6 Areas to be Enquired and Reported by Auditor in Company Audit | Role of Auditor

Enquiry and Report by Auditor in Company Audit – Role of Auditor

The followings items are to be enquired into by the auditor and report on such items only if he has to make any special comments on them. The following 6 areas are to be enquired into by the auditor.

Company Audit

Company Audit – 6 Areas to be enquired and reported – Role of Auditor

1. Loans and Advances made by the Company

The auditor has to inquire whether loans and advances made by the company on the basis of security have been properly secured and whether the terms of such loans and advances have been made in a manner which is not prejudicial (detrimental) to the interests of the company or its members.

The auditor has to scrutinize all loans and advances extended by the company during the audit period with regard to adequacy of the security obtained against each loan and also verify whether such loans and advances are outstanding or not, as on the date of Balance Sheet. In this regard, he has to further verify

  1. The Loan agreements / correspondence.
  2. Terms of Agreement.
  3. Security held by the company against the loan.
  4. The interest rates agreed upon.

Role of an auditor

The auditor should ensure that

1. The security held is legally enforceable.

2. The value of the security is adequate and loan is fully secured.

3. The terms of agreements and the interest rates are not prejudicial to the interests of the company. Low rate of interest or long-term loan may not be prejudicial to the interest of the company under all circumstances.

For example, loan given to the employee at a lower rate of interest should not be considered as prejudicial to the interest of the company. At the same time, if the loan at a lower rate of interest is offered to a concern in which a director is interested, it can be considered as prejudicial to the interest of the company.

Therefore, the auditor has to look into the circumstances of each case and decide whether the terms at which loans and advances extended are prejudicial to the interest of the company or not.

2. Transactions represented by book entries

The auditor has to ensure that the transactions of the company which are represented merely by book entries are not prejudicial to the interest of the company. Usually, such book entries are made among the sister concerns.

Book entries made for the benefit of one concern may be prejudicial for another company. Therefore, during an audit, the auditor has to pay more attention on such book entries.

For example, the company would have sold goods to a customer directly. But the entries will be made in such a way that the company has sold goods to its sister concern at a lower rate and the sister concern would have sold the same goods to the customer at the market rate. This may affect the profitability of the company.

3. Investments sold at less than Cost Price

The auditor has to inquire whether the assets of the company consisting of shares, debentures, and other securities have been sold at a price less than at which they were purchased by the company.

The foremost point to be borne in mind is that this clause is not applicable to

  1. Banking companies and
  2. Investment companies.

In the case of other companies, the sale of investments such as shares, debentures, etc., has to be verified by the auditor to find out whether the selling price is less than the cost of acquisition.

However, even if the selling price of the investments is less than the cost of acquisition, the auditor has to scrutinize the transaction keeping in mind the circumstances of each case. In case he is convinced that selling at a price less than the cost of acquisition is appropriate at that point of time, he need not report the same in his report.

Arriving at the cost of acquisition

To arrive at the cost of acquisition of various securities acquired by the company at various dates, the company may follow the procedure as prescribed in Accounting Standard 13 and Accounting Standard 2, which deal with valuation of Investments and valuation of Stock-in-trade.

4. Loans and Advances shown as Deposits

The auditor has to inquire whether loans and advances made by the company have been shown as deposits. At times, the Directors may extend loans to the concerns in which they are interested and show in the balance sheet such loans as deposits.

Sometimes, the company may extend loans/advances to the sister concerns and show the same as deposits. Hence, the auditor should look into—

1. The purpose for which such deposits are made.

2. With whom such deposits are made

  • Usually, the deposits are made as a security for performing an obligation or for the purpose of earning interest.
  • The auditor has to probe into the above and report if he is of the opinion that a special mention is required in this regard.

5. Personal expenses charged to revenue account

The auditor has to inquire whether personal expenses have been charged to revenue Account. Privileges made available to the director/employee of the company are considered personal expenses..

For example, a company may provide educational facility to the children of its employees or provide a rent free accommodation to the directors of the company. Since these are normal/usual benefits such practices are not to be considered as personal expenses.

At the same time, if any other unusual expenses of the director or its employees is borne by the company, the auditor has to report on the same.

For example, if traveling expenses are incurred by the son of the Director of the company, to watch the Cricket matches abroad, and if the same is included in the Traveling expenses of the company, it has to be reported by the auditor.

6. Allotment of Shares.

The auditor has to inquire whether cash has actually been received in respect of such allotment, and if no cash has actually been received, whether the position as stated in the books of accounts and the balance sheet is correct, regular and not misleading.

We know that shares are issued by the company for cash or for kind. This clause is applicable to

  1. shares issued for cash and
  2. shares issued against a real (bonafide) debt payable by the company immediately in cash.

In case if it is stated that the shares are issued for cash, the auditor has to verify whether the cash is actually received and accounted for in the books of the company.

If the shares are issued against a loan repayable immediately by the company, then the transaction is to be treated as if the shares have been issued against cash.

In any case, the auditor should ensure that the position stated in the books and balance sheet is correct, regular and not misleading.

Above are the aspects to be verified by an auditor and reported only if he finds out any thing adverse.

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