LEGAL CONSIDERATION REGARDING AUDITING

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Fundamentals of Auditing ACC 311

Lesson 06

LEGAL CONSIDERATION REGARDING AUDITING

The Audit Requirement

· Not all limited companies are required to have their financial statements audited. Nor are all

companies required to produce financial statements in the same formats as many exemptions may

apply to small and medium sized companies.

· Broadly speaking, small companies are exempt from the audit requirement, small and medium sized

companies may file abbreviated accounts with the registrar of companies and small companies may

prepare accounts with reduced disclosures for their members.

Appointment, Duties, Rights and Liabilities of Auditor

Appointment:

First Auditors

The first auditors of a company shall be appointed by the directors within 60 days of

incorporation of the company [252(3)]

The first auditors will hold office till the first annual general meeting [252(3)].

If the directors fail to appoint the first auditors, the members shall appoint the first

auditors, provided further that the auditors such appointed shall not be removed during

the tenure expect through a special resolution [(252(6)].

Where the first auditors are not appointed either by the directors or by the members within

120 days of incorporation of the company, the Securities & Exchange Commission of

Pakistan (Commission) will appoint the auditor [252(6)].

Subsequent Auditors

(a) At each annual general meeting the company (members) shall appoint the auditors [252(1)].

(b) The auditors shall hold office from the conclusion of that meeting till the conclusion of

next annual general meeting [Section 252(1)].

To exercise this power the company must give notice to Commission within one week of

these powers having become exercisable [252(7)].

Note: Provided that an auditor or auditors appointed in a general meeting may be removed before

conclusion of the next annual general meeting through a special resolution [252(1)].

Casual Vacancy

a) Any casual vacancy shall be filled by directors. [Sec 252(4)].

b) Auditors so appointed shall hold office till next annual general meeting.[Sec 252(5)]

c) If directors do not appoint auditors to fill casual vacancy within 30 days, Commission may

appoint an auditor.[Sec 252(6)]

Commission's powers to appoint auditors [252(6)]

The Securities & Exchange Commission of Pakistan may appoint an auditor if the following situations arise:

a) First auditors are not appointed within 120 days from incorporation;

b) Subsequent auditors are not appointed in annual general meeting;

c) Casual vacancy is not filled within 30 days; and

d) Auditors appointed are unwilling to act as auditors.

To exercise this power, the company must give notice to Commission within one week of its powers

becoming exercisable.

Fundamentals of Auditing ACC 311

SUMMARY

Auditors

Time of

Appointing Term of

Appointing Remarks

appointment

Authority

Office

Authority in

default

First 1st

Within 60 days

Directors

Till first

Members

Members shall appoint 1st

Auditors

AGM

auditors at a general meeting

Incorporation

within 120 days. After 120

days SECP may make the

appointment.

Subsequent AGM

Members

Till next

SECP

If auditors are not appointed

Auditors

AGM

in Auditors AGM. AGM,

SECP may appoint auditors.

Casual

Within 30 days

Directors

Till next

SECP

After 30 days of vacancy.

Vacancy

of the vacancy

AGM

Vacancy of the vacancy

AGM SECP may appoint

auditors.

Remuneration of Auditors [252(8)]

Fixation of remuneration of auditors depends upon the authority appointing the auditors, i.e.

If auditors are appointed by directors, directors shall fix the remuneration.

ii)

If auditors are appointed by COMMISSION, COMMISSION shall fix remuneration.

iii)

In all other cases, the members (Company) shall fix the remuneration.

Note: Minimum hourly rates are also recommended by The Institute of Chartered Accountants of Pakistan

(ICAP) which is specified in members' Handbook Volume II (Part II ATR-14).

SUMMARY

Appointing Authority Remuneration Fixed by

Directors

Commission

In all other case Members (Company)

Procedure for Change of Subsequent Auditors/ Removal of Auditors / Appointment of New

Auditors (Section-253)

New auditors can be appointed in place of retiring auditors if the following requirements are fulfilled.

