This document provides an overview of compliance with legal requirements for auditing in Pakistan. It covers the authority for appointing and removing statutory auditors, the procedures for appointment and removal, the powers and duties of statutory auditors, qualifications and disqualifications for the role, and requirements for auditing cost accounting records. The key points are:
- Appointment of first auditor is by directors, subsequent auditors are appointed by members at the AGM. SECP appoints if they fail to.
- Removal of auditors requires notice and they have rights to make representations.
- Statutory auditors have rights to access documents and require information from the company. Their duties include reporting on financial statements and
1. Auditing – Study Notes Chapter 6 Compliance with Legal Requirements
CHAPTER SIX
COMPLIANCE WITH LEGAL
REQUIREMENTS
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Coverage from Question Bank:
After completion of this chapter, you will be able to attempt following questions in ICAP's Question
Bank (edition 2015):
Question # in ICAP’s
Question Bank
Type of Question
Question # in ICAP’s Question
Bank
Type of Question
Q. # 76b (ISA 620…..) Concept Review Question Q. # 19 (Companies Ordinance 1984) Case Study
Q. # 7 (Zaman and Bilal) Case Study Q. # 24 (Fruit and nuts) Case Study
Q. # 15 (Alpha) Case Study
1 By: Muhammad Asif, ACA
2. Auditing – Study Notes Chapter 6 Compliance with Legal Requirements
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Appointment of Auditor:
Appointment of first auditor:
1. First auditor is appointed by Directors within 60 days of incorporation.
2. If directors fail to appoint first auditor, Company (i.e. Members) will appoint the auditor within
120 days of incorporation.
3. If first auditor is not appointed by directors and members, SECP will appoint the first auditor
after 120 days of incorporation.
Appointment of subsequent auditor:
1. Subsequent Auditor is appointed by Company (i.e. by members) at each AGM.
2. If members do not appoint auditor at an Annual General Meeting, Commission (i.e. SECP)
will appoint the subsequent auditor.
Appointment in case of casual vacancy:
1. If casual vacancy (i.e. death or disqualification or resignation of auditor during audit) arises,
directors have authority to appoint auditor to fill casual vacancy within 30 days of its
occurrence.
2. If directors do not fill casual vacancy within 30 days (and there are no surviving or
continuing auditors), SECP has authority to appoint auditor to fill casual vacancy.
Appointment in case of mid-term removal of auditor:
If auditor is removed by members before expiry of his term, vacancy is filled by SECP (and not by
members).
Tenure/Term of Auditor:
Tenure of auditor appointed in each case is from date of appointment till the conclusion of next
AGM. At each AGM, existing auditor is retired/removed and fresh appointment is made for next
term (either for same auditor or for another auditor).
Mid-Term Removal of Auditor: (i.e. removal before expiry of tenure)
Removal of First Auditor:
First auditor (which is appointed by directors) may be removed by members in a general meeting
provided:
a member has nominated another auditor, and
notice of nomination has been sent to company atleast 14 days before general meeting.
Removal of Subsequent Auditor:
An auditor appointed at AGM can be removed by members only through Special Resolution. If
removed, company shall inform SECP within one week of removal, because authority to fill vacancy
in such case rests with SECP and not with company.
Remuneration of Auditor:
Remuneration of auditor shall be fixed by appointing authority i.e.
by SECP (if appointment is made by SECP), or
by Directors (if appointment is made by directors) or
by Company (in all other cases) in general meeting or in such manner as the general
meeting may determine.
2 By: Muhammad Asif, ACA
3. Auditing – Study Notes Chapter 6 Compliance with Legal Requirements
CONCEPT REVIEW QUESTION
State the circumstances in which the auditors may be appointed by the directors and by the
members of a company. (03 marks)
(ICAEW – December 2001, Amended)
How the remuneration of the auditor is fixed under section 252(8) of the Companies Ordinance,
1984? (02 marks)
(ICMAP - 2013 September )
Can auditor of a listed company be removed during the term of his office? (02 marks)
(CA Inter -Spring 2002)
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Legal Procedure for Removal/Appointment/Change of Statutory Auditor at AGM:
1. A member shall send a notice to company to appoint another auditor at AGM for the next
period. Such notices shall be sent atleast 14 days before AGM.
