STATUTORY AND REGULATORY GUIDELINES OF AUDITING

STATUTORY AND REGULATORY GUIDELINES OF AUDITING

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CHAPTER OUTLINE

Introduction
Keeping Proper books of Accounts
Mandatory requirement to have accounts audited
Appointment of an Auditor
Auditor’s report
Duties and Powers of an Auditor
Auditor’s remuneration
Removal of an Auditor
Auditors’ right to attend company’s meetings
Supplementary provisions relating to Auditor
Resignation of an Auditor
Right of a resigning Auditors
Powers of Auditors in Relation to Subsidiaries.
Liability of auditors for negligence
False statement to Auditors

LEARNING OBJECTIVES

At the end of this paper, the students are expected to know and understand:

The meaning and importance of auditor’s appointment, qualification, rights, duties and power, removal and resignation.
All legal pronouncements relating to an Auditor would be understood.

INTRODUCTION:

Every Limited liability companies are expected to have their Books of Accounts examine by an Independent Auditor (External Auditor) who has no link whatsoever with the company in order to express his opinion on the Books of Account prepared by the management of the company.

KEEPING PROPER BOOKS OF ACCOUNTS

The keeping of proper books of accounts by every company is made obligatory by statute (S.331 of CAMA). Proper books of accounts are not deemed to have been kept unless they portray a true and fair view of the state of the company’s affairs, explain transactions and enable the preparation of the Statement of Comprehensive Income and the Statement of Financial Position.

The books of accounts must be open at all times to inspection by the directors, secretary and auditors of the company.

The books must generally contain a proper record of financial affairs of the company, changes in the financial position and with respect to the control of and accounting for all assets acquired. In particular, the books must show details of:

a. all sums received and expended, and matters in respect of which the receipts and expenditure took place;

b. all sales and purchases of property, goods and services; and

c. the company’s assets and liabilities and the interest of shareholders.

MANDATORY REQUIREMENT TO HAVE ACCOUNTS AUDITED

It is a mandatory requirement that, the auditor’s report must be attached to every company’s financial statements before they can be circulated to its members. It therefore implies that every company should have an auditor.

APPOINTMENT OF AN AUDITOR

The appointment of an Auditor is regulated by the Companies and Allied Matter Act 2004 (CAMA) which stated the procedures of appointing an External Auditor. Section 357 of Companies and Allied Matters Act 2004 stated the appointment of an external auditor as:

First Appointment:

Section 357 (5) provided that the Directors may appoint the first auditor before the company is to commence business and the auditor so appointed shall hold office to the first Annual General Meeting (AGM).

Subsection (5)a provided that the company at a general meeting can remove the Auditors appointed by the Directors and appoint any other auditors that any member has nominated for appointment provided the members are given not less than 14days notice of the nomination.

Subsection 5(b) stated that where the directors failed to appoint the first auditor, the company may summoned a general meeting for the purpose of appointing the first auditor.

Subsequent Appointments:

Section 357 of the Acts provided as follows concerning the appointment of an auditor.

S 357 (1) every company shall at an Annual General Meeting (AGM) appoint an auditors which shall hold office from the end of that AGM to the conclusion of the next AGM.

S 357 (2) stated that a retiring auditor at an AGM shall be re-appointed without passing any resolution unless:

He is not qualified from re-appointment
A resolution appointing someone else or expressly stating that he must not be re-appointed has been passed in the meeting.
The retiring auditor has given a notice in writing of his unwillingness to be re-appointed.

iii. If someone else apart from the retiring auditor is to be appointed, special notice of the resolution must be given and the notice must be communicated to the auditor who may make representation to the company.

iv. The Minister has powers to direct the Registrar of companies to appoint a person to fill the vacancy if at the Annual General Meeting no auditor is appointed and the retiring one is not re-appointed.

Casual Vacancy

S357 (3) provided that where no auditor is appointed at an AGM, the director may appoint someone to fill the vacancy. Where this happen S357 (4) stated that the company must notified the CAC of this appointment within one week.

S357(6) provided that the Directors may fill any casual vacancy in the office of the auditor but where any such vacancy continues, the surviving or continuing auditor may act.

WHO QUALIFIED TO BE AN AUDITOR?

Section 358 of Companies and Allied Matters Act 2004 spelt out the criteria for the qualification of an external auditor. According to this section a person will not be qualified to be appointed as an auditor if he is:

i. An officer or servant of the company.

ii. A person who is a partner of or in the employment of an officer or servant of the company.

iii. A person or firm who or which offers to the company professional advice in a consultancy capacity in respect of secretarial, taxation or financial management;

iv. A body corporate.

v. A person shall also not qualify for appointment as an auditor of a company if he is under subsection (6) of this section, disqualified for appointment as auditor of any other body corporate which is that company’s subsidiary or holding company or a subsidiary of that company’s holding company, or would be so disqualified if the body corporate were a company.

vii. A firm is qualified for appointment as auditor of a company if, but only if, all partners are qualified for appointment as auditor of it.

viii. S358 (5) state that no person shall act as auditor of a company when he knows that he is disqualified and if an auditor becomes disqualified during his tenure as auditor of a company he shall as soon as he became knowledge of that vacate the position and give a notice in writing of his vacation stating the reason for his action as disqualification.

