Legal requirements (revised practice set) - COMPLIANCE WITH LEGAL REQUIREMENTS

Auditing –Practice Set Chapter 6 Compliance with Legal Requirements
CHAPTER SIX
COMPLIANCE WITH LEGAL
REQUIREMENTS
QUESTIONS
CONCEPT REVIEW QUESTIONS
Q.1 Tawana (Pvt.) Limited (TPL) was incorporated on 10 July 2015 with a paid up capital of Rs. 5,000,000. TPL’s management
intends to appoint Mr. Fakhir as the first auditor of the company.
Under the provisions of the Companies Act, 2017 advise the directors:
(a) Whether Mr. Fakhir can be appointed as the first auditor of TPL. (01)
(b) Who may appoint the first auditor and fix their remuneration. Also state the time frame within which such auditor
may be appointed. (05)
(c) About the rights and duties of the auditors. (04)
(ICAP, CAF 03 Level – Autumn 2015, amended)
Q.2 Under the provisions of the Companies Act, 2017 explain the following:
(a) the rights/duties of an auditor with regard to the general meeting of the company. (04)
(b) how a casual vacancy in the office of the auditor may be filled. (3.5)
(c) provisions relating to the signing of an audit report. (2.5)
(ICAP, CAF 03 Level – Spring 2016)
Q.3 Mr. Khushkismat holds 10% shareholding in Basant Limited (BL), a company listed on Karachi Stock Exchange. He wants
to propose Mustaid and Company, Chartered Accountants to be the new auditors of BL in place of the retiring auditors.
Under the provisions of the Companies Act, 2017 explain the duty of Mr. Khushkismat and the company in respect of the
proposed appointment. Also explain the rights of the retiring auditor under the above circumstances. (10)
Q.4 State the provisions of Companies Act, 2017 for appointment of auditors in the following cases:
i) Subsequent auditors (03)
ii) No appointment (02)
(ICAP, CAF 09 Level – Autumn 1996)
Q.5 The external auditors are normally appointed by the shareholders at the annual general meeting (AGM) of the company.
State the exceptions to this rule. (03)
Q.6 Is it possible to remove an auditor of a company before completion of the term? (02)
Q.7 (a) Woodworks (Pvt.) Limited (WPL) was incorporated on 5 October 2016 with a paid up capital of Rs. 10 million. On 15
January 2017, the directors appointed Murad & Co., Chartered Accountants as first auditors of WPL.
Under the provisions of the Companies Act, 2017 briefly discuss:
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(i) the appointment of Murad & Co. as the first auditors of the Company. (03)
(ii) how the remuneration of the first auditors may be fixed. (02)
(b) Under the provisions of the Companies Act, 2017 explain the circumstances in which the Commission may appoint the
auditors of the Company. (05)
Q.8 You have been asked to send your consent to act as the auditor of a listed company in place of the auditor removed by the
company while their audit was in process. State briefly the course of action you are supposed to follow under the Code of
Ethics prescribed by the Institute of Chartered Accountants of Pakistan. (05)
Q.9 Your firm is the auditor of ABD Limited (ABDL). After the acquisition of majority shareholding in HG Motors (Private)
Limited (HGM), ABDL has decided to replace the existing auditors of HGM in the next annual general meeting and has
approached you for appointment as HGM’s auditors for the next year.
Required:
(a) In the light of the Companies Act, 2017 explain the procedures to be followed and formalities to be complied with for
appointment of your firm as the auditor of HGM. Also explain the rights of the existing auditors in this situation. (08)
(b) Explain the responsibilities of your firm and the existing auditors in the above situation under the Code of Ethics for
Chartered Accountants. (05)
Q.10 Explain the formalities to be completed by a company with the registrar of companies for the appointment, retirement,
removal and otherwise ceasing to hold office as an auditor.
Q.11 (a) Auditors have various duties to perform in their role as auditors, for example, to assess the truth and fairness of the
financial statements.
Required:
Explain THREE rights that enable auditors to carry out their duties. (03)
(ACCA, Fundamentals Level F8 – December 2008)
(b) In case the auditors are removed in AGM, what are the rights of the retiring auditors? (04)
Q.12 Explain the provisions of the Companies Act, 2017 in respect of the following:
(a) Reading and inspection of auditors’ report. (02)
(b) Signature on the audit report. (03)
Q.13 Discuss the provisions of the Companies Act, 2017 related to the attendance of the auditors in the general meeting of the
company. (03)
Q.14 On April 30, 2008 the Board of Directors of MIL informed the CFO that it wishes to change the auditors of the company.
The interim audit for the year ended June 30, 2008 is due to commence shortly.
As the CFO of the company, advise the Board about the provisions contained in the Companies Act, 2017 as regards:
(a) change of auditors prior to the completion of their term. (02)
(b) restrictions imposed on the appointment of certain persons as auditors of the company. (06)
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Q.15 Your assistant has an understanding that under the Companies Act, 2017 only a Chartered Accountant can be appointed
as auditor of a limited company. What is your understanding of the law in this regard? (03)
Q.16 Explain whether or not the following statements are in accordance with the provisions of the Companies Act, 2017 and
support your answer with reasons:
(a) A person who holds shares in a company cannot be appointed as the auditor of such company
(b) A spouse of a director of a company cannot be appointed as the auditor of such company.
