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Accounts & Audit
This Chapter Includes : Nature & Maintenance of Books of Account, B/S,P/L A/c,
Authentication of Annual Accounts, Boards Report, Directors Responsibility
Statement, Copies of B/S & AR, Filing with Registrar, Holding & Subsidiary A/cs,
First Auditor, Auditor: Qualifications & Disqualifications, Remuneration, Rem oval,
Power, Duties; Subsequent Auditors, Appointment by Special Resolution,
Reappointment, Ceiling , Casual Vacancy, Audit of Branches, Signature of Audit
Report, Special Audit, Audit of Cost Accounts.
Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions
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CA Final Gr. I Paper - 4
CA Final Gr. I
D ESCRIPTIVE Q UESTIONS
1998 - Nov [8] (a) (i) W hat is the liability of an auditor for failure to point out in his report
that dividend is paid out of sale of the company's real estate?
(ii) Can an auditor be disqualified for indebtedness in the following cases :
(a) where he is recovering his fees on a progressive basis even though the job is
not complete;
(b) where the auditor's firm has purchased goods from the auditee company and
not paid for them for over six months?
(6 marks)
Answer :
(i) An auditor who is a party to payment of improper dividend is liable to make good
the loss caused to the company. Also, he may be liable for misfeasance
proceedings in case the company goes into winding up.
W here the auditors stated in their official report that the value of the assets
depended upon realisation but submitted a different confidential report to the
directors and the directors going by the official report, paid away dividend which
depleted the company's capital, the auditors were held liable to make good the
company's loss [Ref. London & General Bank No.2]
(ii) As per sec. 226 (3), person who is indebted to the company for an amount
exceeding ` 1,000 shall be disqualified for appointment as an auditor.
The answers to the above given question are :
(a) an auditor can receive the payment for his work i.e. audit fees on a
progressive basis in accordance with a resolution passed in the GM of the
company even though the audit work is not complete. In such a case, he
cannot be said to be indebted to the company and thus he does not have to
vacate his office.
[ICAI, Compendium of Guidance Notes, September 1985]
(b) In a case where the auditor purchases goods from the company on credit he
will be said to be indebted to the company in respect of such credit
purchases, not with standing the fact that such credit period normally
allowed to all the customers by the company. [ICAI, Guidance Note on
Independence of Auditors]. Where the firm is indebted to the company,
each and every partner of the firm is deemed to have been indebted. Thus,
if the amount outstanding exceeds ` 1,000 the auditor shall vacate his office.
[Chapter # 1] Accounts & Audit O
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1999 - May [9] (a) State the disclosure requirements, if any, under Schedule VI to the
Companies Act, 1956 in respect of the following:
(i) Loans received from directors.
(ii) Loans received from directors' relatives.
(iii) Debts due by directors towards goods supplied and advances made by the
company.
(iv) Debts due by partnership firm s in which the directors or relatives of directors are
partners.
(v) Debts due by com panies in which the directors or their relatives are directors or
members.
(vi) Loans and advances received from and given to a subsidiary company and the
partnership firm in which the subsidiary company is a partner.
(vii) Remuneration received by a director of a company from its subsidiary com pany.
(viii) Commission paid to selling agents including sole selling agents.
(9 marks)
(b) State the procedure for the following, explaining the relevant provisions of the
Companies Act:
(i) Appointment of first auditor when the Board of Directors did not appoint the
first auditor within one m onth of the date of registration of the company.
(ii) Removal of first auditor before the expiry of his term .
(4 marks)
Answer :
(a) Disclosure requirement under Schedule VI are as follows :
(i) Loans received from directors : should be classified as secured and
unsecured loans and shown separately in Balance sheet in liabilities side.
(ii) Loans received from directors relatives : are not required to be disclosed
in the Balance sheet.
(iii) Debts due by directors towards goods supplied by the company : must
be shown separately under sundry debtors in Balancesheet. The maximum
amount due by directors of the company at any time during the year must also
be disclosed in the Balancesheet by way of a Note. Similar disclosure is
required in respect of loans & advances made to directors by the company.
(iv) Debts due by partnership firms in which any director of the company is
a partner : must be disclosed separately. But no disclosure is required if only
the relatives of directors are partners.
(v) Debts due by private companies on which the directors are directors or
members : must be stated separately in the Balance sheet. But it is not
necessary if the amount is due from public companies. Similarly it is not
necessary to disclose separately the amount due by companies in which the
relatives of directors are directors or m embers.
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(vi) Loans and advances received from subsidiary companies : should be

