Module 4

Company Audit and Audit of other entities

Company Auditor: Appointment:
The appointment of a company auditor is a formal process governed by laws and
regulations in most jurisdictions (e.g., the Companies Act 2013 in India, or the
Companies Act 2006 in the UK). Here’s a general overview of how an auditor is
appointed, focusing on private and public companies:
Auditor Appointment Process:
1. First Auditor (New Company)
● Private Company:
o Must appoint the first auditor within 30 days of incorporation by the Board
of Directors.
o If the Board fails to do so, shareholders must appoint the auditor within 90
days at an EGM (Extraordinary General Meeting).
● Public Company:
o Same rule applies (Board within 30 days; if not, shareholders within 90
days).
2. Subsequent Auditor (After First Audit)
● Auditor is appointed by members at the AGM (Annual General Meeting).
● The term is usually 5 years, subject to ratification every year (in some
jurisdictions).
Documents Involved
1. Board Resolution – for first auditor.
2. Shareholder Resolution – for subsequent appointments.
3. Consent Letter – from the auditor confirming eligibility and willingness.
4. Certificate – stating auditor is not disqualified under relevant laws.
5. Form Filing – e.g., Form ADT-1 in India, filed with the Registrar of Companies
(RoC).
Eligibility Criteria for Auditor
● Must be a Chartered Accountant (individual or firm).
● Must not be disqualified under the law (e.g., not indebted to the company, not an
employee, etc.).
Rotation of Auditors (Applicable in Some Cases)
● In public companies or certain large private companies, rotation rules apply
 (e.g., no reappointment after one or two terms).
Example: India (Companies Act, 2013)
● First Auditor: Appointed under Section 139(6)
● Subsequent Auditor: Appointed under Section 139(1)
● Form ADT-1: Must be filed within 15 days of appointment
Qualifications of a Company Auditor:
1. Professional Qualification:
o Must be a Chartered Accountant (CA) or equivalent (e.g., CPA in the US, ACA
in the UK).
o If it's a firm, the majority of partners practicing in India (or respective
jurisdiction) must be qualified CAs.
2. Membership:
o Must be a member of a recognized professional accounting body, e.g.:
● ICAI (India)
● AICPA (USA)
● ICAEW (UK)
3. Holding a Valid License:
o Must have a valid Certificate of Practice (CoP) or equivalent license to audit.
4. Not Disqualified:
o The auditor must not be disqualified under applicable company law (details
below).
Qualification (Section 141(1)):
A person shall be eligible for appointment as an auditor of a company only if he is a
chartered accountant.
Firm as Auditor:
A firm can be appointed if the majority of partners practicing in India are qualified
chartered accountants.

Summary
Requirement Details
Professional
Qualification Chartered Accountant (CA), CPA, ACA, etc.

Valid Certificate of Practice (CoP) or audit

Licensing license
Independence Must be independent (no conflict of interest)
 As per company law (e.g., not employee, not
No Disqualifications indebted)
Powers of a Company Auditor:
1. Access to Books and Records
● The auditor has the right to access the company’s books of account and
vouchers at all times, including:
o Financial records
o Minutes of meetings
o Statutory registers
o Supporting documents
2. Right to Obtain Information and Explanations
● The auditor can request any information or explanation from:
o Company officers (directors, managers)
o Employees
● It is the duty of the company to provide these details if reasonably required for
the audit.
3. Right to Visit Branches
● The auditor has the power to visit any branch office and audit its records, unless
a separate branch auditor is appointed.
4. Right to Report
● The auditor must report to the shareholders (or members) on the:
o Truth and fairness of the financial statements
o Compliance with accounting standards
o Any fraud, misstatements, or irregularities (if applicable)
5. Right to Attend General Meetings
● The auditor has the right to receive notices of general meetings, attend them,
and be heard on matters related to the audit.
6. Right to Sign Audit Report
● Only the appointed auditor (or authorized partner of the audit firm) has the right
to sign the audit report and certify the accounts.
Under Section 143 of the Companies Act, 2013:
Auditor Can:
● Access books of account and vouchers of the company and subsidiaries.
● Seek information/explanation from officers.
 ● Report whether:
o Proper books of accounts are maintained.
o Financial statements comply with accounting standards.
o Any fraud or irregularity is detected.
Special Powers:
● In case of suspected fraud, must report to the Central Government (under
Section 143(12)).
Auditor’s Independence
While exercising these powers, the auditor must maintain:
● Professional skepticism
● Independence
● Confidentiality
They cannot misuse access or act in conflict of interest.

