Q.3 ( C ) Explain “statutory” & “non statutory audit”.

Ans : STATUTORY AUDIT -

When audit is compulsory for an enterprise by law it is called as “Statutory
Audit”. Such audit is carried out by a third party or person who is duly
competent for this purpose. Hence, it is also called as External Audit. Only a
person who possess the prescribed qualifications and who is wholly
independent of the client is deemed to be competent. Statutory audit is of
great value to the person associated with the enterprise. In case of a joint
stock company, it is impossible for shareholders to verify the representations
made by the management in the financial statements i.e. in case of statutory
audit the external auditor is responsible and he has to report to the
shareholders. They can only depend on the auditor for his expert opinion.
Statutory audit is conducted by a competent person and hence it is also
beneficial for the creditors, bankers, government departments and investors.
In case of public sector a compulsory audit is necessary to safeguard the
interests of the public against frauds and scams. The object of Statutory
Audit, as laid down in the statute, is to examine the books of accounts and
report whether or not the financial statements show a ‘true and fair view’ if
the state of the company at the end of the financial year ended on that date.

NON STATUTORY AUDIT -

When audit is compulsory for an enterprise by law it is called as “Non -
Statutory Audit”. It is also called as Internal Audit. No specific qualification is
prescribed as such to carry out the non statutory audit or internal audit. It is
carried out by the employees of the company. Non - Statutory Audit provide
consulting service for improving the effectiveness of risk management,
control and governance process. Therefore Non -Statutory Audit as a
consultancy service, is expected to provide inputs to the formulation and
implementation of strategies. As an assurance service it conduct strategy
audit and review management decisions. In case of the Non - Statutory Audit
the internal auditor is responsible and he has to report to the management.
The techniques and methods of auditing are the same as in external
auditing. But the main aim of conducting Non - Statutory Audit is to just
ensure that there is proper compliance with policies, rules and regulations
and procedures of the enterprise such as good business practices, GAAP,
laws of the land and government regulations.
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Q.3 (D) What are the special liability has been imposed by the Companies
Act,1956 on the company auditor.

Ans : Under the Companies Act,1956 an auditor may be subjected to Civil &
Criminal liabilities. Civil Liabilities in the Companies Act :
The civil liability arises when it is proved that the company has suffered
losses as a result of the failure of the auditor to conduct his audit with due
care and skill.

I. Misfeasance ( Section 543) – It is simple procedure under the act for

bringing an action against persons associated with promoter or
management of a company under winding up. An auditor is covered
within the scope of the liability as an officer of the company, pursuant to
the definition of officer given in Section 2(3) of the Act. The charge of
misfeasance which simply means breach of trust or negligence in the
performance of duties can be framed against the auditor, if it appears
that he has misapplied, or retained or become liable or accountable for,
any money or property of the company, or has been guilty of any
misfeasance or breach of trust in relation to the company.

II. Violation of the requirements of Section 227 and 229 – Under

Section 223 of the act and auditor is liable to penalty of Rs.1000 for willful
default in complying with the requirements of Sections 227 and 229 of the
companies act in regard to making of the auditors report or signing or
authentication of any document of the company.

III. Misstatement in Prospectus – The auditor is liable to such person who

may have prescribed to the shares or debentures of the company on the
faith of his report incorporated in the prospectus issued by a company
and have suffered loss due to existence of untrue statement in the report.

Criminal Liabilities in the Companies Act :

 I. Fraud and Deception – Section 539 of the act prescribes severe
criminal penalties in fraudulent falsification of books is carried out by the
auditor. An auditor may be held liable if he has destroyed, mutilated,
altered, falsified, secreted any books, acts or fraudulent entry in any
register, books or account or document belonging to the company.

II. Offence in relation to the company – An auditor as an officer, is liable

to be prosecuted under Section 545 of the Act if he as a past pr present
auditor, has been guilty of offence in relation to the company.

III. False Statement , etc. – Section 638 of the Act, the auditor is liable to
criminal prosecution if he, in any return, certificate, balance sheet,
prospectus, statement or other document makes a statement which is
false in any material particular, knowing it to be material, is punishable
with imprisonment for a term which may extend to two years and also
with a fine.