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    Tuesday, 24 March 2015

    Auditor, its Powers and duties under company Law

    1. Introduction
    When a person is an accountant or when a firm is accounting firm, and duty of such person or firm is to examine financial records or status of an individual or entity, such person or firm is called auditor. In a company, only one or a number of auditors can be appointed. An auditor possesses powers to examine books, vouchers and documents, which are about business of company. However, he is not a mere clerk or bookkeeper in employment of company.

    2. Meaning of Auditor
    According to BLACK’S LAW DICTIONARY, Auditor means a person who checks the accuracy, fairness and general acceptability of accounting records and statements and then attests to them.

    The rule with regard to the appointment of first auditor is as under

    (i) By Directors
    The first auditor must be appointed by the directors of the company within 60 days of incorporation of the company.

    (a) Duration of office
    The first auditor may hold his office until the end of first annual general meeting.

    (b) Filling of casual vacancy
    A casual vacancy in the office of auditor may be filled by the directors but while the vacancy continues, the surviving or continuing auditor or auditors, if any, may act.

    (c) Duration of casual vacancy
    Any auditor appointed to fill in any casual vacancy may hold office until the end of the next general meeting.

    (ii) By company
    If the directors fail to exercise their powers of appointing the first auditor, the company in general meeting may appoint the first auditor.

    (a) Removal and new appointment
    The company in general meeting may remove the first auditors and appoint another auditors, who have been nominated for appointment by any member and of whose nomination notice has been given to the members of the company not less than 14 days before date of meeting.

    (iii) By commission
    If the company in general meeting does not appoint the first auditors within 120 days of the date of incorporation of the company. The commission may appoint the first auditors to fill the vacancy.

    Subsequent appointments are made by the company in general meeting. Every company must at each annual general meeting appoint an auditor to hold office until the next annual general meeting.

    (1) Special notice must be given of a resolution at annual general meeting of the company appointing as auditor a person other than the retiring auditors.

    (2) The member must give such a notice to the company not less than 14 days before the annual general meeting.

    (3) On receipt of special notice the company must forthwith (a) send a copy to the retiring auditor (b) given notice thereof, to its members not less than 7 days before the date fixed for the annual general meeting.

    (5) Qualifications for the appointment of auditor

    Following are the qualifications for the appointment of auditor

    (a) In case of Public company
    In order that a person may become an auditor of a public company, he must be chartered accountant.

    (b) In case of Private company
    In order that a person may become a auditor of private company, he must be in the employment of director or officer of such company.

    6. Disqualifications of Auditor

    Following are the disqualifications of the auditor

    (i) A director or officer of the company
    (ii) A partner of such director or officer;
    (iii) Any person in the employment of such director or officer (except in a private company not being a subsidiary to a public company);
    (iv) Any person indebted to the company.

    7. Powers of Auditor

    The powers of an auditor are as under

    (i) Access to Books
    Every auditor of a company has a right of access at all times to the books of accounts and vouchers of the company. This power is exercisable whether books, etc are kept at the registered office of the company or elsewhere.

    (ii) Requiring Information
    He has the power to require from the directors and officers such information and explanation as he may consider necessary for the performance of his duties.

    (iii) Right to attend meeting
    He is entitled to receive notice of and attend any general meeting of the company at which any accounts which have been examined or reported on by him are to be laid down by the company.

    (vi) Right to make statement
    He is entitled to make any such statement or explanation which he desires in respect of the accounts.

    8. Duties of Auditors

    The duties of the auditors may be briefly sated hereunder

    (i) Acquaintance with duties
    They must acquaint themselves with their duties under the articles and the ordinance

    (ii) To make report
    They must make a report to the members on the books of accounts, balance sheet, and loan account etc.

    (iii) Duty to act honestly
    They must act honestly and with reasonable care and skill before they believe that what they have certify is true.

    (iv) To examine books
    They must examine the books to ascertain that the books show the true financial position.

    (v) Duty to inquire
    The duty of the auditor is not to confine himself merely to verifying mathematical but to inquire into its substantial accuracy.

    (vi) Duty regarding payment and debts
    The auditors should see that payments made and sums borrowed by the company are in accordance with the articles and the ordinance.

    (vii) Duty to examine Bank’s accounts
    The auditors must check cash in hand and balance at bank by inspecting bank statement or obtaining a certificate from bank.

    (viii) Duty not to give advice
    They should not give advice either to directors or members, as to what they ought to do, and whether the business is being conducted prudently or imprudently, profitably or unprofitably.

    To conclude, it can be stated that an auditor of company has to play an important role. To fulfill his duties, an auditor has to remain honest, has to remain acquainted with his duties under articles of association and under companies’ ordinance, and has to make report on all material points of accounts.
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    Item Reviewed: Auditor, its Powers and duties under company Law Rating: 5 Reviewed By: Usman Ali
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