1. To see that his appointment is in order;

2. Inspection of documents books and registers;

3. Inspection of contracts;

4. Study of previous year’s Balance Sheet and Auditor’s Report;

5. Obtaining a schedule of books and persons handling them;

6. Study of internal check system; and

7. Certificate of incorporation and commencement of business.

1. To see that his Appointment is in order:

(a) If he is appointed as the first (newly appointed) auditor of the company by the Board of Directors, he should ask for a copy of the resolution by the Directors authorising his appointment.

(b) If he is appointed in place of a retiring auditor, he should enquire from the retiring auditor whether due notice was served and the provisions of section 225 were complied with or not. It would be a breach of professional etiquette if he does not enquire from him in writing about the circumstances which led to his removal.

(c) If he is appointed by the shareholders at the Annual General Meeting, he should obtain a copy of the resolution. He should inform the Registrar within 30 days of the receipt of the appointment letter in writing that he has accepted or refused to accept the appointment. He should ensure that proper notice or nomination was given, otherwise his appointment will be invalid.

The auditor should correspond in writing with the previous auditor, informing the latter of the fact of his appointment.

(d) If he is appointed to fill a casual vacancy caused by the death of the previous auditor, he should obtain a copy of the resolution passed by the Directors so as to ensure that his appointment is valid.

(e) Under section 224(6) of the Companies Act, a General Meeting of the shareholders should be called to appoint a new auditor in place of the auditor who has resigned. Thus, the vacancy caused by the resignation has to be filled by the company in a General Meeting and not by the Board of Directors.

The auditor should see that his appointment is regular under such circumstances. He should, however, enquire from the auditor who has resigned, about the circumstances in which he has resigned and then decide whether he should accept the appointment or not.

2. Inspection of Documents, Books and Registers

Documents:

1. Memorandum- (1) Under the provisions of section 13 of the Companies Act, the Memorandum of every company shall state:

(a) the name of the company with ‘Limited’ as the last word of the name in the case of a public limited company and with ‘Private Limited’ as the last words of the name in the case of a private limited company;

(b) The State in which the registered office of the company is to be situated;

(c) In the case of a company in existence immediately before commencement of the Companies (Amendment) Act, 1956, the objects of the company.

(d) In the case of a company formed after such commencement –

(1) The main objects of the company to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects.

(ii) Other objects of the company not included in Sub-section (i); and

(e) In the case of companies (other than trading corporations), with objects not confined to one State, the States to whose territories the objects extend.

(2) The Memorandum of a company limited by shares or by guarantee shall also state that the liability of its members is limited.

(3) The Memorandum of a company limited by guarantee shall also state that each member undertakes to contribute to the assets of the company in the event of its being wound up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company, or of such debts and liabilities of the company as may have been contracted before he ceases to be a member, as the case may be, and of the costs, charges and expenses of winding up, and for adjustment of the rights of the contributors among themselves, such amount as may be required, not exceeding a specified amount.

(4) In the case of a company having a Share Capital:

(a) Unless the company is an unlimited company, the Memorandum shall also state amount of Share Capital with which the company is to be registered and the divisions thereof into shares of a fixed amount;

(b) No subscriber of the Memorandum shall take less than one share; and

(c) Each subscriber of the Memorandum shall write against his name the number of shares he takes.

Under section 17, a special resolution has to be passed for alteration of Memorandum so as to change the place of its registered office from one State to another or with respect to the objects of the Company and the alteration shall not take effect until and except in so far as it is confirmed by the Company Law Board on petition.

Such an alteration has to be registered within three months from the date of the order and be filed by the company with the Registrar as provided by section 18 of the Act.

Auditor’s Duty:

The auditor should proceed in the following way in examining the Memorandum of Association:

(1) He should very carefully examine the ‘Object Clause’ of the Memorandum to ensure that the company is carrying on the work as specified.

(2) He should check the ‘Capital Clause’ and see that the issue of share capital is within the ‘Authorised Capital’.

(3) If the Authorised Capital has been increased according to law, it should be verified and traced out.

(4) If the Memorandum has been altered, it should be seen that such an alteration has been made within the provisions of sections 17 and 18 of the Companies Act.

2. Articles of Association:

Under section 26, every company is required to have the Articles of Association. The Articles of Association of a company limited by shares may adopt all or any of the regulations of Table A in Schedule I.

The Articles of Association contain regulations to control the internal administration of the company, viz., regulation for day-to-day work, relationship between its members, their rights and responsibilities, etc. Since the Articles of Association are framed by the company for its use, they may be altered by a special resolution as and when necessary, subject to the provisions of the Companies Act and to the conditions contained in its Memorandum.

According to section 30, the Articles will be printed and divided into paragraphs, numbered consecutively and signed by each subscriber of the Memorandum of Association (who shall add his address, description and occupation, if any) in the presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation, if any.

As quoted earlier, a special resolution subject to the provisions of this Act and to be conditions contained in its Memorandum, has to be passed to alter the Articles of Association when such an alteration has been approved by the Central Government under section 31.

A printed copy of the Articles should be filed by the company within one month of the date of receipt of the order of approval.