Notice from a member is required for a resolution at the AGM (253(1)).

The member shall give notice to the company at least 14 days before the AGM that he

intends to propose the appointment of another person as auditor (253(2)).

On receipt of the notice the company shall send a copy of such notice to the:

retiring auditor, forthwith

ii)

members, at least seven days before the AGM. (253(2))

In case of a listed company, notice shall be published at least in one issue of an English

and an Urdu daily newspaper having circulation in the province where the stock

exchange(s) is situate on which the shares of the company are listed.

The retiring auditor can make representations and the company shall send a copy of

representation to a member or it may be read at AGM.

Provided that the representation cannot be sent OR read at the AGM if the Registrar does not

permit so on the application of the company or any other person. (253 (3)).

A company within 14 days after the AGM shall notify to the Registrar of the

appointment of new auditors with their consent letter. 253(5).

Fundamentals of Auditing ACC 311

ii)

retirement or removal of auditors. Section 253(6)

Note: Under the Schedule-I Part-I of the Chartered Accountant Ordinance, 1961 new auditor accepting

the appointment without communicating with the previous auditor shall be deemed to be guilty of

professional misconduct. The Institute of Chartered Accountant of Pakistan has issued Auditing Technical

release (ATR-2) explaining what does the word "Communication" means. Therefore, it is necessary for the

new auditors to communicate with the previous auditors before accepting the appointment to ascertain that

he has no objection on professional grounds, regarding the appointment. Clause 7 of the Schedule requires

that incoming auditor should ensure before accepting the appointment, that requirements of the Companies

Ordinance, 1984 regarding his appointment have been fulfilled.

Change of Auditors - Checklist

Timing

Actions Required

Notice from a member from the date of AGM

At least 14 days

Send Copy of the notice to:

The retiring auditor

forthwith

Members

At least 7 days before

The date of AGM Publication of the fact in newspapers anytime before the AGM. That notice has been

received. Representation by auditors Sent to members before AGM or read at AGM.

Notification of the change to the Registrar within 14 days after the date of AGM.

Removal of Auditors

First auditor appointed by the directors may be removed by the members in a general

meeting.

ii)

Another person nominated by a member shall be appointed in place of the outgoing

auditor.

iii)

The notice of nomination of the proposed auditor should be given to the member's at least

14 days before the general meeting and all the procedure stated above would be required to

be followed in this case also.

iv)

An auditor or auditors appointed in an annual general meeting may be removed before

conclusion of the next annual general meeting through a special resolution.

In the above case, SECP may appoint the auditor(s) of the company.

Qualification & Disqualification of Auditors

Qualification 254(1)

For appointment as auditor of:

a Public Company or

a Private Company which is a subsidiary of a Public Company.

a Private Company having paid up capital of three million rupees or more.

The person must be a Chartered Accountant within the meaning of the Chartered Accountants Ordinance,

1961.

Note: For listed companies an auditor must have a satisfactory QCR (quality control review) rating issued

by ICAP.

Disqualifications 254(3)

Following persons are not qualified to become auditors of a company:

Present directors, other officer or employees of the company or who held these offices

during the last three years.

ii)

A partner or employee of a director, other officer or employee of the company.

iii)

A spouse of a director.

Fundamentals of Auditing ACC 311

iv)

A person who is indebted to the company.

A body corporate.

vi)

A person or his spouse or minor children or in case of firm all partners of such firm who

holds any shares of an audit client or any of its associated companies.

Provided that if such a person holds shares prior to his appointment as auditors, whether as an individual or

a partner in a firm the fact shall be disclosed on his appointment as auditor and such person shall disinvest

such shares within ninety days of such appointment.

vii)

A person disqualified for appointment as an auditor due to above reasons is disqualified

from holding the office of auditor of another company which is a subsidiary or holding

company of that company 254(4).

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