2. Company shall send copy of notice:
a. to retiring and nominated auditor immediately
b. to members atleast 7 days before AGM.
c. to publish in 1 English and 1 Urdu news paper having circulation in province where
relevant stock exchange is situated (in case of listed company only).
3. Retiring auditor has a right to make a representation in writing to company.
If a representation in writing is made by retiring auditor:
a. Company shall send a copy of such representation to every member whom notice of
meeting is sent.
b. If representation is not sent as aforesaid (e.g. because it was too late or because of
default of company), retiring auditor may require that representation shall be read-
out in meeting. ***
4. Nominated auditors perform their acceptance and continuance procedures before AGM, and
if willing, communicate their willingness to company.
5. At AGM, members will pass a resolution to appoint an auditor from willing auditors.
6. Company shall also inform Registrar within 14 days of appointment/removal of auditor
alongwith consent of appointed auditor.
*** However, it is not necessary for company to circularize representation given by auditor if Registrar
is satisfied, on application of company or other aggrieved person, that this right is being misused to
obtain needless publicity or for defamatory purpose.
Ethical Responsibilities when there is change of auditor:
Responsibilities of Incoming (Proposed/Successor) Auditor:
1. Incoming auditor shall send professional clearance letter to outgoing auditor to ensure that
incoming auditor knows and considers all relevant facts of client before making decision to
accept.
2. Incoming auditor shall obtain a copy of the Representation before acceptance (if made by
retiring auditor).
3. If predecessor auditor is removed during audit,
Incoming auditor should also inform ICAP about the offer of appointment.
3 By: Muhammad Asif, ACA
4. Auditing – Study Notes Chapter 6 Compliance with Legal Requirements
Incoming auditor should not accept offer of appointment without prior clearance from ICAP.
ICAP usually gives clearance within 15 days
Responsibilities of Outgoing (Existing/Predecessor) Auditor:
1. To maintain confidentiality (even after change of appointment).
2. To transfer all books and papers of client (to client or to incoming auditor if advised so by
client).
3. To reply promptly to incoming auditor’s Professional Clearance Letter.
4. Outgoing auditor will file with ICAP a copy of Representation (if made to members).
5. If predecessor auditor is removed during audit, he must immediately file with ICAP a
“Statement of Facts/Circumstances”.
CONCEPT REVIEW QUESTIONS
Describe the procedure for removal of auditor of a listed company as laid down in the Companies
Ordinance, 1984. (06 marks)
(CA Inter, Spring 2004)
Discuss an incoming auditor’s responsibilities when he has been appointed to replace the previous
auditor who had issued a qualified audit opinion. (03 marks)
(CA Inter -Autumn 2002)
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Statutory Powers/Rights of Auditor:
Rights during audit
1. Right of access to books of accounts and supporting documents/papers (whether kept at
registered office or elsewhere). If a company has branch office outside Pakistan, it will be
sufficient if auditor is allowed access to copies or extracts of books and papers transmitted
to principal office in Pakistan.
2. Right to require information and explanation from directors and company (which is
necessary to perform auditor’s duties).
3. Right to receive notices of general meetings.
4. Right to attend general meetings. However, in case of listed companies, auditor (or his
representative) is required to attend general meeting at which financial statements and
auditor’s report are to be considered.
5. Right to speak at general meetings on audit related matters.
Rights on removal:
1. Right to receive notice of removal.
2. Right to make a representation in writing to company.
3. Right to have representation circulated to all members of the company or to be read-out at
general meeting.
4. Right to receive notices of general meetings, attend general meetings and speak at general
meetings at which he is being removed.
