An auditor should carefully go through all the important documents of a company and also various books before commencing actual audit work; otherwise he will be guilty of negligence in duty.
A. Documents:
The principal documents and books that an auditor should see and the special points that he should consider in respect of each are enumerated hereunder:
1. Memorandum of Association:
Capital and objects clauses; guarantee clause instead of capital clause in case of a company limited by guarantee.
ADVERTISEMENTS:
The objects clause should state:
(i) The main objects, objects incidental or ancillary thereto, and
(ii) Other objects.
2. Articles of Association:
ADVERTISEMENTS:
Adoption of Table A; classes of shares and rights attached thereto; allotment and calls; forfeiture; transfer and transmission of shares; brokerage and underwriting commission on placing shares; alteration of capital; borrowing powers; number, qualification, powers, duties and remuneration of directors and managing directors or manager; meetings of shareholders and directors; accounts and audit; dividends and reserves; capitalisation of profits etc.; in case of companies not limited by shares, any additional matters which are not inconsistent with any provisions of Tables C, D or E.
3. Contracts:
Terms of contracts or agreements with vendors, underwriters, managing directors, managers, promoters etc. and also those relating to acquisition of property, assets and securities.
4. Prospectus or statement in lieu of prospectus (in case of a public company or a private company converted into a public company):
ADVERTISEMENTS:
Particulars re: issue of shares and made within the two preceding years, if any; time for opening and closing of subscription lists; minimum subscription; underwriting commission or brokerage; estimates re: preliminary expenses and expenses of issue; details of option or rights issue, if any; shareholders’ rights re: voting, capital and dividends; details re : capitalisation of reserves, if any; directors’ qualification share, if any; directors’ and promoters’ interest in contracts, if any; brief particulars of material contracts; remuneration of promoters, directors, managing directors or managers etc.
In case of second or subsequent issue of shares or debentures by an existing company the prospectus must contain an auditors’ report re: profits and losses of the company in each of the preceding five years, rates of dividend paid on different classes of shares as well as assets and liabilities on the last closing date (including similar particulars in respect of subsidiaries, if any).
In case of purchase of business by the company or acquisition of shares or debentures of some other company, a similar report as above from a qualified accountant to be named in the prospectus re: profits and losses for the preceding five years and also assets and liabilities of the business so purchased or of the other company and also subsidiaries thereof must be included in the prospectus.
ADVERTISEMENTS:
5. Shelf Prospectus (with or without information memorandum):
Any public financial institution, public sector bank or scheduled bank whose main object is financing, shall file with the Registrar of Companies a “shelf prospectus” defined as a prospectus issued by any financial institution or bank for one or more issues of securities or classes of securities specified in the said prospectus.
An “information memorandum” of all material facts regarding new charges created, changes in financial position occurred between the first offers, previous offer and succeeding offers of securities within such time as may be prescribed by the Central Government must also be filed with the Registrar before making a second or subsequent offer of securities under the same shelf prospectus.
A public company may make an offer of securities by circulating an information memorandum to the public before filing a prospectus, but it must file a prospectus before the opening of the subscription list and in case of an offer by a “red herring prospectus” (defined as a prospectus which does not contain complete particulars on prices and quantum of securities offered), at least three days before the opening of the subscription list.
ADVERTISEMENTS:
Any variation between the information memorandum and red-herring prospectus must be highlighted and intimated individually to persons to whom the offer to subscribe has been made.
If the issuing company and the underwriters to the issue, have received any advance subscription, they shall not encash such money before the date of opening of the issue without having individually intimated the prospective subscribers of the variations referred to above and giving an opportunity to them to withdraw their applications and subscription moneys.
This right of withdrawal must be intimated to the company and the underwriters within 7 (seven) days from the date of such intimation. A shelf prospectus (along with an information memorandum issued to the public) filed at the stage of first offer of securities shall be valid for a period of 1 (one) year from the date of opening of the first issue under that prospectus.
If, however, an update of information memorandum is filed every time a subsequent offer of securities is made, such memorandum together with the shelf prospectus shall constitute the prospectus.
ADVERTISEMENTS:
A shelf prospectus, a red-herring prospectus and an information memorandum carry the same obligations as are applicable in the case of a prospectus.
6. Balance sheet, profit and loss account, directors’ and auditors’ reports for the last year (including separate, special or supplementary report, if any):
Special points or remarks, notes to accounts, if any.
B. Statutory Books Etc.: (To be Compulsorily Maintained)
1. Register of investments not held in a company’s name:
ADVERTISEMENTS:
The nature, value and other particulars for identifying shares, debentures and other securities in which investments have been made by but not held in the name of a company and also the bank or person in whose name or custody the securities etc., are held.
2. Register of securities bought back:
Particulars of securities bought back; consideration paid therefor; dates of cancellation, extinguishing and physically destroying of the securities and such other particulars as may be prescribed.
3. Copies of instruments creating charges and register of charge:
Particulars of all charges specifically affecting the properties of a company as well as all floating charges on an undertaking or any property of a company indicating short description of the property charged, amount of the charge and the names of persons entitled to the charge except in case of securities to bearer.