(c)
i. Director can appoint auditor in first general meeting;
ii. If auditor is not appointed in the general meeting, he is appointed in the next general meeting.
iii. Power and duties of auditor can be limited by the management.
iv. Appointment of the auditors of private limited company is not compulsory under provisions of the Company Act,
2017.
(ICAP, CAF 09 Level – Amended)
(d) State whether or not under the following circumstances an auditor become disqualified to be appointed as statutory
auditor of the company.
i. The auditor and one of the directors of the company are real brothers.
ii. The auditor has given an interest-free loan to the company.
iii. The auditor after appointment has been allotted 10 percent shares of the company.
(ICAP, CFAP 06 Level – Summer 1992 – Amended)
Q.17 State with reasons whether the following statements are in accordance with the provisions of the Companies Act, 2017:
(-) It is mandatory for all manufacturing companies to have their cost accounts audited by a cost and management
accountant. (02)
CONCEPT APPLICATION QUESTIONS
Q.18 Orient Trading Limited was incorporated on October 21, 2004. Ahmad Ali, the company secretary has approached you on
October 31, 2004 for your appointment as the first statutory auditor of the company. Assuming that you are eligible for
this appointment, explain who should make this appointment under the provisions of the Companies Act, 2017. (03)
Q.19 (a) You have received a letter from the company secretary of ABC Group of companies on March 04, 2006. The group
consists of four public limited unlisted companies. The secretary requested you to advise him as to who will have the
authority to appoint new auditors in following situations relating to different companies of the group:
- The auditors of Company A will be retiring in August, 2006 on the conclusion of the Annual General Meeting of the
company.
- The auditors of Company B were removed by the members on March 02, 2006.
- The auditors of Company C became disqualified on February 14, 2006.
- The auditors of Company D resigned on January 28, 2006. (08)
(b) What would be the term of office of new auditors in the cases given above? (02)
Q.20 Describe the relevant provisions of the Companies Act, 2017 that would be required to be complied with in the following
circumstances:
(-) On 1 March 2014 AB Limited, a listed company, received a notice from a member of the company proposing a change
in the auditors of the company. The annual general meeting of AB Limited is scheduled to be held on 19 March 2014. (03)
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Q.21 Discuss the following, in the light of provisions of the Companies Act, 2017:
(-) On 30 August 2012, Rafiq Nizami & Co. (RNC), Chartered Accountants, were appointed as auditors of Delton Tractors
Limited (DTL), a listed company, for the year ending 30 June 2013. Zafar, a partner of RNC, holds 5,000 shares of DTL.
(03)
Q.22 Mr. Azhar, the sole proprietor of Azhar & Co. Chartered Accountants, was appointed as the auditor of XYZ Limited, an
unlisted public company, for the financial year ending June 30, 2009. Mr. Azhar married Miss Ismat, a director of XYZ
Limited, on February 23, 2009. The company secretary of XYZ Limited wants to know whether the marriage would have
any impact on the status of Mr. Azhar as the auditor of the company.
Discuss the situation with reference to the relevant provisions of the Companies Act, 2017.
Q.23 The management of Pakpurt Limited had a dispute on taxation matters with their auditors, ABC & Co. The directors want
to remove auditors before finalization of audit and appoint XYZ & Co. in their place. While discussing the matter Mr.
Kazim, one of the directors objected that the auditors cannot be removed before the annual general meeting. Keeping in
view the above case you are required to comment on the claim of Mr. Kazim considering the relevant provisions of the
Companies Act, 2017. (02)
Q.24 During your audit of Rigsby Ltd for the year ended 31 July 2002, the following points have arisen.
(1) The directors have not provided you with details of transactions in the private bank account, which is used for
their expenses, as the year-end balance is unchanged from 31 July 2001.
(2) You have not been able to see the minutes of directors’ meetings because the directors regard some of the matters
as confidential.
(3) An extraordinary general meeting had been held on 14 November 2001, of which you had been unaware, to
capitalise some reserves. You believe there might not have been sufficient reserves at that time to meet the
capitalisation.
State what rights of the auditor, set out in the Companies Acts, have been denied. (03)
(Institute of Chartered Accountants in England and Wales, Professional Level – September 2002)
Q.25 Mr. Akbar is the Chief Executive of Prosperity Limited, a listed company. He is not pleased with the performance of the
current auditors. He is planning to propose the name of M/s Asghar Saleem & Co. as the new auditors in the coming AGM
after approval of the Board. Mr. Asghar a partner in M/s Asghar Saleem & Co. is the brother of Mr. Akbar. Is the
arrangement legally permissible? (02)
Q.26 Mr. K the partner of an audit firm, in normal course of his investment activities bought shares of ABC Limited, of which his
firm was statutory auditor.
However, he disposed of all these shares within thirty days and immediately informed the company secretary about the
whole transaction. Is the company secretary required to take any step under the Companies Act, 2017? Discuss. (04)
Q.27 The following three entities have approached Alpha & Company, Chartered Accountants (the firm) for appointment as
their statutory auditors. In each case there are following issues which need to be considered before the firm decides to
accept the assignments.
(i) Client: Safe Bank Limited
Issue: the firm has acquired office equipment from the bank under finance lease arrangements. In addition, some
partners of the firm are also using the bank’s credit card facility.
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(ii) Client: Pride Communication Limited (PCL):
Issue: One of the firm’s partners had remained the director of PCL for many years, as a nominee of Federal Government.