classified as "secured and unsecured Loans" and should be shown separately.
But no such disclosure is required in respect of loans received from
partnership firms in which the subsidiary company is a partner. Loans and
advances given to subsidiary companies and the Partnership firm in which the
subsidiary company is a partner must be disclosed in the Balance sheet.
(vii) Managerial Remuneration received by a director of a company from its
subsidiary company : should be shown separately in the Profit & Loss A/c by
way of a note.
(viii) Commission paid to Sole Selling Agents and other Agents : must be
shown separately in the Profit & Loss A/c.
(b) (i) Appointment of first Auditor : As per Sec. 224(5) of the Companies Act,
1956, the first auditor of a company shall be appointed by the Board of
Directors within one month of the date of registration of the Company.
According to proviso (b) to Sec. 224(5), if the Board of Directors fail to exercise
its powers under this Sec., the Company in General Meeting may appoint the
first auditor and fix his remuneration.
(ii) Removal of first Auditor: The first auditor shall hold office until the conclusion
of the first annual general meeting. The company may however at a general
meeting, remove any such auditor and appoint in his place any other person
who has been nominated for appointment by any member of the Company and
of whose nomination notice has been given to the members of the company
not less than 14 days before the date of the m eeting [proviso (a) to
Sec.224(5)]. Previous approval of the Central Government is not required for
such rem oval [Sec.224 (7)].
1999 - Nov [6] (a) How far is Balance Sheet an acknowledgement of a debt of a
company? Board of Directors of Halim Abdul & Sultan Company Limited passed a
resolution for payment of sitting fees to Directors and the same was shown as fees due
to Directors in the Balance Sheet of the Company. Examine whether this provision of
fees to Directors in the Balance Sheet can be considered as an effective enforceable
acknowledgem ent of debt of the company.
(7 marks)
Answer :
An entry in the Balance sheet showing a debt owed to the creditor amounts to an
acknowledgment of liability unless it is shown that authentication was colourable and
vitiated for some satisfactory reason. [Babulal Rukmanand Vs. Official liquidator,
Bharatpur Oil Mills (Pvt) Ltd.]
The directors are the agents of the company and therefore it is not competent for
the Board to authorise the giving of a definite promise to pay themselves [` coliseum
(Borrow) Ltd.]. to the same effect it was held that a Balance sheet showing fees due to
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directors did not amount to an acknowledgement of debt on the ground that it was not
competent for the Board of Directors to promise to pay themselves since the directors
were interested in the matter and were incapable of binding the company by passing
any resolution [Tirumalai Jyengar Vs. Official liquidator.].
Present Case:
In the given case, the resolution passed by the Board of Directors for payments of fees
to directors and showing of such dues in the Balance sheet does not amount to an
effective enforceable acknowledgment of debt due to reasons mentioned above.
2000 - May [6] (a) (i) State the requirements under the Companies Act with regard to
compliance of accounting standards and the disclosure to be made in case the profit
and loss account and the Balance Sheet of the company do not comply with the
accounting standards. What is the duty of the auditor of the company in this regard?
(5 marks)
(ii) The Profit and Loss Account and Balance Sheet of AS Limited have been signed
by two directors A and B. The board comprises of a third director C, who is also the
managing director. The company has also employed a full time secretary. Examine
whether the authentication of the financial statements is in accordance with law.
(3 marks)
Answer :
(i) W ith effect from 31.10.1998, the Com panies (Amendment) Act, 1999, has
introduced three new sub sections to Sec. 211 requiring compliance of
Accounting Standards by all companies and disclosure of particulars in case of
non- compliance. Also, a new clause has been inserted in Sec. 227 requiring the
auditors to state in their report as to whether the annual accounts comply with
the Accounting standards. Companies (Amendment) Act, 2000 has also inserted
a new Sub-Sec. (2AA) requiring the directors to state in the Directors
Responsibility Statement as to whether applicable Accounting Standards have
been complied with. There provisions are explained as below :
1. Meaning of Accounting Standards [Sec. 211(3C)] : The expression
Accounting Standard means the standards of Accounting as recommended
by the Institute of Chartered Accountants of India (1CA1) as may be
prescribed by the Central Government in consultation with National Advisory
Committee on Accounting Standards fervor, until the Accounting Standards
are prescribed, Central Government, the Standard of Accounting specified
by the ICAI shall be deemed to be the Accounting Standards.
2. Duties of the Company (Sec.211) :
(a) Compliance with Accounting Standards : Every Profit & Loss A/c
and Balance Sheet of the company shall comply with the AS.
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(ii)
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(b) Disclosure in case of non-compliance : W here the Profit & Loss A/c
and the Balance sheet of the company do not comply with AS, the
Company shall make the following disclosures :
C
Deviation from AS
C
Reasons for deviation
C
Financial effect, if any, arising due to such deviation.
3. Duties of the Directors [Sec.217 (2AA)] : Boards report shall include a
directors responsibility statement indicating whether, in the preparation of
Annual Accounts, the applicable As have been followed or not in case of any
material departure from the applicable AS. Proper explanation for the same
shall be given in the directors Responsibility Statem ent.
4. Duties of the Auditor [Sec. 227] : It has been made obligatory in the part
of the auditors to state whether the Profit & Loss A/c and the Balance Sheet
of the company comply with the AS. In case of non-compliance the auditors
are required to qualify the Audit report.
As per Sec. 215, of the Companies Act, 1956, except in the case of a banking
company, the Balance Sheet and Profit and Loss A/c of a company must be
signed on behalf of the Board of directors by two director and the manager or
secretary, if any. If the company has a Managing Director, he should be one of
the signed directors.
Present Case :
In the instant case, the company has 3 directors A, B, & C. C is also the
managing director of the company. The company has employed a Secretary but
has no manager. Thus the Profit & loss A/c and the Balance sheet should be
signed by :
(a) the Secretary,
(b) the Managing Director Mr. C and
(c) either of the directors, Mr. A or Mr. B.
However, in the given case, the Balance sheet has been signed by Mr. A & Mr.
B only. As such, the signed of Profit & loss and Balance sheet is not is
accordance with the sec. 215 and is therefore invalid.
2001 - May [9] (b) A group of shareholders approaches you for advice regarding the
affairs of Aggressive Textiles Ltd. According to the shareholders, the management of
the company is not exercising its powers properly and that the statutory audit is being
carried out in a routine manner. They want that a special audit should be conducted so
that the real nature of transactions carried out by the management will come to light.
Advise, with reference to the provisions of the Companies Act, as to when a special
audit can be directed and by whom.
(7 marks)
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Answer :
The main purpose of Special Audit is to provide to the Central Govt. a critical review of
the company's W orking and the State of its Affairs. The Special Audit is ordered in
special circumstances only after making such enquiry as the CG may deem fit.
1. Circumstances in which special audit may be ordered : Special audit may be
ordered by CG if it forms an opinion as to the existence of any of the following
circumstances :
(a) That the affairs of the company are not being managed in accordance with
sound business principles or prudent commercial practices.
(b) That the company is being m anaged in a manner likely to cause serious injury
or damage to the interests of the trade, industry or business to which it
pertains.
(c) That the financial position of the company is such as to endanger its solvency.
2. Can Shareholders apply to the CG for ordering Special Audit ?
W here the Stakeholder form an opinion as to the existence of any of the above
circumstances, they may make a complaint to the CG. If the CG is satisfied about
the existence of such circumstances, it may order a special audit to be conducted.
But such a complaint does not bind the CG to order a special audit, even if the
complaint is made by all the stakeholders. Thus, the power of the CG to order
special audit is discretionary in nature.
3. Ordered by : Special audit may be ordered by CG without providing an opportunity
of being heard to the company.
CG may appoint other the companys auditor or any other Chartered
Accountant (Whether or not in practice) to conduct the special audit, who shall be
called the Special Auditor.
2001 - Nov [5] (b) M/s. Rao & Rao, a firm of Chartered Accountants have to be
appointed as the auditors of M/s. ABC Co. Ltd., a Government Company. Explain the
steps to be taken regarding the appointment and payment of remuneration to the
auditors.
(7 marks)
Answer :
According to the provisions of Sec. 619 (2) of the Companies Act, 1956, the auditor of
a Govt. Company shall be appointed or re-appointed by the Comptroller and Auditor
General of India. Further, the limits specified in sub - Sec. (1B) and (1C) of Sec. 224
shall apply in relation to the appointment or reappointment of an auditor u/s 619.
Therefore, M/s ABC Co. Ltd. the Govt Company must approach C & AG for appointment
of auditor.
Companies (Amendment) Act, 2000 has introduced a new sub-section (aa) to
Sec. 224 (8) stating that in the case of an auditor appointed u/s 619 by C & AG, the
remuneration shall be fixed by the company in the general meeting or in such manner
as the company in general meeting may determine. Thus, the remuneration is to be
fixed by the company itself even though the appointment is made by C & AG.
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2003 - May [5] (b) (i) What is the liability of an auditor for failure to point out in his
report that dividend is paid out of capital?
(ii) Can an auditor be disqualified for indebtedness in the following cases?
(a) W here he is recovering his fees on a progressive basis even though the job
is not complete.
(b) W here the auditor's firm has purchased goods from the auditee company and
not paid for them for over six months.
(7 marks)
Answer :
(i) Please refer 1998 - Nov [8] (a) (i) on page no.16
(ii) Please refer 1998 - Nov [8] (a) (ii) on page no.16
2003 - May [6] (a) The Profit and Loss Account and Balance Sheet of a listed company
have not been prepared in accordance with some of the applicable accounting
standards. Examine the responsibility of the directors and auditors in this regard under
the Companies Act, 1956.
(8 marks)
Answer :
Please refer 2000 - May [6] (a) (i) on page no.19
