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Company law assignment
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Assignment on:
Company laws and secretarial practices
Topics: - Dividend & Interest
Audit, Account & Statutory Books
submitted date : 26/11/2012
Company Laws & secretarial practices. 1
JAGANNATH UNIVERSITY,DHAKA
Submitted To:
A.N.M. Asaduzzaman Fakir
Lecturer
Department of Accounting &
Information Systems
Jagannath University, Dhaka
Submitted By:
Company Laws & secretarial practices. 2
Group : 07 (Zenith)Sl no. Name ID No(1) Shahida Akter Limu 114467
(2) Prodip Kumer Das 114475
(3) Sukla Das 114513
(4) Md. Mojammel Haq 114535
(5) Maria Akter Koly 114611
(6) Moushumi Kobir (GL) 104607
Company Laws & secretarial practices. 3
Contents Sl No. Subject Page No.
1) Definition of Dividend 5
2) Types of Dividend 5-10
3) Dividend policy 10-18
4) Dividend date 19-20
5) Dividend in case of others corporate entities 20-21
6) Dividend & Distributions 21-28
7) Interest 29
8) Types of Interest 29-30
9) Warrants 30
10) Features of warrants 31
11) Types of Warrants 31-34
12) Audit & Auditors 35
13) Appointment & Remuneration of Auditors 35-40
14) Qualifications, Disqualifications, Power & Duties of Auditors.
40-55
15) Rite of Auditors to attend general meting 56-58
16) Audit of cost account In certain cases 59-69
17) Reference 70
Company Laws & secretarial practices. 4
Company Laws & secretarial practices. 5
Definition of Dividend
Dividend is a taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth. Companies are not required to pay dividends. The companies that offer dividends are most often companies that have progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting their profits, so they usually choose to pay them out to their shareholders.
Types of Dividends
A dividend is generally considered to be a cash payment to the holders of company stock. However, there are several types of dividends, several of which do not involve the payment of cash to shareholders. These dividend types are:
Cash dividend. The cash dividend is by far the most common of the dividend types used. On the date of declaration, the board of directors resolves to pay a certain dividend amount in cash to those investors holding the company's stock on a specific date. The date of record is the date on which dividends are assigned to the holders of the company's stock. On the date of payment, the company issues dividend payments.
Company Laws & secretarial practices. 6
Cash Dividend Example
On February 1, ABC International's board of directors declares a cash dividend of $0.50 per share on the company's 2,000,000 outstanding shares, to be paid on June 1 to all shareholders of record on April 1. On February 1, the company records this entry:
Debit Credit
Retained earnings 1,000,000
Dividends payable 1,000,000
On June 1, ABC pays the dividends, and records the transaction with this entry:
Debit Credit
Dividends payable 1,000,000
Cash 1,000,000
Stock dividend. A stock dividend is the issuance by a company of its common stock to its common shareholders without any consideration. If the company issues less than 25 percent of the total number of previously outstanding shares, you treat the transaction as a stock dividend. If the transaction is for a greater proportion of the previously outstanding shares, then treat the transaction as a stock split. To record a stock dividend, transfer from retained earnings to the capital stock and additional paid-in capital accounts an amount equal to the fair value of the additional shares issued. The fair value of the additional shares issued is based on their fair market value when the dividend is declared.
Stock Dividend Example
Company Laws & secretarial practices. 7
o ABC International declares a stock dividend to its shareholders of 10,000 shares. The fair value of the stock is $5.00, and its par value is $1. ABC records the following entry:
Debit Credit
Retained earnings 50,000
Common stock, $1 par value 10,000
Additional paid-in capital 40,000
Property dividend. A company may issue a non-monetary dividend to investors, rather than making a cash or stock payment. You record this distribution at the fair market value of the assets distributed. Since the fair market value is likely to vary somewhat from the book value of the assets, the company will likely record the variance as a gain or loss.
Property Dividend Example
ABC International's board of directors elects to declare a special issuance of 500 identical, signed prints by Pablo Picasso, which the company has stored in a vault for a number of years. The company originally acquired the prints for $500,000, and they have a fair market value as of the date of dividend declaration of $4,000,000. ABC records the following entry as of the date of declaration to record the change in value of the assets, as well as the liability to pay the dividends:
Debit Credit
Long-term investments - artwork 3,500,000
Gain on appreciation of artwork 3,500,000
Company Laws & secretarial practices. 8
Debit Credit
Retained earnings 4,000,000
Dividends payable 4,000,000
On the dividend payment date, ABC records the following entry to record the payment transaction:
Debit Credit
Dividends payable 4,000,000
Long-term investments - artwork 4,000,000
Scrip dividend. A company may not have sufficient funds to issue dividends in the near future, so instead it issues a scrip dividend, which is essentially a promissory note to pay shareholders at a later date. This dividend creates a note payable.
Scrip Dividend Example
ABC International declares a $250,000 scrip dividend to its shareholders that has a 10 percent interest rate. At the dividend declaration date, it records the following entry:
Company Laws & secretarial practices. 9
Debit Credit
Retained earnings 250,000
Notes payable 250,000
The date of payment is one year later, so that ABC has accrued $25,000 in interest expense on the notes payable. On the payment date (assuming no prior accrual of the interest expense), ABC records the payment transaction with this entry:
Debit Credit
Notes payable 250,000
Interest expense 25,000
Cash 275,000
Liquidating dividend .When the board of directors wishes to return the capital originally contributed by shareholders as a dividend, it is called a liquidating dividend, and may be a precursor to shutting down the business. The accounting for a liquidating dividend is similar to the entries for a cash dividend, except that the funds are considered to come from the additional paid-in capital account.
Liquidating Dividend Example
ABC International's board of directors declares a liquidating dividend of $1,600,000. It records the dividend declaration with this entry:
Debit Credit
Company Laws & secretarial practices. 10
Additional paid-in capital 1,600,000
Dividends payable 1,600,000
On the dividend payment date, ABC records the following entry to record the payment transaction:
Debit Credit
Dividends payable 1,600,000
Cash 1,600,000
Dividend policy
Dividend policy is concerned with taking a decision regarding paying cash dividend in the present or paying an increased dividend at a later stage. The firm could also pay in the form of stock dividends which unlike cash dividends do not provide liquidity to the investors, however, it ensures capital gains to the stockholders. The expectations of dividends by shareholders helps them determine the share value, therefore, dividend policy is a significant decision taken by the financial managers of any company.
Various models have been developed to help firms analyse and evaluate the perfect dividend policy. There is no agreement between these schools of thought over the relationship between dividends and the value of the share or the wealth of the shareholders in other words.
One school comprises of people like James E. Walter and Myron J. Gordon (see Gordon model), who believe that current cash dividends are less risky than future capital gains. Thus, they say that investors prefer those firms which pay regular dividends and such dividends affect the market price of the share. Another school
Company Laws & secretarial practices. 11
linked to Modigliani and Miller holds that investors don't really choose between future gains and cash dividends.
Relevance of dividend policy
Dividends paid by the firms are viewed positively both by the investors and the firms. The firms which do not pay dividends are rated in oppositely by investors thus affecting the share price. The people who support relevance of dividends clearly state that regular dividends reduce uncertainty of the shareholders i.e. the earnings of the firm is discounted at a lower rate, ke thereby increasing the market value. However, its exactly opposite in the case of increased uncertainty due to non-payment of dividends.
Two important models supporting dividend relevance are given by Walter and Gordon.
Company Laws & secretarial practices. 12
Walter's model
James E. Walter's model shows the relevance of dividend policy and its bearing on the value of the share.
Assumptions of the Walter model
1. Retained earnings are the only source of financing investments in the firm, there is no external finance involved.
2. The cost of capital, k e and the rate of return on investment, r are constant i.e. even if new investments decisions are taken, the risks of the business remains same.
3. The firm's life is endless i.e. there is no closing down.
Basically, the firm's decision to give or not give out dividends depends on whether it has enough opportunities to invest the retain earnings i.e. a strong relationship between investment and dividend decisions is considered.
Model description
Dividends paid to the shareholders are re-invested by the shareholder further, to get higher returns. This is referred to as the opportunity cost of the firm or the cost of capital, ke for the firm. Another situation where the firms do not pay out dividends, is when they invest the profits or retained earnings in profitable opportunities to earn returns on such investments. This rate of return r, for the firm must at least be equal to ke. If this happens then the returns of the firm is equal to the earnings of the shareholders if the dividends were paid. Thus, its clear that if r, is more than the cost of capital ke, then the returns from investments is more than returns shareholders receive from further investments.
Walter's model says that if r<ke then the firm should distribute the profits in the form of dividends to give the shareholders higher returns. However, if r>ke then the investment opportunities reap better returns for the firm and thus, the firm should invest the retained earnings. The relationship between r and k are extremely important to determine the dividend policy. It decides whether the firm should have zero payout or 100% payout.
In a nutshell :
If r>ke, the firm should have zero payout and make investments.
Company Laws & secretarial practices. 13
If r<ke, the firm should have 100% payouts and no investment of retained earnings.
If r=ke, the firm is indifferent between dividends and investments.
Mathematical representation
Walter has given a mathematical model for the above made statements :
where,
P = Market price of the share D = Dividend per share r = Rate of return on the firm's investments ke = Cost of equity E = Earnings per share'
The market price of the share comprises of the sum total of :
the present value if an infinite stream of dividends the present value of an infinite stream of returns on investments made from
retained earnings.
Therefore, the market value of a share is the result of expected dividends and capital gains according to Walter.
Criticism
Although the model provides a simple framework to explain the relationship between the market value of the share and the dividend policy, it has some unrealistic assumptions.
1. The assumption of no external financing apart from retained earnings, for the firm make further investments is not really followed in the real world.
2. The constant r and ke are seldom found in real life, because as and when a firm invests more the business risks change.
Company Laws & secretarial practices. 14
Gordon's Model
Myron J. Gordon has also supported dividend relevance and believes in regular dividends affecting the share price of the firm.