(iii) Client: Gama Limited
Issue: A partner of the firm holds shares in Beta Limited which is an associated company of Gama Limited.
Required:
In each case specify the minimum conditions specified by Companies Act, 2017, which should be fulfilled in order to
accept the audit engagement. (09)
Q.28 Cobblers Limited is the holding company of Shoes Limited and Boots Limited. There is no common directorship as the
holding company has nominated different persons as the directors for each subsidiary. Moreover, there is no inter-
company investment among the subsidiary companies.
The following issues are under consideration of the company secretary:
(i) The directors of Shoes Limited, which had been incorporated eighty three days back, are considering appointment of
Mr. Bright, a chartered accountant, as the first auditor. Mr. Bright holds a very small number of shares in Boots Limited.
(ii) The members of Cobblers Limited have appointed Mr. Polite, a qualified MBA, as auditor of the company in their
annual general meeting at a fee which is less than the fee charged by the previous auditor.
In the light of relevant provisions of Companies Act, 2017, provide your response to the following:
(a) With reference to (i) above, discuss whether Mr. Bright is qualified to be appointed as auditor of Shoes Limited.
(b) With reference to (ii) above, discuss the validity of appointment of Mr. Polite as auditor of Cobblers Limited. (05)
Q.29 Justify giving reasons whether the appointment of auditor in the following case is in compliance with the requirements of
Companies Act, 2017.
Zubair and Company, Chartered Accountants (ZC) has received an offer for appointment as auditor of Haroon Limited
(HL). Saima, who is the wife of a partner of ZC, is the chief executive of Jameel Limited (JL). JL is an associated company of
HL. Saima also holds 100,000 shares in JL. (03)
Q.30 Comment on each of the following independent situations in respect of appointment of auditors, with reference to the
applicable rules and regulations:
(a) Guava and Company, Chartered Accountants, have received a request for appointment as auditor of Orange Bank
Limited (OBL). Most of the partners of Guava and Company maintain their accounts with OBL and are enjoying credit card
facilities from them. The maximum outstanding balance on the credit card facility, due from any partner is Rs. 399,000.
(b) Apricot and Company, Chartered Accountants, have received an offer for appointment as auditor of Banana Limited.
Mr. Pumpkin who is a director of Banana Limited holds 25% shares in Water Melon Limited. The spouse of a partner also
holds shares in Water Melon Limited.
(c) Mr. Zaheer, a cost and management accountant, has received an offer for appointment as external auditor of Lychee
(Private) Limited (LPL). The paid up capital of LPL is Rs. 1,500,000 of which 40% is owned by Blue Black Limited, a listed
company.
(d) Mr. Sadiq has recently joined your firm as a partner. He has served on the Board of Directors of Strawberry Limited
(SL) until 30 June 2009, as a Government nominee. In the Annual General Meeting of SL held on 31 August 2011, a
shareholder has proposed the name of your firm for appointment as the external auditors for the year ending 30 June
2012. (11)
(ICAP, CAF 09 Level – Autumn 2011 – Amended)
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Q.31 Comment on each of the following situations with reference to the appointment of external auditors in accordance with
the requirements of the Companies Act, 2017.
(a) ABC Limited and DEF Limited are associated companies on account of common directorship. Salman and Company,
Chartered Accountants (SCC) have received an offer for appointment as the auditor in ABC. Salman, a partner in SCC is the
spouse of Naveen, who is an employee in DEF. (02)
(b) All the partners of Kashif Associates are Cost and Management Accountants. The firm has received an offer for
appointment as the auditor of Nihal (Private) Limited (NPL). NPL has a paid-up capital of Rs. 500,000 and 30% of its
shares are held by Siyal Limited which is a public company. (03)
Q.32 Comment on each of the following independent situations with reference to the applicable rules and regulations.
(a) Waqar is a partner in Sohail and Company, Chartered Accountants, who are the auditors of Wasim Limited for the year
2011. Aqib who was a partner of Waqar in 2008 in his food business, has recently been appointed as a Director of Wasim
Limited. (02)
(b) Aleem, Asif and Company (AAC), Chartered Accountants, has accepted an offer for appointment as auditors of Gul
Limited (GL). Kamal who is a partner in AAC, held 5000 shares in GL. Within thirty days of acceptance, he gifted the shares
to his son Kamran, who is a manager in AAC. (06)
(c) Saleem is a partner in Orange and Company, Chartered Accountants. He also practices as a sole proprietor and has
received an offer for appointment as auditor of ABC Financial Services Limited which is a subsidiary of DEF Bank Limited.
The balance outstanding against the credit card issued by DEF Bank Limited to a partner of Orange and Company is Rs.
1,010,500. (02)
(ICAP, CAF 09 Level – Spring 2012, Amended)
Q.33 Comment on each of the following independent situations in the light of the requirements of the Companies Act, 2017:
(a) Khan and Company, Chartered Accountants has received an offer for appointment as auditors of Good Bank Limited
(GBL). Shahid is a partner in Khan and Company. He has obtained a personal finance of Rs. 450,000 from GBL and also
holds GBL’s credit card. The outstanding balance on his credit card is Rs. 100,000. (03)
(b) Abid is a partner in AFL & Company, Chartered Accountants. AFL has accepted an offer for appointment as auditors of
Saima Limited (SL). Saima, the wife of Abid, owned 11% shares in SL. She also works as SL’s General Manager Marketing.
