Sub-sections (1A), (2), (3), (4) and (4A) of the Companies Act, 1956 specifies the duties of an auditor of a company in a quite comprehensive manner. It is noteworthy that scope of duties of an auditor has generally been extending over all these years. The Companies (Amendment) Act of 1965 introduced two sub-sections (1A) and (4A) in section 227 of the Act; the sub-sections are reproduced below :
“(1A) Without prejudice to the provisions of sub-section (1), the auditor shall enquire:
- 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 interests of the company or its members;
- whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company;
- where the company is not an investment company within the meaning of section 372 or a banking company, whether, so much of the assets of the company, as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;
- whether loans and advances made by the company have been shown as deposits;
- whether personal expenses have been charged to revenue account;
- 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 received in respect of such allotment, and if no 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.”
(4A) “The Central Government may, by general or special order, direct that, in the case of such class or description of companies as may be specified in the order, that auditor’s report shall also include a statement on such matters as may be specified therein : Provided that before making any such order, the Central Government may consult the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 in regard to the
class or description of companies and other ancillary matters proposed to be specified therein unless the Government decides that consultation is not necessary or expedient in the circumstances of the case.” It may be noted that sub-section (1A) is independent both of sub-section (1) which narrates the powers of auditors, and of sub-sections (2) and (3) which states the function and duties of the auditors. It is merely a directive to the auditor to make certain specific enquiries. In the circumstances, it would be presumed that the legislature by its introduction did not intend to extend the scope of audit report or its form generally. This view is strengthened by the introduction of sub-section (4A). It empowers the Central Government to extend the scope of the audit report in respect of a particular class or description of companies by requiring a statement on such matters as may be specified by the Central Government by a general or special order to be included there. The opinion of the Research Committee of the Institute of Chartered Accountants of India on section 227(1A) is reproduced below :
“The auditor is not required to report on the matters specified in sub-section (1A) unless he has any special comments to make on any of the items referred to therein. If he is satisfied as a result of the inquiries, he has no further duty to report that he is so satisfied. In such a case, the content of the Auditor’s Report will remain exactly the same as the auditor has to inquire and apply his mind to the information elicited by the enquiry, in deciding whether or not any reference needs to be made in his report. In our opinion, it is in this light that the auditor has to consider his duties under section 227(1A).” Therefore, it could be said that the effect of the introduction of sub-section (1A) is that the auditor should make a report to the members in case he finds answer to any of these matters in adverse. But he has to enquire into all the matters specified in the Order and report thereon.