Assumptions of the Gordon model
Gordon's assumptions are similar to the ones given by Walter. However, there are two additional assumptions proposed by him :
1. The product of retention ratio b and the rate of return r gives us the growth rate of the firm g.
2. The cost of capital ke, is not only constant but greater than the growth rate i.e. ke>g.
Model description
Investor's are risk averse and believe that incomes from dividends are certain rather than incomes from future capital gains, therefore they predict future capital gains to be risky propositions. They discount the future capital gains at a higher rate than the firm's earnings thereby, evaluating a higher value of the share. In short, when retention rate increases, they require a higher discounting rate. Gordon has given a model similar to Walter's where he has given a mathematical formula to determine price of the share.
Mathematical representation
The market price of the share is calculated as follows:
where,
P = Market price of the share E = Earnings per share b = Retention ratio (1 - payout ratio) r = Rate of return on the firm's investments ke = Cost of equity br = Growth rate of the firm (g)
Company Laws & secretarial practices. 15
Therefore the model shows a relationship between the payout ratio, rate of return, cost of capital and the market price of the share.
Conclusions on the Walter and Gordon Model
Gordon's ideas were similar to Walter's and therefore, the criticisms are also similar. Both of them have shown the supremacy of regular dividends through their models and clearly stated the strong relationship between dividend policies and market value of the firm.
Capital structure substitution theory & dividends
The capital structure substitution theory (CSS) describes the relationship between earnings, stock price and capital structure of public companies. The theory is based on one simple hypothesis: company managements manipulate capital structure such that earnings-per-share (EPS) are maximized. The resulting dynamic debt-equity target explains why some companies use dividends and others do not. When redistributing cash to shareholders, company managements can typically choose between dividends and share repurchases. But as dividends are in most cases taxed higher than capital gains, investors are expected to prefer capital gains. However, the CSS theory shows that for some companies share repurchases lead to a reduction in EPS. These companies typically prefer dividends over share repurchases.
Mathematical representation
From the CSS theory it can be derived that debt-free companies should prefer repurchases whereas companies with a debt-equity ratio larger than
should prefer dividends as a means to distribute cash to shareholders, where
D is the company’s total long term debt
is the company’s total equity
is the tax rate on capital gains
is the tax rate on dividends
Company Laws & secretarial practices. 16
Low valued, high leverage companies with limited investment opportunities and a high profitability use dividends as the preferred means to distribute cash to shareholders, as is documented by empirical research.
Conclusion
The CSS theory provides more guidance on dividend policy to company managements than the Walter model and the Gordon model. It also reverses the traditional order of cause and effect by implying that company valuation ratios drive dividend policy, and not vice-versa. The CSS theory does not have 'invisible' or 'hidden' parameters such as the equity risk premium, the discount rate, the expected growth rate or expected inflation. As a consequence the theory can be tested in an unambiguous way.
Irrelevance of dividend policy
The Modigliani and Miller school of thought believes that investors do not state any preference between current dividends and capital gains. They say that dividend policy is irrelevant and is not deterministic of the market value. Therefore, the shareholders are indifferent between the two types of dividends. All they want are high returns either in the form of dividends or in the form of re-investment of retained earnings by the firm. There are two conditions discussed in relation to this approach :
decisions regarding financing and investments are made and do not change with respect to the amounts of dividends received.
when an investor buys and sells shares without facing any transaction costs and firms issue shares without facing any floatation cost, it is termed as a perfect capital market.
Two important theories discussed relating to the irrelevance approach, the residuals theory and the Modigliani and Miller approach.
Residuals theory of dividends
One of the assumptions of this theory is that external financing to re-invest is either not available, or that it is too costly to invest in any profitable opportunity. If the firm has good investment opportunity available then, they'll invest the retained
Company Laws & secretarial practices. 17
earnings and reduce the dividends or give no dividends at all. If no such opportunity exists, the firm will pay out dividends.
If a firm has to issue securities to finance an investment, the existence of floatation costs needs a larger amount of securities to be issued. Therefore, the pay out of dividends depend on whether any profits are left after the financing of proposed investments as floatation costs increases the amount of profits used. Deciding how much dividends to be paid is not the concern here, in fact the firm has to decide how much profits to be retained and the rest can then be distributed as dividends. This is the theory of Residuals, where dividends are residuals from the profits after serving proposed investments.
This residual decision is distributed in three steps:
evaluating the available investment opportunities to determine capital expenditures.
evaluating the amount of equity finance that would be needed for the investment, basically having an optimum finance mix.
cost of retained earnings<cost of new equity capital, thus the retained profits are used to finance investments. If there is a surplus after the financing then there is distribution of dividends.
Extension of the theory
The dividend policy strongly depends on two things:
investment opportunities available to the company amount of internally retained and generated funds which lead to dividend
distribution if all possible investments have been financed.
The dividend policy of such a kind is a passive one, and doesn't influence market price. the dividends also fluctuate every year because of different investment opportunities every year. However, it doesn't really affect the shareholders as they get compensated in the form of future capital gains.
Modigliani-Miller theorem
Company Laws & secretarial practices. 18
Franco Modigliani Merton Miller
The Modigliani–Miller theorem states that the division of retained earnings between new investment and dividends do not influence the value of the firm. It is the investment pattern and consequently the earnings of the firm which affect the share price or the value of the firm.
Assumptions of the MM theorem
The MM approach has taken into consideration the following assumptions:
1. There is a rational behavior by the investors and there exists perfect capital markets.
2. Investors have free information available for them.3. No time lag and transaction costs exist.4. Securities can be split into any parts i.e. they are divisible5. No taxes and floatation costs.6. The investment decisions are taken firmly and the profits are therefore
known with certainty. The dividend policy does not affect these decisions.
Model description
The dividend irrelevancy in this model exists because shareholders are indifferent between paying out dividends and investing retained earnings in new opportunities. The firm finances opportunities either through retained earnings or by issuing new shares to raise capital. The amount used up in paying out dividends is replaced by the new capital raised through issuing shares. This will affect the value of the firm
Company Laws & secretarial practices. 19
in an opposite ways. The increase in the value because of the dividends will be offset by the decrease in the value for new capital raising.
Dividend Dates
Any dividend that is declared must be approved by a company's Board of Directors before it is paid. For public companies, there are four important dates to remember regarding dividends. These are discussed in detail with examples at the Securities and Exchange Commission site .
Declaration date is the day the Board of Directors announces its intention to pay a dividend. On this day, a liability is created and the company records that liability on its books; it now owes the money to the stockholders. On the declaration date, the Board will also announce a date of record and a payment date.
In-dividend date is the last day, which is one trading day before the ex-dividend date, where the stock is said to be cum dividend ('with [including] dividend'). In other words, existing holders of the stock and anyone who buys it on this day will receive the dividend, whereas any holders selling the stock lose their right to the dividend. After this date the stock becomes ex dividend.
Ex-dividend date is the day on which all shares bought and sold no longer come attached with the right to be paid the most recently declared dividend. This is an important date for any company that has many stockholders, including those that trade on exchanges, as it makes reconciliation of who is to be paid the dividend easier. Existing holders of the stock will receive the dividend even if they now sell the stock, whereas anyone who now buys the stock will not receive the dividend. It is relatively common for a stock's price to decrease on the ex-dividend date by an amount roughly equal to the dividend paid. This reflects the decrease in the company's assets resulting from the declaration of the dividend. The company does not take any explicit action to adjust its stock price; in an efficient market, buyers and sellers will automatically price this in.
Book closure Date Whenever a company announces a dividend pay-out, it also announces a date on which the company will ideally temporarily close its books for fresh transfers of stock.
Record date Shareholders registered in the stockholders of record on or before the date of record will receive the dividend. Shareholders who are not registered as of
Company Laws & secretarial practices. 20
this date will not receive the dividend. Registration in most countries is essentially automatic for shares purchased before the ex-dividend date.
Payment date is the day when the dividend checks will actually be mailed to the shareholders of a company or credited to brokerage accounts.
Dividend-reinvestment
Some companies have dividend reinvestment plans, or DRIPs, not to be confused with scrips. DRIPs allow shareholders to use dividends to systematically buy small amounts of stock, usually with no commission and sometimes at a slight discount. In some cases, the shareholder might not need to pay taxes on these re-invested dividends, but in most cases they do.
Dividend in case of Other corporate entities
Cooperative businesses
Cooperative businesses may retain their earnings, or distribute part or all of them as dividends to their members. They distribute their dividends in proportion to their members' activity, instead of the value of members' shareholding. Therefore, co-op dividends are often treated as pre-tax expenses. In other words, local tax or accounting rules may treat a dividend as a form of customer rebate or a staff bonus to be deducted from turnover before profit (tax profit or operating profit) is calculated.
Consumers' cooperatives allocate dividends according to their members' trade with the co-op. For example, a credit union will pay a dividend to represent interest on a saver's deposit. A retail co-op store chain may return a percentage of a member's purchases from the co-op, in the form of cash, store credit, or equity. This type of dividend is sometimes known as a patronage dividend or patronage refund, as well as being informally named divi or divvy.[6][7][8]
Producer cooperatives, such as worker cooperatives, allocate dividends according to their members' contribution, such as the hours they worked or their salary.
Company Laws & secretarial practices. 21
Trusts
In real estate investment trusts and royalty trusts, the distributions paid often will be consistently greater than the company earnings. This can be sustainable because the accounting earnings do not recognize any increasing value of real estate holdings and resource reserves. If there is no economic increase in the value of the company's assets then the excess distribution (or dividend) will be a return of capital and the book value of the company will have shrunk by an equal amount. This may result in capital gains which may be taxed differently than dividends representing distribution of earnings.
Mutual funds
The distribution of profits by other forms of mutual organization also varies from that of joint stock companies, though may not take the form of a dividend.