Saima disposed of the shares held by her to Abid’s father, within 30 days of the appointment of AFL but continues to
remain employed in SL. (03)
Q.34 Comment on each of the following independent situations with reference to the applicable rules and regulations.
(a) Zaman is a partner in a firm of Chartered Accountants and holds 5,000 shares in Mardan Limited (ML). His firm has
received an offer for appointment as auditors of Khanewal Limited (KL). ML and KL are subsidiaries of Dera Khan Limited
(DKL). (03)
(b) The total paid up capital of IJK Limited is Rs. 990 million whereas its ordinary share capital is Rs. 130 million. LMN
Limited holds 50 million non-voting preference shares and 2 million ordinary shares in IJK Limited. The par value of both
types of shares is Rs. 10 each.
Bilal and Company has received an offer for appointment as auditors of IJK Limited.
Faryal, the wife of a partner in Bilal and Company, is a director in LMN Limited. Faryal also holds 10,000 shares in LMN
Limited. (04)
(ICAP, CAF 09 Level – Autumn 2012 – amended)
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Q.35 Daud and Company, Chartered Accountants (DC), has received an offer for appointment as auditor of Jamal Limited (JL).
Wife of Daud is a Shareholder and Director in Royal Limited (RL).
Required:
In accordance with the requirements of the Companies Act, 2017, state whether and under what circumstances DC could
accept the audit, under each of the following situations:
(a) JL holds 51% shareholding in RL. (03)
(b) JL is an associated company of RL. (05)
(c) One of the directors in JL also holds 10% shareholding in RL. (02)
Q.36 Comment on the following independent situations, with reference to the requirements of the Companies Act, 2017.
(a) Mateen has recently joined Humayun and Company (HC), a firm of Chartered Accountants, as a Director with a
commitment of being promoted as a partner in due course. HC is the auditor of Strawberry Limited (SL). Mateen
was previously associated with SL as a Director. He left that job in 2011 but still holds 1,000,000 shares in SL. (03)
(b) Hamid is a partner in a Chartered Accountant firm and holds 100,000 Term Finance Certificates in Sona Fertilizers
Limited (SFL). Hamid’s firm is considering to accept the audit of SFL. (02)
Q.37 In the light of Companies Act, 2017 comment on each of the following independent scenarios:
(a) Partners of Ubaid & Co., Chartered Accountants have authorised Zehra, who is a chartered accountant, to sign the
audit report of Tufail Limited. Zehra is a manager in the firm and has been managing the audit of Tufail Limited for a
number of years. (02)
(b) Tariq Limited a listed company, is due to hold its annual general meeting on 15 September 2017. Discuss the rights
and duties of the auditors of Tariq Limited in relation to the meeting. (04)
(c) Fareed, a director of Tameer Limited, got married to Hira, a chartered accountant. Hira is a senior employee of
Salman & Co., Chartered Accountants who are also the auditors of Tameer Limited. (02)
(d) Brass Limited wants to appoint Jafer & Co., Chartered Accountants as their statutory auditor. One of the partners in
Jafer & Co. had served on the Board of Brass Limited for many years as a government nominee. (02)
Q.38 Under the provisions of the Companies Act, 2017 briefly describe whether Murad is eligible to be appointed as an auditor
of the company in each of the following independent situations:
(i) Murad, a partner in Delta and Company, Chartered Accountants, is also a director in Gama Limited (GL). His firm has
received an offer for appointment as auditors of Star Limited (SL). Both GL and SL are subsidiaries of Pluto Limited
(PL). (03)
(ii) Murad is a sole proprietor in Murad and Company, Chartered Accountants. He has received an offer for appointment
as auditor of Super Energy Limited (SEL), a power generation company in Multan. Murad has not paid his electricity
bills to SEL for the last two months. (02)
(iii) Murad is a partner in Beta & Company, Chartered Accountants (BCC). His firm has accepted an offer for appointment
as auditors of Panama Limited (PL). Rita, who is Murad’s sister, is working as an internal auditor in PL. She also owns
20% shares in PL. Rita disposed the shares to Murad’s wife, within 30 days of appointment of BCC but continues to
remain employed in PL. (05)
SUGGESTED SOLUTIONS
Q.1 (a)
Mr. Fakhir can be appointed only if he is a chartered accountant having valid certificate of practice from ICAP.
(b)
Who may appoint first auditor and time frame:
1. First auditor is appointed by directors within 90 days of incorporation.
2. If directors do not appoint auditor within 90 days of incorporation, Commission may (on its own, or on
application by company or any member) direct company to make good the default.
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3. If the company does not comply order within specified time, the Commission shall appoint auditor of the
company.
Who may fix their remuneration:
The remuneration of the first auditor shall be fixed by the board or by the Commission, if the auditors are appointed by
the board or the Commission, as the case may be.
(c)
Rights:
 Right to have access to books of accounts
 Right to require information from directors officers or employees of the company.
 Right to receive notice, attend and speak at general meeting
 Right to make representation in writing in case of removal.
Duties:
 Duty to conduct audit in accordance with ISAs as adopted by ICAP.
 Duty to examine whether adequate records are kept and accounting records agree with financial statements.
 Duty to make audit report to members expressing opinion on financial statements and other additional matters.
Q.2 (a) Rights/duties of an auditor with regard to general meeting:
1) Right to receive all notices of any general meetings which members of company are entitled to receive.
