articles to issue such bond provided they were authorized by a resolution passed by the shareholders at a general meeting of the company. But no such resolution was passed by the company. It was held that Turquand could recover the amount of the bond from the company on the ground that he was entitled to assume that the resolution was passed.

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