In the case of mutual insurance, for example, in the United States, a distribution of profits to holders of participating life policies is called a dividend. These profits are generated by the investment returns of the insurer's general account, in which premiums are invested and from which claims are paid. The participating dividend may be used to decrease premiums, or to increase the cash value of the policy. Some life policies pay nonparticipating dividends. As a contrasting example, in the United Kingdom, the surrender value of a with-profits policy is increased by a bonus, which also serves the purpose of distributing profits. Life insurance dividends and bonuses, while typical of mutual insurance, are also paid by some joint stock insurers.
DIVIDENDS AND DISTRIBUTIONS
Procedure for declaring dividends:
The procedure have to follow for declaring dividend:
(1) The company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends.
(2) A dividend must not be declared unless the directors have made a recommendation as to its amount. Such a dividend must not exceed the amount recommended by the directors.
Company Laws & secretarial practices. 22
(3) No dividend may be declared or paid unless it is in accordance with shareholders' respective rights.
(4) Unless the shareholders' resolution to declare or directors' decision to pay a dividend, or the terms on which shares are issued, specify otherwise, it must be paid by reference to each shareholder's holding of shares on the date of the resolution or decision to declare or pay it.
(5) If the company's share capital is divided into different classes, no interim dividend may be paid on shares carrying deferred or non-preferred rights if, at the time of payment, any preferential dividend is in arrear.
(6) The directors may pay at intervals any dividend payable at a fixed rate if it appears to them that the profits available for distribution justify the payment.
(7) If the directors act in good faith, they do not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on shares with deferred or non-preferred rights.
PROCEDURE RELATING TO PAYMENT OF DIVIDEND.
The Following is the procedure relating to payment of final dividend:
1.Finalisation of Accounts : -The company secre tary should ge t the accounts f ina l ized by theaccounts department. The finalized accounts must be also audited. The finalization of accounts will provide data about the net profits of the company.
2.Board Meeting: -The secretary should convene the board meeting to recommend dividend. Thesecretary places the finalized accounts before the board, and other relevant records. The board thenrecommends the dividend based on profits of the company and the company’s dividend policy.
3.Transfer to Reserves : -The secretary should ensure that a certain percentage of profits istransferred to reserves. For this purpose the companies (Transfer of Profit to Reserves) Rules, 1975must be followed.
4.Book Closure: -
Company Laws & secretarial practices. 23
The secretary has to decide the book closure date or the record date for payment of dividend. Only those shareholders whose names are recorded in the register of members on the book closure are eligible for dividend. The concerned stock exchange must be informed about the book closure date.
5.Intimation to Sock Exchange : -The secretary should intimate the concerned stock exchange(where the company’s shares are listed) about the dividend recommended by the board.
6.Annual General Meeting: -The secretary should convene AGM. The agenda of AGM shouldinclude the item relating to declaration of dividend. The dividend is recommended by the Board,and the final dividend is declared or approved by the shareholders.
7.Resolution at AGM : -The dividend is declared after passing an ordinary resolution. The companysecretary should record the resolution relating to declaration of dividend.
8.Intimation to Stock Exchange: -The secretary should intimate the concerned stock dividendabout the declaration of dividend. The intimation must be sent at least 21 days in advance from thedate from which the dividend shall be payable.
9.Preparation of Dividend List: -The secretary has to prepare the dividend list to whom the dividendis payable.
10.Payment of Dividend : -The secretary issues dividend warrants to the members through the post.The dividend warrant must be dispatched to the members with in 30 days from the date of declaration of dividend.
11.Transfer to unpaid dividend account : -The declareddividend if not paid or not claimed, with in30 days from the date of declaration, must be transferred to Unpaid Dividend Account.
Learning Object
Short look on dividend
Describe the types of dividend
Company Laws & secretarial practices. 24
Focus on dividend policies
Highlights on procedure of declaring dividends
Key Word
Dividend
Dividend Policies
→ Walter Model
→ Gordon Model
→ Modiglian Model
Dividend Date
Procedures
Multiple Choice Question.
1. What is the key point of measuring the performances of a company?
(a) Interest (c) Dividend
(b) Share Capital (d) Debtor
Ans: (c) Dividend.
2. Who declares the dividend of a company?
(a) General manager (c) Shareholders
(b) Marketing manager (d) Board of directors
Ans: (d) Board of directors.
3. Which of the following is the most common form of dividend?
(a) Cash dividend (c) Stock dividend
(b) Property dividend (d) Scrip dividend
Company Laws & secretarial practices. 25
Ans: (a) Cash dividend.
4. Dividend liability of a company is created when___.
(a) Dividend is declared
(b) Dividend is paid
(c) Dividend being due unpaid
(d) From the 1st operating day
Ans: (a) Dividend is declared.
5. Which of the following dividend creates note payable of a company?
(a) Cash dividend (c) Property dividend
(b) Scrip dividend (d) Liquidity dividend
Ans: (b) Cash dividend.
6. When the board of directors wishes to return the original capital, contributed by the shareholders, may grant which of the following?
(a) Liquidity dividend (c) Scrip dividend
(b) Cash dividend (d) Property dividend
Ans: (a) Liquidity dividend.
7. How many times the dividend is declared in a year in Bangladesh?
(a) Once (c) Twice
(b) Thrice (d) Any of the above
Company Laws & secretarial practices. 26
Ans: (b) Twice.
8. Dividend to be paid only at____.
(a) Annual General Meeting
(b)Statutory General Meeting
(c) Extraordinary General Meeting
(d)Meeting of board of directors
Ans: (a) Annual General Meeting.
9. Producers cooperative allocate dividends according to_____.
(a) Contribution to total capital
(b)Performance of the member
(c) Trade with the cooperative
(d)None of the above
Ans: (b) Performance of the member
10. The net profit of a company can be____.
(a) Paid out as dividend
(b) Transferred to reserved fund
(c) All of the above
(d) None of the above
Ans: (c) All of the above
True/False:
Company Laws & secretarial practices. 27
1. The most popular form of dividend is cash dividend.
2. The property dividend is a non-monetary dividend.
3. A company issue scrip dividend when it has a huge amount of cash in hand.
4. Relevancy theory implies that there is no affect of dividend policy on the price of the share.
5. MM theorem assume that there is no taxes and floatation cost.
6. 100% dividend pay out ratio enhance the goodwill of a company.
7. Consumer cooperatives allocate dividends accordingly to their contribution to the capital.
8. A dividend must not be declared unless the directors have made a recommendation as to its amount.
9. The board of directors has to decide the book closure date or payment of dividend.
10. The secretary has to prepare the dividend list to whom the dividends is payable.
Answer:
1. True; 2. True; 3. False; 4. False 5. True; 6. True; 7. False; 8. True; 9.False; 10. True.
SHORT QUESTION:
1. What is dividend?
Company Laws & secretarial practices. 28
2. When dividend is declared?
3. What is dividend policy?
4. What is relevancy of dividend policy?
5. What is irrelevancy of dividend policy?
6. What is the affect of dividend on the price of the share?
BROAD QUESTION:
1. Define dividend. Broadly discuss different types of dividend.
2. State the procedure of declaring dividend.
3. Explain the procedures relating to payment of dividend.
4. What is relevancy of dividend policy? Describe the WALTER MODEL.
5. What is irrelevancy of dividend policy? Describe the MM MODEL with assumption.
Company Laws & secretarial practices. 29
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds.
When money is borrowed, interest is typically paid to the lender as a percentage of the principal, the amount owed to the lender. The percentage of the principal that is paid as a fee over a certain period of time (typically one month or year) is called the interest rate. A bank deposit will earn interest because the bank is paying for the use of the deposited funds. Assets that are sometimes lent with interest include money, shares, consumer goods through hire purchase, major assets such as aircraft, and even entire factories in finance lease arrangements. The interest is calculated upon the value of the assets in the same manner as upon money.
Interest is compensation to the lender, for a) risk of principal loss, called credit risk; and b) forgoing other investments that could have been made with the loaned asset. These forgone investments are known as the opportunity cost. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of using the assets ahead of the effort required to pay for them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege. In economics, interest is considered the price of credit.
Types of interest
Simple interest
Simple interest is calculated only on the principal amount, or on that portion of the principal amount that remains unpaid.
The amount of simple interest is calculated according to the following formula:
where r is the period interest rate (I/m), B0 the initial balance and m the number of time periods elapsed.
Company Laws & secretarial practices. 30
To calculate the period interest rate r, one divides the interest rate I by the number of periods m.
Compound interest
In economics, interest is considered the price of credit, therefore, it is also subject to distortions due to inflation. The nominal interest rate, which refers to the price before adjustment to inflation, is the one visible to the consumer (i.e., the interest tagged in a loan contract, credit card statement, etc.). Nominal interest is composed of the real interest rate plus inflation, among other factors. A simple formula for the nominal interest is:
Where i is the nominal interest, r is the real interest and is inflation.
Warrants
A warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date.
Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. Both are discretionary and have expiration dates. The word warrant simply means to "endow with the right", which is only slightly different from the meaning of option.
Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, and make them more attractive to potential buyers. Warrants can also be used in private equity deals. Frequently, these warrants are detachable, and can be sold independently of the bond or stock.
In the case of warrants issued with preferred stocks, stockholders may need to detach and sell the warrant before they can receive dividend payments. Thus, it is sometimes beneficial to detach and sell a warrant as soon as possible so the investor can earn dividends
Company Laws & secretarial practices. 31
Features of warrant
Warrants have similar characteristics to that of other equity derivatives, such as options, for instance:
Exercising: A warrant is exercised when the holder informs the issuer their intention to purchase the shares underlying the warrant.
The warrant parameters, such as exercise price, are fixed shortly after the issue of the bond. With warrants, it is important to consider the following main characteristics:
Premium: A warrant's "premium" represents how much extra you have to pay for your shares when buying them through the warrant as compared to buying them in the regular way.
Gearing (leverage): A warrant's "gearing" is the way to ascertain how much more exposure you have to the underlying shares using the warrant as compared to the exposure you would have if you buy shares through the market.