Summary Table
Power Details
Full access to books, accounts, and
Access to records documents
Request information/ Can ask any officer/employee for audit-
explanations related info
Branch audit Visit or request audit of branches
Report to shareholders on accuracy and
Reporting compliance
Attend general meetings Right to attend and speak on audit matters
Authorized to sign and submit the audit
Sign audit report opinion

Duties of a Company Auditor:

1. Examine Financial Statements
● Audit the balance sheet, profit and loss account, cash flow, and related
documents to ensure they present a true and fair view.
2. Compliance Check
● Verify whether the financial statements are prepared in accordance with:
o Applicable accounting standards
o Company law
 o Regulatory requirements
3. Report to Shareholders
● Prepare an audit report to be presented to shareholders, giving their opinion on
the financial statements.
4. Check Books and Records
● Ensure that proper books of account have been maintained and match the
financial statements.
5. Detection of Fraud or Errors
● While auditors are not responsible for preventing fraud, they must report any
fraud or material misstatements they discover.
6. Report Fraud (if applicable)
● In some jurisdictions (e.g., India under Section 143(12) of the Companies Act,
2013), the auditor must report suspected fraud to regulatory authorities.
7. Maintain Confidentiality
● Auditors must not disclose company information unless required by law.
8. Attend General Meetings
● Auditors have the right and duty to attend and be heard at general meetings on
matters concerning their report.
Liabilities of a Company Auditor:
Civil Liability
● Can be sued for negligence if their failure causes loss to:
o The company
o Shareholders
o Creditors
● Example: Issuing a clean report despite knowing about misstatements.
Criminal Liability
● Can face fines, imprisonment, or both for:
o Wilful misstatement
o Fraudulent conduct
o Falsification of documents
o Failure to report fraud (in jurisdictions like India)
Professional Misconduct
● Can be penalized by the governing accounting body (e.g., ICAI in India) for:
o Breach of ethical standards
 o Conflict of interest
o Gross negligence or incompetence
Penalty under Company Law
● For violations of company law provisions, auditors may face:
o Monetary penalties
o Disqualification
o Debarment from audit practice
Section Provision
Duties of auditor (reporting, compliance, fraud
Sec 143 detection)
Auditor cannot render prohibited non-audit
Sec 144 services
Sec 147 Penalties for contravention (civil & criminal)
Sec Mandatory reporting of fraud to the Central
143(12) Government

Summary
Category Description
Duties Audit accounts, report truthfully, ensure compliance
For negligence or loss caused to company/
Civil Liability stakeholders
Criminal Liability For fraud, falsification, or willful misconduct
Professional For breaching ethics or standards of the accounting
Liability profession
Statutory Liability Under specific provisions of the Companies Act
professional ethics of an auditor
Professional Ethics of an Auditor:
1. Integrity
● Auditors must be honest and straightforward in all professional and business
relationships.
● No false statements, manipulation, or misleading information.
Example: Not altering audit findings to please the client.
2. Objectivity
● Must not let bias, conflict of interest, or undue influence affect their judgment.
 ● Avoid being swayed by relationships or pressures from management.
Example: Remaining neutral even if a long-term client is underperforming.
3. Professional Competence and Due Care
● Must maintain knowledge and skill at a professional level.
● Perform duties diligently, in accordance with applicable standards and laws.
Example: Staying updated with changes in tax laws, IFRS, or auditing standards.
4. Confidentiality
● Must not disclose any client information to third parties without legal or
professional duty to do so.
● Confidentiality continues even after the engagement ends.
Example: Not discussing a client’s audit issues with other clients or the media.
5. Professional Behavior
● Must comply with laws and regulations, and avoid any conduct that discredits
the profession.
Example: Not engaging in marketing practices that degrade fellow professionals.
6. Independence
● Must be independent in mind and appearance when conducting audits.
● Avoid financial, business, or personal relationships that create a conflict of
interest.
Example: Not auditing a company where the auditor's relative is a key executive.
Audit Procedure of NGOs:
1. Planning the Audit
● Understand the NGO’s structure, mission, and objectives.
● Identify:
o Sources of funding (grants, donations)
o Major programs or activities
o Legal/regulatory framework (e.g., FCRA in India)
● Review:
o Past audit reports
o Governing documents (Trust deed, society registration, etc.)
o Internal controls
Objective: Develop an audit strategy tailored to the NGO’s nature and risks.
2. Evaluating Internal Controls
● Assess systems for:
 o Fund receipts and disbursements
o Authorization of expenses
o Segregation of duties
o Donor fund tracking
● Identify any weaknesses in internal controls.
Focus is on fund utilization and prevention of misuse.
3. Verification of Income
● Check sources of income:
o Donations (local and foreign)
o Grants (government and institutional)
o Membership fees (if applicable)
o Investment income
● Verify:
o Donation receipts and acknowledgments
o Grant agreements and conditions
o FCRA compliance (for foreign contributions)
Ensure that income is recorded correctly and used as per donor conditions.
4. Verification of Expenditure
● Check that expenses are:
o Authorized and approved
o Related to NGO’s objectives
o Supported by bills and vouchers
● Trace expenses to:
o Activity reports
o Budgets approved by the board or donor
Focus on transparency, accountability, and no personal benefit.
5. Bank and Cash Verification
● Verify:
o Bank reconciliation statements
o Petty cash balances
o Cash receipts and disbursements
● Check for:
o Unusual withdrawals
 o Transfers between project accounts
6. Compliance Review
● Review compliance with:
o Local NGO laws (e.g., Societies Registration Act, Trust Act)
o Tax laws (e.g., 12A/80G in India for tax exemption)
o Foreign contribution laws (e.g., FCRA compliance in India)
o Donor-specific conditions
7. Physical Verification (if needed)
● Visit project sites or offices to verify:
o Assets purchased with donor funds
o Activities carried out (cross-check with financial records)
8. Preparation of Audit Report
● Issue an audit opinion on:
o Fair presentation of financial statements
o Proper utilization of funds
o Any irregularities or non-compliance
● Include:
o Recommendations for improving internal controls
o Comments on specific donor fund usage (if required)

