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Auditing Theory

Notes Powers of Auditor of a Holding Company

A view was expressed that the Auditor signing the consolidated financial statement should be
empowered to access the books, records and documents of the entities whose accounts are
consolidated. It was also felt that such right of the Auditor would be subject to the rules to be
framed under the Act. In view of the legal position that a statutory auditor will not be able to
access to all books and records of all entities whose accounts are consolidated, by virtue of the
limitations of his appointment in the holding company, adequate records stating the basis for
consolidation of accounts should be made available to him.

Certification of Internal Control by CEO/CFO

The Committee dwelt at length matters connected with Audit and the basic principles governing
Audit. The Committee felt the need for a high quality of financial reporting, a strengthened
corporate governance mechanism, an independent audit and fearless expression of opinion by
the Auditors. The Committee feels that the internal controls in any organization constitute the
pillar on which the entire edifice of Audit stands. For this purpose, it was felt that public listed
companies be required to have a regime of internal financial controls for their own observance.
Active interest of the shareholders’ association in improving the quality of financial reporting,
investor education for better understanding of the financial statements combined with presence
of internal controls would provide for effective financial reporting. In sum :- Internal controls as
mandated by the company with the approval of the Audit Committee, if any, should be certified
by the CEO and CFO of the Company and in the Directors report through a separate statement
on the assessment. The investors be educated and imparted with better understanding and
appreciation of the financial statements. The law should also provide for an active role for the
shareholders’ associations in ensuring high quality of financial reporting.

The Audit Committee

While considering issues relating to management and governance structures in a company
(Chapter IV, para 17.1), this Committee has recommended a committee of the Board on accounting
and financial matters to be termed as the Audit Committee.

All matters relating to appointment of auditors, examination of the auditor’s report along with
financial statements prior to consideration and approval by the Board, related party transactions,
valuations and other matters involving conflicts of interest should also be referred to the Board
only through the Audit Committee.
Cost Audit

At present, the Companies Act contains provisions relating to maintenance of Cost Records
under section 209 (1) (d) and Cost Audit under section 233B of the Companies Act in respect of
specified industries. The Committee felt that Cost Records and Cost Audit were important
instruments that would enable companies make their operations efficient and exist in a
competitive environment.
The Committee noted that the present corporate scenario also included a sizeable component of
Government owned enterprises or companies operating under administered price mechanism
or a regime of subsidies. It would be relevant for the Government or the regulators concerned
with non-competitive situations to seek costing data. The Committee, therefore, took the view
that while the enabling provision may be retained in the law providing powers to the Government
to cause Cost Audit, legislative guidance has to take into account the role of management in

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