Expiration Date: This is the date the warrant expires. If you plan on exercising the warrant you must do so before the expiration date. The more time remaining until expiry, the more time for the underlying security to appreciate, which, in turn, will increase the price of the warrant (unless it depreciates). Therefore, the expiry date is the date on which the right to exercise ceases to exist.
Restrictions on exercise: Like options, there are different exercise types associated with warrants such as American style (holder can exercise anytime before expiration) or European style (holder can only exercise on expiration date).
Types of warrants
A wide range of warrants and warrant types are available. The reasons you might invest in one type of warrant may be different from the reasons you might invest in another type of warrant.
Equity warrants: Equity warrants can be call and put warrants. o Callable warrants: Callable warrants give the Company the right to
force the warrant holder to exercise the warrants into their predetermined number of shares at a predetermined price (or using a
Company Laws & secretarial practices. 32
predetermined price formula) after certain contractual conditions are met
o Putable warrants: Putable warrants give the warrant holder the right to force the Company to issue the underlying securities at a predetermined price after certain contractual conditions are met
Covered warrants: A covered warrants is a warrant that has some underlying backing, for example the issuer will purchase the stock beforehand or will use other instruments to cover the option.
Basket warrants: As with a regular equity index, warrants can be classified at, for example, an industry level. Thus, it mirrors the performance of the industry.
Index warrants: Index warrants use an index as the underlying asset. Your risk is dispersed—using index call and index put warrants—just like with regular equity indexes. It should be noted that they are priced using index points. That is, you deal with cash, not directly with shares.
Wedding warrants: are attached to the host debentures and can be exercised only if the host debentures are surrendered
Detachable warrants: the warrant portion of the security can be detached from the debenture and traded separately.
Naked warrants: are issued without an accompanying bond, and like traditional warrants, are traded on the stock exchange
PRACTICAL CASE
* Directors of a newly formed company purpose to pay interest out of capital. Advise the directors in respect of the above proposal in the company in the light of the provisions of the companies Act, 1956.
* A share warrant can be transferred by delivery of possession. Bechuanaland Exploration Co Ltd v. London Trading Bank.
* In the case of a stolen share warrant the transferee in good faith a good title to it. Webb Hale & Co v. Alexandria Water Co.
Company Laws & secretarial practices. 33
Multiple choice Question :
1. Interest is a fee paid by ----------. a)borrower b)owner c)agent d)any third parties.
2. Bank interest earned by ----------.
a) consumer b)bank deposit holder c)share holder d)money lender
3.Warrant is a ----------.
a)security b) warranty card c)bond d)none of them
4.Which of the following is equity warrants----------.
a)covered b)index c)naked d)putable
5. Which of the following warrants is traditional warrant -------.
a)basket warrants b)index warrants c)wedding warrants d)naked warrants
Answer: (1) a. borrower ,(2) b. bank deposit holder,(3)a security ,(4)d putable ,(5)d naked warrants .
True/False:
(a)Interest are 3 types.
(b)Expiry date is the date on which the right to exercise ceases to exist.
(c)A bank deposit will earn interest because the bank is paying for the use of the deposited funds.
(d)Compound interest is considered the credit price.
(e)There are different exercise types associated with style or Spanish style.
Answer:
(a)False, (b) True, (c) True, (d) True, (e) False.
Company Laws & secretarial practices. 34
Short Question:
1. Define simple interest & compound interest.2. How can interest be an income source of a bank?3. A company can pay interest out of its capital. Comment.4. What is warrant?
Broad Question:
1. What are the main characteristics of warrants?
2. Describe the classification of warrants.
3. How to interest are calculated?
Company Laws & secretarial practices. 35
AUDIT & Auditors
The company is obliged to arrange its books of accounts to be audited under sec.
183(3) of the Companies Act. A company starts and functions with investment in
the form of capital provided by persons who are not in control of the application of
funds so supplied by them. They would, therefore, like to sec that their investments
are safe. For this purpose they will be interested in that the accounts are checked
and audited by duly qualified persons who are not connected with a) the company,
b) the directors of the company, and c) the employees of the company. The
auditors, who are appointed by the investors (i.e. the shareholders) to scrutinise the
accounts, however, are not expected to give advice as what ought to be done or on
the prudence or imprudence of the business activities of the company. The auditors
will ascertain and state about the true financial position of the business by
examining the books of accounts. In such exercises the shareholders need to rely
on the auditors.
Appointment of Auditors(1) First auditors: The first auditor or auditors of company shall be appointed by
the board of directors within one month of the date of registration of the company.
The auditor or auditors so appointed shall hold office until the conclusion of the
first annual general meeting.
If the board fails to make such an appointment, the company in general
meeting may make it. [Sec. 224(5)]
(2) Subsequent auditors: The auditors are appointed at every annual general
meeting of the company and they hold office from the conclusion of that meting
till the conclusion of the next annual general meeting. The company shall give
intimation of the appointment to every auditor within seven days of the
appointment. [Sec. 224(4)]
Company Laws & secretarial practices. 36
Restriction on number of companies for appointment as an auditor: No
company shall appoint or reappoint any person as its auditor if such person is at the
date of appointment or reappointment holding appointment as auditor of 20
companies. As a result of the Companies (Amendment) Act, 1988, a person in
whole-time employment elsewhere will not be eligible to be appointed as auditor
of a company.
Provided further that where any partner of the firm is also a partner of any other
firm or firms of auditors, the number of companies which may be taken into
account, by all the firms together, in relation to such partner shall not exceed the
specified number in the aggregate.
Provided also that where any partner of a firm of auditors is also holding office, in
his individual capacity, as the auditor of one or more companies, the number of
companies which may be taken into account in his case shall not exceed the
specified number, in the aggregate.
Reappointment of retiring auditors: Subject to the limit of 20 companies in
which an individual or a firm can be appointed auditor and also subject to such
case where the appointment or reappointment can be made by special resolution, a
retiring auditor, by whatsoever authority appointed, shall be reappointed, unless (a)
he is not qualified for reappointment; (b) he has given the company notice in
writing of his unwillingness to be reappointed; (c) a resolution has been passed at
that meeting appointing somebody instead of him or providing expressly that he
shall not be reappointed; or (d) where notice has been given of an intended
resolution to appoint someone else in the place of a retiring auditor but by reason
of the death, incapacity or disqualification of that person the resolution cannot be
proceeded with. [Sec. 224(2)]
Company Laws & secretarial practices. 37
(3) Casual vacancy: The board may fill any casual vacancy in the office of an
auditor. Where such a vacancy is caused by the resignation of an auditor, it shall
only be filled by the company in general meeting. Any auditor appointed in a
casual vacancy shall hold office until the conclusion of the next annual general
meeting. [Sec. 224(6)]
(4) Central Government to appoint auditors in certain: Where at the annual
general meeting no auditors are appointed or reappointed, the Central Government
may appoint a person to fill the vacancy. [Sec. 224(3)]
It is the duty of the company to inform the Central Government within 7 days if it
fails to appoint or reappoint auditors at an annual general meeting.
(5) Appointment a auditors of a government company: The auditor of a
government company shall be appointed or reappointed by the Central
Government on the advice of the Comptroller and Auditor General of India. [Sec.
619(2)]
Remuneration of AuditorsIf the auditors are appointed by the board of directors or the Central government,
their remuneration may be fixed by the board of Central Government, as the case
may be. If the auditors have been appointed the shareholders in general meeting,
their remuneration shall be fixed by the company in general meeting or in such
manner as the company in general meeting may determine.
Any sums paid by the company in respect of the auditors’ expenses shall be
deemed to be included in the expression “remuneration.” [Sec. 224(8)]
Company Laws & secretarial practices. 38
Auditor not to be appointed except with the approval of the
company by special resolution in certain cases
Auditor not to be appointed except with the approval of the company
by special resolution in certain cases.—( 1) In the case of a company in which not
less than twenty-five per cent of the subscribed share capital is held, whether
singly or in any combination, by—
(a) a public financial institution or a Government company or Central
Government or any State Government, or
(b) any financial or other institution established by any Provincial or State Act in
which a State Government holds not less than fifty-one per cent of the
subscribed share capital, or
(c) a nationalised bank or an insurance company carrying on general insurance
business, the appointment or re-appointment at each annual general meeting of
an auditor or auditors shall be made by a special resolution.
(2) Where any company referred to in sub-section (1) omits or fails to pass at its
annual general meeting any special resolution appointing an auditor or
auditors, it shall be deemed that no auditor or auditors had been appointed by
the company at its annual general meeting, and thereupon the provisions of
sub-section (3) of section 224 shall become applicable in relation to such
company.
Explanation.—For the purposes of this section,—
(a) “general insurance business” has the meaning assigned to it in the General
Insurance (Emergency Provisions) Act, 1971(17 of 1971);
Company Laws & secretarial practices. 39
(b) “nationalised bank” means a c new bank as defined in the
Banking Companies (Acquisitii jransfer of Undertakings) Act, 1970
(5 of 1970) [or in the Banking C? les (Acquisition and Transfer of
Undertakings) Act, 1980 (10 of 1980)].]
Provisions as to resolutions for appointing or removing
auditors
(1) Special notice shall be required for a resolution at an annual general meeting
appointing as auditor a person other than a retiring auditor, or providing
expressly that a retiring auditor shall not be re-appointed.
(2) On receipt of notice of such a resolution, the company shall forthwith send a
copy thereof to the retiring auditor.