2) Right to attend general meetings. However, in case of listed company, it is duty of auditor or a person authorized
by him in writing to attend general meeting in which financial statements and auditor’s report are considered.
3) Right to speak at general meetings on audit related matters.
4) Right to make representation in writing if change of auditor is proposed.
(b)
1. Casual vacancy of auditor is filled by directors within 30 days of its occurrence.
2. If casual vacancy is not filled by directors within 30 days, Commission may (on its own, or on application by
company or any member) direct company to make good the default.
company.
(c)
 Audit report shall be signed, dated and shall indicate the place at which it is signed.
 If the auditor is an individual, report shall be signed by him.
 If the auditor is a firm, report shall be signed by firm, with the name of engagement partner.
Q.3 Duties of Mr. Khushkismat under Companies Act, 2017:
1. Mr. Khushkismat should obtain consent of proposed auditor.
2. Mr. Khushkismat should send a notice to change the auditor to company atleast 7 days before AGM.
Duties of Company under Companies Act, 2017:
1. Company shall send copy of this notice to retiring auditor and
2. Company shall also post notice on its website.
3. At AGM, members will pass a resolution to appoint auditor from proposed auditors.
4. Within 14 days of appointment of auditor, company shall inform Registrar days about such appointment
alongwith consent of appointed auditor.
Rights of Retiring Auditor under Companies Act, 2017:
1. Retiring auditor has a right to make a representation in writing to company atleast two days before the date of
general meeting.
2. If such a representation in writing is made by retiring auditor, it shall be read out at AGM before taking up the
agenda for appointment of the auditor.
Q.4 i) Subsequent auditors:
1. Subsequent auditor is appointed by company at each AGM (on recommendation of the board).
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2. If subsequent auditor is not appointed at AGM, Commission may (on its own, or on application by company or
any member) direct company to make good the default.
company.
ii) No appointment
1. If subsequent auditor is not appointed at AGM, Commission may (on its own, or on application by company or
any member) direct company to make good the default.
company.
Q.5 Circumstances in which auditors may be appointed by directors:
1. Directors can appoint first auditor of company within 90 days of incorporation.
2. Directors can fill casual vacancy within 30 days of its occurrence.
3. If auditor is removed before expiry of his term, board of directors shall appoint the auditors with prior approval
of the Commission.
Circumstances in which auditors may be appointed by SECP:
1. if company fails to appoint the first auditors within ninety days of incorporation, or
2. if company fails to appoint subsequent auditors at an annual general meeting; or
3. if company fails to fill up a casual vacancy within thirty days of occurrence of the vacancy; or
4. if appointed auditors are unwilling to act as auditors of the company;
5. if a disqualified person is appointed as auditor,
Examiners’ Comments:
This part was also attempted well and candidates possessed good understanding of situations where auditors are appointed
by persons other than the company’s shareholders.
Q.6 An auditor, whether appointed by Directors or appointed by Members, can be removed before expiry of his term by
members through Special Resolution.
This question was not very well answered.
Q.7 (a)
(i)Directors cannot appoint Murad & Co because 90 days have passed since incorporation. Now, the appointing authority
rests with SECP.
(ii)The remuneration of the first auditor shall be fixed by the board or by the Commission, if the auditors are appointed by
the board or the Commission, as the case may be.
(b)
1. if company fails to appoint the first auditors within ninety days of incorporation, or
2. if company fails to appoint subsequent auditors at an annual general meeting; or
3. if company fails to fill up a casual vacancy within thirty days of occurrence of the vacancy; or
4. if appointed auditors are unwilling to act as auditors of the company;
5. if a disqualified person is appointed as auditor,
Q.8
 Incoming auditor shall send professional clearance letter to outgoing auditor.
 Incoming auditor should inform ICAP about the offer of appointment.
 Incoming auditor should not accept offer of appointment without prior clearance from ICAP. ICAP usually gives
clearance within 15 days
Very few students knew the prescribed steps required to be followed under the Code of Ethics when a practicing member
accepts an audit engagement in place of another member whose audit was in process when removed. A large number of
students wrote about client screening process, which is not an ethical requirement.
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Q.9 (a)
Procedures to be followed under Companies Ordinance 1984:
1. Board of Directors shall recommend auditors, after obtaining consent of proposed auditors. A notice of
recommendation shall be sent to members with the notice of AGM.
2. A member or members (having 10% or more shareholding in company) can also propose an auditor, provided:
a. consent of proposed auditors has been obtained by member, and
b. member has sent a notice in this regard to company atleast 7 days before AGM.
Company shall send copy of this notice to retiring auditor and shall also post on its website.
3. Retiring auditor has a right to make a representation in writing to company atleast two days before the date of
general meeting.
If such a representation in writing is made by retiring auditor:
a. It shall be read out at AGM before taking up the agenda for appointment of the auditor.
b. it shall be mandatory for the auditor or a person authorized by him in writing to attend the general
meeting in person.
5. Within 14 days of appointment of auditor, company shall inform Registrar within 14 days about such
appointment alongwith consent of appointed auditor.
Rights of existing auditor on removal:
1. Right to receive notice of removal.
2. Right to make 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.
(b)
Responsibilities of Incoming auditor under Code of Ethics:
1. Incoming auditor shall send professional clearance letter to outgoing auditor. Permission of client is required before
such communication. If permission is not granted, auditor should not accept engagement.
