FUNDAMENTALS OF AUDITING ACC311 Lecture 6
Lesson 06
LEGAL CONSIDERATION
REGARDING AUDITING
REGARDING AUDITING
The Audit Requirement
• Not all limited
companies are required to have their financial statements audited. Nor are all
companies are required to have their financial statements audited. Nor are all
companies required to
produce financial statements in the same formats as many exemptions may
produce financial statements in the same formats as many exemptions may
apply to small and
medium sized companies.
medium sized companies.
• Broadly speaking,
small companies are exempt from the audit requirement, small and medium sized
small companies are exempt from the audit requirement, small and medium sized
companies may file
abbreviated accounts with the registrar of companies and small companies may
abbreviated accounts with the registrar of companies and small companies may
prepare accounts with
reduced disclosures for their members.
reduced disclosures for their members.
Appointment, Duties,
Rights and Liabilities of Auditor
Rights and Liabilities of Auditor
Appointment:
First Auditors
a) The first auditors of
a company shall be appointed by the directors within 60 days of
a company shall be appointed by the directors within 60 days of
incorporation of the
company [252(3)]
company [252(3)]
b) The first auditors
will hold office till the first annual general meeting [252(3)].
will hold office till the first annual general meeting [252(3)].
c) If the directors fail
to appoint the first auditors, the members shall appoint the first
to appoint the first auditors, the members shall appoint the first
auditors, provided
further that the auditors such appointed shall not be removed during
further that the auditors such appointed shall not be removed during
the tenure expect
through a special resolution [(252(6)].
through a special resolution [(252(6)].
d) Where the first
auditors are not appointed either by the directors or by the members within
auditors are not appointed either by the directors or by the members within
120 days of
incorporation of the company, the Securities & Exchange Commission of
incorporation of the company, the Securities & Exchange Commission of
Subsequent
Auditors
Auditors
(a) At each annual
general meeting the company (members) shall appoint the auditors [252(1)].
general meeting the company (members) shall appoint the auditors [252(1)].
(b) The auditors shall
hold office from the conclusion of that meeting till the conclusion of
hold office from the conclusion of that meeting till the conclusion of
next annual
general meeting [Section 252(1)].
general meeting [Section 252(1)].
(c) If no auditors are
appointed at annual general meeting Commission shall appoint an auditor.
appointed at annual general meeting Commission shall appoint an auditor.
To exercise this power
the company must give notice to Commission within one week of
the company must give notice to Commission within one week of
these powers having
become exercisable [252(7)].
become exercisable [252(7)].
Note: Provided that an
auditor or auditors appointed in a general meeting may be removed before
auditor or auditors appointed in a general meeting may be removed before
conclusion of the next
annual general meeting through a special resolution [252(1)].
annual general meeting through a special resolution [252(1)].
Casual Vacancy
a) Any casual vacancy
shall be filled by directors. [Sec 252(4)].
shall be filled by directors. [Sec 252(4)].
b) Auditors so appointed
shall hold office till next annual general meeting.[Sec 252(5)]
shall hold office till next annual general meeting.[Sec 252(5)]
c) If directors do not
appoint auditors to fill casual vacancy within 30 days, Commission may
appoint auditors to fill casual vacancy within 30 days, Commission may
appoint an auditor.[Sec
252(6)]
252(6)]
Commission’s powers to
appoint auditors [252(6)]
appoint auditors [252(6)]
The Securities &
Exchange Commission of Pakistan may appoint an auditor if the following
situations arise:
Exchange Commission of Pakistan may appoint an auditor if the following
situations arise:
a) First auditors
are not appointed within 120 days from incorporation;
are not appointed within 120 days from incorporation;
b) Subsequent
auditors are not appointed in annual general meeting;
auditors are not appointed in annual general meeting;
c) Casual vacancy
is not filled within 30 days; and
is not filled within 30 days; and
d) Auditors appointed
are unwilling to act as auditors.
are unwilling to act as auditors.
To exercise this power,
the company must give notice to Commission within one week of its powers
the company must give notice to Commission within one week of its powers
becoming
exercisable.
exercisable.