Statutory Duties of Auditor:
The auditor shall make a report to the members of the company which shall state:
1. whether or not they have obtained all the information and explanations which to the best of
their knowledge and belief were necessary for the purposes of the audit;
4 By: Muhammad Asif, ACA
5. Auditing – Study Notes Chapter 6 Compliance with Legal Requirements
2. whether or not in their opinion, proper books of accounts have been kept by the company
as required by the Companies Ordinance, 1984
3. whether or not in their opinion,
(i) the balance sheet and profit and loss account together with the notes thereon have
been drawn up in conformity with the Companies Ordinance, 1984, and are in agreement
with the books of accounts and are further in accordance with accounting policies
consistently applied;
(ii) the expenditure incurred during the year was for the purpose of the company’s
business; and
(iii) the business conducted, investments made and the expenditure incurred during the
year were in accordance with the objects of the company;
4. whether or not in their opinion and to the best of their information and according to the
explanations given to them, the balance sheet, profit and loss account, cash flow statement
and statement of changes in equity together with the notes forming part thereof conform
with approved accounting standards as applicable in Pakistan, and, give the information
required by the Companies Ordinance, 1984, in the manner so required and respectively
give a true and fair view of the state of the company’s affairs as at June 30, 2015 and of the
profit (or loss), its cash flows and changes in equity for the year then ended.
5. whether or not in their opinion, Zakat deductible at source under the Zakat and Ushr
Ordinance, 1980, was deducted by the company and deposited in the Central Zakat Fund
established under that Ordinance.
If any of the above matters is answered in “negative” or in “qualification”; auditor shall state its reason
with factual position in auditor’s report.
CONCEPT REVIEW QUESTION
What are the rights of an auditor under the Companies Ordinance, 1984? (06 marks)
(ICMA Pakistan, Summer 2003)
The Companies Acts confer certain rights on auditors during their term of office, as well as in
respect of their removal or resignation from office.
Set out the statutory rights in relation to their client that auditors have during their term of office.
(03 marks)
(ICAEW - 2001 June)
Certain rights are conferred on auditors by the Companies Acts when it is proposed to remove them
from office.
State the rights the auditor has in these circumstances. (02 marks)
(ICAEW - 2003 March)
Your firm has received notice from Dalmation plc (Dalmation), a listed company, that it will not be
re-appointed as external auditor when its term of office expires as the audit committee of
Dalmation has recommended the appointment of another firm.
Set out the rights and responsibilities of your firm relating to the change in appointment.
(03 marks)
(ICAEW – June 2009)
5 By: Muhammad Asif, ACA
6. Auditing – Study Notes Chapter 6 Compliance with Legal Requirements
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Annual audit is required for all types of companies. There is no exemption in Pakistan for any
company whether public or private and whether small or large.
Qualification Criteria:
Audit of:
a Public Company, or
a Private company which is subsidiary of a public company, or
a private company with paid up capital of Rs. 3 million or more
, shall be conducted by:
A Chartered Accountant (as per Chartered Accountants Ordinance, 1961)or
A firm of Chartered Accountants (provided all partners of firm are chartered accountants)
For other companies, audit is required but qualification is not prescribed by law. However, such
auditor shall still comply disqualification criteria.
Disqualification Criteria:
Following persons are disqualified for appointment as auditor in a company:
1. If a person (i.e. sole-practitioner or any partner in a firm) or his spouse or minor child holds
shares in the company or any of its associated company. However, if such a person holds
shares at time of appointment, he can be appointed if he discloses the fact at time of
appointment and disposes shares within 90 days of appointment.
2. If a person is indebted to the company.
However following are not considered debt in this regard:
a. sum payable to a credit card issuer not exceeding Rs. 500,000.
b. sum payable to a utility company not exceeding period of 90 days.
3. If a person is or was an employee (or officer or director) of the company in last 3 years.
4. If a person is a partner or employee of an employee (or officer or director)of the company.
5. If a person is Spouse of a director.
6. If a person is a Body corporate.
If a person is disqualified for a company, he is also disqualified for its subsidiaries, its holding, and
holding’s other subsidiaries.
CONCEPT REVIEW QUESTION
Under the Companies Ordinance, 1984 which persons are not qualified for appointment as auditors
of companies? (05 marks)
(CA Inter, Autumn 2003)
Exam Tips
1. All conditions of disqualification apply at time of appointment as well as during
term of appointment.