Documents Reviewed in NGO Audits

● Financial statements (Income & Expenditure, Balance Sheet)
● Receipts & vouchers
● Donor agreements
● FCRA returns (if applicable)
● Minutes of board meetings
● Bank statements & reconciliations
● Statutory registers

Special Considerations
Area Auditor Focus
FCRA compliance, fund utilization, donor
Foreign contributions restrictions
Were funds used strictly for the intended
Designated funds purposes?
Related party
transactions Transparency and arm’s length dealing
Program vs admin Is spending aligned with program goals and
cost limits?
audit procedure of charitable institutions

Audit Procedure of Charitable Institutions:

1. Understand the Institution
● Obtain:
o Trust deed / Memorandum of Association / Bye-laws
o Registration certificates (e.g., under Trust Act, Societies Registration Act,
Section 8 of Companies Act)
o Tax registration (e.g., 12A, 80G in India)
● Understand:
o Objectives of the institution
o Activities undertaken
o Funding sources (donations, grants, interest, etc.)
Purpose: Identify the legal structure, scope, and areas of audit focus.
2. Review Internal Controls
● Evaluate:
o Receipt and payment processes
o Approval and authorization of expenditures
o Asset safeguarding
o Bookkeeping practices
Strong internal controls reduce risk of fund misuse and errors.
3. Examine Books of Accounts
● Check:
o Cash book, ledger, journal, donation register
o Receipts and payments statement
o Income & expenditure account
o Balance sheet
Ensure records are accurate, complete, and up-to-date.
4. Verify Income
● Major sources include:
o Voluntary donations (general or corpus)
 o Grants (government or private)
o Fees (if any, like for charitable hospitals or schools)
o Income from investments or properties
Audit Steps:
● Match donation receipts to bank statements
● Check donor restrictions (e.g., corpus funds not spent)
● Ensure investment income is properly recorded
Corpus donations should be accounted for separately and not used for general
expenses.
5. Verify Expenditure
● Ensure expenses are:
o Authorized and approved
o In line with charitable objectives
o Supported by bills/vouchers
Examples of expenditures to verify:
● Relief efforts
● Education programs
● Medical aid
● Admin expenses (should be within permissible limits)
Also check allocations – whether expenses are administrative or program-related.
6. Verify Bank and Cash Transactions
● Reconcile bank balances
● Check:
o Bank statements
o Bank reconciliation statements
o Cash balance verification
● Ensure:
o No unaccounted cash transactions
o All receipts are deposited into the bank
7. Verify Assets and Investments
● Physically verify major assets (buildings, equipment, etc.)
● Confirm investments (FDs, bonds, mutual funds) are:
o In the institution’s name
o Authorized under applicable laws
In India, trusts must invest only in approved modes under Section 11(5) of the Income
Tax Act.
8. Compliance Check
● Tax Compliance:
o Is the institution registered under Section 12A/12AB and 80G (India)?
o Are audit reports filed (e.g., Form 10B or 10BB)?
o Are TDS and GST (if applicable) being complied with?
● Legal Compliance:
o Annual returns with the Charity Commissioner or Registrar
o Board meeting minutes
o Amendments to trust deed or rules (if any)
9. Review Utilization of Specific Funds
● Match fund utilization with donor restrictions.
● Verify end-use of:
o Foreign contributions (e.g., FCRA compliance in India)
o Project-based grants
Misuse of donor-restricted funds is a serious compliance issue.
10. Audit Report Preparation
● Issue report containing:
o Auditor’s opinion on financial statements
o Compliance with tax and legal requirements
o Observations on internal control weaknesses
o Recommendations for improvements
Audit Procedure of Educational Institutions:
1. Understand the Institution
● Review the nature and structure:
o Public or private?