AUDITOR’S REPORT

Section 359 provided that an auditor shall make a report to the members on the account examined by him. The report shall state the matters contained in the sixth schedule of the Acts. S359 (3) state that in addition to the report as stated in subsection 1, the auditor shall in the case of public company make a report to the audit committee.

DUTIES AND POWERS OF AN AUDITOR.

Section 360 (1) of the Companies and Allied Matters Act 2004 state that it is the duty of the auditor to make a report to carry out investigation that will help them form an opinion on matters such as whether:

i. Proper books of accounts have been kept by the company and Proper returns adequate for the purpose of the audit was obtained from branches not visited.

ii. The Company statement of financial position and income statement are in agreement with the accounts records and returns.

S360 (2) state that where the auditor is not satisfied concerning the above he must state that fact in his report.

S360 (3) stated that the auditor shall all right of access to the company’s books and accounts and also entitle to require from the office all information and explanation that he deemed fit to enable carry out his duties.

REMUNERATION OF AUDITORS

Section 361 of Companies and Allied Matters Act 2004, states that the remuneration of the auditors of a company may be:

In the case of an auditor appointed by the Directors, the remuneration may be fixed by the Directors or;
The remuneration shall be fixed by the company in the general meeting or in such a manner as the company in general meeting may determine.

The remuneration shall include sums paid by the company in respect of the auditor’s expenses.

REMOVAL OF AN AUDITOR

Section 362 subsection 1 of Companies and Allied Matters Act of 2004, provided that a company may by ordinary resolution remove an auditor before the expiration of his term of office, notwithstanding anything in any agreement between it and him. Where that occurred, subsection 2 provided that the company shall within fourteen (14) days give a notice to that effect to the Commission. Subsection 3 provided that the auditor so removed shall not be deprived of any entitlement in respect of the termination of his appointment.

AUDITORS’ RIGHT TO ATTEND COMPANY’S MEETINGS

Section 363 of the Companies and Allied Matter Acts 2004 gives the auditor right to attend the company’s meeting.

According to subsection 1, a company’s auditors shall be entitled to attend any general meeting of the company and to receive all notices of and other communications relating to any general meeting which a member of the company is entitled to receive and to be heard at any general meeting which they attend on any part of the business of the meeting which concerns them as auditor.

Subsection 2 provided that an auditor of a company who has been removed shall be entitled to attend‐

(a) The general meeting at which his term of office would otherwise have expired; and

(b) Any general meeting at which it is proposed to fill the vacancy caused by his removal, and to receive all notices of, and other communications relating to, any such meeting which any member of the company is entitled to receive, and to be heard at any such meeting which he attends on any part of the business of the meeting which concerns him as former auditor of the company.

SUPPLEMENTARY PROVISIONS RELATING TO AUDITORS

Section 364 of the Acts make some provisions relating to the auditors as follow:

(1) A special notice shall be required for a resolution at a general meeting of a company‐

(a) Appointing as auditor a person other than a retiring auditor; or

(b) Filling a casual vacancy in the office of auditor; or

(d) Removing an auditor before the expiration of his term of office.

(2) On receipt of notice of such an intended resolution as is mentioned in subsection (1), the company shall forthwith send a copy of it‐

(a) To the person proposed to be appointed or removed, as the case may be;

(b) In a case within subsection (1) (a) of this section, to the retiring auditors; and

(c) Where, in a case within subsection (1) (b) or (c) of this section, the casual vacancy was caused by the resignation of an auditor, to the auditor who resigned.

(3) Where notice is given of such a resolution as is mentioned in subsection (1) (a) or (d) of this section and the retiring auditor (or, as the case may be, the auditor proposed to be removed) makes with respect to the intended resolution 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 or has been sent.

(4) If a copy of any such representations is not sent out as required by subsection (3) of this section 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.

(5) 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 claiming to be aggrieved, the court is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter; and the court may order the company’s costs on the application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to the application.

RESIGNATION OF AN AUDITOR

Section 365 of the companies and allied matters Acts 2004 deals with issues that relates to the resignation of the auditors in a company.

Subsection 1 stated that an auditor of a company may resign his office by depositing a notice in writing to that effect at the company’s registered office and any such notice shall operate to bring his term of office to an end on the date of which the notice is deposited or such later date as may be specified in it.

Subsection 2 provided that an auditor’s notice of resignation shall not be effective unless it contains:

i. A statement that there are no circumstances connected with his resignation which he considered should be brought to the notice of the members or the creditors of the company.

ii. A statement of any of such circumstances.

Subsection 3 provided that where a notice under this section is deposited at a company’s registered office, the company shall within fourteen days send a copy of the notice:

To the commission and,
If the notice contained the statement under subsection 2(b), then the notice must be sent to every person who is entitled to be sent copies of the financial statement.

Subsection 4 provided that where a company or any person is are aggrieved after receiving a notice which contain a statement under subsection 2(b). Such person shall within 14 days that the company received the notice apply to the court for an order as stated in subsection 5.