2003 - Nov [8] (a) How would you deal with the following situations in the matter of
appointment of Auditors?
(i) The shareholding of L.I.C. and U.T.I. increased from 23 percent to 27 percent
of the subscribed share capital of the company after issue of notice of the Annual
General Meeting, but before the date of the Annual General Meeting.
(ii) Ordinary resolution is passed at the Annual General Meeting of a company when
a special resolution is required to be passed for appointment of Auditor?
(8 marks)
Answer :
(i) Sec. 224 A of Companies Act, 1956, requires a company to appoint an auditor
by passing a Special Resolution, where 25% or more of its subscribed capital is
held by the Govt or its instrumentalities. However, it does not specify the date on
which 25% of the subscribed share capital must be held by the Govt.
instrumentalities. ie. whether the date of notice of the meeting or the date of
passing the special resolution shall be the effective date.
Ordinarity, there will be no difference in the shareholding as on the date of issue
of notice and the date of the Annual General Meeting, However, in exceptional
cases, where the shareholding as on these two dates differ, the material date is
the date of AGM in Such a case, the company has two option. Option I - Company may adjourn the AGM and later issue the required notice
in accordance with the provisions of the ACt. The special resolution appointing
the auditors shall be passed in adjourned AGM.
(ii)
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Option II - Company may omit or pass over the item on the agenda regarding
the appointment of auditors. Auditors shall be appointed by the CG in such a
case. [Deptt. circular no. - 2/76, 1/1/76 - CL-V, dt. 5.6.1976].
Provision relating to appointment of auditors by the Central Govt. are
explained as below:
1. Notice to the Central Govt. : where at an AGM, no auditors are appointed
or reappointed, the company shall within 7 days give notice of the fact to the
C.G. The notice shall be given to the Regional Director to whom the powers
have been delegated the C.G.
2. Appointment by C.G. : on receipt of notice from the company, the C.G.
may appoint a person to fill the vacancy.
3. Default : If the company fails to give notice to the G.G, the company &
every officer of the company who is in default shall be punishable with fine
which may extend to ` 5,000/-.
2004 - Nov [8] (b) State the procedure for the following, explaining the relevant
provisions of the Companies Act, 1956:
(i) Appointment of First Auditor, when the Board of Directors did not appoint the
First Auditor within one m onth from the date of registration of the company.
(ii) Removal of Statutory Auditor (appointed in last Annual General Meeting) before
the expiry of his term .
W hat difference it would make, if the Auditor was First Auditor appointed by the Board
of Directors?
(7 marks)
Answer :
(i) The provisions relating to First Auditors are as follows :
1.
Manner of appointment : First auditors of as company shall be appointed
by the Board of Directors within one month of the date of registration of the
company. If the Board fails to appoint the first auditors within the said
period of 1 month, the company in the general meeting may appoint the
first auditors of passing an ordinary resolution.
2.
Tenure of office : First auditors shall hold office until the conclusion of the
first AGM of the com pany.
3.
No notice of appointment : There is no requirement regarding intimation
of appointment to the first auditors by the company. Similarly, first auditors
are not required to inform the registrar whether they have accepted the
appointment or not.
4.
Removal before first AGM : The company may remove the first auditor
by passing an ordinary resolution at the general meeting. No special notice
is required for such removal. However, procedure prescribed u/s 225 (2)
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and (3) shall be followed. Any other person m ay be appointed in his place
of whose nomination a notice has been given to the members of the
company not less than 14 days before the date of the meeting.
(ii) Auditor appointed in a annual General Meeting may be removed from office
before the expiry of his term only by the company in general m eeting, after
obtaining the previous approval from the Central Government in that behalf [Sec.
224(7)].
Further the company has to follow the following procedure prescribed in Sec.
225 (2) and (3) as explained below :
(i) No special notice under Sec. 225 (1) is required for a resolution in the
general meeting to remove the auditor, hold the general meeting etc.
(ii) The auditor shall be informed of the Board's decision immediately. [Sec.
22(2)].
(iii) The auditor can make a representation. The copy of the representation
should be sent to all the members to whom notice of meeting is sent. If the
copy of the representation is not sent as it was received late or because of
the company's fault, the auditor may insist that the representation may be
read at the meeting. [Sec. 225 (3)].
(iv) If company does not wish to send the representation to the members of
read at the general meeting, the company has to apply to Central
government/Company Law Board. If Central Government/Company Law
Board is satisfied that the right of representation is being misused by
auditor to secure needless publicity for defamatory matter, the Central
Government/ Company Law Board may order that the representation need
not be sent and the representation need not be read at the meeting.
[(Proviso to Sec. 225(3)].
(v) An ordinary resolution is to be passed at the general meeting for the
removal of the auditor.
The first auditors appointed by Board can be removed by the company at a
general meeting : The provisions in respect of removal as contained in Sec. 225 (2)
& (3) are applicable for removal of first auditors also. However, in case of removal of
first auditor appointed by the Board of Directors, only an ordinary resolution is sufficient
to remove the auditor and Central Government's approval is not required.
2005 - May [5] (b) (i) Define the expression "Accounting Standards" within the meaning
of Companies Act, 1956.
(ii) XYZ Limited did not prepare its Balance Sheet as at 31st March, 2005 and the
Profit & Loss Account for the year ended on that date in conformity with some
of the mandatory Accounting Standards issued by the Institute of Chartered
Accountants of India. You are required to state with reference to the provisions
of the Companies Act, 1956, the responsibilities of directors and statutory auditor
of the company in this regard.
(7 marks)
Q&A-4.25
Answer :
(i) As per sub-Sec. (3C) of Sec.211 of the Companies Act, 1956,the expression
Accounting standards means the standards of accounting recommended by the
institute of Chartered, Accountants of India constituted under the Chartered
Accountants Act, 1949 as may be prescribed by the Central Government in
consultation with the National Advisory Committee on Accounting Standards
established under sub-Sec. (1) of Sec. 210A of the said Act.
Proviso to the said sub-Sec. states that the standards of accounting specified by
the Institute of Chartered Accountants of India shall be deemed to be the
Accounting Standards until the accounting standards are prescribed by the
Central Government under this sub-section.
(ii)
Please refer 2000 - May [6] (a) (i) on page no.19
2005 - May [8] (a) What do you understand by Corporate Governance? Explain, how
the provisions of the Companies Act, 1956 relating to Audit Committee will help in
achieving some of the objectives of Corporate Governance.
(8 marks)
Answer :
Please refer 2009 - May [8] (b) on page no.44
2005 - Nov [5] (b) (i) State the provisions of the Companies Act, 1956 regarding the
appointment of auditors in the following cases :
(a) A Com pany, whose Annual General Meeting was held on 30th September, 2005,
but it failed to appoint the auditor.
(b) A Company, whose financial year shall end on 31st Decem ber, 2005 and whose
auditor (appointed in last Annual General Meeting held on 30th March, 2005) had
died on 15th October, 2005.
(7 marks)
Answer :
(a) Please refer 2003 - Nov [8] (a) (ii) on page no.22
(b) Provisions of Sec. 224 (6) are as follows :
1. Manner of filling casual vacancy : Board may fill any casual vacancy in the
office of the Director Auditor. However, where a casual vacancy is caused by
the resignation of an auditor, the vacancy shall be filled by the shareholder in
general meeting.
2. Other Joint Auditors may act : Till the time a casual vacancy continues, the
remaining auditor (s) (ie.- the other joint auditors,), if any, may act.
3. Tenure of office of new auditor : Any auditor appointed in the casual
vacancy shall hold office until the conclusion of the next annual general
meeting.
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2005 - Nov [9] (b) S Ltd. is a subsidiary company of H Ltd. The Financial year of H Ltd.
is from 1st April to 31st March whereas the financial year of S Ltd. is 1st July to 30th
June every year. This is now causing difficulties particularly in view of the requirement
of reporting and circulating the consolidated annual accounts as required by Accounting
Standard AS-21. The Board of Directors of H Ltd. decides that the accounting year of
S Ltd. for the year 1st July, 2005 to 30th June, 2006 be extended from present 12
months to 21 months, i.e. 1st July, 2005 to 31st March, 2007, so that the financial years
of the holding company and the subsidiary company end on the same date.
State the provisions of the Companies Act, 1956 in this respect.
(5 marks)
Answer :
This problem relates to provisions of Sec. 212 (2) & Sec 213 of the Companies Act,
1956.
1. Requirements of the Finan cial year : Sec. 212 (2) prescribes the following
requirements relating to the financial years of the holding and subsidiary company:
(a) Financial year of the subsidiary must co-incide with the financial year of the
holding company.
(b) W here this is not the case, the financial year of the subsidiary company shall
end before the financial year of the holding company ends. Also the gap
between the end of financial year of the subsidiary company and end of the
financial year of the holding company shall not exceed 6 months.
(c) It must be insured that the duration of the financial year of the subsidiary is not
less than that of the holding company. If the F.Y. of the subsidiary company
is shorter in duration, the Annual accounts of two or more financial years of
the subsidiary are required to be attached, so that the total period covered
therein is not less than the period covered by the holing company's financial
year.
2. CG's Power of extension of F.Y. : Sec. 213 empowers the CG to extend the
F.Y. of the holding company or its subsidiary com pany so that :
(a) F.Y. of both the companies coincide, or
(b) The end of F.Y. of Subsidiary com pany does not precede the end of F.Y. of
the holding company by more than 6 months.
3. CG's Pow er to make consequential orders : W here the CG allows extension of
F.Y. it is also empowered to make the consequential order that the requirements
of the Act relating to holding of AGM, submission of annual accounts and filling of
annual returns may be complied with as per the directions of CG in this behalf.
4. Over-riding effect of Sec. 213: Provisions of Sec. 213 shall apply notwithstanding
anything to the contrary contained in any law for the time being in force.