2. Incoming auditor shall obtain a copy of the Representation before acceptance (if made by retiring auditor).
Responsibilities of Existing auditor under Code of Ethics:
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. Outgoing auditor will file with ICAP a copy of Representation (if made to members).
4. To communicate with other auditor through Professional Clearance Letter. Permission of client is required before
such communication. If permission is not granted, predecessor auditor should inform proposed auditor that he not
cannot reply to his letter without permission.
In part (a) most of the students explained the procedure to be followed correctly except the requirement to intimate the
registrar about the change. Some of the students mentioned about informing and obtaining permission from ICAP which was
incorrect.
In part (b) most of the candidates restricted their response only to seeking professional clearance. Many students did not
mention the responsibilities of the previous auditors to respond to new auditor’s request for NOC and the new auditor’s
responsibilities if a response is not received from the previous auditors or a negative response is received.
Further, few students also discussed the capabilities of the new firm to take up the audit and the eligibility of the auditors
who can accept the audit of a listed company, which were not relevant.
Q.10 Within 14 days of appointment of auditor, company shall send Registrar intimation of appointment of auditor alongwith
written consent of appointed auditor.
Q.11 (a)
1. Auditor has a right to access to the company‘s books, accounts and vouchers (in whatever form they are held)
2. Auditor has a right to access to copies of books, accounts and vouchers of branches (transmitted to principal
office)
3. Auditor has a right to require management and employees of the company to provide him with such information
and explanation as he thinks necessary for the purpose of audit
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(b)
1. Right to receive notice of removal.
2. Right to make representation in writing to company.
3. Right to receive notices of general meetings, attend general meetings and speak at general meetings at which he
is being removed.
Q.12 (a)
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.
(b)
 Audit report shall be signed, dated and shall indicate the place at which it is signed.
 If the auditor is an individual, report shall be signed by him.
 If the auditor is a firm, report shall be signed by firm, with the name of engagement partner.
Q.13 Auditor has a right to attend general meetings. However, in case of listed company, it is duty of auditor or a person
authorized by him in writing to attend general meeting in which financial statements and auditor’s report are considered.
Further, if retiring auditor makes representation in writing, it shall be mandatory for the auditor or a person authorized
by him in writing to attend the general meeting in person.
Q.14 (a)
1. An auditor, whether appointed by Directors or appointed by Members, can be removed before expiry of his term
by members through Special Resolution.
of the Commission.
(b)
Following persons shall not be appointed as auditor in a company:
1. A person or his spouse or minor child holds any shares in the audit client 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 disinvest shares within 90 days of appointment.
2. A person is indebted to the company, other than in ordinary course of business of such entities.
However following are not considered debt in this regard:
a. sum payable to a credit card issuer upto Rs. 1,000,000.
b. sum payable to a utility company unpaid upto 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.
7. A person who has given guarantee or security to the company in connection with the indebtedness of third
person.
8. A person or firm who has business relationship with the company (directly or indirectly), other than in ordinary
course of business of such entities.
9. A person who has been convicted by a Court of an offence involving fraud in last 10 years.
10. A person who is not eligible for appointment as auditor under Code of Ethics adopted by ICAP and ICMAP.
If a person is disqualified for a company, he is also disqualified for its subsidiaries, its holding, and holding’s other
subsidiaries. Therefore, always be sure about status if question involves two companies.
Q.15 This understanding is wrong.
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.
11

Q.16 (a) False. A person who holds shares in a company can be appointed as auditor if he discloses the fact at time of
appointment and disinvest shares within 90 days of appointment.
(b) True.
(c)
(i) False. Only members appoint auditor in any AGM.
(ii) False. If auditor is not appointed in a general meeting, he is appointed by SECP.
(iii)False. Powers and duties of statutory auditor are mentioned in Companies Ordinance 1984 and cannot be limited by
management.
(iv)False. Appointment of auditor is compulsory for every company except a private company having paid up capital of
one million or less.
(d)
(i) Auditor is not disqualified, because only spouse of director is disqualified for appointment as statutory auditor.
(ii)Auditor is not disqualified. Companies Ordinance 1984 disqualifies auditor if he is indebted to company, but NOT when
company is indebted to him.
(iii)Auditor becomes disqualified, because he cannot acquire shares in audit client after appointment.
Q.17 This statement is incorrect.
Audit of cost accounts is required only when Commission directs an audit (subject to the recommendation of the
regulatory authority supervising the business of relevant sector).
Further, audit of cost accounts shall be conducted by an auditor who is either a Chartered accountant or a Cost and
management accountant.
Q.18
1. First auditor is appointed by directors within 90 days of incorporation.
2. If directors do not appoint auditor within 90 days of incorporation, Commission may (on its own, or on
application by company or any member) direct company to make good the default.
company.
Provisions of law relating to appointment of first auditor was asked and almost every student had complete knowledge of the
same.
Q.19 (a)
Company A:
Company (i.e. Members) has authority to appoint auditor in the Annual General Meeting (on recommendation of the
board).
If members do not appoint auditor at the AGM, Commission will appoint the subsequent auditor (after issuing order to
company to make good the default).
Company B:
As auditor is removed before expiry of his term, board of directors shall appoint the auditors with prior approval of the
Commission.
Company C:
Casual vacancy has arisen in this situation and directors have authority to appoint auditor to fill casual vacancy within 30
days of its occurrence.