(3) Where notice is given of such a resolution and the retiring auditor makes with
respect thereto representations in writing to the company (not exceeding a
reasonable length) and requests their notification to members of the company,
the company shall, unless the representations are received by it too late for it
to do so,—
(a) in any notice of the resolution given to members of the company, state the
fact of the representations having been made; and
(b) send a copy of the representations to every member of the company to whom
notice of the meeting is sent, whether before or after the receipt of the
representations by the company, and if a copy of the representations is not
sent as aforesaid because they were received too late or because of the
company’s default the auditor may (without prejudice to his right to be heard
orally) require that the representations shall be read out at the meeting;
Company Laws & secretarial practices. 40
Provided that copies of the representations need not be sent out and the
representations need not be read out at the meeting if, on the application either of
the company or of any other person who claims to be aggrieved, the [Central
Government] is satisfied that the rights conferred by this subsection are being
abused to secure needless publicity for defamatory matter; and the [Central
Government] may order the company’s costs on such an application to be paid it in
whole or in art by the auditor, notwithstanding that he is not a party to the
application.
(4) Sub-sections (2) and (3) shall. apply to a resolution to remove the first auditors
or any of them under sub-section (5) of section 224 or to the
removal of any auditor or “sub-section (7) of that section, as
they apply in relation to a resolution that a retiring auditor shall not be re
appointed.
Qualification of a Company AuditorA person shall not be qualified for appointment as auditor of a company unless he
is a Chartered Accountant within the meaning of the Chartered Accountants Act,
1949. A firm whereof all the partners practising in India are qualified for
appointment as aforesaid may be appointed by its firm name to be the auditor of a
company. In such a case any partner so practising may act in the name of the firm.
[Sec. 226(1)]
Disqualification of a Company AuditorNone of the following persons shall be qualified for appointment as auditor of a
company; (a) a body corporate; (b) an officer or employee of the company; (c) a
person who is a partner, or who is in the employment of an officer or employee of
the company; and (d) a person who is indebted to the company for an amount
exceeding one thousand rupees or who has given any guarantee or provided any
Company Laws & secretarial practices. 41
security in connection with the indebtedness of any third person to the company for
an amount exceeding one thousand rupees. [Sec. 226(3)]
Practical CasesThe auditors of a company made a confidential report to the directors, calling their
attention to the fact that the securities of some loans were insufficient and that
there was difficulty in realisation. They also stated that, in their opinion, no
dividend should be paid for the year. In their report to the shareholders, hoever,
they merely stated that the value of securities was dependent upon realisation.
Dividends, for the year, were in due course declared by the company on the
directors’ recommendations. Are the auditors liable for the above mentioned
statement in their report to the shareholders regarding the realisable value of
securities?
Key Points:
(1) It is compulsory for every company to have its accounts audited by qualified
auditors, because auditors are the safeguard to the interest of shareholder.
(2) The company should select an auditor in accordance with the Sec. 226(1).
(3) The first auditors shall appoint or remove by the board of director.
(4) Remuneration of auditors shall be in accordance with the law 224(8).
Contents:
Qualification of a company auditor, Disqualifications Appointment of removal of
auditors, Remuneration of auditors Rights and powers of auditors, duties of an
auditor, auditing branch office accounts, special audit, cost audit, questions,
Company Laws & secretarial practices. 42
Learning Objectives:
From this chapter we can know about
(1) The Rights & Powers of Auditors
(2) Duties of an Auditor
(3) Auditing Branch Office Accounts
Power of Auditors
The companies Act makes it compulsory for every company to have its accounts
audited by qualified auditors. And the auditors have some rights & Powers under
his sub-ordinate employers. The Powers of Auditors are printed below:
1. Title to visit branches
Where the accounts of any branch office are audited by a person other then the
company’s auditor, the latter shall (a) be entitled to visit the branch office, if he
deems it necessary to do so for the performance of his duties as auditor, and (b)
have a right of access at all times to the books and accounts and vouchers of the
branch office. [section:288(2)]
2. Right of lien
The auditors right of lien is a controversial one. but it was it was hel that hte
auditor has no lien on books of accounts in respect of audit work. But if he has
worked on the books of accounts in the capacity of an accountant, he has a right
of lien on such books.
Company Laws & secretarial practices. 43
3. Title to call for information and explorations
He shall be entitled to require from the officers of the company such
information and explorations as the auditor may think necessary for the
performance of his duties as auditor [Sec:227 (1)]
The auditor shall make a report to the members of the company on the accounts
examined by him, and on every balance-sheet and profit and loss account and
on every other document declared by this Act to be part of or annexed to the
balance-sheet or profit and loss account which are laid before the company in
general meeting during his tenure of office, and the report shall state whether, in
his opinion and to the best of his information and according to the explanations
given to him, the said accounts give the information required by this Act in the
manner so required and give a true and fair view—
(i) in the case of the balance-sheet, of the state of the company’s affairs as at the
end of its financial years; and
(ii) in the case of the profit and loss account, of the profit or loss for its financial
year.
4. Title to attend general meetings:
He shall be entitled to attend any general meeting and to be heard at any general
meeting which he attends on any part of the business which concerns him as
auditor. [Sec:231]
Company Laws & secretarial practices. 44
5. Right of access of books of account
Every auditor of a company shall have a right of access at all times to the books
and accounts and vouchers of the company, whether kept at the head office of
the company or elsewhere, and shall be entitled to require from the officers of
the company such information and explanations as the auditor may think
necessary for the performance of his duties as auditor.
[1A) Without prejudice to the provisions of sub-section (1), the auditor shall
inquire—
(a) whether loans and advances made by the company on the basis of security
have been properly secured and whether the terms on which they have been
made are not prejudicial to the interest of the company or its members;
(b) whether transactions of the company which are represented merely by book
entries are not prejudicial to the interests of the company;
6. Title to sign the audit report
Section 229 Provides that only the person appointed as auditor of the company
of where a firm is so appointed, only a partner of the firm practicing in India,
may sign the auditor’s report or sign or authenticate any other document of the
company required by law to be signed or authenticated by the auditor.
Company Laws & secretarial practices. 45
7. Title to receive notice of general meeting
All notices of, and other communications relating to, and general meeting of a
company which any member of the company is entitled to have sent to him
shall also be forwarded to the auditor of the company.
8. Title to claim remuneration
He is also entitled to claim his remuneration on completion of audit of the
accounts of the company.
9. Title to the auditor’s report
The auditor’s report shall also state—
(a) whether he has obtained all the information and explanations which to the
best of his knowledge and belief were necessary for the purposes of his audit;
(b) whether, in his opinion, proper books of account as required by law have
been kept by the company so far as appears from his examination of those
books, and proper returns adequate for the purposes of his audit have been
received from branches not visited by him;
[(bb) whether the report on the accounts of any branch office audited under
section 228 by a person other than the company’s auditor has been awarded to
him as enquired by clause (c) of sub-section (3) of that section and how he has
dealt with the same in preparing the auditor’s report;]
Company Laws & secretarial practices. 46
(c) whether the company’s balance-sheet and profit and loss account dealt with
by the report are in agreement with the books of account and returns;
[(d) whether, in his opinion, the profit and loss account and balance-sheet
comply with the accounting standards referred to in sub-section (3C) of section
211;]
[(e) in thick type or in italics the observations or comments of the auditors
which have any adverse effect on the functioning of the company;
(f) whether any director is disqualified from being appointed as director under
clause (g) of sub-section (1) of section 274.]
[(g) whether the cess payable under section 441A has been paid and if not, the
details of amount of cess not so paid.].
Comments:
(i) The audit is intended for the protection of the shareholders and the auditor is
expected to examine the accounts maintained by the Directors witi a view to
inform the shareholders of the true fmancial position of the company. The
Directors occupy a fiduciary position in relation to the shareholders and in
auditing the accounts maintained by the Directors the auditor acts in the interest
of the shareholders who are in the position of beneficiaries; Institute of
Chartered Accountants of India v. P.K. Mukherjee, 1968 (38) Comp. Cas. 628:
1968(2)ComLJ211:AIR 1968 SC 1104.
(ii) The provisions of section 227 of the Companies Act do not apply to a
Government Company because a Government Company is subject to the
provisions of section 619 of the Act; Guru Gobinda Basu v. Sankari Prasad
Company Laws & secretarial practices. 47
Ghosal, 1963 (33) Comp. Cas. 1132: 1964 (1) Com U 87: AIR 1964 SC
254.
Duties of an Auditor:
(1) Duty o certify statutory report. The auditor has to certify the statutory report
as correct, insofar as the report relates to the shares allotted by the company, the
cash received in respect of such shires an4 the receipts and payments of the
company. [Sec. 166(4)1
(2) Duty in relation to the declaration of solvency. In case of members’
voluntary winding up, the declaration of solvency must be accompanied by a
copy of the auditors’ report on the profit and loss account and the balance sheet
of the, company prepared up to the date of the declaration and should embody a
statement of the company’s assets and liabilities as on that date. [Sec. 488(2(b)]
The statutory duties of the auditors can be expanded but they cannot be
restricted by the articles or the directors of the company.
(3) Duty in relation to the issue of prospectus. Section 56(1) provides ha very
prospectus Issued by an existing company shall contain a report
(4) Duty to assist inspectors. It shall be the duty of the auditor to preserve and
produce for an inspector all books and papers of the company which are in his
custody or power. He shall also give the inspector all assistance in connection
with the investigation as he is reasonably able to give. [Sec. 240(1)]
(5) Duty to make enquiries. Section 227(IA) introduced by the Companies
(Amendment) Act, 1965, has imposed a duty on auditors to inquire:
Company Laws & secretarial practices. 48
(I) whether loans and advances made by the company on the basis of security
have been properly secui’ed and whether the terms on which they. have been
made are not prejudicial to the interests of the company or its members;
(ii) whe1her transactions of the company which are represented merely by book
entries are not prejudicial to the interests of the company;
(iii) where the company is an investment company or a banking company,
whether so much of the assets of the company as consist of shares, debentures
another securities have been sold at a price less than that at which they are
purchased by the company;
(iv) whether loans and advances made by the company have been shown as
deposits;
(v) whether personal expenses have been charged to revenue account;
(vi) where it is stated in the books and papers of the company that any shares
have been allotted for cash, whether cash has actually been so received, whether
the position, as stated in the account books and the balance sheet is correct,
regular and not misleading.
