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Unit 2: Auditing Practices

means of the annual report and financial statements sent to the shareholders. The audit provides Notes
an external and objective check on the way in which the financial statements have been prepared
and presented, and it is an essential part of the checks and balances required. The question is not
whether there should be an audit, but how to ensure its objectivity and effectiveness. Audits are
a reassurance to everybody who has a financial interest in companies, quite apart from their
value to Boards of Directors.

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Caution The most direct method of ensuring that companies are accountable for their
actions is through open disclosure by boards and through audits carried out against strict
accounting standards.

Self Assessment

Fill in the blanks:
1. The present structure of a modern company has the ....................... as the focal point of the
legal system governing them.

2. The annual audit is one of the cornerstones of .......................
3. The audit provides an ....................... on the way in which the financial statements have
been prepared and presented.

2.2 Generally Accepted Auditing Practices

2.2.1 Investor Considerations

Companies incorporated under the Companies Act, 1956 must keep proper books and records,
sufficient to give a true and fair view of the company’s affairs and to explain its transactions.
Shareholders of such companies must appoint auditors at the annual general meeting. In practice,
a firm of accountant whose partners would each qualify for appointment is usually appointed.
Auditors must report to a company’s shareholders on the accounts examined by them; their
report must cover various matters and include whether in their opinion the accounts give a true
and fair view of the state of affairs of the company and of its results.

Notes For all companies whose annual turnover exceeds a specified amount, a statutory
audit under the Companies Act is required, along with a tax audit for certain matters
prescribed under the Income tax Act. The Government may direct that a cost audit be
carried out for a company required to maintain detailed cost accounting records.

2.2.2 Statutory Requirements

Books and Records

Every company is required to keep proper books of account with respect to the following:
1. All sums of money received and expanded by the company as well as the matters with
respect to which the receipts and expenditures took place.

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