Assignment 3 Auditing

Q. Describe the qualifications and disqualifications of the company auditor.

Ans : The qualifications and disqualifications of a company auditor are as follows:

Qualifications:

1. Expertise: The auditor should possess the necessary skills, knowledge, and experience in accounting, auditing, and finance to perform the audit effectively. This includes being up-to-date with relevant laws, regulations, and standards.

2. Independence: The auditor should maintain objectivity and independence from the company to ensure unbiased opinions. This means avoiding any relationships or interests that could influence their judgment.

3. Professional certification: The auditor should hold a recognized professional certification like CA or CPA, demonstrating their expertise and commitment to ethical standards.

4. Registration: The auditor should be registered with the relevant professional body or regulatory authority, ensuring they meet the required standards and are subject to disciplinary actions if necessary.

5. Integrity: The auditor should possess high ethical standards, honesty, and integrity, ensuring they perform the audit with professionalism and transparency.

Disqualifications:

1. Employment: The auditor should not be an employee of the company or its subsidiary to maintain independence and avoid any conflict of interest.

2. Financial interest: The auditor should not have any direct or indirect financial interest in the company, such as shares, investments, or loans, to prevent bias.

3. Relationships: The auditor should not have close relationships with the company's directors, officers, or employees, such as family ties or close friendships, to maintain objectivity.

4. Conflict of interest: The auditor should not have any conflict of interest that could compromise their objectivity, such as providing other services to the company or having a personal stake in the audit outcome.

5. Professional misconduct: The auditor should not have been convicted of professional misconduct, such as fraud, dishonesty, or negligence, which could impact their credibility and trustworthiness.

6. Bankruptcy: The auditor should not be bankrupt or have a history of bankruptcy, as this could impact their financial stability and independence.

7. Conviction: The auditor should not have been convicted of any offense related to fraud, dishonesty, or corruption, which could impact their integrity and trustworthiness.

Q. Explain the provisions of section 44AA and 44AB under income tax.

Ans : Section 44AA and 44AB of the Income Tax Act, 1961, deal with the provisions related to the maintenance of books of account and audit requirements for certain taxpayers.

Section 44AA: Maintenance of Books of Account

This section requires certain taxpayers to maintain books of account and documents as prescribed by the Income Tax Department. The provisions are as follows:

1. Who is required to maintain books of account?: The following taxpayers are required to maintain books of account:

    - Business income exceeding ₹1,20,000 or total sales/gross receipts exceeding ₹10,00,000 in any of the three preceding years.

    - Profession income exceeding ₹1,50,000 in any of the three preceding years.

    - Individuals claiming deductions under sections 10A, 10B, or 80HH to 80RRB.

2. What books of account are required to be maintained?: The taxpayer must maintain:

    - A cash book and ledger account.

    - Journal for recording all transactions.

    - Carbon copies of bills, receipts, and invoices.

    - Stock register and inventory records (for businesses).

3. Penalty for failure to maintain books of account: If a taxpayer fails to maintain the required books of account, they may be penalized up to ₹25,000.

Section 44AB: Audit of Accounts

This section requires certain taxpayers to get their accounts audited by a chartered accountant. The provisions are as follows:

1. Who is required to get their accounts audited?: The following taxpayers are required to get their accounts audited:

    - Business income exceeding ₹1 crore in any of the three preceding years.

    - Profession income exceeding ₹50 lakh in any of the three preceding years.

    - Individuals claiming deductions under sections 10A, 10B, or 80HH to 80RRB.

2. What is the due date for audit?: The audit report must be obtained on or before the due date for filing the income tax return (usually September 30th for businesses and October 31st for professionals).

3. Who can conduct the audit?: Only a chartered accountant (CA) can conduct the audit.

4. What is the penalty for failure to get accounts audited?: If a taxpayer fails to get their accounts audited, they may be penalized up to 0.5% of the total sales, turnover, or gross receipts, subject to a maximum of ₹1,50,000.

These provisions aim to ensure that taxpayers maintain accurate and reliable financial records and comply with tax laws.

Short Notes:

a) Appointment of Company Auditor

Who can appoint:

- Shareholders (in annual general meeting)

- Board of Directors (in case of first auditor or casual vacancy)

Eligibility:

- Qualified Chartered Accountant (CA) or firm of CAs

- Not disqualified under Companies Act, 2013

- Not an officer or employee of the company

Procedure:

1. Board recommends auditor to shareholders

2. Shareholders approve auditor in annual general meeting

3. Auditor appointed for 5-year term (can be re-appointed)

4. Form ADT-1 filed with Registrar of Companies within 15 days

Types of Auditors:

- Statutory Auditor (appointed by shareholders)

- Internal Auditor (appointed by Board of Directors)

- Branch Auditor (appointed by Statutory Auditor)

Remuneration:

- Determined by shareholders or Board of Directors

- Paid by company

Resignation/Removal:

- Auditor can resign or be removed by shareholders

- Form ADT-3 filed with Registrar of Companies within 30 days.

b) Duties of Company Auditor

Primary Duty:

- Express opinion on financial statements (true and fair view)

Key Duties:

1. Examine financial statements: Verify accuracy and completeness

2. Verify assets and liabilities: Confirm existence and valuation

3. Check internal controls: Evaluate effectiveness

4. Assess accounting policies: Ensure consistency and compliance

5. Detect fraud: Identify material irregularities

6. Report to shareholders: Submit audit report

7. Comply with standards: Follow auditing standards and guidelines

8. Maintain independence: Avoid conflicts of interest

9. Attend annual general meeting: Clarify audit report

10. Report to Board of Directors: Share findings and recommendations

Additional Duties:

- Certify compliance with laws and regulations

- Verify receipts and payments

- Check minutes of meetings

- Evaluate risk management systems