(6) Duty to make a report to. the members. The auditor shall make a report to
the members of the company on the accounts examined by him, and on every
balance sheet and profit and loss account and every document declared to be
part of or annexed to the balance sheet or profit and loss account, which are laid
before the company in general meeting during his tenure of office. The report
shall state whether, in his opinion and to the best of his information and
according to the explanations given to him, thy said accounts give the
information required by this Act in a manner so required and give a true and fair
Company Laws & secretarial practices. 49
view, (a) of the state of the company’s affairs at the end of its financial year in
the case of the balance sheet; and (b) of the profit or loss for its financial year in
the case of its profit and loss account.
The object of this provision is to secure to the shareholders, independent and
reliable information respecting the true financial position of the company at the
time of audit. If the auditors feel that proper books of account have not been
maintained as required by the Act or the accounts do not represent a true and
fair view, they must mention it in their report to the shareholders. Lindley L.J in
Re London and General Bank (No.2) observed as follows: “A person whose
duty it is to convey information to others does not discharge that duty by simply
giving them so much information as is calculated to induce them, or some of
them, to ask for more... An auditor who gives shareholders means of
information, instead of information, in respect of a company’s financial position
does so at his peril and runs the very serious risk of being held, judicially, to
have failed to discharge his duty.”
General Duties
In addition to the above statutory duties, there are certain other duties of an
auditor which have been recognized by courts. These general duties are stated
below:
1. An auditor must be honest, that is, he must not certify what he does not
believe to be true.
In Deputy Secretary to the Government of India, Ministry of Finance v. S.N.
Das Gupta,’ it was observed: “Vis-a-vis the shareholders the auditor holds a
position of trust and it is his bounden duty to honour that trust by being candid
with shareholders and telling them frankly and fully everything with regard to
Company Laws & secretarial practices. 50
the affairs of the company which have come to his knowledge and which it is
material for the shareholders to know...his duty is to make a full, careful and
truthful report in default of which he must be held to have failed in the
discharge of his obligations.”
2. He must exercise reasonable care and skill in the discharge of his duties.
What is reasonable care and skill depends upon the circumstances of each case.
Where there is nothing to excite suspicion, very little enquiry will be reasonable
and sufficient; and when suspicion is aroused, more care is obviously necessary
but still an auditor is not bound to exercise more than reasonable care and skill
even in case of suspicion. He is perfectly justified in acting on the opinion of
an. expert where special knowledge is required. If he fails to exercise
reasonable care and skill, he may be held liable for damages.7
5Newton v. Birmingham Small Arms Co, Ltd. (1906) 2 Ch. D. 378.
6A.I.R (1956) Cal. 414. .
7Re London and General Bank (No. 2) 1892 2 Th. 673.
3. It is the duty of an auditor to verify not merely, the arithmetical accuracy of
the balance sheet but its substantial accuracy. An auditor is not to be confined
to mechanics of checking vouchers and making arithmetical computations. He
must see that the books show a true and correct representation of company’s
affairs.
The auditor must check cash in hand and also bank balance at bank by
inspecting the pass-book or by obtaining certificate from the bank. Similarly, he
should verify the existence of assets and riot assume as true the particulars
Company Laws & secretarial practices. 51
given in earlier balance sheets or the words of persons in management of the
company.
The professional standards have undoubtedly risen in recent years. In Controller
of Insurance v. H. C. Das, it was held that an auditor should not merely rely
upon the statements of persons who constitute the management in matters
capable of direct verification by him from books, accounts and vouchers.
4. An auditor is a watchdog, not a bloodhound. He is not a detective nor is he
to approach his work with suspicion. He is justified in believing tried servants
of the company in whom confidence. is placed by the company. He is entitled
to assume that they are honest, and to rely upon their representations, provided
he takes reasonable care. If there is anything calculated to excite suspicion, he
should probe into the bottom, but in the absence of anything of that kind, he is
only bound to be reasonably cautious and careful.
It was held that it was no part of an auditor’s duty to take stock and that he is
not guilty of negligence if he accepts a certificate of the manager as to the value
of stock in the absence of suspicious circumstances.
5. An auditor must report all material facts and points to the shareholders. He
is not bound to give advice either to directors or shareholders as to what they
ought to do. He is not concerned with the policy of the company.
6. An auditor not only owes a duty of protecting shareholders but also owes a
duty of care even to a non-member if he knows that his audited accounts are
going to be produced in order to attract someone to invest in the company,
unless there is an express disclaimer of responsibility.
Company Laws & secretarial practices. 52
Auditing Branch Office Accounts
Where a company has a branch office, the accounts of that of fice shall be
audited by the company’s auditor or by a person qualified for appointment as
auditor of the company. Where the branch office is situated in a country outside
India
The accounts shall be audited either by the company’s auditor or by a person a
qualified according to the provisions of the Act, or by an accountant duly
qualified to act as an auditor of the accounts of the branch office in accordance
with the laws of that country. [Sec: 228(1)]
1. Appointment of auditor in the branch office of a company: Where a
company in general meeting decides to have the accounts of a branch office
audited otherwise than by the company’s auditor, the company in that meeting
shall for the audit of those accounts appoint a person qualified for appointment as
auditor of the company under section 226, or where the branch office is situate in a
country outside India, a person who is either qualified as aforesaid or an
accountant duly qualified to act as an auditor of the accounts of the branch office in
accordance with the laws of that country, or authorize the Board of directors to
appoint such a person in consultation with the company’s auditor;
(b) The person so appointed (hereafter in this section referred to as the branch
auditor) shall have the same powers and duties in respect of audit of the accounts
of the branch office as the company’s auditor has in respect of the same;
(c) the branch auditor shall prepare a report on the accounts of the branch office
examined by him and forward the same to the company’s auditor who shall in
preparing the auditor’s report, deal with the same in such manner as he considers
necessary;
Company Laws & secretarial practices. 53
(d) the branch auditor shall receive such remuneration and shall hold his
appointment subject to such terms and conditions as may be fixed either by the
company in general meeting or by the Board of directors if so authorized by the
company in general meeting.
2. Powers an duties of branch auditor
The person so appointed (hereafter referred to as the branch auditor) shall have
the same powers and duties in respect of audit as the company’s auditor has in
respect of the same. [Sec:228 (3)(b)]
Where the accounts of any branch office are [audited by a person other than the
company’s auditor] the company’s auditor-
(a) Shall be entitled to visit the branch office, if he deems it necessary to do so
for the performance of has duties as a auditor, and
(b) Shall have a right of access at all times to the books and accounts and
vouchers of the company maintained at the branch office.
Provided that in the case of a banking company having a branch office outside
India, it shall be sufficient if the auditor is allowed access to such copies of, and
extracts from the books and accounts of the branch as have been transmitted to
the principal office of the company in India.
3. Title to prepare a report
The branch auditor shall prepare a report on the accounts of the branch office
examined by him and forward the same to the company’s auditor who shall, in
preparing the auditor’s report, deal with the same in such manner as he
considers necessary. [Sec. 228 (3) (c)]
Company Laws & secretarial practices. 54
4. Remuneration of branch auditor
The branch auditor shall receive such remuneration and shall hold his
appointment subject to such terms and conditions as may be fixed either by the
company or by the board of directors, if so authorized in general meeting. [Sec.
228 (3) (d)]
5. Exemption of branch audit
(4) Notwithstanding anything contained in the foregoing provisions of this
section, the Central Government 5 [may make rules providing for the
exemption of] any branch office from the provisions of this section to the extent
specified in the rules and in making such rules the Central Government shall
have regard to all or any of the following matters, namely:—
(a) the arrangement made by the company for the audit of accounts of the
branch office by a person otherwise qualified for appointment as branch auditor
even though such person may be an officer or employee of the company;
(b) the nature and quantum of activity carried on at the branch office during a
period of three years immediately preceding the date on which the branch office
is exempted from the provisions of this section;
(c) The availability at a reasonable cost of a branch auditor for the audit of
accounts of the branch office;
(d) any other matter which in the opinion of the Central Government justifies
the grant of exemption to the branch office from the provisions of this section.]
Company Laws & secretarial practices. 55
Key Points
The Powers of an auditor are huge. Almost every step the auditor has right of
access to the company. He performs 2 types of duties. One is statutory duties and
another is general duties. He has right to auditing branch office and accounts of
that office.
Contents:
Qualification of a company auditor, Disqualifications Appointment of removal of
auditors, Remuneration of auditors Rights and powers of auditors, duties of an
auditor, auditing branch office accounts, special audit, cost audit, questions,
Learning Objectives:
From discussing this chapter we will know the company’s accounts and audit
auditing is the most important part of any company. We can know the existence of
auditor of the company and his position. An auditor has the power and duties to
control the company. He is appointed by the companies Act 1965.
Signature of audit report, etc.—
Only the person appointed as auditor of the company, or where a firm is so
appointed in pursuance of the proviso to sub-section (1) of section 226, only a
partner in the firm practicing in India, may sign the auditor’s report, or sign or
authenticate any other document of the company required by law to be signed or
authenticated by the auditor.
Reading and inspection of auditor’s report—
The auditor’s report shall be read before the company in general meeting and shall
be open to inspection by any member of the company.
Company Laws & secretarial practices. 56
Right of auditor to attend general meeting—
All notices of any other communications relating to, any general meeting of a
company which any member of the company is entitled to have sent to him shall
also be forwarded to the auditor of the company; and the auditor shall be entitled to
attend any general meeting and to be heard at any general meeting which he
attends on any part of the business which concerns him as auditor.
Pena1ty for non-compliance with sections 225 to 231—
If default is made by a company in complying with any of the provisions contained
in sections 225 to 231, the company, and every officer of the company who is in
default, shall be punishable with fine which may extend to [five thousand rupees].