5.
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Procedure for seeking Extension :

(a) Call for a Board Meeting of S Ltd. Pass a resolution to extend the F.Y. of S
Ltd. to 21 months i.e. from 1st July, 2005 to 31st March, 2007 so that the F.
Years of H Ltd and S Ltd. can coincide.
(b) Make an application to the CG for seeking extension of F.Y. of S Ltd. to 21
months i.e. from 1st July, 2005 to 31 st March, 2007. No form has been
prescribed for such an application. The application shall be made to the CG
on the plain paper giving all the required details. The application shall State
the reasons for seeking extension.
(c) The company shall pay the prescribed fees in accordance with the companies
(fees on Applications) Rules, 1999.
(d) Following documents shall be attached with the application :
C
a certified true copy of the latest Balance sheet and Profit & Loss A/c of
H Ltd & S Ltd.
C
a certified true copy of the memorandum and articles of H Ltd & S Ltd.
C
Proof of Payment of Fees.
C
A certified true copy of the Resolution passed by the Board of Directors
of S Ltd. proposing the extension of Financial year of S Ltd. to 21 Months,
i.e. from 1st July, 2005 to 31st march. 2001.
2006 - Nov [9] (a) (ii) Ram & Company was appointed as auditor of ABC Limited at the
Annual General Meeting held on 30th Septem ber, 2004. Can Ram & Co. continue as
auditor of the company in case the next annual general meeting has not been held in
time ? W hat would be the position in case the next annual general m eeting was held
on 30th September, 2005, but adjourned without considering the business of
appointment or re-appointment of auditor?
(4 marks)
Answer :
Duty and Responsibility for holding AGM is on the directors and so where AGM is not
held within time limit specified u/s 166 and Sec.210, the auditors vacate their office on
the last day on which the AGM should have been held. This is due to the reason that
the directors cannot be allowed to take advantage of their own defaults. However, an
auditor of the company has no responsibility to hold the AGM and hence he does not
vacate his office if AGM is not held. Moreover sec. 224 (1) provides that an auditor shall
hold his office from the conclusion of one AGM to the conclusion of next AGM. As such,
an auditor is not appointed to audit the accounts of a particular financial year, but is
appointed for the period falling between two AGMS. Thus, an auditor shall continue in
office until the next AGM is concluded.
W here an AGM is held whereat the new auditors are appointed, but the AGM is
adjourned to a later date, the new auditors cannot resume office until the conclusion of
the adjourned AGM. The present auditors would continue to be auditors till the
Q&A-4.28
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conclusion of the adjourned AGM, since the auditors hold office from the conclusion of
one AGM to the conclusion of next AGM. W here an auditor was appointed for the year
1954, but no AGM was held until 1957, it was held that the auditor should audit all the
accounts of the company which were placed in the AGM held next after their
appointment. [Deptt. Letter No.-35/13/74-CL.III, dt. 21.11.1974]
Applying the above provisions the given problem are answered as follows :
(a) In case the next AGM is not held in time, Ram & Company shall continue to be
auditors.
(b) In case the next AGM is held on 30th Sept., 2005 but is adjourned without
considering the business of appointment or re-appointment of auditor, Ram &
Company shall continue as auditors.
2006 - Nov [9] (b) Explain the legal position in respect of the following with reference
to the provisions of the Companies Act, 1956 :
(i) XYZ Limited, having one Indian subsidiary company and an overseas subsidiary
company, attached to its Balance Sheet documents mentioned under Sec. 212
in respect of its Indian subsidiary com pany only.
(ii) Statutory auditors of a public company did not verify the correctness of the
particulars furnished in the Boards' Report in respect of certain employees under
Sec. 217(2A).
(7 marks)
Answer :
(i) Sec. 212 of the Companies Act, 1956 does not make any distinction between an
Indian Subsidiary and an overseas Subsidiary company. u/s 4 (4),a company
shall be deemed to be the holding company of another, if only that other is its
subsidiary. U/s 4 (5), the expression "company" includes any body corporate and
the definition of body corporate is sec. 2(7) includes a company incorporated
outside India. In view of this, the Indian holding company is legally bound to
comply with the requirements in respect of both the Indian & foreign subsidiary
companies. However, if there is any; difficulty in complying with this requirement,
the Board of Directors of M/s XYZ ltd. may apply to the Central Govt. U/s 212 (8)
either to waive the requirement or the modify the same. Hence, the company has
violated the provision of sec. 212.
(ii) The given question relates to Sec-227 read with Sec. 217 (2A) & 218. U/s 217
(2A). It is the duty of the Board to give information in the Board's Report
regarding the following employees :
(a) an employee who was employed throughout the financial year and received
remuneration of ` 24 lakhs or more;
(b) an employee who was employed for a part of the financial year and received
remuneration of ` 2 lakhs per month or more for any part of that year.
Q&A-4.29
(c) an employee who was employed throughout the financial year or part there
of and received remuneration at a rate, in the aggregate, is in excess of that
drawn by the managing director or whole time director or manager and holds
by himself or along with his spouse and dependent. Children, not less than
2% of the equity share capital of the company.
As per Sec. 227, it is the duty of the auditor to m ake an audit report. The audit report
shall relate to the following documents:
(i) The accounts examined by him.
(ii) Every balance sheet of the company.
(iii) Every Profit & loss a/c of the company.
(iv) Documents annexed to the Balance Sheet and Profit & Loss a/c.
As per Sec. 218, Board's Report referred to in Sec. 217 shall be attached (and not
annexed) to the Balance Sheet.
A combined reading of sections 217 (2A), 218 and 227 makes it clear that it is not the
duty of the auditors to report on any matter contained in the Board's Report. Thus, in the
given case the auditors have not committed any default.
2007 - May [6] (a) (i) Define the expression "Accounting Standards" within the meaning
of Companies Act, 1956.
(ii) XYZ Limited did not prepare its Balance Sheet as at 31 st March, 2007 and the
Profit and Loss Account for the year ended on that date in conformity with some
of the mandatory Accounting Standards issued by the Institute of Chartered
Accountants of India. You are required to state with reference to the provisions
of the Companies Act, 1956 the responsibilities of directors and statutory auditor
of the company in this regard.
(8 marks)
Answer :
(i) Please refer 2005 - May [5] (b) (i) on page no. 24
(ii) Please refer 2000 - May [6] (a) (ii) on page no. 19
2008 - May [9] (c) Annual General Meeting of a Company has been concluded on 30th
April, 2008. Now, the company is required to submit/file its Annual Return and Annual
Accounts with Register of Companies. You are required to state the procedure for such
submission/filing.
(4 marks)
Answer :
The Annual Return of a company is required to be filed with Registrar of Companies
within sixty days from the day on which the Annual General Meeting of a company is
held. This return is filed as an enclosure to Form No. 20B and is to be electronically
filed.
Q&A-4.30
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Similarly, Annual Accounts are to be electronically filed within 30 days from the day on
which the Annual General Meeting of a company is held. The Directors' Report,
Auditors' Report, Balance Sheet and related schedules are enclosed to Form No. 23AC
and the Profit and Loss Account and related schedules are enclosed to Form No.
23ACA.
Following procedure is to be followed for submitting/filing the above :
(i) To check whether the computer has the required hardware, software and the
internet connection.
(ii) To download the forms, one by one, from the website of Ministry of Corporate
Affairs.
(iii) To fill up the Company Identification Number (CIN), as a first step, in the forms
and thereafter, by clicking the profile button, company's name is automatically
filled. It is to be noted that at this time, the computer must rem ain connected to
internet.
(iv) To fill up the desired information in the forms.
(v) To attach the Annual Return and Annual Accounts to the respective forms.
(vi) To check the forms with the help of the "check form" button provided in the forms.
(vii) To digitally sign the forms
(viii) To electronically submit / file the forms
(ix) to pay the filing fee either through credit card or cash/cheque on generation of
challan.
(x) To check from the website of Ministry of Corporate Affairs, in due course, whether
the forms submitted/filed have been approved.
P RACTICAL Q UESTIONS
2001 - May [5] (a) M/s Easy Escape Consultants Ltd. was incorporated in the year 1997
as a Public Limited Company. It made a public issue in the year 1998 and collected
substantial funds from the public. However, the company, till date, has not filed any
Annual Returns or Balance Sheets with the Registrar of Companies, New Delhi. Efforts
to locate the directors at their given addresses have not yielded any results. A group of
shareholders, who wish to take initiative in this regard seek your advice in respect of the
following matters:
(i) The nature of defaults committed and the penal action that can be taken against
the company and its Directors;
(ii) W hether any steps can now be taken to hold a general meeting of the company
to elect a new set of Directors in place of the existing Directors.
(8 marks)
Q&A-4.31
Answer :
Legal Provision :
Every company having share capital, shall within 60 days from the day on which the
AGM is held, prepare and file with the Registrar the annual return as stated in sec. 159
of the Companies Act, 1956. In case such a return is not filed the company and every
officer of the com pany who is in default is punishable with a fine which m ay extend to
` 500 for every day during which the default continues.
Similarly, if the company has not fileds Balance Sheet, the company and its
directors will be held liable for the penalties as provided in Sec. 220 of the Act Apart
from this, the company and its directors will also be held responsible for violation of Sec.
166 of the companies Act, 1956 for not holding the AGM and Sec. 210 for not laying the
Annual Accounts of the company in the manner laid down in this section. the penalty
for not filing the annual accounts with Registrar is ` 500/- for every day as provided in
Sec. 162. The penalty for violation of Sec. 166 for not holding the AGM is upto
` 50,000/- for the company and every officer of the company who is in default and in the
case of continuing default, with a further penalty which may extend to ` 2,500/- for every
day of default. Court shall take cognizance of the offence on a complaint in writing of
the Registrar or of a shareholder of the company or of a person authorised by CG in this
behalf [Sec. 621]
Present Case :
The shareholders of M/s Easy Consultants Ltd. can approach the Company Law Board
as provided in Sec. 167. The CLB has the power, on the application of any member of
the company, to call or direct the calling of a general meeting of the company and give
such ancillary or consequential directions, for holding the AGM. The CLB has power to
give a direction that even one member present at the meeting can constitute a quorum
for the purpose of the meeting.
2001 - Nov [9] (a) Examine, with reference to the relevant provisions of the Companies
Act, 1956, the validity/legality of the following:
(iii) M/s. XYZ Co. Ltd. held its Annual General Meeting beyond the permissible time
limit and the legality of the documents filed by the Company has been questioned.
(3 marks)
Answer :
It is not right to say that once the time for holding the AGM has expired, the meeting
held after the prescribed time is void. Failure to hold the AGM is punishable with fine u/s
168. Therefore, the legality of the meeting and the document filed pursuant to the
meeting cannot be questioned merely because of the delay in holding the AGM.
Q&A-4.32
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2002 - Nov [4] (b) On the basis of the information given below, advise M/s XYZ Ltd.
about the provisions applicable for the appointment of Auditors.
Date of Incorporation
3.10.2002
Date of Receipt of Certificate of Commencement of Business
18.10.2002
Nominal Value of
Equity shares held
(` in Lakhs)
Uttar Pradesh Government
11,600
Central Government
8,000
Bharat Heavy Electricals Ltd. (A Corporation controlled by the Central
Government)
8,000
Private Sector Companies
8,800
Indian Mutual Funds
4,000
Foreign Financial Institutions
4,000
Individual Members
3,600
Total
48,000
(7 marks)
Answer :
On the basis of the information given in the question, the following is the share holding
pattern in respect of XYZ ltd.
%
N.V. of share / (` in lacs)
Uttar Pradesh Govt.
24.10%
11.600
Central Govt.
16.70%
8,000
Bharat Heavy Electricals (BHEL)
16.70%
8,000
57.50%
27.600
Sec. 619 B (c) of the Companies Act, 1956, inter alia provides that provisions of Sec.
619 shall also apply to the companies in which not less than 51% of the paid up share
capital is held
C
by the Central Govt.
C
one or more State Govt.
C
and one or more Govt. companies though such companies are themselves not
Govt. Companies.
Thus, the auditor of such companies can be appointed only by the Comptroller &
Auditor General (C & AG) of India as per Sec. 619.
In the Present case :
Here in the given case, 57.50% of the share capital is held by the combination of
Central Govt. the State Govt of U.P. & BHEL, (a Govt. Co.) thus, the appointment of the
auditors of XYZ Ltd. will be regulated by the provisions of Sec. 619 and accordingly the
auditors are appointed by C & AG.
Q&A-4.33
2004 - May [8] (b) Explain, how the auditor will be appointed in the following cases :
(i) A Government Company within the meaning of Sec. 617 of the Companies Act,
1956.
(ii) The Auditor of the company has resigned on 31st December, 2003, while the
Financial year of the company ends on 31st March, 2004.
(iii) A company, whose shareholders include the following :
(a) Bank of Baroda (A Nationalised Bank) holding 12% of the subscribed capital
in the company.
(b) National Insurance Company Limited (carrying on General Insurance
Business) holding 10% of the subscribed capital in the company.
(c) Maharashtra State Financial Corporation (A Public Financial Institution)
holding 8% of the subscribed capital in the company.
(7 marks)
Answer :
(i) Please refer 2001 - Nov [5] (b) on page no. 21
(ii) Please refer 2005 - Nov [5] (b) (i) (b) on page no. 25
(iii) The case of appointment of auditor of a company whose 25% or more of the
subscribed capital is held by Government, financial institutions, nationalised
banks, General insurance companies is governed by the provisions of Sec. 224
A of the Companies Act, 1956. According to the provisions of the said section in
the case of a company in which not less than twenty-five percent of the
subscribed share capital is held, whether singly or in any combination, by :
(a) a public financial institution or a Government company or Central
Government or any State Government, or
(b) any financial or other institution established by any Provincial or State Act
in which a State Government holds not less than fifty-one per cent of the
subscribed share capital, or
(c) A nationalised bank or an insurance company carrying on general
insurance business, the appointment or re-appointed at each annual
general meeting of an auditor or auditors shall be made by a special
resolution.
In view of the above provisions of the Companies Act, 1956, since the combined
holding of the nationalised bank, general insurance company and the financial
institution covered by the said provisions is 30% which exceeds the limit of 25%
of the subscribed capital of the company, the company has to appoint its auditor
is the Annual General Meeting by passing a special resolution.
2005 - May [1] {C} Answer the following :
(a) The Annual General Meeting of M/s Robertson Ltd, for laying the Annual Accounts
thereat for the year ended 31st March, 2004 was not held as the accounts were not
ready. In this context:
Q&A-4.34
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(i) Advise the company regarding compliance of the provisions of Sec. 220 of the
Companies Act, 1956 for filing of copies of Annual Accounts with the
Registrar of Companies.
(ii) W ill it make any difference in case the Annual Accounts were duly laid before
the AGM held on 27th September, 2004 but the same were not adopted by
the shareholders?
(5 marks)
Answer :
Legal Provisions : As per the provisions of Sec. 220 the company shall file with the
Registrar three copies of Balance sheet,Profit & loss a/c, and all other documents as
required to be annexed or attached to the Balance Sheet.
All such documents shall be filed with in 30 days from the date on which the
Balance sheet and profit & loss a/c were laid at AGM.
If the AGM of a company for any year has not been held, the com pany shall never
the less file the annual accounts and all other documents which are required to be
annexed or attached to the balance sheet. Such documents shall be filed within 30 days
of the last date the AGM ought to have been held. Additionally, the company shall
prepare a statement of the fact and of the reasons therefore, and such statement shall
be annexed to the Balance sheet and to the copies thereof required to be filed with the
registrar.
Thus, sec. 220 has made it obligatory on every com pany to file the annual accounts
with the registrar, even if the AGM of the company has not been held.
Present Case :
(i) In the given case, AGM of /s Robertson Ltd. ought to have been held on or
before 30.09.2004 (Unless extension upto Three months were granted by the
Registrar). Accordingly, M/s Robertson Ltd. is under an obligation to file the
annual accounts within 30 days of the last date of AGM ought to have been held,
i.e. on or before 3.10.2004. The company shall be penalised if, on or before
30.10.2004, the company does not get the accounts prepared, audited and file
them with the Registrar.
(ii) W here the AGM of a company is held within time prescribed u/s 166 & 210, the
company is under an obligation to file the annual accounts within 30 days of
laying the annual accounts at AGM.
In the present case, if the annual accounts were laid before the AGM held
on 27th Sept. 2004 (i.e. before the last date of holding the AGM), M/s Robertson
Ltd. must file the annual accounts on or before 27.10.2004.
It is worth noting that even if the annual accounts are laid but not adopted in
the AGM held on 27.09.2004, the annual accounts must be filed on or before
27.10.2004 (since the due date for filing the annual accounts is reckoned with
respect to the date of laying of annual accounts in the AGM, and not with respect
Q&A-4.35
to the date of adoption of annual accounts); In such a case, a statement of