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SUMMARY
Auditors Time of
First 1st
Auditors
Subsequent
Auditors
Casual
Vacancy
appointment
Appointing
Authority
Within 60 days
of
Incorporation
Term of
Office
Directors Till first
AGM
AGM Members Till next
AGM
Within 30 days
of the vacancy
Directors Till next
AGM
Appointing
Authority in
default
Remarks
Members Members shall appoint
1st
1st
auditors at a general
meeting
meeting
within 120 days. After
120
120
days SECP may make the
appointment.
SECP If auditors are not
appointed
appointed
in Auditors AGM. AGM,
SECP may appoint
auditors.
auditors.
SECP After 30 days of
vacancy.
vacancy.
Vacancy of the vacancy
AGM SECP may appoint
auditors.
Remuneration of Auditors
[252(8)]
[252(8)]
Fixation of remuneration
of auditors depends upon the authority appointing the auditors, i.e.
of auditors depends upon the authority appointing the auditors, i.e.
i) If auditors are
appointed by directors, directors shall fix the remuneration.
appointed by directors, directors shall fix the remuneration.
ii) If auditors
are appointed by COMMISSION, COMMISSION shall fix remuneration.
are appointed by COMMISSION, COMMISSION shall fix remuneration.
iii) In all other
cases, the members (Company) shall fix the remuneration.
cases, the members (Company) shall fix the remuneration.
Note: Minimum hourly
rates are also recommended by The Institute of Chartered Accountants of
Pakistan
rates are also recommended by The Institute of Chartered Accountants of
Pakistan
(ICAP) which is specified
in members’ Handbook Volume II (Part II ATR-14).
in members’ Handbook Volume II (Part II ATR-14).
SUMMARY
Appointing Authority
Remuneration Fixed by
Remuneration Fixed by
a) Directors
Directors
Directors
b) Commission
Commission
Commission
c) In all other
case Members (Company)
case Members (Company)
Procedure for Change of
Subsequent Auditors/ Removal of Auditors / Appointment of New
Subsequent Auditors/ Removal of Auditors / Appointment of New
Auditors (Section-253)
New auditors can be
appointed in place of retiring auditors if the following requirements are
fulfilled.
appointed in place of retiring auditors if the following requirements are
fulfilled.
a) Notice from a
member is required for a resolution at the AGM (253(1)).
member is required for a resolution at the AGM (253(1)).
b) The member shall give
notice to the company at least 14 days before the AGM that he
notice to the company at least 14 days before the AGM that he
intends to propose the
appointment of another person as auditor (253(2)).
appointment of another person as auditor (253(2)).
c) On receipt of
the notice the company shall send a copy of such notice to the:
the notice the company shall send a copy of such notice to the:
i) retiring
auditor, forthwith
auditor, forthwith
ii) members, at
least seven days before the AGM. (253(2))
least seven days before the AGM. (253(2))
d) In case of a listed
company, notice shall be published at least in one issue of an English
company, notice shall be published at least in one issue of an English
and an Urdu daily
newspaper having circulation in the province where the stock
newspaper having circulation in the province where the stock
exchange(s) is situate
on which the shares of the company are listed.
on which the shares of the company are listed.
e) The retiring auditor
can make representations and the company shall send a copy of
can make representations and the company shall send a copy of
representation to a
member or it may be read at AGM.
member or it may be read at AGM.
Provided that the
representation cannot be sent OR read at the AGM if the Registrar does not
representation cannot be sent OR read at the AGM if the Registrar does not
permit so on the
application of the company or any other person. (253 (3)).
application of the company or any other person. (253 (3)).
f) A company
within 14 days after the AGM shall notify to the Registrar of the
within 14 days after the AGM shall notify to the Registrar of the
i) appointment of
new auditors with their consent letter. 253(5).
new auditors with their consent letter. 253(5).
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ii) retirement or
removal of auditors. Section 253(6)
removal of auditors. Section 253(6)
Note: Under the
Schedule-I Part-I of the Chartered Accountant Ordinance, 1961 new auditor
accepting
Schedule-I Part-I of the Chartered Accountant Ordinance, 1961 new auditor
accepting
the appointment without
communicating with the previous auditor shall be deemed to be guilty of
communicating with the previous auditor shall be deemed to be guilty of
professional misconduct.
