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Company Law Notes for Company Law Notes

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Accounts and Audit

Account

  • Typically, account means invoice or record of money paid or owed.
  • A detailed statement of all types of financial transaction.
  • A recording of monetary dealing
  • Keeping a ledger/ register relating financial transactions
  • Account book or ledger Balance sheet or financial statement.

Therefore account is a language of business expressed in monitory form. Account must give a true and fair view. Due to lack of such true and fairness Enron Company, world.com of USA, Satyam Computer of India, were collapsed. The movement of corporate governance in corporate law was started all over in 2006 AD.

Basically, there are 3 types of accountancy:

  • Financial Accountancy
  • Only the historical
  • Picture of financial position and performance
  • Reporting to external parties
  • Management Accountancy
  • Interpretation of financial account
  • Plan of action of certain presumption and analysis of future prospects.
  • Cost Accountancy
  • Measurement of efficiency of cost.
  • Cost of production and trading (recording)
  • The aim of cost accountancy is maximizing wealth and profit
  • Input and output cost
  • The ratio between input and output, e.g. depreciation cost of machine, house etc.

Preparation of Account:

  • “Preparation of account must be guided by the universally accepted accounting principle named GAAP (Generally Accepted Accounting Principles)
  • Because it gives the picture of trust worthy and reliable.

Accounting fundamental:

In course of preparation of account the following principles must be followed.

  • Ethic is core value of account. So, ethic must be shown in account preparation.
  • GAAP must be followed double entry book keeping system is applied in account in almost country.
  • The principles of corporate governance must not be ignored.
  • Legal provision must not be ignored,

Generally the users of accounting system are of 2 types;

1. Internal party

  • Management committee, Audit committee, Finance or planning Dept.

2. External party

  • Such as; shareholders, regulators

Objectives of Accountancy

  • To know the internal objective is fulfilling or not.

  • To find error and to detect fraud

Right of the shareholders relating to account

  • Right to inspect the account

Final account gives:

  • The income and expenditure statement (Financial statement or balance sheet)

  • Trade Account

  • Profit – loss account

  • Profit – loss appropriation

  • The level of application of accounting fundamentals (corporate governance and law)

Nepalese prospective

  1. Preparation of Account section 108
  2. Section 108(1) of Nepalese Company Act – language Nepali, English; Section 108(2) of Nepalese Company Act – system double entry book keeping ,reflection of actual affairs(true and fair), Section 108(3) of Nepalese Company Act – place to be kept the account book, Section108(4) of Nepalese Company Act – maintaining cash balance.

Liabilities relating to account

  1. Final responsibility is of directors or other officers (Section 108(5) of Nepalese Company Act)
  2. Board of directors must prepare annual financial statement and report of the board of directors Section 109 of Nepalese Company Act.

Audit

  • Account and Audit are the best instruments for maintaining financial ethic and transparency.
  • Corporate governance is depended upon the better accounting and auditing of companies.
  • Generally the term auditing is associated with detecting the fraud errors in account.
  • But widely speaking, Auditing validates honesty and fairness in financial statement or account and as whole in operational system.
  • Auditing provides a critical basis for management in taking decisions.
  • Auditing is an independent valuation of an organization.
  • So, presently the Auditing is not limited in financial data but Auditing examines the financial as well as operational system of an organization.
  • In course of Auditing an auditor involves in searching and verifying the accounting records as well as in examining other evidences which supports the financial and operational facts.
  • Auditing is more concerned with verification of accounting data with determining accuracy and reliability of accounting statement and reports.
  • Auditing is conducted by obtaining the internal and external data of organization, incepting documents, by observing enquires within and outside of organization and performing other necessary auditing procedures.
  • Auditing is essential for reduction of risk. Audited financial statements are the means by which business corporations’ reports their operating results and financial position.

As per the value of good corporate governance;

  1. Audits should be performed by individuals who are independent from the management and controlling shareholders of corporation being audited and are knowledgeable in auditing.
  2. Auditor’s should undertake auditing with sufficient information and devote sufficient time and efforts to the task.
  3. Auditors must not reveal, unless required by law, any confidential corporate information learned while auditing.

Therefore, an audit is the independent examination of financial information contained in financial statement of an entity, whether profit oriented or not, conducted with view of expressing an opinion.

Objectives of Audit:

1. Primary objectives

  • To determine whether financial statements have been prepared in conforming with GAAP or not
  • To verify that statements reflect true and fair financial position of business organization

2. Subsidiary objectives

  • detection and prevention of errors
  • Detection and prevention of fraud.

Types of Audit

1. Statutory Audit
Statutory audit is properly known as annual external audit. It checks financial statement as required by governing laws. It is a financial valuation conducted by external auditor. (Section 110 to 119 of Nepalese Company Act)

2. Internal Audit
It is a profession acting to achieve desired objectives of the organization.

Internal audit is carried out by utilizing a systematic methodology for analyzing the business process, purpose procedures and activities highlighting organization’s problem and recommending solution. Professional are called the internal auditors, who are employed by organization to perform the internal auditing activities

Here, professionals mean internal auditors who are employed by organizations to perform the internal auditing activities.

Internal Audit involves:

  • Efficiency of operation.
  • Reliability of financial reporting
  • Deterring and investigating frauds
  • Safeguarding assets
  • Compliance with laws and regulations

Internal Auditors are not merely concerned with the organizations financial controls. Their works include all of the organizations internal controls.

3. Cost Audit

  • It is an efficiency audit.
  • The Audit that concluded basically to find out the cost of any product or services. It measures the monetary value of goods and services.
  • It is conducted to find out machinery tools, equipment and other things.
  • The price is determined after the fair valuations of goods on the basis of materials used, labor consumed and resources used by it.

4. Social Audit

  • An outsider, who is a critical friend of a company, can be a social auditor of this company.

  • Such auditor will check the book and ask the probing questions to find out the effectively of organization’s internal operation and broad external impacts in society or community.

  • She/he needs not to be expert on accounting and having license of auditing.

  • Just s/he evaluates the organization’s social responsibility towards the society at large.

5. Legal Audit

  • Corporate governance and Auditing are correlated

  • Transparency, disclosure, good process, good decision-making etc. are fundamentals of corporate governance.

  • Good process denotes doing things according to the laws and best practices.

  • Legal audit is practiced by such corporate lawyer which examines the position of corporate governance status of entity.

The 19th century laid down the foundation of modern corporation. That is why, that was the ‘century of entrepreneurs’.

The 20th century was the ‘century of management’

Now, the 21st century promises to be the ‘century of corporate governance’.

Financial Audit, legal Audit and Social Audit help to promote the corporate governance.

Therefore, Auditing has a vital role to enforce the law, regulation, and principle of corporate governance.

Proper accounting and auditing is protection measure for security of every stakeholder of corporation.

Appointment of Auditor:

  • Auditor is appointed to safeguard the interest of shareholders and other stakeholders of company.
  • It is clear that auditing is an independent examination of financial and other operational information or descriptions of company. Therefore, an auditor must be appointed independently.
  • Only independent auditor can examine the accounting and other operational records in fair and true basis.
  • Fair and true view is the essence of auditing.
  • Section 110 of Nepalese Company Act – every company shall appoint an auditor.
  • It is suggested to read, Chapter – 8 (Sections 110 to 119) of Nepalese Company Act.

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