reasons for non-adoption of annual accounts shall also be filed with the
Registrar.
2005 - Nov [5] (a) A group of shareholders has approached you for advice regarding
the affairs of LPM Paper Mills Ltd. According to them, the management of the company
is not carrying out its functions in accordance with the prudent commercial practice and
if the affairs of the company are allowed to run in future in the same manner, the
company's solvency would be in danger. They want that a Special Audit be conducted
to find out the actual nature of the transactions.
(i) You are required to state with reference to the provisions of the Companies Act,
1956, as to when a special audit can be directed and by whom.
(8 marks)
Answer :
(i) Please refer 2001 - May [9 ] (b) on page no. 20
2006 - May [5] (b) The subscribed share capital of AJR Company Ltd. at the end of the
financial year ending 31 st March, 2005 was ` 20 crores, out of which two public Financial
Institutions were holding share capital amounting to ` 3 crores. During the financial year
2005-2006 the company through public issue of shares raised its subscribed capital by
additional ` 60 crores. Out of ` 60 crores the two public financial institutions were further
allotted shares amounting to ` 20 crores, raising the total contribution of these two
institutions to ` 23 crores before the date of the companys closure of books for annual
general meeting scheduled for 15 th September, 2005, where auditors were to be
appointed. The Company as usual, by getting an ordinary resolution passed appointed
the auditors. A group of shareholders of the company allege that the appointment of
auditors is violative of certain provisions of the Companies Act, 1956. They however,
did not raise any objection to the appointment of auditors at the previous annual general
meeting held on 10th Septem ber, 2004. Examining the provisions of the Companies Act,
1956 decide :
(i) W hether contention of the shareholders shall be tenable ?
(ii) Should the contention of shareholders be tenable, what action is the company
required to take for the appointment of auditors in the above situation at the
annual general meeting scheduled for 15 th September, 2005 ?
(iii) W ould your answer be still the same in case the total subscribed capital
contributed by the two public financial institutions is only ` 10 crores, including
the previous contribution of ` 3 crores?
(7 marks)
Q&A-4.36
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Answer :
The given problem relates to sec. 224A of Companies Act, 1956.
Legal Provision :
1. Requirement of Special Resolution for appointment or re-appointment of
Auditors : The appointment or re-appointment of an auditor shall be made by a
special resolution if not less than 25% of the subscribed share capital, whether
singly or jointly held by :(a) Public Financial Institution,
(b) Govt. Company.
(c) Central Govt.
(d) Any State Govt.
(e) Any financial or other institution established by any Provincial or State Act in
which a State Govt. hold's not less than 51% of the subscribed share capital.
(f) Nationalised Bank.
(g) Insurance Company Carrying on general insurance business.
2. Consequences of failure to pass Special Resolution : where a company to
which this section applies omits or fails to pass a special resolution it shall be
deemed that no auditor (s) had been appointed by the company and thereupon the
company shall, within 7 days, give notice of that fact to the CG and the CG may
appoint a Person to fill the casual vacancy.
Given Case :
F.Y. ending
F.Y. ending
31.3.04
31.3.05
Total subscribed share capital
20 crores
80 crores
Subscribed share capital held by public financial
institutions
3 crores
23 crores
Percentage of total subscribed share capital which
is held by Public financial institutions
15%
More than 25%
Date of AGM appointing auditors
10.09.2004
15.09.2004
Nature of Resolution actually passed
for appointment of auditors
Ordinary Resolution Ordinary Resolution
Nature of Resolution required for
appointment of auditors
Ordinary Resolution
Special Resolution
Conclusion :
(i) Appointment of auditors in the AGM held on 15.09.2005 is violative of the
provisions of Sec. 224 A. This is so because two Public Financial Institutions
hold more than 25% of the subscribed share capital of AJR company Ltd. and
therefore the appointment of auditors requires a special Resolution. Accordingly,
the contention of the shareholders that appointment of auditors is violative of the
certain provisions of the companies Act, 1956 (i.e. Sec. 224 A) is correct.

(ii)
(iii)
Q&A-4.37
In this case, the company is required to intimate to the CG the fact that no
auditors were appointed in the AGM hold on 15th Sept 2005. Such intimation
shall be given within 7 days of conclusion of AGM. Thereafter, the CG shall fill
the vacancy.
In case the total subscribed capital hold by the two Public financial Institutions
is only ` 10 crores, the provisions of Sec. 224A. Shall not be attracted, since in
such a case the shareholders of the Public financial institutions is less than 25%
of the subscribed share capital. Accordingly, the appointment of auditors by
ordinary Resolution shall be valid.
2006 - May [7] (a) (ii) One of the m embers of ADB Ltd. has proposed the name of Mr.
Fame for appointment as a Director of the Company in the Annual General Meeting and
given a notice under Sec. 257 of the Com panies Act, 1956. Mr. Fame is one of the
partners of Fame & Fame, Chartered Accountants, who are the retiring auditors of the
company. But the audit of the company is being looked after by another partner of the
firm. Examine whether Fame & Fame can be reappointed as auditors, if Mr. Fame is
appointed as Director.
(4 marks)
Answer :
This problem relates to Sec. 226 of the Companies Act, 1956.
Legal Position :
1. According to Sec. 226, a person shall be disqualified to be appointed or
reappointed as an auditor of the company if he is an officer or employee of the
company.
2. As per Sec. 2 (30), a director is an officer of the company.
3. According to sec. 257, any member of a public company can give a notice
proposing the appointm ent of any person (whether a member or not) as a director
of the company.
Position in the given case :
1. Mr. Fame is a partner in the Firm "Fame & Fame". Fame & Fame are the retiring
auditors of the company, and they are seeking re-appointment in the forth coming
AGM.
2. The name of Mr. Fame has been proposed as a director by a member by giving a
notice u/s 257. Mr. Fame has been appointed as a director in the AGM.
Conclusion - On appointment as a director, Mr. Fame becomes an officer of the
company. Therefore, Mr. Fame and any firm in which Mr. Fame is a partner, is
disqualified to be reappointed as auditors of the company.
2006 - May [7] (b) Examine the validity of the following :
(i) The Board of Directors of a company decides to revise the accounts which have
been submitted to the Auditors, but the auditors have not yet given their report.
Q&A-4.38
(ii)
Solved Scanner
The Board of Directors of a company decides to revise the Audited accounts

before adoption by the shareholders in the Annual General Meeting.(iii)The
Board of Directors of a company decides to revise the accounts which have
already been adopted by the shareholder in the Annual General Meeting.
(7 marks)
Answer :
(i) W here the auditors have not yet given their report, the Board may revise the
accounts. The revised accounts shall be approved by the Board and thereafter
signed on behalf of the Board in accordance with the provisions of Sec. 215.
Then, the revised accounts shall be submitted to the auditors. The auditors
report shall be based on the revised accounts submitted by the Board.
(ii) The given problem deals with the Guidance Notes an "Auditor's Report on
Revised Accounts of Companies before circulation to shareholders". (ICAI,
Compendium of Guidance Notes) As per the said Guidance note, in the case the
auditors have submitted their report, the Board may revise the accounts and
resubmit them to the auditor, provided that :
C
The accounts already approved by the Board have not been circulated to
and placed before the shares holders at AGM;
C
The Auditor's Report on the revised accounts is given in substitution of his
earlier audit report.
C
Adequate disclosure regarding revision of accounts is m ade by the Board
in the revised accounts; and
C
Adequate disclosure regarding revised audit report is made by the auditor
in his Audit Report.
(iii) There is no provisions in the Companies Act 1956 expressly permitting or
prohibiting or reopening of accounts after adoption.
Generally, reopening or rectification of accounts is not perm itted if the accounts
have already been adopted at AGM. ICAI also confirms this opinion. Accordingly,
accounts once adopted by the members cannot be reopened, revised or rectified
under any circumstances.
However, Deptt. of Company Affairs (DCA) has permitted revision/rectification
of accounts provided that C
The revision is made for meeting the technical requirements of taxation
laws or of any other law.
C
Such revision will result in true and fair view of the state of affairs of the
company.
C
The revised Annual accounts shall be adopted in the subsequent AGM or
extra ordinary general meeting as per Sec. 219.
C
The revised annual accounts shall be filed with the registrar as per. Sec
220.
Q&A-4.39
2007 - May [7] (b) State the provisions of the Companies Act, 1956 in respect of
appointment of Auditor in the following cases :
(i) A Government Company within the meaning of Sec. 617 of the Companies Act,
1956.
(ii) A public limited company at whose annual general meeting held on 30 th
November, 2006 in respect its accounting year ended on 30th June, 2006, the
auditor was appointed to hold office as such till the conclusion of its next annual
general meeting, but whose auditor has resigned on 15th March, 2007.
(iii) A company whose shareholders include the following :
(a) Bank of Baroda (a nationalised bank) holding 12% of the Subscribed
capital in the Company.
(b) National Insurance Co. Ltd. (carrying on general insurance business)
holding 10% of the Subscribed capital in the Company.
(c) Maharashtra State Financial Corporation (a public financial institution)
holding 8% of the Subscribed capital in the Company.
(7 marks)
Answer :
Please refer 2004 - May [8] (b) on page no.33
2007 - May [8] (a) MNC Ltd., a company, whose paid up capital was ` 4.00 crores, has
issued rights shares in the ratio of 1:1. The said company is listed with Mumbai Stock
Exchange. W hether the company is required to appoint any Audit Committee and if yes,
draft a suitable Board Resolution to appoint an Audit Committee covering the aspects
as provided in the Companies Act, 1956 and the Listing Agreement with the Stock
Exchange. In case the company is not required to appoint any Audit Comm ittee, state
the provisions of the Companies Act, 1956 in respect of appointment of Audit
Comm ittee by a Company.
(8 marks)
(b) An allegation was levelled against PQR Ltd. that the funds of the company are
misused. Mr. Z, one of the Directors of the company wants to inspect the books of
account of the company in order to ascertain whether the allegation was true. But
since Mr. Z does not have the knowledge of accounting, he appoints Mr. A, his
friend and a practising Chartered Accountant to go through the books of account
of the company on his behalf. The company seeks your advice as to whether Mr.
A may be allowed to inspect the books of account of the company on behalf of Mr.
Z. You are required to give your advice to the company keeping in view the
provisions of the Companies Act, 1956.
W hat would be your advice if Mr. Z would have been a shareholder only and
not a Director of the company ?
(7 marks)
Q&A-4.40
Solved Scanner
Answer :
(a) According to Sec. 292A of the Companies Act, 1956, a Public Co. having a paid
up capital of `5 crores or more is required to have an Audit committee. Since, after
the rights issue by MNC ltd. its paid up capital has increased to `8 crores, it is
required to appoint an Audit Committee
Relevant Board Resolution for appointment of an Audit Committee is as
follows:
Resolved that pursuant to the provisions contained in Sec. 292A of the
Companies Act, 1956 and clause 49 of listing agreement with the Mumbai Stock
Exchange, an Audit Committee of the company be and is hereby constituted as
below:
Mr. A
Independent Director
Mr. B
Mr. C
Mr. D
Mr. E
Mr. X
Director nominated by IDBI.
Mr. Y
Financial executive
Mr. Z
Managing director
FURTHER RESOLVED THAT the chairman of the committee, who shall be an
independent director, be elected by the members from am ongst themselves.
FURTHER RESOLVED that the quorum for a meeting of the Audit committee shall
be 1/3rd of the total number of members or two directors (other than M.D)
whichever is higher.
Further resolved that the Audit Committee shall comply with the following :
1. The Audit Committee shall have meetings periodically as it may deem fit with
at least three meeting in a year, viz., one meeting before finalization of annual
accounts and one every six months.
2. The Audit Committee shall invite such of the executives (and particularly the
head of the finance function) to be present at the meeting of the Committee
whenever required by it.
3. The finance Director, head of internal audit and the auditors of the company
shall attend and participate at the meeting without right to vote.
Further resolved that the audit Committee shall have the authority to investigate
into any matter that may be prescribed under the said Sec. 292A of the Companies
Act, 195 and the m atters as mentioned in the Listing Agreem ents entered into
between the Company and the Mumbai Stock Exchange and all the matters as
may be referred to it by the board from time to time and for this purpose the Audit
Committee shall have full access to information contained in the records of the
Com pany and external professional advice. If necessary.
Q&A-4.41
Further resolved that the Audit committee shall conduct discussions with the
auditors periodically about internal control system, the scope of audit including the
observations of the auditors.
Further resolved that : the Audit Committee shall review the quarterly and annual
financial statements and subm it the same to the Board with its recommendations,
if any.
Further resolved that : the recommendations made by the Audit Committee on
any matter relating to financial managem ent including the audit report shall be
binding on the Board. However, where such recomm endations are not accepted
by the Board , the reasons for the same shall be recorded in the minutes of the
Board meeting or comm unicated to the shareholders.
Further resolved that : the Audit Committee have the minutes of its meetings
drawn and approved by the Chairman of the Committee and the same be
circulated to the members of the Board within thirty days from the date of such
meeting.
Further resolved that : the Company Secretary of the Company shall be the
Secretary to the Audit Committee.
Further resolved that : the Chairman of the Audit Committee shall attend the
annual general meeting of the Company to provide any clarifications on matters
relating to audit as may be required by the members of the company.
Further resolved that : the Boards Report/Annual Report to the members of the
Company shall include the particulars of the constitution of the Audit Committee.
(b) Sec. 209 (4) of the Companies Act 1956 provides that the books of account and
other books and papers shall be open to inspection by any director during the
business hours.
The right of inspection given by this sub-section is not so restricted that it can only
be exercised personally by the director. In Vakharia Vs Supreme General Film
Exchange Co. Ltd it was held that a director is entitled to take inspection of
accounts personally or through an agent provided that there is no reasonable
objection to the person chosen and the agent undertakes not to utilize the
information obtained by him for any purpose other than the purpose of his principal.
Present Case :
As the right of inspection is a statutory right given under this sub-Section, a director who
is prevented from or refused inspection may enforce his right through court.
As such, Mr. Z being the director, can appoint Mr., A to inspect the Books of
accounts of the company.
In case Mr. Z is the member of the company.
As per the provisions of the Act the board shall from time to time determine whether
and to what extent and at what times and places and under what conditions or
Q&A-4.42
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regulation, the accounts and books of the company, or any of them , shall be open to
inspection of members not being directors. No member (Not being a director) shall have
any right to inspection any account or books or document of the company except as
conferred by law or authorized by the board or by the company in general meeting.
In case Mr. Z is a member of the company, he shall be able to inspect the books
of account only if he is given such a right by ordinary resolution of the mem bers or if
authorized by the board . But even in such case Mr. Z would have to exercise the right
personally and not through a proxy i.e. he can himself inspect the books but cannot ask
Mr. A to inspect the books in his behalf.
2007 - Nov [6] (b) The auditors of PQR Ltd. accepted the Certificate of the Manager,
a person of acknowledged competence and high reputation, as to the value of the stock
in trade. The stock was grossly overstated for several years in the balance sheets of the
company. As a result of this over valuation dividends were paid out of capital. The
Auditors did not examine the books of account very minutely. If they had done so and
compared the amount of stock at the beginning of the year. With the purchases and
sales during the year, they would have noticed the over valuation. The company
subsequently went into liquidation and the auditors were sued to make good the loss
caused by the wrongful payment of dividends relaying on the balance sheets figures.
Based on the above facts, you are required to decide. W ith reference to the provisions
of the Companies Act, 1956 and the decided case laws, the following issues:
(i) W hether auditors of the com pany will be liable for the loss caused to the
company by the wrongful paym ent of dividends based on the Balance Sheets
duly audited by the Auditors.
(ii) W hat are the statutory duties of the Auditors in this regard?
(7 marks)
Answer :
According to AASI : "Basic Principles Governing an Audit", an auditor should exercise
due skill and care in conducting an audit moreover, in case of any suspicious
circumstances, the auditor should seek additional evidences. Stock in trade is a material
item appearing in the financial statements. Applying the provisions of AASI with respect
to valuation of stock, an auditor is duty bound to ensure that the company has an
efficient system for recording the sale, purchase, storage, consumption and disposal of
stock and raw materials.
As per AAS 5 - "Audit Evidence : It is the duty of the auditor to obtain sufficient
appropriate audit evidence before forming any conclusions.
As per AA 11 - "Representations by Management":The auditor should obtain
representations from management, where ever considered appropriate. However,
representations by management cannot be a substitute for other audit evidence that the
auditor could reasonably expect to be available. If a representation by management is
Q&A-4.43
contradicted by other evidence, the auditor should examine the circumstances and
when necessary, reconsider the reliability of other representations made by
management.
Farline to verify the books of accounts by the auditor amounts to negligence since
it amounts to failure to exercise reasonable care and skill in the performance of duties
of an auditor.
An auditor has no right to rely upon others where physical verification is possible.
the auditor should not blindly rely on the certificate or representations of management
as regards the matters which are capable of direct verification by him from books of
accounts and vouchers. Valuation of stock is a material item, for which corroborative
evidences must be obtained. In the given case, the auditor has not scrutinized the
books of accounts and so he has been grossly negligent. Thus, an auditor who
approves of whatever is stated to him by the management of the company, does not
discharge his duty of exercising reasonable skill and care [Ref:- Controller of Insurance
vs. H.C Das] An auditor is duty bound to verify the assets himself and cannot rely on
verification done by persons appointed by the company. The auditor is not entitled to
assume that the directors, Officers and employees of the company would have done
their work correctly, and so dispense with verifying them [Ref: - Fox & sons vs. Morris
Grant & Co.]
Statutory duties of auditors are :
1. To ensure that the company has an efficient system for recording the purchase,
sale, storage consumption and disposal of stock & raw material.
2. To verify books of accounts.
3. To reconsider the reliability of certificate of valuation of stock submitted by the
manager of the company.
2008 - May [5] (a) A group of shareholders has approached you for advice regarding
the affairs of LPM Paper Mills Ltd. according to them, the management of the company
is not carrying out its functions in accordance with the prudent commercial practice and
if the affairs of the company are allowed to run in future in the same manner, the
companys solvency would be in danger. They want that a Special Audit be conducted
to find out the actual nature of the transactions.
(i) You are required to state with reference to the provisions of the Companies Act,
1956, as to when a special audit can be directed and by whom ?
(8 marks)
Answer :
Please refer 2005 - Nov [5] (a) on page no. 35
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CA Final Gr. I (New Course)