If directors do not fill casual vacancy within 30 days, SECP has authority to appoint auditor to fill casual vacancy (after
issuing order to company to make good the default).
Company D:
Casual vacancy has arisen in this situation. However, as the directors have not filled the casual vacancy within 30 days of
its occurrence, SECP has authority to appoint auditor in this case.
12

(b)
Term of office of auditor in each case is from the date of appointment till the conclusion of next AGM.
This was one of the easiest questions set in the paper and generally the performance of the candidates was satisfactory.
However, in Part (a), in case of Company D, the students failed to appreciate that the time frame of filling out casual vacancy
by directors has elapsed and authority to appoint auditors then rested with SECP. Part (b) of this question was well
performed by majority with some exceptions where students related auditors’ term with directors term.
Q.20 Requirement to be complied by Company:
1. Company shall send copy of this notice to retiring auditor and shall also post on its website.
2. If retiring auditor makes a representation in writing, it shall be read out at AGM before taking up the agenda for
appointment of the auditor.
4. Company shall inform Registrar within 14 days from the date of any appointment of auditor about such
appointment alongwith consent of appointed auditor.
Q.21 RNC had to disclose the shareholding at time of appointment. Assuming that RNC has disclosed this fact at time of
appointment, auditor should disinvest shares within 90 days of appointment.
Q.22 Spouse of a director cannot be appointed as statutory auditor of a company. As disqualification has arise after the
appointment, therefore casual vacancy has arisen which should be filled by directors within 30 days of its occurrence.
Q.23
1. An auditor can be removed before the expiry of his term. However, directors don’t have authority to remove
auditor.
2. An auditor can be removed before expiry of his term only by special resolution of members.
of the Commission.
Q.24
Situation Right violated
(1)  Right to require information and explanation from directors and company
(2)  Right of access to books of accounts and supporting documents/papers
(3)  Right to receive notice of general meeting, attend and speak at general meeting.
Most of the examinees answered it correctly. However, some students answered the scenario of audit procedure to be
followed in case of disagreement with management and limitations in scope of their work whereas few stated the rights of
auditors instead of stating those rights that have been denied like access to books of accounts etc.
Q.25 M/s Asghar Saleem & Co. can be appointed as statutory auditor of Prosperity Limited because law disqualified only
spouse of director for appointment as auditor. There is no violation of law if brother of director is appointed as auditor.
Majority of the students failed to answer this question correctly. This question required careful study of the Companies
Ordinance, 1984.
Q.26 Mr. K bought shares after the appointment, so he becomes disqualified on date of purchase of shares and casual vacancy
has arisen.
Company secretary should communicate the fact to directors so that they can fill the casual vacancy within 30 days. If
casual vacancy is not filled by directors within 30 days, company secretary should inform SECP which shall fill casual
vacancy (after issuing orders to company to make good the default).
13

Only a few candidates knew the provisions of law dealing with vacancy of the office of the auditor because of disqualification
subsequent to appointment. Quite a number, without any apparent reason, reproduced the provisions related to disclosure
and disposal of investments in client’s equity, at the time of appointment.
Q.27 (i) Safe Bank Limited
1. Terminate the lease agreement and settle outstanding amounts if this is not in the ordinary course of business of
such entities, and
1. Sum payable on each credit card should not exceed Rs. 1,000,000.
(ii) Pride Communication Limited
Firm will have to ensure that three years have passed since the partner resigned from client. If three years have not
passed, firm will have to remove the relevant partner from partnership.
(iii) Gama Limited
1. Partner shall disclose the shareholding in associated company of Gama Limited at time of appointment.
2. Shares will be disinvested within 90 days of appointment.
Three situations were given in the question and in each case the students were required to determine and explain whether
the auditor can accept appointment offered by the prospective clients. Although many students were well prepared for such
questions, a large number also displayed poor knowledge and understanding of relevant provisions contained in the
Companies Ordinance, 1984.
Many students failed to explain the following:
(i) The firm cannot be appointed as auditor of the company unless the lease agreement is terminated and credit card balance
of the partners is reduced to Rs. 500,000 or less.
(ii) A director can be appointed as external auditor of the company three years after the date on which he ceases to be a
director of the company. Therefore, it was only possible for the firm to accept the appointment if the concerned partner
resigned from the firm.
(iii) The firm can accept appointment as auditor of a company if a partner of the firm holds shares in the associated
undertaking of that company, provided he disposes off the shares within ninety days of appointment. Some of the students
gave reasons because of which the firm may not accept appointment as auditors, but did not explain as to what it should do if
it did want to accept the appointment. Many of the students could not produce exact answers i.e. in the third situation they
explained that the concerned partners will have to dispose of the shares but did not mention that such disposal can be made
within 90 days of appointment.
Q.28 (i)
Although directors have power to appoint first auditor within 90 days of incorporation, however, auditor holds shares in
an associated company of audit client (because Shoes Limited and Boots Limited both are under common management
and control).
Mr. Bright can be appointed as statutory auditor of Shoes Limited only if:
 Mr. Bright discloses his shareholding in associated company of Shoes Limited, and
 Shares are disinvested within 90 days of appointment.
(ii)
Mr. Polite cannot be appointed as statutory auditor of Cobblers Limited because audit of a public company 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.
There is no violation of law in charging a fee lower than predecessor auditor.
