Preliminary steps before commencing a Company Audit
A person, who is qualified under Section 226, will be appointed as auditor to company under Section 224, Before Commencing the Audit work. The following preliminary steps are to be executed.
Verification of Appointment: First of all auditor has to conform whether his appointment is properly made or not. If appointment is not proper, he can claim remuneration, if he is appointed by share holders, he has to see whether the procedure specified under Section 224, is properly followed or not. If he is appointed by directors he has to go through the resolution made by the court.
Verification of Memorandum: Memorandum is started of the company. It deals with external affairs of the company. Out of its clauses, the information written under objects clause, liability clause and capital clause is useful to auditor. Therefore he should refer to memorandum and such information should be taken to audit notebook.
Verification of Articles: Articles read about internal affair of the Company. It includes calls on share, transfer of shares, transmission of shares, reserves, payment of dividend etc. All these things are useful to Company auditor and hence abstracts from articles should be taken to audit notebook.
Verification of Prospectus: Before commencing the audit work, auditor should refer to prospectus also to obtain information relating to minimum subscription, preliminary expenses, underwriters commission, terms of issue etc.
Verification of Contract Deeds: On account of legal entity company can enter into contracts. Auditor should refer to those contract deeds to know about names of parties to the Contract, Contract prices, other terms etc.
Verification of Certificate of incorporation and certificate of Commencement of business: If it is first audit of the company, auditor should refer to Certificate of Incorporation and Certificate of Commencement of Business issued by registrar of Companies to conform that the company has got formed properly in accordance with requirements of companies act.
Verification of Internal Check System: Internal check means arrangement of staff in such a way where work done by one clerk automatically gets checked by the other. Well planned internal check system minimizes scope for frauds and errors. In presence of well designed internal check system, auditor can follow shortcut methods like test checking etc. Good internal check system reduces the work load of auditor.
List of Books: Auditor should obtain list of books maintained by the company. Company maintains several statutory books or compulsory books, Statistical or Optional books, Cost records, financial records etc. All those books are to be listed.
List of Offices: Auditor should refer to organization chart of the company and key positions are to be found. Here auditor has to gather names, rights, duties, specimen signatures etc of staff members employed at such key positions.
Verification of Financial Statement: Auditor should get copies of previous 3 or 4 years financial statements along with audit reports. By going through them an idea with regard to profitability, financial position and previous auditor’s opinion can be obtained.
Central Government Permission: On certain occasions company has to obtain permission to central government. For example; to issue share warrants, to grant to directors etc. Here auditor has to observe whether permission from Central Government is obtained or not.
Audit Program: Planning of audit work is called Audit Programme. It shows division of audit work among audit staff. After preparation of audit program audit work can be commenced. Audit program has several advantages like completion of audit work within desired period, proper entrustment of work, etc. At the same time audit programme has certain disadvantages also like making work mechanical etc.
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