D ESCRIPTIVE Q UESTIONS
2009 - May [8] (b) Explain, how the provisions of the Companies Act. 1956 relating to
Audit Committee will help in achieving some of the objectives of Corporate Governance.
(5 marks)
Answer :
Corporate Governance stipulates parameters of accountability, control and reporting
functions of the Board of Directors. It also emphasis the importance of various
shareholders in direction and performance functions of the company. It also calls for
establishing a proper and a viable relationship amongst the various shareholders of the
company.
Corporate Governance is a process or a set of systems and processes to ensure
that the company is managed to suit the best interest of all the shareholders. The
shareholders may be internal i.e. promoters, members, employees and executives etc.
or external i.e. customers, lenders, dealers, vendors, bankers, community, Government
and regulation etc Corporate Governance is concerned with the establishment of a
system whereby the directors are intrusted with the responsibilities and duties in relation
to the directions of corporate affairs.
This system calls for total transparency, integrity and accountability of the
management and discharge of social responsibility of the company. The importance of
corporate Governance lies in the contribution both to business prosperity and to
accountability.
To act as a measure of good Corporate Governance, Sec. 292 A was inserted in
the Com panies Act 1956 by companies (Amendm ent) Act, 2000 requiring mandatory
appointment of Audit committed by every Public company having paid up capital of ` 5
crores or m ore.
The following provisions of Sec. 292 A will go a long way in achieving some
of the objectives of the corporate Governance :
1. Mandatory appointment of audit committee by every public company having a paid
up capital of ` 5 crores or more.
2. At least 2/3rd of the total number of members of the committee shall be the
directors other than Managing or whole time directors.
3. The auditor, internal auditor and the director-in-charge of finance shall attend and
participate in the meetings of the audit comm ittee.
4. The chairman of the audit com mittee shall attend the AGM of the company to
provide any clarification on matters relating to audit.
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5.
Functions of the audit committee shall include compliance of internal control,

discussion with auditors about internal control systems, the scope of audit including
observations of the auditors, review of financial statements before subm ission to
the Board and other functions as may be specified by the Board.
6. Powers of audit committee shall include the power to investigate into any matter
in relation to the items specified in sec. 292A and any other matter referred to it by
the Board. It shall have access to information contained in the record of the
company. It shall have the power to seek external professional advice, if
necessary.
7. The annual report shall disclose the composition of the audit committee.
8. Recommendation of audit committee on any matter relating to financial
management, including the audit report shall be binding on the Board. If the Board
does not accept the recommendation of the committee, it shall record the reasons
therefore and communicate such reasons to the shareholders.
Thus it is evident that the establishment of audit committee would result in
additional assurance regarding the quality and reliability of the financial information
used by the Board and company It would thus prevent accounting failures and corporate
scandals, strengthen accounting and audit function etc.
To conclude, the audit committee is a sincere step to enhance the Corporate
Governance, effective audit function and quality financial reporting, this would restore
investor and public confidence and business and economy will grow as a whole.
2010 - Nov [1] {C} (d) A is the Auditor of B and Co. Ltd. Board of Directors decided to
remove A on certain grounds. Please indicate what procedure is to be followed to
remove A ? Advise the Board.
(5 marks)
Answer :
Please refer 2004 - Nov [8] (b) (ii) on page no. 23.
2011 - May [1] {C} (b) Evershine Ltd., whose financial year ended on 31st March, 2010
held its annual general meeting on 30th Septem ber, 2010. The meeting transacted all
other businesses except the accounts as they were not ready and adjourned the
meeting to 20th Decem ber, 2010 for consideration of accounts. The Registrar of
Companies issued show cause notice for violation of section 210 of the Companies Act,
1956. Advise.
(5 marks)
Answer :
Annual General Meeting including any adjournment thereof shall be completed within
the statutory period specified under section 166 and 210. Company cannot adjourn the
Annual General Meeting beyond the last date on which the Annual General Meeting is
required to be held.
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As per Section 166(1) of the Companies Act, 1956, every company must hold its
first Annual General Meeting within 18 months of its incorporation and subsequently one
in each calendar year. Not more than 15 months shall elapse between the two Annual
General Meetings. Powers are vested in the Registrar of companies to grant extension
of time up to 3 months for holding an Annual General Meeting for genuine reasons.
Section 210(3)(b) provides that every company should lay before every subsequent
Annual General Meeting its annual accounts within 6 months or the extended period for
holding Annual General Meeting, if any, granted by the Registrar of Companies, from
the date of closure of the accounts.
Advise to Evershine Ltd :
The show cause notice for violation of Sec 210 is valid. This is because, the company
held the AGM within 6 months from the date of closure of the accounts but failed to lay
the accounts within 6 months. Therefore, the company should go for compounding of
offence under Sec 621A .
2011 - Nov [6] (a) State in the light of the provisions of the Companies Act, 1956, as to
how the auditor will be appointed in the following cases:
(i) A company in which a nationalized bank is holding 30% of the subscribed
capital.
(ii) A Government company, within the meaning of section 617 of the Companies
Act, 1956.
(iii) A company in which office of auditor has become vacant on account of
resignation by the auditor.
(8 marks)
Answer :
(i) Section 224A requires a company to appoint an auditor only by passing a special
resolution where 25% or more of its subscribed capital is held by the
Government or its instrumentalities. The section was enacted so that
Government has a decisive role in the appointment of auditors in the companies
in which it has made substantial investm ents, but at the same time it does not
get overburdened with the responsibility of giving approvals. The provisions in
this regard are explained as follows:
1.
When is special resolution required for appointment of auditor?
The appointment or reappointment of an auditor shall be made by a
special resolution if not less than 25% of the subscribed share capital,
whether singly or in any com bination is held, by (a) A Public Financial Institution;
(b) A Government Company;
(c) The Central Government;
(d) Any State Government;
Q&A-4.47
(e) Any financial or other institution established by any Provincial or State

