Accounts & Audit Books of accounts to be kept by a company - - PowerPoint PPT Presentation

Section 9

Accounts & Audit

Books of accounts to be kept by a company

Definition: Books of Accounts [Section 2(11)] Include records maintained in respect of

• all sums of money received and expended by a company

and matters in relation to which the receipts and expenditure take place;

• all sales and purchases of goods and services by the

company;

• all assets and liabilities of the company; and
• items of cost in respect of production, processing,

manufacturing or mining activities.

Annual accounts

Definition: Financial Statements [Section 2(33)]

• a statement of financial position as at the end of the period;
• a statement of profit or loss and other comprehensive

income or in the case of a company carrying on any activity not for profit, an income and expenditure statement for the period;

• a statement of changes in equity for the period;
• a statement of cash flows for the period;
• notes, comprising a summary of significant accounting policies

and other explanatory information;

• comparative information in respect of the preceding period;

and

• any other statement as may be prescribed.

Authentication of accounts

• Authentication means the process of approval of accounts

for the purpose of issuance of the same to the members.

• It is evident that the members are only asked to review

the financial statements and ask any question, it is actually the directors who are empowered as well as responsible for approval and issue of accounts.

• Directors authenticate the financial statements in their

meeting by passing a resolution.

• The members only receive the financial statements and

can ask any questions arising out of these financial statements and finally adopt in an AGM.

Fillings of accounts

A listed company is required to send 3 copies of its financial statements along with directors, chairman’s review and the auditors report thereon to Commission and stock exchange. In addition to that all the companies are required by law to send 1 copy

• f its financial statements which are adopted in the annual general

meeting along with reports & documents required to be annexed to same, signed as per the requirements of act, to the registrar within 30 days of the said AGM in case of listed companies and 15 days in the case of other companies. If the general meeting to which such accounts and reports are presented does not adopt these accounts and reports, the fact shall be mentioned to the registrar along with the copies of documents to be filed as above. This filing requirement shall not apply to a private company having paid up capital not exceeding Rupees 10 million or such higher amount as may be notified by the Commission

Directors Report1

Why should directors report? By now we know that the directors are the persons who are elected and appointed by the members of the company to run and manage the company. The decisions of the directors regarding company directly affect the company and its members. The accounts of the company are also a report from the directors to its members but it is expected out of directors that they should add wording to those accounts as well, that wording, we can say, is their report. Board shall prepare a directors’ report for each financial year. However this requirement is not applicable to a private company, not being a subsidiary of public company, having the paid up capital not exceeding Rupees 3 million.

Directors Report2

Contents for every directors report Director of every company shall make out and attach to the accounts, a report containing following particulars, namely:

• Statements regarding the state of the affairs of the company

and a fair view of its business

• Particulars of any amount recommended as dividend
• Particulars of any amount transferred or proposed to be

transferred to any reserve account. Additional contents of public company and their subsidiaries The directors’ report shall state the names of persons who, at any time during the financial year, were directors of company. The directors’ report shall address any specific changes and commitments affecting the financial position of the company,

• ccurring between the financial year end date and the date of

the report.

Directors Report3

The directors’ report of a public company shall address all the material changes occurred during the financial year which affect:

• the business of the company
• its holding company
• any of its subsidiaries
• any other company where it has made investments

Also the directors’ report shall discuss the reservations, observations, qualification etc. or any adverse remarks pointed out by the auditors. Directors’ report shall state;

• the earnings per shares and the reasons for incurring loss and also contain the reasonable

indication of future profit, if any.

• Pattern of shareholding shall be circulated along with the directors’ report and the report shall state

the name and place of incorporation of its holding company if such holding company is incorporated

• utside Pakistan.
• Shall contain the information regarding default in repayments of loans.
• Shall state the description of principal risks and uncertainties facing the company and shall contain

the comments in respect of adequacy internal financial controls. Business review of listed company The business review of a listed company must at least cover following:

• the main trends and factors likely to affect the future development, performance and position of the

company’s business;

• the impact of the company’s business on the environment;
• the activities undertaken by the company with regard to corporate social responsibility during the

year;

• directors’ responsibility in respect of adequacy of internal financial controls as may be specified.

Appointment & Removal of auditors

Appointments

First Auditors

• By Board of Directors within 90 days of incorporation.
• By Commission [SECP] if Company fail to appoint after 90 days.

Subsequent Auditors

• Appointed Auditors shall hold office until the conclusion of forthcoming AGM.
• Commission may appoint a person if company fails to appoint;
• First auditors in 90 days
• Auditor in AGM
• Auditor due to casual vacancy in 30 days
• Appointed auditors are unwilling to act.