Penalty for non-compliance by auditor with sections 227 and 229—
If any auditor’s report is made, or any document of the company is signed or
authenticated, otherwise than in conformity with the requirements of sections 227
and 229, the auditor concerned, and the person, if any, other than the auditor who
signs the report or signs or authenticates the document, shall, if the default is
willful, be punishable with fine which may extend to
[ten thousand rupees].
Special Auditor:
The chartered accountant or the company’s auditor appointed under sub- section
(1) to conduct a special audit as afore said is hereafter in this section referred to as
the special auditor.
Company Laws & secretarial practices. 57
Power of Central Government to direct special audit in certain cases
Power of Central Government to direct special audit in certain cases.—
(1) Where the Central Government is of the opinion—
(a) that the affairs of any company are not being managed in accordance with
sound business principles or prudent commercial practices; or
(b) that any company is being managed in a manner likely to cause serious
injury or damage to the interest of the trade, industry or business to which it
pertains; or
(c) that the financial position of any company is such as to endanger its
solvency,
the Central Government may at any time by order direct that a special audit of
the company’s accounts for such period or periods as may be specified in the
order, shall be conducted and may by the same or a different order appoint
either a chartered accountant as defined in clause (b) of sub-section (1) of
section 2 of the Chartered Accountants Act, 1949 (38 of 1949) (whether or not
such chartered accountant is a chartered accountant in practice within the
meaning of that Act), or the company’s auditor himself to conduct such special
audit.
[Section – 233 A (2)]
(2) Powers and duties of Special auditor:
special auditor shall have the same powers and duties in relation to the special
audit as an auditor of a company has under section 227:
Provided that the special auditor shall, instead of making his report to the
members of the company, make the same to the Central Government.
Company Laws & secretarial practices. 58
(3) Report by special auditor:
This report shall be include all the matters required to be included in an
auditor’s report under section 227 and, if the Central Government so directs,
shall also include a statement on any other matter which may be referred to
him by that Government.
(4) Expenses of special audit:
The expenses of, and incidental to, any special audit under this section
including the remuneration of the special auditor) shall be determined by the
Central Government (which determination shall be final) and paid by the
company and in default of such payment shall be recoverable from the
company as an arrear of revenue.]
(5) Action on the report:
On receipt of the report of the special auditor, the Central Government may
take such action on the report as it considers necessary in accordance with the
provisions of this Act or any other law for the time being in force:
Provided that if the Central Government does not take any action on the report
within four months from the date of its receipt, that Government shall send to
the company either a copy of, or relevant extract from, the report with its
comments thereon and require the company either to circulate that copy or
those extracts to the members or to have such copy or extracts read before the
company at its next general meeting.
[Section – 233 A (7)]
Company Laws & secretarial practices. 59
Books of Account to be kept by a CompanyEvery company must maintain proper books of accounts of its affairs. The following transactions must be entered in the books of accounts of the company which must be kept at its registered office :-
a. all sums of money received and expended by the company and the matters in respect of which the respect of which the receipt and expenditure took place;
b. all sales and purchases of goods by the company; and c. the assets and liabilities of the company. d. in the case of a company engaged in production, processing,
manufacturing or mining activities, such particulars relating to utilisation of material or other items of cost as may be prescribed relating to certain class of companies as the Central Government may require.
The books of accounts must comply with the following conditions :-
1. The books must give a true and fair view of the state of affairs of the company or the branch office, if any, and explain its transaction.
2. The books must be kept on accrual basis and according to double entry system of accounting.
Every company must keep its books of account at its registered office. However, some of the books of account may be kept at such other place in India as the Board of Directors may decide, provided a notice in writing giving full address of that other place alongwith requisite filing fee is filed with the Registrar of Companies within seven of such decision.
If the company has a branch office, the books of account relating to transactions at the branch office may be kept at that branch office, but proper summarised reports and statements must be sent to the registered office or such other place where the books are kept, at intervals of not more than three months. The books of account of the branch must give a true and fair view of the affairs of the branch and clearly explain its transactions.
Company Laws & secretarial practices. 60
They must not conceal any transaction and also not disclose any transaction which is fictitious. The books of accounts and other documents and records are open to inspection by any director during business hours. Similarly, they are open to inspection by the Registrar of Companies or an officer authorised by the Central Government.
These books and papers together with the vouchers pertaining to entries made must be maintained for at least 8 years. It has been clarified by the Department of Company Affairs in their Circular No. 2/83 dated 2/3/1983 that the books of account should be prepared and maintained in indelible ink (and not in pencil).
The following persons are responsible for maintaining the books of accounts of a company :-
1. The managing director or manager; 2. If the company has neither a managing director nor
manager, then every director of the company; 3. Every officer and other employee who has been authorised
and to whom responsibility to maintain the books has been alloted by the Board of Directors.
If any of the persons referred to above fails to take all reasonable steps to maintain proper books of accounts or has by his own willful act been the cause of any default by the company in this respect, he is punishable with imprisonment up to six months or with fine which may extend to Rs. 1,000 or with both. However, no person can be sentenced to imprisonment unless it is proved that the contravention was committed by him wilfully.
Preparation of Balance Sheet and Profit and Loss AccountThe company has to prepare its balance sheet and profit & loss account from the books of account maintained by it. Every Balance Sheet of a company must give a true and fair view of the state of affairs of the company as at the end of the financial year and must be in the prescribed format.
If the responsible for maintaining proper books of account fails to take all reasonable steps to secure compliance by the company
Company Laws & secretarial practices. 61
with the requirement of law relating to the form and contents of the balance sheet, he is liable for each offence to imprisonment for a term extending up to six months or to fine up to Rs.1,000/- or to both.
Form of Balance Sheet,Part 1 to Schedule VI of the Companies Act, 1956 gives the format in which the balance sheet is to be prepared. The schedule specifies 2 types of formats, the horizontal format and the vertical format. A company can prepare its balance sheet in either of the 2 formats. In the horizontal format, the liabilities including the share capital are placed on the left side and assets of all types on the right. The main heads in this form are arranged as under:
(a)
Share Capital (a) Fixed assets
(b)
Reserves and surplus (b) Investments
(c)
Loans (c) Current assets, loans and advances
(d)
Current liabilities and (d) Miscellaneous expenditure to the provisions extent not written off or adjusted
(e)
Profit & Loss Account
----------- -----------
Total
----------- -----------
In the vertical format, the various heads of liabilities and assets are arranged vertically and current liabilities are shown as deduction, from current assets. Whatever information which is required to be given in the horizontal format must also be given in the vertical format. Summarised prescribed vertical form of balance sheet is given below:
Company Laws & secretarial practices. 62
I. Sources of Funds
(1)
Shareholders' funds
(2)
Loan funds
----------------------
Total
----------------------
II Application of Funds
(1)
Fixed assets
(2)
Investments
(3)
Current assets, loans and advances
Less: Current liabilities & provisions
(4)
(a) Miscellaneous expenditure to the extent not written off or adjusted
(b) Profit & Loss Account
----------------------
Total ----------------------
The Central Government may, on the application or with the consent of the Board of Directors of the company, by order, modify in relation to that company, any of the requirements as to matters to be stated in the company's balance sheet or profit and
Company Laws & secretarial practices. 63
loss account for adapting them to the circumstances of the company.
Circulation of Balance Sheet and Auditors' ReportA copy of every balance sheet, profit and loss account, auditors' report and every other document required to be annexed or attached to the balance sheet must be sent not less than twenty-one days before the general meeting to every member, to every trustee for debenture holders, and to all other persons who are entitled to have a notice of general meetings. In the case of a company not having a share capital, the above documents need not be sent to a member, or debenture holder who is not entitled to have notice of general meetings.
In case of listed companies, the company may keep the aforesaid documents available for inspection at its registered office during working hours for a period of twenty-one days before the meeting and send to every member and trustee for debentureholders only a summarised statement containing the salient features of these documents in the prescribed format.
Auditors of Company
Auditors of Government CompaniesThe auditor of a Government company is appointed or re-appointed by the Central Government on the advice of the Comptroller and Auditor-General of India provided that the audit would be within the number of acceptable audits available to each auditor.
The Comptroller & Auditor General of India has the power :-
a. to direct the manner in which the company's accounts are to be be audited by the auditor so appointed and to give such auditor instructions in regard to any matter relating to the performance of his functions as such
b. to conduct supplementary or test audit of the company's accounts by such person or persons or persons as he may authorise in this behalf; and for the purpose of such audit, to require additional information to be furnished to any person
Company Laws & secretarial practices. 64
or persons so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General may, by general or special order, direct.
The auditor must submit a copy of his audit report to the Comptroller and Auditor-General of India who shall have the right to comment upon or supplement, the audit report in such manner as he may think fit.
Any such comments upon, or supplement to, the audit report must be placed before the annual general meeting of the company at the same time and in the same manner as the auditors' report.
Auditors of Other CompaniesIt is the duty of the auditor conduct the audit of the books of accounts of the company and to make his report to the members of the company on the accounts examined by him, and on every balance sheet, every profit and loss account and on every other document declared by the Act to be part of or annexed to the balance-sheet or profit and loss account and laid before the company in general meeting during his tenure of office. The auditor’s report, besides other things necessary in any particular case, must expressly state-
1. whether, in his opinion and to the best of his information and according to explanation given to him, the accounts give the information required by the Act and in the manner as required;
2. whether the balance-sheet gives a true and fair view of the company's affairs as at the end of the financial year and the profit and loss account gives a true and fair view of the profit or loss for the financial year;
3. whether he has obtained all the information and explanations required by him for the purposes of his audit;
4. whether in his opinion, the profit & loss account and balance sheet refered to in his report comply with the accounting standards recommended by the Institute of Chartered Accountants of India;
Company Laws & secretarial practices. 65
5. whether, in his opinion, proper books of account as required by law have been kept by the company, and proper returns for the purposes of his audit have been received from the branches not visited by him;
6. whether the company's balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns.
In case any of the above matters is answered in the negative or with a qualification, the auditor's report must state the reason for the same. Where the auditor is unable to express any opinion in answer to a particular question, his report shall indicate such fact together with the reasons why it is not possible for him to give an answer to such question.