o Registered under a trust, society, or company (Section 8)?
o Recognized by education boards or universities?
● Obtain:
o Constitution documents (trust deed, MoA, registration)
o Previous audit reports
o Organization chart
Goal: Get a clear picture of the institution's operations, legal setup, and sources of
income.
2. Review Internal Controls
● Evaluate systems for:
o Fee collection and recording
o Procurement and payments
o Payroll and HR
o Grants and donations
● Check segregation of duties and approval processes.
Focus on areas vulnerable to leakage or fraud—especially cash handling and fee
collection.
3. Verification of Income
● Key income sources:
o Student fees (tuition, transport, hostel, exam, etc.)
o Government grants (for aided institutions)
o Donations (corpus/general)
o Rental or investment income
Audit Steps:
● Compare actual fee collections to:
o Fee structure approved by governing body or regulatory authority
o Student enrollment records
● Cross-check:
o Fee receipts issued vs. bank deposits
o Grant receipts with sanction letters
o Donor conditions (if any)
Watch for unrecorded fees, discounts, or waivers.
4. Verification of Expenditure
● Review payments for:
o Salaries and wages
o Academic supplies and utilities
o Building maintenance
o Scholarships and concessions
o Capital expenses (infrastructure, equipment)
Check for:
● Proper approval and documentation
 ● Expenditure being related to educational purposes
● Any capex funded by grants or donations
Supporting documents (bills, vouchers, minutes) must be available and approved.
5. Payroll Verification
● Verify:
o Payroll register
o Appointment letters
o Pay slips and statutory deductions (PF, ESI, TDS)
● Check compliance with applicable labor laws and employment contracts
6. Bank and Cash Verification
● Reconcile:
o Bank statements with books
o Fee receipts with deposits
o Petty cash balances with actual count
● Review:
o Cash handling controls
o Unusual withdrawals or transfers
Look for unauthorized or cash-based transactions not recorded in books.
7. Verification of Fixed Assets
● Verify:
o Assets register (for buildings, lab equipment, furniture, buses, etc.)
o Physical existence of major assets
o Capitalization vs. expense treatment
o Depreciation policy and records
Especially important in schools and colleges where infrastructure spending is high.
8. Compliance Check
● Statutory compliance:
o Income Tax Act (12A/80G for charitable institutions)
o TDS, GST (if applicable)
o EPF, ESI laws
● Education department norms (e.g., no unauthorized fee hikes, grant conditions)
● Grant compliance (funds used for intended purpose)
In India, charitable educational institutions must ensure compliance with Section
10(23C) or Section 12A/12AB of the Income Tax Act for tax exemption.
9. Examine Donor and Grant Fund Utilization
● Match donations or grants to actual expenditures
● Check restricted funds are:
o Used for specific purposes
o Not mixed with general funds
For foreign donations, check FCRA compliance (if applicable).
10. Preparation of Audit Report
● Audit report should include:
o Auditor’s opinion on financial statements
o Comments on internal controls
o Compliance with applicable laws and education department norms
o Any irregularities or suggestions for improvement
In India, educational trusts/societies must also file Form 10B/10BB along with their
income tax return, if claiming exemption.
Key Audit Focus Areas for Educational Institutions
Area Audit Focus
Collected as per approved structure? Properly recorded and
Student fees deposited?
Proper appointment, payroll documentation, TDS and EPF
Staff salaries compliance?
Government grants Properly utilized? Complied with terms of sanction?
Capex Proper approvals, physical verification, correct classification
Statutory compliance TDS, GST, PF, ESI, Income Tax Act, Education Act compliance
Related party
transactions Any conflicts of interest in payments or procurements?