4. Register and index of members:
ADVERTISEMENTS:
Name, address and occupation of each member; shares with distinctive numbers or stocks held by each member amount paid or agreed to be paid thereon; dates of entry as and ceasing to be a member.
5. Register and index of debenture- holders:
Particulars relating to debenture-holders similar to those concerning members as above.
6. Copies of foreign registers of members and debenture-holders:
Copies of entries in a foreign or branch register maintained in a state or country outside India in respect of members and debenture-holders resident in such foreign state or country indicating same details as under items 3 and 4 above.
7. Copy of annual return:
Registered office and situation of foreign register, if any; summary of share capital and debentures including amounts of commission and discount on issue thereof; particulars of indebtedness; list of past and present members and debenture-holders; particulars of directors, managers and secretaries etc., past and present, as on the date of the last annual general meeting; details of share; debenture transfers whether shares and debentures are with recognised stock exchange(s).
8. Minute books:
Proceedings at meetings of the board of directors or of committees thereof and also those at general meetings.
(a) Directors:
Using the common seal; approval of contracts; allotment and calls, forfeiture, transfer and transmission of shares and debentures; appointment of officers, bankers etc.; appointment and remuneration of managing/whole-time directors and auditors (in some cases); sanction of capital expenditure; exercise of borrowing powers; approval of investments within prescribed limits; approval of accounts and directors’ report; recommendations re : appropriation of profits, creation or capitalisation or reserves; declaration of interim dividend etc.
(b) Shareholders:
Adoption of directors’ report, accounts and auditor’s report; declaration of dividend; appointment or election and fixation of remuneration of directors and auditors; alteration of memorandum and articles; creation of reserve capital; reduction of capital; payment of interest out of capital; authorising directors to hold office of profit, appointment of associates or entering into contracts with them as selling or buying agents; making loans or offering guarantees to companies making investments in other bodies corporate, if any; winding-up etc.
9. Books of account:
Records of (a) sums of money received and expended under different heads, (b) all sales and purchases of goods, (c) all assets and liabilities, and (d) particulars relating to cost of materials, labour and other items as may be prescribed in case of any class of companies engaged in production, processing, manufacturing or mining activities, if so required by the Central Government. Such books must be kept on accrual basis according to double entry system of bookkeeping and show a true and fair view of the state of affairs of the company and explain its transactions.
10. Register of contracts, companies and firms in which directors are interested:
Date of contract or arrangement; names of parties thereto; principal terms and conditions; date when placed before the board; names of directors voting for and against and those remaining neutral; names of corporate bodies and firms in which each director is interested etc.
11. Register of directors, etc.:
Name, father’s or husband’s name, address, nationality and occupation as well as date of birth, if any (in case of public companies and private companies which are subsidiaries of public companies) of directors, managing directors, managers.
12. Register of directors’ shareholding etc.:
Number, description and value of shares in or debentures of a company or its subsidiary or holding company or a subsidiary of its holding company held by each director, and manager or in trust for him or of which he has a right to become the holder; and also the date of and the price or other consideration for any transaction in such shares and debentures.
13. Register of inter-corporate loans investments and guarantees:
Name of the body corporate, amount, terms, purpose and security in respect of investment made or loan or guarantee given; date of investment/loan/guarantee/security; or to be entered chronologically in the register within 7 (seven) days from the date thereof. The register should be kept at the company’s registered office and open to inspection in the same manner as in the case of register of members under Section 163.
C. Statistical Books (Maintained for Facility of Work though not Compulsory):
1. Share application and allotment book:
Particulars re: classes and number of shares applied for by different persons; application money received; number of shares allotted; allotment money due and received.
2. Share calls book:
Particulars of different calls made and call money received on different classes of shares.
3. Register of share transfers:
Details re : shares transferred from one shareholder to another
4. Application and allotment, calls and transfer registers for debentures:
All particulars as in case of shares as under items 1 to 3.
5. Dividend book List:
Details of rate and amount of dividend due and paid to each shareholder under different classes of shares and income-tax deducted, if any.
6. Debenture interest book/list:
Particulars of interest on debentures due and paid to each debenture holder and income tax deducted, if any.
7. Directors’ and shareholders’ attendance registers:
Record of attendance at meetings of directors and of shareholders.
8. Register of sealed documents:
Particulars of all documents on which company’s common seal has been affixed.
9. Register of probates, letters of administration etc.:
Brief particulars of legal heir-ship documents in convention with transfer or transmission of shares, debentures etc.
10. Register of powers of attorney:
Details of powers of attorney executed by a company in favour of officers and other persons.
It should be remembered that an auditor of a company enjoys the right of unhindered and unconditional access to any of the aforesaid documents and books or any other books and papers maintained by the company if he considers inspection of the same necessary for purposes of the audit.
Any refusal on the part of directors, manager or other officers of the company to show these books and documents to an auditor or any restrictions imposed by them in this regard are illegal and are not binding on an auditor because such refusal or restriction would constitute an infringement of the auditor’s statutory rights, which have already been discussed.