2. Appointment by firm’s name shall be appointment of all partners. Therefore, ALL
partners must comply qualification and disqualification criteria.
6 By: Muhammad Asif, ACA
7. Auditing – Study Notes Chapter 6 Compliance with Legal Requirements
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Cost Accounting Records:
A company engaged in production, processing, manufacturing or mining activities is required to
keep prescribed particulars relating to following cost accounting records:
1. Utilisation of Material or
2. Utilisation of Labour
3. Utilisation of Other inputs or items of cost.
Audit of Cost Accounting Records:
Where a company is required to keep Cost Accounting records, Federal Govt. may direct that an audit
of cost accounts of the company shall be conducted in the manner as may be specified in the order.
Audit of cost accounts shall be conducted by an auditor who is a:
chartered accountant within the meaning of the Chartered Accountant Ordinance, 1961, or
a cost and management accountant within the meaning of the Cost and Management
Accountants Act, 1966.
Such auditor shall have the same powers and duties as a statutory auditor of the company and such
other powers and duties as may be prescribed.
7 By: Muhammad Asif, ACA
8. Auditing – Case Studies Chapter 6 Compliance with Legal Requirements
CHAPTER SIX (CASE STUDIES)
COMPLIANCE WITH LEGAL
REQUIREMENTS
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Structure of the Case:
You may be given different short situations and requirement will be to comment on
appointment/qualification/independence of statutory auditor in each situation.
Suggested Approach to Answer:
Decide whether it is a situation of legal requirements or ethical requirements:
If words like “Companies Ordinance”, “Legal”, “Statutory” are used, apply legal provisions.
If words like “Code of Ethics”, “Ethical”, “Threats, Safeguards” are used apply ethical provisions.
If words “applicable rules and regulation” are used, apply legal provision if situation is
discussed in law. Otherwise, apply ethical provisions.
Remember: In exam, both (legal and ethical) regulations are not discussed in a single
situation.
If question relates to legal requirements:
1. There may be THREE issues involved in the case:
a. Whether appointment is made by appropriate authority.
b. Whether qualification criteria is complied.
c. Whether disqualification criteria is complied.
2. If appointment is not appropriate on more than one grounds, you will cover BOTH one by one.
3. Whatever is the case, do not reproduce provision of law; rather state your decision by directly
applying legal provisions to the facts of case. (this is because usually 2 or 3 marks only are
allocated to each case of statutory appointment in exam question)
If question relates to ethical requirements:
1. Identify and explain threat. If a situation involves more than one threats, you will describe all.
2. Discuss relevant safeguards which could be applied in the given situation to reduce threat(s).
1 By Muhammad Asif, ACA
9. Auditing – Case Studies Chapter 6 Compliance with Legal Requirements
Model Case Study From Examination Questions:
Case Study – First Example
Comment on each of the following situations with reference to the appointment of external auditors in accordance with
the requirements of the Companies Ordinance, 1984:
(a) Farrukh & Co., Chartered Accountants, has received an offer to be appointed as the external auditor of Ebrahim Gas
Company. The firm is indebted to the company as it has not paid the last two months’ bills amounting to Rs. 4,860.
(b) After seventy days of incorporation, the directors of Rahman Limited (RL) decided to appoint Mr. Shahid as the
company’s statutory auditor. Mr. Shahid was employed by RL before he started his own practice.
(c) The directors of Fazal Limited (FL) have decided to appoint Syed & Company, Chartered Accountants, as external
auditor of the company. One of the partner’s spouse holds 1,000 shares in the subsidiary of FL.
(d) The directors of Najam (Pvt.) Limited having paid-up capital of Rs. 4.5 million have appointed Mr. Dawood to act as the
external auditor of the company. Mr. Dawood has been awarded a diploma in International Financial Reporting Standards
by the Institute of Chartered Accountants of Pakistan and has completed the mandatory period of training from a leading
firm of chartered accountants.