Thus, the Memorandum of the company, its articles, if any, and the agreement, if any, which the company proposes to enter into with any individual for appointment as its managing or whole-time director or manager, shall be presented to the Registrar of the State in which the registered office of the company is situated as provided by section 33.

Under section 36, Memorandum and Articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member and contained covenants on its and his part to observe all the provisions of the Memorandum and of the Articles.

All monies payable by any member to the company under the Memorandum or Articles shall be a debt due from him to the company.

Auditor’s Duty:

The auditor should examine the Articles of Association of the company for the following matters:

(i) Issue of Share Capital.

(ii) Calls on shares.

(iii) Calls in advance.

(iv) Calls in arrears.

(v) Forfeiture and re-issue of shares.

(vi) Transmission of shares.

(vii) Payment of commission of shares.

(viii) Rights of various classes of shareholders.

(ix) Appointment, remuneration, rights and duties of Managing Director or Manager.

(x) Appointment, remuneration, qualification shares, rights and duties of Directors.

(xi) Alteration of Share Capital.

(xii) Dividends and Reserves.

(xiii) Borrowing powers of the Company and Directors, etc.

(xiv) Appointment, rights and duties of the auditor.

(xv) Accounts and Audit of the Company.

(xvi) Underwriting of Shares.

(xvii) Meetings and their procedure.

(xviii) How to inform Shareholders.

(xix) Voting Powers of the Shareholders.

(xx) Payment of interest out of capital.

(xxi) How far Table A has been followed in framing the Articles of Association?

The auditor should go through the Articles very carefully and see specially that the regulations contained are in accordance with the law. He should further see that for alteration of the Articles, section 31 has been followed.

It is to be noted that if a company has not adopted its own Articles, Table A of the Companies Act will be applicable.

In the case of Leeds Estate Building and Investment Society Ltd. vs. Shepherd (1887), it was held that an auditor has no defence with him to say that he could not see the Articles of Association when he knew of their existence.

3. Prospectus:

Matters to be stated and reports to be set out in Prospectus are given in section 56 of the Companies Act. A Prospectus is issued with the objective of inviting public to purchase the share of the company. Ordinarily, all matters dealt with above in the Articles of Association are found in the Prospectus.

Auditor’s Duty:

The auditor should examine the Prospectus for the following matter:

(i) Amount of capital to be issued, classification of shares and right of shareholders attached therewith,

(ii) Amount payable on allotment and calls,

(iii) Amount of minimum subscription,

(iv) Particulars of any contract entered into with the vendors for the purchase of business,

(v) Amount payable for underwriting commission on shares or debentures,

(vi) Amount of preliminary expenses paid or payable,

(vii) Qualifications, remuneration, etc. of Directors,

(viii) Appointment, remuneration, etc. of Managers.

(ix) Particulars of any material contracts entered into within two years of the date of issue of the prospectus.

Books and Registers:

Under section 209 every company shall keep at its registered office proper Books of Account with respect to:

(a) All sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place;

(b) All sales and purchases of goods by the company;

(c) The assets and liabilities of the company; and

(d) In the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilization of material or labour or to other items of cost as may be prescribed if such class of companies is required by the Central Government to include such particulars in the Books of Account.

All or any of the Books of Account may be kept at such other place in India as the Board of Directors may decide. When the Board of Directors so decides, the company shall, within seven days of the decision, file with the Registrar a notice in writing giving the full address of that other place.

Where a company has a Branch Office, whether in or outside India, the company shall be deemed to have complied with the provisions given above, if proper Books of Account relating to the transactions effected at the Branch Office are kept at that office and proper summarized returns, made up to dates at intervals of not more than three months, are sent by the Branch Office to the company at the registered office or the other place referred to earlier.

For the purpose of sub-section (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein-

(a) if there are not kept such books as are necessary to give a true and fair view of the state of affairs of the company or branch office, as the case may be, and to explain its transactions; and

(b) if such books are not kept on accrual basis and according to the double entry system of accounting.

The Books of Account and other books and papers shall be open to inspection by any Director during business hours.

The Books of Account of every company relating to a period of not less than eight years immediately proceeding the current year shall be preserved in good order. In the case of a company incorporated less than eight years before the current year, the Books of Account for the entire period preceding the current year shall be preserved.

The Managing Director or Manager is made responsible for maintaining and preserving the Books of Account. The Board of Directors of the company, if there is no Managing Director or Manager, will be responsible for maintaining the books. In default, anyone responsible will be punishable with imprisonment for a term which may extend to six months or with fine which may extend to one thousand rupees; or with both.

1. Register of Members:

Every company will keep in one or more books a Register of its Members and enter therein the following particulars (under section 150):

(a) The name and address, and the occupations, if any, of each member;

(b) The shares held by each member, the amount paid thereon, etc;

(c) The date at which each person was entered in the register as a member; and

(d) The date at which any person ceased to be a member.

Provided that where the company has converted any of its shares into stock and has given notice of the conversion to the Registrar, the register shall show the amount of stock held by each of the members converted instead of the shares so converted which were previously held by him.

If default is made in complying with these provisions, the company and every officer of the company, who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues.