Act in which a State Government holds not less than 51% of the
subscribed share capital;
(f) A nationalised bank;
(g) An insurance company carrying on general insurance business.
2.
Consequences of failure to pass the special resolution
W here a com pany to which this section applies omits or fails to pass a
special resolution it shall be deemed that no auditor or auditors had been
appointed by the company and thereupon the company shall, within 7
days, give notice of that fact to the Central Government and the Central
Government may appoint a person to fill the vacancy.
(ii) According to the provisions of Sec. 619 (2) of the Companies Act, 1956, the
auditor of a Govt. Company shall be appointed or re-appointed by the
Comptroller and Auditor General of India. Further, the limits specified in sub Sec. (1B) and (1C) of Sec. 224 shall apply in relation to the appointment or
reappointment of an auditor u/s 619.
Therefore, M/s ABC Co. Ltd. the Govt Company must approach C & AG for
appointment of auditor.
(iii) Provisions of Sec. 224 (6) are as follows :
1.
Manner of filling casual vacancy : Board may fill any casual vacancy in
the office of the Director Auditor. However, where a casual vacancy is
caused by the resignation of an auditor, the vacancy shall be filled by the
shareholder in general meeting.
2.
Other Joint Auditors may act : Till the time a casual vacancy continues,
the remaining auditor (s) (i.e..- the other joint auditors,), if any, may act.
3.
Tenure of office of new auditor : Any auditor appointed in the casual
vacancy shall hold office until the conclusion of the next annual general
meeting.
2012 - May [5] (b) Explain briefly the provisions of the Companies Act, 1956 regarding
constitution of Audit Committee. MNC Ltd. constituted an audit committee as required
by the said Act. The committee in its report dated 30 th April 2012 has pointed out various
irregularities in the financial transactions entered into by the company. The
management of the company does not agree with the contents of the audit committee
report. Explain the action that can be taken in this regard.
(8 marks)
Answer :
Provisions related to Constitution of Audit Committee :
(i) As per section 292A of Companies Act, 1956, every public company having paid
up capital of 5 crores or more must constitute a committee of Board termed as
Audit Committee.
Q&A-4.48
(ii)
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This audit committee shall consist of minimum 3 directors. Out of the total
members of committee, at least two-third of the total number of members shall
be those directors who are not managing or whole time directors. The committee
shall elect its own Chairman. Terms of reference will be specified in writing by
the Board [Section 292A(2)]
(iii) Its composition will be disclosed in the Annual report of the company.
Course of action in case of differing with the content of the audit committee
report :
(i) As per Section 292A, a recommendations of the audit Committee on any matter
relating to financial management, including the audit report, shall be binding on
the Board.
(ii) If the Board does not accept the recommendations of the Audit Committee. It
shall record the reasons therefore and communicate such reasons to the
shareholders.
(iii) The Chairman of the Audit Committee shall attend the Annual General
Meeting(s) of the company to provide any clarifications on matters relating to
Audit.
2012 - Nov [3] (a) Examine the validity of the following appointments with reference to
the provisions of the Companies Act, 1956:
(i) Yashodharman Granites Limited reappointed Suresh & Company, a firm of
Chartered Accountants, as auditors of the company at the Annual General
Meeting held on 30th September, 2011. The wife of one of the partners of Suresh
& Company acquired large number of equity shares in Yashodharman Granites
Limited on 5th October, 2011. But Suresh & Company continue to function as
statutory auditors of the company.
(ii) Dalauda Cement Limited appointed CA Naresh as statutory auditor of the
company at the Annual General Meeting held on 30th September, 2010. The next
Annual General Meeting was held on 30th September, 2011 but it was adjourned
to 30 th November, 2011 for consideration of the accounts for the year ended 31 st
March, 2011. CA Naresh continued to function as statutory auditor of the
company even though a new auditor was appointed in his place at the Annual
General Meeting held on 30 th September, 2011.
(8 marks)
Answer : (a) (i)
Appointment of a Chartered Accountant rendering professional services as an
auditor
W here a Chartered Accountant renders professional services (e.g., where he is
consulted only professionally on incom e tax matters by the com pany), he cannot be said
to be an office or employee of the company. Therefore, he is not disqualified to become
an auditor of the company in terms of section 226(3)(b) [Department Letter No. 8/1/57PR, dated 11.7.1957].
Q&A-4.49
Disqualification on account of holding of a security of a company.

As per section 226(3)(e), a person shall not be qualified for appointment as an auditor
of a company if he holds any security of that company. This disqualification shall apply
after a period of 1 year from the date of commencement of the Companies
(Amendment) Act, 2000, i.e. 13.12.2000. The expression security for this purpose
means any instrument which carries voting rights.
In case any security of the company is held by a relative of an auditor, the above clause
is not attracted.
Present case :
According to the provisions of Companies Act, 1956, Suresh & Company can continue
to function as statutory auditors of the Com pany even after 5 th October 2011 i.e. after
investment made by wife of a partner in the equity shares of Yashodharman Granites
Limited.
(ii) Tenure of Auditor
Sec. 224(1) provides that an auditor shall hold his office from the conclusion of
one AGM to the conclusion of the next AGM. As such, an auditor is not
appointed to audit the accounts of a particular financial year, but is appointed for
the period falling between two AGM. Thus, an auditor shall continue in office until
the next AGM is concluded.
W here an AGM is held whereat the new auditors are appointed, but the AGM is
adjourned to a later date, the new auditors cannot assume office until the
conclusion of the adjourned AGM. The present auditors would continue to be the
auditors till the conclusion of the adjourned AGM, since the auditors hold office
from the conclusion of one AGM to the conclusion of next AGM.
Present case :
CA Naresh is right in continuing to function as statutory auditor of the
company even though a new auditor was appointed at his place.
He will continue to hold office till the conclusion of adjourned meeting held
on 30th Nov. 2011.
The new auditor can function as statutory auditor only from the conclusion
of adjourned meeting held on 30th Nov. 2011.
2013 - May [3] (a) The statutory auditors of Ghosunda Refinery Limited, did not verify
the correctness of the particulars furnished in the Boards Report in respect of certain
employees under Clause (2A) of Section 217 of the Companies Act, 1956. State the
particulars which are required to be furnished under Clause (2A) of Section 217 of the
said Act and also explain the legal position relating to verification of these particulars
by the auditors of the said Company.
(8 marks)
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P RACTICAL Q UESTIONS
2008 - Nov [1] {C} (b) A Government company holds 49% of the subscribed share
capital in Smart & Co. Ltd. Mr. R has been appointed as the auditor at the annual
general meeting of Smart & Co. Ltd. through an ordinary resolution. Certain members
of the company object to this appointment on the ground that the appointment of
auditors is violative of the provisions of the Companies Act, 1956. Examine the legal
position with reference to the relevant provisions of the Companies Act, 1956.
(5 marks)
(c) Audit Accounts of a public company are not available. Examine the possibility of
filing unaudited accounts with the Registrar of companies with reference to the relevant
provisions of the Companies Act, 1956.
(5 marks)
Answer :
(b) Legal Provisions relating to Appointment of Auditor : As per sec. 224A (1) of
the Companies Act, 1956, the appointment or reappointment at each AGM of an
auditor (s) shall be made by a Special Resolution where a company in which not
less than 25% of the subscribed share capital is hold whether singly or in any
combination by :
(i) a public financial institution or a Govt. Company of Central Govt or any State
Govt. or
(ii) any financial or other institution established by any Provincial or State Act in
which a State Govt. holds not less than 51% of the subscribed share capital;
or,
(iii) a nationalized bank or an insurance company carrying on general insurance
business.
If any company fails to pass special resolution at its AGM for appointing
auditor (s), it shall be deemed that no auditors (s), have been appointed by
the company at its AGM and there upon the provisions of Sec. 224 (3) of the
Act shall become applicable in relation to such company, i.e. the Central Govt.
Is to be informed and it will exercise its power of appointing the auditor (s).
Present case :
Hence, in the present case, it shall be deemed that Mr. R had not been appointed
as Auditor of Smart & Co. Ltd. because the company had not passed special
Resolution in its AGM for appointing Mr. R as the auditor of the company.
(c) Filing of Un-audited Balance sheet with Registrar of Companies : As per sec.
220 (1) of the Companies Act, 1956, Balance sheet and Profit & Loss account shall
be filed with Registrar of Companies together with all documents which are
required to be annexed or attached thereto. Sec. 216 stipulates that the Auditor's
Report (including the auditor's separate or Supplem entary report, if any) shall be
attached to the Balance sheet.
Q&A-4.51
According to Sec. 218, if any copy of Balance sheet is issued, circulated or