The Central Government is empowered to issue orders requiring the auditor to include in his report a statement on such matters as may be specified. In exercise of this power the Central Government has issued an order called "The Manufacturing and other Companies (Auditor's Report) Order, 1975. It is the duty of the auditor to comply with this order when making his report to the shareholders.
Only the person appointed as auditor of the company or where a firm of auditors is so appointed, only a partner of that the firm practising in India, can sign the auditor's report or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.
==========================================================================
Inter Corporate Loans and Investments
A company cannot :-
i. make any loan to any other body corporate ii. give guarantee or security in connection with any loan made
by any person to another body corporate
Company Laws & secretarial practices. 66
iii. acquire, by subscription, purchase or in any other manner, securities in any other body corporate
exceeding 60 % of its paid up share capital and free reserves or 100 % of its free reserves, whichever is more, unless approved by a special resolution passed at a general meeting of members.
The Board of the company may give a guarantee without being previously authorised by a special resolution of members if all the following conditions are satisfied :-
i. a Board resolution is passed to this effect ii. there exist exceptional circumstances which prevent the
company from obtaining previous authorisation by special resolution
iii. the Board resolution is confirmed within 12 months in a general meeting or its next Annual general meeting, whichever is earlier.
Notice of such resolution must clearly indicate the specific limits, the particulars of the body corporate in which the investment / loan / guarantee / security is proposed, the purpose of the investment / loan / guarantee / security, sources of funding, etc.
No investment / loan / guarantee / security may be made or given unless the Board resolution sanctioning it is with the consent of all directors present at the meeting and prior approval of the public financial institution ( if any term loan is outstanding ) is obtained.
Approval of the public financial institution is not required if the investment / loan / guarantee / security is with the 60 % limit as mentioned above and there has been no default in repaying the term loan and / or interest thereon.
No loan can be made at a rate of interest lower than the bank rate prescribed by the Reserve Bank of India.
A company which has defaulted in repaying public fixed deposits cannot make or give any investment / loan / guarantee / security
Company Laws & secretarial practices. 67
unless the fixed deposit is fully repaid along with interest due as per the terms and conditions of the fixed deposit.
A register of such inter-corporate loans and investments must be maintained giving the relevant details.
The above provisions do not apply to :-
i. Any loan / guarantee / security made or given by :-
a. a banking company or an insurance company or a housing finance company in the ordinary course of its business or a company established with the object of financing industrial enterprises or providing infrastructural facilities
b. a company whose principal business is the acquisition of shares, stocks, debentures or other securities
c. a private company unless it is a subsidiary of a public company
ii. Investment made under Rights issue of securities iii. Loan made by holding company to its wholly subsidiary
company iv. Guarantee or security given by a holding company for loan
to its wholly owned subsidiary v. Acquisition of securities by a holding company in its wholly
owned subsidiary
Learning Objectives:
(1) Review of Audit
(2) Appointment of Auditors, Remuneration of Auditors.
(3) Special resolution with regard of auditor.
(4) Provisions as to resolution for appointing or removing auditors.
(5) Qualifications or disqualifications of auditors.
Company Laws & secretarial practices. 68
The Companies Act makes it compulsory for every company to have its accounts audited by qualified auditors. The desirability of this provision can be based on the fact that shareholders who contribute the capital of the company leave its management and control in the hands of directors.
Review Question:
Multiple Choice Questions:
(1) The company is obliged to arrange its books of accounting to be audited
under sec. _______
(a) 183(3) (b) 184(3)
(c) 183(2) (d) 184(1)
Answer: (a) 183(3)
(2) Auditors are safeguard of whom?
(a) Manager (b) Owner of the company
(c) Shareholders (d) All of the above
Answer: (c) Shareholders
(3) What is the qualification act relating to company auditor?
(a) 227(1) (b) 224(6)
(c) 226(1) (d) 226(4)
Answer: (c) 226(1)
(4) Who of the following can’t be an auditor of a company?
(a) a body corporate (b) a person who is a partner
(c) an officer or employee of the company
(d) All of the above
Answer: (d) All of the above
Company Laws & secretarial practices. 69
(5) The first auditor or auditors of company shall be appointed by the board of
directors within _______
(a) one month (b) two months
(c) three months (d) four months
Answer: one month
(6) Casual vacancy is under section ______
(a) 224 (b) 225
(c) 224(6) (d) 225(7)
Answer: (c) 224(6)
(7) In which meeting the appointment of auditors is made?
(a) extra ordinary general meeting
(b) annual general meeting
(c) statutory meeting
(d) meeting of board of directors
Answer: (b) annual general meeting
(8) Which of the following may be the remuneration of an auditor?
(a) by the board or Central Government
(b) by the company in general meeting
(c) all of the above
(d) none of the above
Answer: (c) all of the above
(9) In which meeting the removal of an auditor made?
(a) annual general meeting (b) extraordinary general meeting
(c) statutory meeting (d) none of the above
Answer: (a) annual general meeting
Company Laws & secretarial practices. 70
(10) An auditor who is appointed must give notice of his appointment to the
registrar within how many days?
(a) 30 days (b) 60 days
(c) 15 days (d) 10 days
Answer: (a) 30 days
(11) Does auditor any power to audited any branch office of his company?
a) No b) Yes
c) a+b d) None
Ans: b
(12) What duties are performed by an auditor?
a) Legal duties b) Illegal duties
c) Original duties d) Statutory duties
Ans: d
(13) Does an auditor any right to claim remuneration?
a) Yes b) No
c) May be d) None
Ans: a
Company Laws & secretarial practices. 71
(14) In which matter exemption of branch audit is occurred?
a) The availability at a reasonable cost of a branch auditor.
b) Under the circumstances of special audit.
c) Under the circumstances of cost audit.
d) None
Ans: a
(15) Who signs the report the document shall, the default is will fal?
a) Reporter
b) Auditor
c) Company
d) Any member
Ans: b) Auditor
(16) Who can appoint the special auditor?
a) The chartered Accountant
b) The Company’s Auditor
c) Company
d) both a+b
Ans: (d)
Company Laws & secretarial practices. 72
(17) Have any Power & duties of special auditor?
a) Yes
b) No
c) May be
d) None of the se
Ans: (a) Yes.
True/ False(1) The companies act makes it compulsory for every company to have its
accounts audited by qualified auditors.
Answer: True
(2) It is not compulsory for every company to have its accounts audited by
auditors.
Answer: False
(3) A chartered accountant can’t be an auditor.
Answer: True
(4) A body corporate hall be qualified for appointment as an auditor.
Answer: False
(5) Where casual vacancy is caused by the registration of an auditor, it shall
only be filled by the company in general meeting.
Answer: True
(6) The first auditor or auditors of company shall be appointed by the board of
directors.
Company Laws & secretarial practices. 73
Answer: True
(7) Reappointment of retiring auditors relating to the Sec. 226(1)
Answer: False
(8) The company have to inform the central government within 7 days, if it
fails to appoint auditors at an annual general meeting.
Answer: False
(9) An officer or employee of the company shall be qualified for appointment
as auditor.
Answer: False
(10) A public financial institution or a government company is under the special
resolution of auditor.
Answer: True
(11) The branch auditor shall prepare a report.
Ans: True
(12) The auditor has might of access to books of accounts.
Ans: True
(13) The auditor has no right of lien.
Ans: False
(14) The auditor has no powers and duties of branch auditor.
Ans: False
(15) The auditor has right to visit branches.
Ans: True
Short Question1. What are the qualifications of a company auditor?
Company Laws & secretarial practices. 74
2. What are the disqualifications of a company auditor?
3. Describe the remuneration process of auditors?
4. Examine the provisions for the appointment and/or reappointment of the
auditors by:
(i) A new company-appointment of first auditors.
(ii) A public company where public financial institutions/ government etc.
hold not less than twenty-five per cent of the subscribed capital.
(iii) Government companies.
5. What are the provisions of the companies Act relating to the power of an
auditor of a company?
6. What do u mean by auditing Branch office Accounts.
7. Discuss the duties of an auditor under the two heads
8. “An auditor must report all material facts and points to the share holders” –
Do you agree?
9. “An auditor is a watchdog, not a blood-hound.” – explain it.
10. Who is the special auditor?
11. What the performance of special auditor? Explain it.
12. Who is the cost auditor?
13. What are the functions of cost auditor? Mention it.
14. What are the power and duties of cost auditor?
15. What is the qualifications of the cost auditor?
16. What will be the punishment it default is made in complying with the
provisions of this section?
Broad Question1. What are the provisions of the companies act relating to the qualifications,
appointment, remuneration of auditors?
2. What are the provisions as to resolutions for appointing or removing
auditors?
Company Laws & secretarial practices. 75
3. When auditor not to be appointed except with the approval of the company
by special resolution? State the cases.
4. What are the qualifications and disqualifications of auditors? Describe with
certain laws.
5. Does an auditor any power of a company? Mention it.
6. “An auditor has a right of access at all times to the books and accounts and
vouchers of the branch office” – Do you agree with this statement?
7. Under Companies Act what duties are performed by the auditors?
8. Explain the companies Act in respect of auditing of accounts of a branch
office of a company.
9. “An auditor not only owes a duty of protecting shareholders but also owes a
duty of care even to a non-member” – Explain it.
10. State under what circumstances in which class of companies may be
conducted under the companies (Amendment)
11. State under circumstances by whom cost audit may be conducted under the
companies (Amendment) Act, 1965.
12. Under what circumstances maybe central Government direct special audit
of a company’s accounts?
13. How is the report of a special auditor dealt with? Explain it .
Reference
Company Laws & secretarial practices. 76
1) Soft Copy of course teacher.
2) Wikipeadia.
3) Company law – Ashok K. Bagrial.
4) Fundamentals of company law - A.I. Khan.
Company Laws & secretarial practices. 77