Removals

• By Special Resolution of Shareholders

Sec 246 CA 2017

Appointment and remuneration of auditors1

Introduction

• The annual financial statements of the company should be audited by an

auditor before they are sent to the members or filed to Commission or registrar and also they shall be accompanied by the auditor’s report.

• Company

should always have an auditor appointed under the Companies Act 2017 except for a private company having paid up capital not exceeding Rupees 1 million or such higher amount as may be notified by the Commission.

• The auditors’ duty is to express an opinion on the truthfulness/fairness or
• therwise of the accounts.
• Auditor may be appointed in his individual capacity or in the capacity of a

firm.

• Usually companies appoint only 1 auditor however for large companies 2
• r more joint auditors may be appointed but the expression used is a

plural as the ‘auditors’ even for a single auditor.

• Most of the companies are required to appoint the practicing Chartered

Accountants as their auditors and the exception is only for the private companies with a paid up capital of less than Rs 3 millions.

Appointment and remuneration of auditors2

Appointment and removal of first auditors and their remuneration

• First auditors of the company shall be appointed by the directors within 90 days after the date
• f incorporation, the directors are also entitled to fix the remuneration of the auditors so

appointed by them.

• If the first auditors are not appointed as such by the directors, Commission may appoint the

auditors and fix their remuneration.

• The company shall be required to give a notice to the Commission regarding its powers

becoming exercisable. Appointment of subsequent auditor

• First auditors shall retire on the date of first AGM and in their place the new auditors shall be

appointed.

• New auditor shall be appointed by members by passing a resolution in the general meeting.
• Notice for appointment of the auditor shall be sent by any member having 10% or more of

share holding of the company at least 7 days before the date of meeting and the company shall circulate this notice to the retiring auditor and shall also upload it on its website.

• If more than 1 persons are proposed as auditor of the company by its members, then

resolution of the members in the general meeting shall decide as to who shall be appointed in the office of the auditor of the company.

• The auditor so appointed shall hold the office of the auditor till conclusion of next AGM. The

members may remove him from office before the expiration of the term of the office by passing a special resolution, in this case the new auditor will be appointed by the board with the approval of the Commission.

Appointment and remuneration of auditors3

Right of retiring auditor to make representation

• If a notice is received from any person appointing any person other than the existing auditor,

then such notice from the member shall be sent to the retiring auditor.

• The retiring auditor has got right to make representation in writing at least 2 days before the

general meeting.

• The representation shall be read out at the meeting before taking up the agenda for

appointment of the auditor it shall be mandatory for the auditor to attend the general meeting in person. Casual vacancy

• Casual vacancy in the office of the auditor arising due to the resignation or death etc. shall

be filled by the directors within 30 days of such casual vacancy.

• If auditors are not appointed in case of casual vacancy by the directors of the company within

30 days of the occurrence of vacancy then Commission shall appoint auditor to fill in the casual vacancy.

• Commission shall also be empowered to appoint auditors and fix their remuneration when

the auditors appointed by the company are unwilling to act as auditors.

• An auditor appointed to fill the casual vacancy shall hold the office of the auditor till the

conclusion of next AGM. Notice to registrar Company is required to inform the registrar within 14 days of every appointment, removal or retirement of the auditor. In case of appointment the consent of the concerned auditor is also required along with intimation.

Who can act as an auditor

 CAN ACT

INDIVIDUALS

• A member of a Recognized Supervisory Body

e.g. ICAP, and

• Allowed by the rules of that body to be as

auditor through a practice license.

• CA – Public Co. & Its subsidiaries
• CA – Private Co. if Capital Exceeds Rs 3 M
• CA or ACMA – Private Co. if Capital does

not exceed Rs 3 M FIRMS

• Controlled by members of a suitably

authorized through a practice license by a supervisory body e.g. ICAP

 CAN NOT ACT

EXCLUDED BY LAW In Pakistan

• An officer (Director or secretary) of the company
• An employee of the company
• A business partner or employee of the above.
• Certain other persons as per list below.

Qualification & Disqualifications of auditors

Persons Disqualified to be auditor of a Company

• Any person employed at Company in last 3 Years
• Partner, director, officer, employee of a company
• Spouse of a director
• Person indebted to the company

[exceptions: credit card balance of <Rs 1 M, utility bills upaid upto 90 days.]

• Person who has given a guarantee / security related indebtedness of third party

to the company

• Person who has business relationship with the company
• Person who has been convicted by a court of an offence related to fraud and 10

years has not elapsed since conviction.