According to subsection 5, where the court discovered that the auditor is using the notice of resignation to secure needless publicity for defamatory matter, it may, by order, direct that the copies of the notice need not be sent out: and it may further order the company’s costs on the application to be paid in whole or in part by the auditor even though he is not a part to the application.

Subsection 6 provided that the company shall, within fourteen days of the court’s decision, send to the persons mentioned in subsection (3) of this section:

i. If the court makes an order under subsection (5) of this section, a statement setting out the effect of the order.

ii. If not, a copy of the notice containing the statement under subsection (2) (b) of this section.

Subsection 7 state that if default is made in complying with the provisions of subsection (3) or (6) of this section, the company and every officer of it who is in default shall be guilty of an offence and liable to a daily default fine of N100.

RIGHTS OF A RESIGNING AUDITORS.

Section 366 of Companies and Allied Matters Act provide the right of resigning auditors’ requisition to company meeting.

(1) Where an auditor’s notice of resignation contains a statement under section 365 (2) (b) of this Act, there may be deposited with the notice a requisition signed by the auditor calling on the directors of the company forthwith duly to convene an extraordinary general meeting of the company for the purpose of receiving and considering such explanation of the circumstances connected with his resignation as he may wish to place before the meeting.

(2) Where an auditor’s notice of resignation contains such a statement, the auditor may request the company to circulate to its members before:

(a) The general meeting at which his term of office would otherwise have expired; or

(b) Any general meeting at which it is proposed to fill the vacancy caused by his resignation or convened on his requisition, a statement in writing (not exceeding a reasonable length) of the circumstances connected with his resignation.

(3) If a resigning auditor requests the circulation of a statement by virtue of subsection (2) of this section, the company shall (unless the statement is received by it too late for it to comply):

(a) In any notice of the meeting given to members of the company, state the fact of the statement having been made; and

(b) Send a copy of the statement to every member of the company to whom notice of the meeting is or has been sent.

(4) If the directors do not within 21 days from the date of the deposit of a requisition under this section proceed duly to convene a meeting for a day not more than 28 days after the date on which the notice convening the meeting is given, every director who fails to take all reasonable steps to secure that a meeting is convened as mentioned above shall be guilty of an offence and liable to a fine of N500.

(5) If a copy of the statement mentioned in subsection (2) of this section is not sent out as required by subsection (3) of this section because it was 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 statement shall be read out at the meeting.

(6) Copies of a statement need not be sent out and the statement 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 court is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter; and the court may order the company’s costs on such an application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to the application.

(7) An auditor who has resigned his office shall be entitled to attend any such meeting as is mentioned in subsection (2) (a) or (b) of this section and to receive all notices of and other communications relating to any such meeting which any member of the company is entitled to receive, and to be heard at any such meeting which concerns him as former auditor of the company.

POWERS OF AUDITORS IN RELATION TO SUBSIDIARIES.

Section 367 of the companies and allied matters act of 2004 states the powers of the auditors in relation to companies having subsidiaries as:

Subsection 1(a), if the subsidiary company is a body corporate that was incorporated in Nigeria, it is duty of the subsidiary company and its auditors to give the auditors of the holding company all the information and explanation required to enable them perform their duties as auditors of the holding company.

1 (b) stated that it shall be the duty of the holding company, if required by its auditors to do so, to take all such steps as are reasonably open to it to obtain from the subsidiary such information and explanation as are mentioned above.

Subsection 2 provided that if a subsidiary or holding company fails to comply with the provisions of subsection (1) of this section, the subsidiary or holding company, and every officer of it who is in default, shall be guilty of an offence and liable to a fine; and if an auditor fails without reasonable excuse to comply with paragraph (a) of the subsection, he shall be guilty of an offence and so liable.

LIABILITY OF AUDITORS FOR NEGLIGENCE

Section 368 of the Company and Allied Matters Act 2004 contain circumstances under which an auditor can incurred liability.

Subsection (1) stated that a company’s auditor shall in the performance of his duties, exercise all such care, diligence and skill as is reasonably necessary in each particular circumstance.

Subsection 2 state that where a company suffers loss or damage as a result of the failure of its auditor to discharge the fiduciary duty imposed on him by subsection (1) of this section, the auditor shall be liable for negligence and the directors may institute an action for negligence against him in the court.

According to subsection 3, if the directors fail to institute an action against the auditor under subsection (2) of this section, any member may do so after the expiration of 30 days’ notice to the company of his intention to institute such action.

FALSE STATEMENTS TO AUDITORS

Section 369 of the Companies and Allied Matters Acts 2004 pronounced sanctions for an act of making a false statement to the auditor.

Subsection 1 state that an officer of a company commits an offence if he knowingly or recklessly makes to a company’s auditors a statement (whether written or oral) which‐

(a) Conveys or purports to convey any information or explanation which the auditors require, or are entitled to require, as auditors of the company; and

(b) Is misleading, false or deceptive in a material particular.

Subsection 2 state that a person guilty of an offence under this section shall be liable to imprisonment for one year or to a fine of N500 or both.