Register of Charges:

Under section 143, every company is required to keep at its registered office a Register of Charges and enter therein all charges on the undertaking or on any property of the company- giving in each case:

(i) A short description of property charged,

(ii) The amount of the charge, and

(iii) Except in the case of securities to bearer, the names of the persons entitled to the charges.

If any officer of the company knowingly omits, or willfully authorizes or permits the omission of any entry required to be made, he shall be punishable with fine which may extend to five hundred rupees.

3. Register of Directors, etc:

Under section 303 of the Companies Act, every company is required to keep at its registered office a register of its Directors, Managing Director, Manager and Secretary containing their names, addresses, nationality, father’s or husband’s name in full, occupation and his business or occupation, if any.

If default is made in complying with the provisions of this section, the company and every officer of the company, who is in default, shall be punishable which may extend to fifty rupees for every day during which the default continues.

4. Register of Directors’ Shareholdings, etc:

Under section 307, a separate register has to be maintained by every company to record the number, description and amount of any shares or debentures of the company or any other body corporate being the company’s subsidiary or holding company, or a subsidiary of the company’s holding company, which are held by him or in trust for him or of which he has any right to become the holder whether on payment or not.

5. Register of Contracts, Companies and Firms in which Directors are Interested:

According to section 301, every company is required to keep one or more registers in which separate particulars of all contracts or arrangements, e.g., dates of contract or arrangement, names of the parties, principal terms and conditions and the date of the meeting of the Board of Directors on which the contract is considered, will be entered.

Auditor has to see whether the register is kept as per requirements of the Act and is in order.

6. Index of Members:

Under section 151, every company having more than fifty members shall, unless the Register of Members is in such a form as in itself to constitute an index, keep an index (which may be in the form of card index) of the names of the members of the company and shall, within fourteen days after the date on which any alteration is made in the Register of Members, make the necessary alteration in the index.

The index will contain a sufficient indication to enable the entries relating to each member and will be kept at the same place at which the Register of Members will be kept.

In default, the company and every officer who is in default shall be punishable with fine which may extend to fifty rupees.

7. Register and Index of Debenture holders:

Under section 152, every company shall keep in one or more books a Register of the holders of its Debentures and enter therein the particulars relating to the names, addresses, occupations, etc., about the Debenture holders.

In default, the company and every officer of the company shall be punishable with fine which may extend to fifty rupees.

8. Register of all investments made by the company in Shares:

Under section 372(6), every company shall keep a Register of Investments made by it in shares of any other body or bodies corporate showing names of such corporate bodies in which investment has been made, date of investment, date on which body corporate came in the same group and the names of all body corporate in the same group as investing company.

9. Register of Loans:

According to section 370 of the Companies Act, every lending company shall keep a register in respect of loans made, guarantees given and the date on which the loans have been made.

10. Register of Public Deposit:

Under section 58(A), every company shall maintain a separate register in which all public deposits are to be recorded.

11. Register of Investments:

According to section 49 of the Companies Act, it is provided that “all investments of a company shall be made and held in its own name.” If the company’s nominee or director becomes on its behalf a director in another company and is required to hold qualification shares, they may be held jointly in the name of the company and such person. A separate register shall be maintained by the company for such investment.

12. Foreign Register of Members and Debenture holders:

Under sections 157 and 158, if it is authorized by the Articles of Association, a company may keep a register of members and debenture holders in the State or country outside India where they are resident. Such a register is kept in that state or country as a branch register. It is known as Foreign Register.

3. Inspection of Contracts:

Next, the auditor should examine the contracts which have been entered into between a company and other parties, e.g.

(i) Contracts with the vendors of any property.

(ii) Contracts with the brokers and underwriters.

(iii) Contracts with the promoters for the preliminary expenses, etc.

Usually, brief particulars about such contracts are given in the

The auditor should see that the Statement of Particulars is correct and transactions relating to such contracts have been properly recorded in the Books of Accounts.

4. Study of Previous Year’s Balance Sheet and Auditor’s Report:

When the auditor is appointed in place of retiring auditor, he should examine the Balance Sheet of the last year and also the Report of the auditor appointed last year to be familiar with any relevant matter raised by the previous auditor. He should ensure that the objections or qualifications raised in the previous Audit Report have been duly met by the company.

Besides this, he may also examine the Directors’ Report to the members containing the recommendations of the Directors in respect of the appropriation of profits made last year. This is very important.

5. Obtaining a Schedule of Books and Persons handling them:

The auditor should, then, get a list of the persons employed to maintain accounts of the company and also of books maintained by them. This will help him in the successful conduct of the audit whenever he needs some information and explanations, and difficulties can, thus, be met easily.

6. Study of Internal Check System:

This is another significant part of an auditor’s duty to obtain a detailed statement from the Directors of the Company about the system of the internal check in operation. This will enable him to note down the shortcomings of the accounting system and the procedure followed by the company.

7. Certificate of Incorporation and Commencement of Business:

A public limited company is not allowed to commence business unless a certificate entitling the company to commence business is granted. A private company is entitled to commence business and exercise borrowing powers immediately after incorporation. The auditor should examine the certificate and see that the company has commenced business after it is granted.