• Body Corporate
• Person not eligible to act as auditor under Code of Ethics as adopted by ICAP &

ICMAP

• Shares of the audit client held by a person, his spouse or minor children, firm &

partners.

[exceptions: if such person disclose this fact and disinvest such shares with in 90 days of his appointment]

Sec 247 CA 2017

Qualification and disqualification of auditors1

Qualifications For a public company and its subsidiaries and a private company having paid up capital of more than or equal to Rupees 3 million; the qualification of auditors is a CA within the meanings of CA Ordinance 1961. Further a firm majority of whose partners practicing in Pakistan are CA may be appointed by its firm name as auditors of a company. As per CA Ordinance 1961, only those persons can act as auditors who have obtained a valid certificate of practice from ICAP. Furthermore, a body corporate cannot be appointed as auditor – the auditor has to be a natural person or the firm of natural persons who have a valid certificate of practice from ICAP. In the case of a company other than those specified above, the auditor must be a CA or CMA having valid certificate of practice from the respective institute or a firm of CA or CMA, having such specified criteria.

Qualification and disqualification of auditors2

Disqualifications The following named persons cannot act as auditors of the company.

• a person who is a director, other officer or employee of the company or held such a position at

any time during the preceding 3 years;

• a person who is a partner of a director, officer or employee of the company or is in the

employment of any of these persons;

• the spouse of a director of the company
• a person who is indebted to the company. A person is not considered as indebted:
• if the company is a utility provider and the unpaid bills are not for more than 90 days
• if the company is a credit card issuer and outstanding credit card amount is not more than 1 Million
• a person who has given a guarantee;
• Person or a firm who, directly or indirectly, has business relationship with the company other

than in the ordinary course of business of such entities

• A person who has been convicted by the court a period of ten years has not elapsed;
• A body corporate;
• A person who is not eligible to act as auditor under the code of ethics as adopted by the ICAP

and ICMAP; and

• a person or his spouse or minor children, or in case of a firm, all partners of such firm who

holds any shares of an audit client or any of its associated companies.

• Exception if such a person holds shares prior to his appointment, the fact shall be disclosed and such

person shall disinvest such shares within 90 days of such appointment.

Access to books & records Receive notice of AGM & other meetings Receive information necessary for audit

Auditors have the following rights beside duty to perform audit with due professional care and competence.

Rights of Auditor

Auditor’s right to access the records and information

Right to access information Every auditor has a right to access at all times to the books, accounts and vouchers

• f the company.

Right to call branch’s information Auditor has right to access to such copies of, extracts from, the books and accounts

• f the branch as have been transmitted to the principal office of the company;

Right to demand information from certain persons Auditor has the right to require any of the following persons to provide him with such information or explanations as he thinks necessary for the performance of his duties:

• any director, officer or employee of the company;
• any person holding or accountable for any of the company’s books, accounts or

vouchers;

• any subsidiary undertaking of the company;
• any officer, employee or auditor of any such subsidiary undertaking of the

company or any person holding books, accounts or vouchers of subsidiary etc. Right in respect of general meetings

• The auditor is entitled to attend, receive all notices of any general meeting.
• The auditor is entitled to be heard at any general meeting.

Auditors’ report

Following are matters to be stated by the auditor in his report:

• The auditors shall state in the auditors’ report that they have obtained all the

information and explanations which in their knowledge and belief were necessary for the purposes of the audit; however if any information is not provided by the company, the auditors shall report that they were not provided with all the required information and explanations.

• The auditor shall further express a opinion about the books of accounts as to the

adequateness

• f

them as per the requirements

• f

the Companies Act 2017.Opinion shall also be expressed as to the conformity of the accounts with the requirements of the Act and with books of accounts.

• Auditors shall also state that whether or not in their opinion the said financial

statements give the information required by this Act in the manner required by the Act and give a true and fair view:

• f the state of the company’s affairs as at the end of its financial year;
• f the profit or loss or surplus or deficit, as the case may be, for its financial year; and
• generation and utilisation of the cash and cash equivalents of the company for its financial year;
• Opinion
• f

the auditors shall also be required

• n

expenditure incurred, investments and guarantee extended by the company during the year were for the business of the company and were in line with the objects of the company.

• Auditor shall also report as to the responsibility of the company regarding

deduction and payment of Zakat under relevant law has been discharged.

Auditors’ report

Signature of an audit report The auditor’s report must

• state the name of the auditor and the engagement partner
• be signed
• be dated
• indicate the place at which it is signed.
• If the auditor is an individual then the report must be

signed by him, if it is a firm then it must be signed by the partnership firm with the name of the reporting partner.