The Institute of Chartered Accountant of Pakistan has issued Auditing Technical
The Institute of Chartered Accountant of Pakistan has issued Auditing Technical
release (ATR-2)
explaining what does the word “Communication” means. Therefore, it is
necessary for the
explaining what does the word “Communication” means. Therefore, it is
necessary for the
new auditors to
communicate with the previous auditors before accepting the appointment to
ascertain that
communicate with the previous auditors before accepting the appointment to
ascertain that
he has no objection on
professional grounds, regarding the appointment. Clause 7 of the Schedule
requires
professional grounds, regarding the appointment. Clause 7 of the Schedule
requires
that incoming auditor
should ensure before accepting the appointment, that requirements of the Companies
should ensure before accepting the appointment, that requirements of the Companies
Ordinance, 1984
regarding his appointment have been fulfilled.
regarding his appointment have been fulfilled.
Change of Auditors –
Checklist
Checklist
Actions Required
Timing
Notice from a member
from the date of AGM At least 14 days
from the date of AGM At least 14 days
Send Copy of the notice
to:
to:
a) The
retiring auditor forthwith
retiring auditor forthwith
b)
Members At least 7 days before
Members At least 7 days before
The date of AGM
Publication of the fact in newspapers anytime before the AGM. That notice has
been
Publication of the fact in newspapers anytime before the AGM. That notice has
been
received. Representation
by auditors Sent to members before AGM or read at AGM.
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.
change to the Registrar within 14 days after the date of AGM.
Removal of
Auditors
Auditors
i) First auditor
appointed by the directors may be removed by the members in a general
appointed by the directors may be removed by the members in a general
meeting.
ii) Another person
nominated by a member shall be appointed in place of the outgoing
nominated by a member shall be appointed in place of the outgoing
auditor.
iii) The notice of
nomination of the proposed auditor should be given to the member’s at least
nomination of the proposed auditor should be given to the member’s at least
14 days before the
general meeting and all the procedure stated above would be required to
general meeting and all the procedure stated above would be required to
be followed in this case
also.
also.
iv) An auditor or auditors
appointed in an annual general meeting may be removed before
appointed in an annual general meeting may be removed before
conclusion of the next
annual general meeting through a special resolution.
annual general meeting through a special resolution.
v) In the above case,
SECP may appoint the auditor(s) of the company.
SECP may appoint the auditor(s) of the company.
Qualification &
Disqualification of Auditors
Disqualification of Auditors
Qualification 254(1)
For appointment
as auditor of:
as auditor of:
a) a Public
Company or
Company or
b) a Private
Company which is a subsidiary of a Public Company.
Company which is a subsidiary of a Public Company.
c) a Private
Company having paid up capital of three million rupees or more.
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,
Chartered Accountant within the meaning of the Chartered Accountants Ordinance,
1961.
Note: For listed
companies an auditor must have a satisfactory QCR (quality control review)
rating issued
companies an auditor must have a satisfactory QCR (quality control review)
rating issued
by ICAP.
Disqualifications 254(3)
Following persons are
not qualified to become auditors of a company:
not qualified to become auditors of a company:
i) Present directors,
other officer or employees of the company or who held these offices
other officer or employees of the company or who held these offices
during the last three
years.
years.
ii) A partner or
employee of a director, other officer or employee of the company.
employee of a director, other officer or employee of the company.
iii) A spouse of a
director.
director.
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iv) A person who
is indebted to the company.
is indebted to the company.
v) A body corporate.
vi) A person or his
spouse or minor children or in case of firm all partners of such firm who
spouse or minor children or in case of firm all partners of such firm who
holds any shares of an
audit client or any of its associated companies.
audit client or any of its associated companies.
Provided that if such a
person holds shares prior to his appointment as auditors, whether as an
individual or
person holds shares prior to his appointment as auditors, whether as an
individual or
a partner in a
firm the fact shall be disclosed on his appointment as auditor and such person
shall disinvest
firm the fact shall be disclosed on his appointment as auditor and such person
shall disinvest
such shares within
ninety days of such appointment.
ninety days of such appointment.
vii) A person
disqualified for appointment as an auditor due to above reasons is disqualified
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
of auditor of another company which is a subsidiary or holding
company of that company
254(4).