(e) All directors of Hussain Associates (Pvt.) Limited are chartered accountants. The company has recently received an
offer for appointment as the external auditor of Masood (Pvt.) Limited which has a paid-up share capital of Rs. 1,000,000.
(10 marks)
(CA Inter, Spring 2010)
Suggested Solution:
Farrukh & Co. can be appointed as auditor of Ebrahim Gas Company because the firm is not indebted to the company as
the sum payable to utility company does not exceed period of 90 days.
(b)
As directors have not appointed first auditor within 60 days of incorporation, authority to appoint auditor rests with
members, and not with directors.
Mr. Shahid cannot be appointed as statutory auditor of RL because he has been an employee of the company in last three
years.
(c)
Subsequent auditor is appointed by Company (i.e. by members) and NOT by directors.
Syed & Company can be appointed as statutory auditor of FL only if:
Shareholding by spouse of partner in associated company of FL is disclosed at time of appointment, and
Shares are disposed within 90 days of appointment.
(d)
Subsequent auditor is appointed by Company (i.e. by members) and NOT by directors.
Mr. Dawood cannot be appointed as statutory auditor of Najam (Pvt.) Limited because audit of a company having paid up
capital of three million or more can be conducted only by a chartered accountant (within the meanings of CA Ordinance
1961). Appointment of a disqualified person as auditor is void, and vacancy in such shall be filled by SECP.
(e)
Hussain Associates (Pvt) Limited cannot be appointed as statutory auditor of any company because it (auditor) is a body
corporate and, therefore, is disqualified.
2 By Muhammad Asif, ACA
10. Auditing – Case Studies Chapter 6 Compliance with Legal Requirements
Case Study – Second Example
Analyze the following independent situations with reference to qualification of statutory auditor:
(i) Mr. Zakir Ali, a practicing chartered accountant, has been offered appointment in Heera Limited as external auditor. He
was an employee of the company before he started his own practice.
(ii) Diamond Associates (Pvt) Limited, a consultancy company, the majority of whose directors are chartered accountants,
have been offered appointment as external auditor in Lal (Pvt) Limited whose share capital is less than Rs. 1.5 million.
(iii) Miss Fatima Khan, a practicing chartered accountant, has been offered appointment in Neelam Limited as external
auditor. She was an employee of the company’s director two months before the offer.
(iv) Mr. Farid Hussain is a partner of Farid & Company, Chartered Accountants. The firm has been offered appointment in
Feroza Limited as external auditor. Son of Mr. Farid holds shares of Feroza Limited. (08 marks)
(CA Inter, Autumn 2006)
Suggested Solution:
(i) Zakir Ali can be appointed as statutory auditor of Heera Limited only if three years have passed since he left the Heera
Limited.
(ii) Diamond Associates (Pvt) Limited cannot be appointed as statutory auditor of any company because it (auditor) is a
body corporate and, therefore, is disqualified.
(iii) Miss Fatima Khan can be appointed as statutory auditor of Neelam Limited because she is no more an employee of
director of Neelam Limited.
(iv) If son of partner is major:
Farid & Company can be appointed as statutory auditor of Feroza Limited because there is no violation of law if major son
of auditor holds shares in audit client.
If son of partner is minor:
Firm can be appointed as statutory auditor of Feroza Limited only if:
Shareholding of a minor son of partner in audit client is disclosed at the time of appointment, and
Share are disposed within 90 days of appointment.
Examiners’ Comments:
Legal provisions regarding appointment of statutory auditor is a topic regularly asked and was attempted fairly by most
students. The general deficiencies noted in the answers were as follows:
• The time lapse after which an ex-employee can become an external auditor was not mentioned.
• There were many examinees who said that a private limited company having paid up capital less than rupees three million
can appoint, even a body corporate, as its auditors.
• There was a general misconception that an ex-employee of a director also needs a time lapse of three years for appointment
as an external auditor.
• Very few students knew that if shares are held by the minor son of a person, he cannot accept appointment as an external
auditor. There is no such restriction if the son has attained the age of majority.
3 By Muhammad Asif, ACA