published without there being annexed or attached thereto as the case may be. a
copy each of (i) Profit or loss A/c; (ii) any accounts, reports or Statements which by
virtue of Sec. 212 are required to be attached to the Balance sheet ; (iii) Auditor's
Report; (iv) Board Report.
The company and every officer of the company who is in default, shall be
punishable with fine which may extend to ` 5000. In view of the requirements of
Sec. 216, & 218 220, unaudited Balance Sheet and Profit & Loss A/c cannot be
filed with Registrar of companies.
2009 - May [1] {C} Answer the following :
(a) Examine the validity of the following with reference to the provisions of the
Companies Act, 1956 :
(i) The Balance Sheet and Profit and Loss Account of TXN Ltd. for the year
ended 31st March, 2009 was signed by one of its Directors and the Secretary.
(ii) Mr. Prakash, a Chartered Accountant in full time practice was appointed as the
auditor of ABC Ltd., a company which is a subsidiary of DGH Ltd. and DGH
Ltd. has another subsidiary called PKM Ltd. Mr. Prakash had taken a loan of
` 25,000 from PKM Ltd. and the loan is outstanding as on the date of his
appointment as auditor of ABC Ltd.
(5 marks)
Answer :
(i) Legal Provisions of Companies Act, 1956 : Provisions of Sec. 215 of the
Com panies Act, 1956, provides that every Balance sheet and Profit & loss A/c
of a company (other than a banking co.) shall be signed by its Manager or
Secretary, if, any, and by not less than 2 Directors of the company one of whom
shall be the Managing Director where there is any.
Taking consideration of the above provisions of the Companies Act. 1956,
signing of the accounts only by a Director and Secretary does not fulfill the
requirements of Law.
Present Case :
In the present case, if the company has a Managing Director, then the Managing
Director and at least one other Director along with the Secretary shall sign the
Balance sheet and Profit & Loss A/c. If there is no Managing Director then two
directors authorised by the board and the Secretary shall sign the same.
(ii) In case the am ount of interim dividend has not been transferred to a separate
bank account and is not paid within the time, the company and its directors have
exposed themselves to the applicable penal provisions of the said Act.
As per the provisions of the Companies Act, 1956 several Board Resolutions
are required in course of carrying on the affairs of a limited company. But, it may
sometimes so happen that a Board Meeting can not be held. To meet such
Q&A-4.52
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eventualities, the Companies Act, 1956 contains the solution in Sec. 289,
According to this section, the board resolution can be passed by way of
circulation It may, however, be noted that the matters listed in the provisions of
Section 292 requiring passing of resolution at the board meetings only can not
be passed by way of circulation.
The chairman of ABC Ltd. Is advised that the approval in the form of a Board
Resolution may be obtained by way of passing the relevant resolution by
circulation if the matter is not covered by Section 292 of the said Act.
Assuming that the present resolution required to be passed is not falling
within the items listed in Sec. 292 of the said Act, the resolution can be passed
by circulation.
The procedure to be adopted for the purpose of passing a resolution by
circulation is as follows :
(i) Sent the draft of the resolution in duplicate together with the necessary
papers, if any, to all the directors then in India. It is to be ensured that the
number of such directors is not less than the directors required to form the
quorum for a Board Meeting.
(ii) Send that draft of the resolution in duplicate together with the necessary
papers, if any, to all other directors at their usual address in India.
(iii) Obtain one copy of the draft resolution duly signed by the directors,
whether approving the resolution or disapproving the same. It may be
noted that the resolution shall be deemed to be passed by the Board if all
directors then in India or majority of all directors as are entitled to vole on
the matter approve the resolution by signing one copy and returning the
same to the company.
(iv) The resolution passed by circulation shall be placed before the next Board
Meeting for confirmation.
(v) The resolution shall be recorded in the minutes of the next Board Meeting.
2009 - Nov [1] (a) Prakash Carriers Limited appointed Mr. Raman as its auditor in the
Annual General Meeting held on 30th September, 2009. Initially, he accepted the
appointment. But he resigned from his office on 31st October, 2009. For personal
reasons. The Board of Directors seeks your advice for filling up the vacancy by
appointment of Mr. Albert as auditor. Advise.
Also suggest the procedure to be adopted in case Mr. Albert is proposed to be removed
from his office before the expiry of his term.
(5 marks)
Answer :
Filling Casual Vacancy : Please refer 2005 - Nov [5] (b) (i) (b) on page no. 25
Removal of Auditor : Please refer 2004 - Nov [8] (b) (ii) on page no. 23
Q&A-4.53
2010 - May [3] (a) Ambitions Engineering Consultants Ltd., whose financial year ends
on 31 st March, has acquired Struggling Techies Ltd. making it a subsidiary company.
The financial year of the subsidiary company ends on 30th June. The management of
the holding company wants to change the financial year of the subsidiary com pany, if
possible, so as to coincide with the financial year of the holding company. State the
relevant provisions of the Companies Act, 1956 regarding the financial year and the
maximum period upto which the accounts can be prepared in a Financial Year and the
approvals, if any, required to be taken to accomplish this task.
(5 marks)
Answer :
Please refer 2005 - Nov [9] (b) on page no.26
2010 - Nov [2] (b) XYZ Ltd. while preparing the Balance Sheet and Profit and Loss
Account for the financial year ended 31st March, 2010 did not comply with the
Accounting Standards. State the consequences that follow in case of Non-compliance.
(8 marks)
Answer :
Please refer 2000 - May [6] (a) (ii) on page no.19
2011 - Nov [1] {C} (a) The Board of Directors of Vishwakarma Electronics Limited
consists of Mr. Ghanshyam, Mr. Hyder (Directors) and Mr. Indersen (Managing
Director). The company has also employed a full time Secretary.
The Profit and Loss Account and Balance Sheet of the company were signed by Mr.
Ghanshyam and Mr. Hyder. Examine whether the authentication of financial statem ents
of the company was in accordance with the provisions of the Companies Act, 1956 ?
(5 marks)
Answer :
The provisions relating to authentication of balance-sheet and profit and loss account
are contained in Section 215 of the Companies Act, 1956. According to the said
provisions except in the case of a banking company, the Balance Sheet and Profit and
Loss Account of a company must be signed on behalf of the Board of Directors by two
Directors and the Manager or Secretary, if any. If the company has a Managing
Director, he should be one of the signing directors.
Present case:- In the instant case, the com pany has 3 Directors namely Mr.
Ghanshyam, Mr. Hyder and Mr. Indersen who is also the Managing Director. The
company has also employed a full time secretary but has no manager. Thus the B/s and
P&L A/c should be signed by:
(a) the secretary
(b) the Managing Director, Mr. Indersen
(c) either of the Directors, Mr Ghanshyam or Mr. Hyder.
However in the present case the B/s was signed by Mr. Ghanshyam and Mr. Hyder
only. As such the provisions u/s 215 has not been followed. Hence the B/s and P&L A/c
is not valid.
Q&A-4.54
Solved Scanner
2012 - Nov [1] {C} (a) The paid up capital of Western Zone Insurance Limited is ` 7
crore. Point out whether the said company is required to file Balance Sheets and Profit
and Loss Account along with Directors and Auditors Report for the year 2011-12 by
using the XBRL taxonomy under the Companies Act, 1956?
(4 marks)
Answer :
The following companies have to file the Balance Sheets and Profit and Loss A/c along
with Directors and Auditors Report for the year 2010-11 onwards by using the XBRL
taxonomys :
(i) All Companies listed in India and their Indian subsidiaries.
(ii) All Com panies having a paid up capital of ` 5 crore and above.
(iii) All Com panies having a turnover of ` 100 crore and above.
Exempted Companies
(i) Banking Companies
(ii) Insurance Companies
(iii) Power Companies
(iv) Non Banking Financial Companies
Present Case
W estern Zone Insurance Limited being an Insurance Company is not required to file the
Balance Sheet and Profit and Loss A/c along with Directors and Auditors Report by
using XBRL Taxonomy.
2013 - May [1] {C} (a) Mr. Ramanujam, one of the Directors in Debari Food Processing
Limited was not satisfied with the performance of the company in financial matters. He
requested Mr. Anandaraja, a Chartered Accountant, to inspect the books of accounts
of the company on his behalf. Decide, under the provisions of the Companies Act, 1956
whether the said company can refuse to allow Mr. Anandaraja to inspect the books of
accounts?
(4 marks)
Similarly Asked Questions
No. Category
Question
1 Descriptive Can an auditor be disqualified for

indebtedness in the following cases?
(a) W here he is recovering his fees on a
progressive basis even though the job is
not complete.
(b) W here the auditor's firm has purchased
goods from the auditee company and
not paid for them for over six months.
Marks
Frequency

98 - Nov [8] (a) (ii), 03 - May [5] (b) (ii)
2
3
Practical
Practical
Practical
Q&A-4.55
6, 7
2 Times
Practical Questions of 04 - May [8] (b) (i) and

07 - May [7] (b) (i)
7, 7
2 Times
Practical Questions of 04 - May [8] (b) (iii)

and 07 - May [7] (b) (iii)
7, 7
2 Times
Practical Questions of 05 - Nov [5] (a) and 08

- May [5] (a)
8, 8
2 Times
Table Showing Marks of Compulsory Questions

Year
08
N
09
M
Descriptive
Practical
10
Total
10
09
N
10
M
10
N
11
M
11
N
12
M
12
N
13
M

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Accounts & Audit

CA Final Gr. I Paper - 4

[Chapter # 1] Accounts & Audit O

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(vi) Loans and advances received from subsidiary companies : should be

[Chapter # 1] Accounts & Audit O

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[Chapter # 1] Accounts & Audit O

CA Final Gr. I Paper - 4

[Chapter # 1] Accounts & Audit O

CA Final Gr. I Paper - 4

[Chapter # 1] Accounts & Audit O

Please refer 2000 - May [6] (a) (i) on page no.19

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[Chapter # 1] Accounts & Audit O

Procedure for seeking Extension :

CA Final Gr. I Paper - 4

[Chapter # 1] Accounts & Audit O

CA Final Gr. I Paper - 4

[Chapter # 1] Accounts & Audit O

CA Final Gr. I Paper - 4

[Chapter # 1] Accounts & Audit O

CA Final Gr. I Paper - 4

[Chapter # 1] Accounts & Audit O

to the date of adoption of annual accounts); In such a case, a statement of

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[Chapter # 1] Accounts & Audit O

CA Final Gr. I Paper - 4

The Board of Directors of a company decides to revise the Audited accounts

[Chapter # 1] Accounts & Audit O

CA Final Gr. I Paper - 4

[Chapter # 1] Accounts & Audit O

CA Final Gr. I Paper - 4

[Chapter # 1] Accounts & Audit O

CA Final Gr. I Paper - 4

CA Final Gr. I (New Course)

[Chapter # 1] Accounts & Audit O

Functions of the audit committee shall include compliance of internal control,

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[Chapter # 1] Accounts & Audit O

(e) Any financial or other institution established by any Provincial or State

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[Chapter # 1] Accounts & Audit O

Disqualification on account of holding of a security of a company.

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[Chapter # 1] Accounts & Audit O

According to Sec. 218, if any copy of Balance sheet is issued, circulated or

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[Chapter # 1] Accounts & Audit O

CA Final Gr. I Paper - 4

1 Descriptive Can an auditor be disqualified for

[Chapter # 1] Accounts & Audit O

Practical Questions of 04 - May [8] (b) (i) and

Practical Questions of 04 - May [8] (b) (iii)

Practical Questions of 05 - Nov [5] (a) and 08

Table Showing Marks of Compulsory Questions

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