Audit Procedure of Government Bodies (Departments/Agencies):

Key Features:
● Funded by government budgets
● Subject to CAG (Comptroller and Auditor General) audit (in India)
● Public accountability is critical
Audit Procedure:
● Verify budget allocations vs. actual expenditure
● Check compliance with:
 o Government rules (General Financial Rules – GFR)
o Departmental guidelines
● Examine sanctions, approvals, and utilization certificates
● Verify public procurement practices (tenders, quotations)
● Check for unspent balances or fund lapses
● Audit fund transfers to implementing agencies (if applicable)
Audit Procedure of Local Bodies (Municipalities, Panchayats, etc.):
Key Features:
● Handle local governance functions (water, sanitation, infrastructure)
● Funded by state grants, property tax, and user charges
Audit Procedure:
● Verify tax collections, user fees, fines
● Review expenditure on public works and service contracts
● Examine registers of fixed assets, roads, vehicles
● Check compliance with State Municipal or Panchayat Acts
● Verify records of Standing Committee or Ward meetings
● Examine contractor bills and project implementation reports
● Audit often performed by State Audit Departments
Audit Procedure of Cooperative Societies:
Key Features:
● Operate for member benefit, e.g., credit societies, milk federations
● Subject to Cooperative Societies Act (varies by state)
Audit Procedure:
● Verify member records and share capital contributions
● Audit loans issued, interest charged, and recovery position
● Check compliance with:
o Bye-laws of the society
o Registrar of Cooperatives' directives
● Review dividend distribution, reserves, and statutory deductions
● Verify election records of managing committee
● Audit cash book, stock register, and investments
In India, audit may be conducted by government-appointed auditors or Chartered
Accountants empaneled with the Registrar.
Audit Procedure of Hostels (Educational/Working Hostels):
Key Features:
● May be part of educational institutions or standalone
● Often subsidized or funded by NGOs, governments
Audit Procedure:
● Verify fee receipts, student registers, and rent collected
● Check meal expenses, utilities, maintenance expenses
● Review hostel occupancy records
● Examine vendor payments for food and supplies
● Inspect asset register for furniture, kitchen equipment, etc.
Audit Procedure of Hospitals (Private or Charitable):
Key Features:
● Handle large cash flows, medicines, and equipment
● May receive donations or government grants
Audit Procedure:
● Verify patient receipts (OPD, IPD, diagnostics, etc.)
● Review doctor payments, salaries, and PF/ESI compliance
● Check stock of medicines and medical supplies
● Examine donations, grants, and their utilization
● Check fixed assets (equipment, ambulances)
● Audit billing system and patient records
Special attention to unbilled revenue, free/concessional treatment, and insurance claims.
Audit Procedure of Clubs (Sports, Recreation, or Social Clubs):
Key Features:
● Member-based non-profit entities
● Earn income from subscriptions, events, and bar/restaurant sales
Audit Procedure:
● Verify membership fees, subscription records, and dues recovery
● Review event incomes (ticketing, sponsorships)
● Audit bar and kitchen inventory – consumption vs. sales
● Examine vendor payments, salary records, and statutory dues
● Check minutes of executive committee meetings
Inventory shrinkage and unapproved spending are common risks.
Audit Procedure of Banks (Scheduled/Cooperative/Rural):
Key Features:
● Highly regulated (by RBI in India or central bank in other countries)
● Handle public deposits and issue loans
Audit Procedure:
● Statutory audit focuses on:
o Cash verification
o Loan documentation and classification (NPA check)
o Interest income recognition
o Statutory reserves and CRR/SLR compliance
● Verify internal controls, core banking software data
● Confirm customer balances
● Check for compliance with:
o Banking Regulation Act
o RBI guidelines (asset classification, KYC/AML norms)
Concurrent audits, stock audits, and revenue audits are also used in banking.
Comparative Summary Table
Entity Main Focus Areas Key Risks
Government Budget vs. expenditure, grants, Misuse of funds, non-
Bodies public procurement compliance
Tax collection, asset maintenance,
Local Bodies project expenditure Irregular payments, corruption

Cooperative Loan recovery, member equity, Loan defaults, manipulation

Societies compliance with bye-laws of books
Fee receipts, food supply, occupancy Ghost students, misuse of
Hostels records funds
Billing, donations, drug stock, staff Misbilling, inventory theft,
Hospitals payroll cash leakage
Member subscriptions, events, bar Cash mishandling, misuse of
Clubs sales resources
Loan classification, CRR/SLR, NPA understatement, fraud,
Banks income recognition compliance gaps
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