Legal provisions relating to appointment of auditor is a topic regularly examined and was fairly attempted. However, some of
the students seemed confused and made the following types of errors:
• Failed to point out that directors cannot appoint first auditors after 60 days of incorporation.
• Emphasized the issue of undercutting but failed to realize that an MBA cannot be appointed as auditor of a public company.
Q.29 Issue of Shareholding of Spouse:
14

Appointment of ZC as statutory auditor of HL is valid only if:
1. Shareholding of spouse of a partner in JL (associated company of HL) is disclosed at time of appointment, and
2. Shares are disposed within 90 days of appointment.
Issue of Directorship of Spouse in associated company:
If JL and HL are associated because of holding/subsidiary relationship, then ZC will be disqualified for JL as well as for HL
(its holding/subsidiary).
Q.30 (a)
Guava and Company can be appointed as statutory auditor of OBL because auditor is not indebted to the OBL as sum
payable on each credit card does not exceed legal threshold of Rs. 1,000,000.
(b)
Water Limited and Banana Limited are associated companies (as director of one company holds more than 20% shares in
another company).
Apricot and Company can be appointed as statutory auditor of Banana Limited if:
 Shareholding of spouse of auditor in associated company is disclosed at time of appointment, and
 Shares are disposed within 90 days of appointment.
(c)
Mr. Zaheer can be appointed as statutory auditor of LPL because:
 LPL is not a public company.
 LPL is not a subsidiary of a public company, and
 LPL’s paid up capital is less than 3 million.
(d)
Firm cannot be appointed as statutory auditor of SL because one of the partner (Mr. Sadiq) has been a director of the
company in last three years. Therefore, whole firm is disqualified.
In this question the students were supposed to give their views on five different situations with reference to appointment of
auditor. Most of the students seemed to have studied the related guidelines and scored high marks. The errors were mostly in
respect of the following:
• Some students gave the decision without any reasoning.
• Only few students knew specific qualification for auditors of private companies having paid-up capital of less than Rs. 3
million.
Q.31 (a)
SCC can be appointed as statutory auditor of ABC because law disqualifies only spouse of director for appointment as
auditor. There is no violation of law if spouse of employee is appointed as auditor.
(b)
Kashif Associates can be appointed as auditor of NPL because:
 NPL is not a public company.
 NPL is not a subsidiary of a public company, and
 NPL’s paid up capital is less than 3 million.
(Note for students: It is also relevant to note that a private company with paid-up capital of less than 1 million is not
required to conduct audit under Companies Act 2017)
(a) Though a number of students gave the correct answer that employment of spouse of a partner in associated company of
the client has no relevance to the appointment of the auditor. However, many candidates gave detailed provisions of the
Companies Ordinance related to directors of audit clients and their spouses which was not relevant.
(b) Some candidates stated incorrect paid up capital requirement and many candidates considered NPL as a subsidiary of a
public company.
15

Q.32 (a) Sohail and Company can be appointed as statutory auditor of Wasim Limited because none of the partners have been a
director or employee of the company in last three years. There is no violation of the law if a partner (or his
partner/employee) quits the firm and becomes employee or director at audit client.
(b)
If son of partner is Major:
AAC can continue as statutory auditor of GL because partner has rightly disposed its shareholding within 90 days of
appointment. There is no violation of law if a manager holds shares in audit client.
If son of partner is Minor:
AAC cannot continue as statutory auditor of GL if 90 days have passed after appointment because partner has not rightly
disposed its shareholding.
(c) Saleem can be appointed as statutory auditor of ABC Financial Services Limited as sole-proprietor, because he is not
personally indebted to the company.
Orange and Company is disqualified for statutory audit of DEF Bank Limited as well as for its subsidiary ABC Financial
Services because a partner in the firm is indebted to DEF Bank Limited as sum payable on credit card exceeds legal
threshold of Rs. 1,000,000.
This question was designed to test the knowledge of students on appointment of auditors with reference to the provisions
contained in the Companies Act, 2017. The students were required to comment on different situations with reference to the
applicable rules and regulations. However, the overall performance was quite poor. All the five parts of the question required
a very close review of the given situations to really put forward an appropriate reply. Most students seemed to adopt a casual
approach and did not view the situations from all angles and therefore arrived at incorrect conclusions. As always, many
students gave the verdict without reasoning whereas some produced the correct opinion but gave incorrect reasons.
Q.33 (a)
Khan and Company cannot be appointed as auditor of GBL because one partner is indebted to the GBL (if personal finance
of Rs. 450,000 from GBL is not in ordinary course of business of such entities) and, therefore, is disqualified.
Sum payable on credit card does not exceed legal threshold of Rs. 1,000,000.
(b)
Issue of spouse of auditor as shareholder in audit client:
AFL & Company can be appointed as statutory auditor of SL, because shareholding by spouse of the auditor has been
disposed within 90 days of appointment (there is no violation of the law if father of auditor holds shares in audit client).
Issue of spouse of auditor as employee in audit client:
Auditor is qualified for appointment as his spouse, Saima, is not a director in SL.
This question intended to test the students on qualification/disqualification of auditor in terms of the provisions of the
Companies Ordinance, 1984.
(a) In this part most students appeared to be confused and concluded that the limit of Rs. 500,000 applies to all credit
facilities taken together. In fact this relaxation applies to outstanding balance of credit card only. An auditor is not allowed to
avail any other credit facility from the client.
(b) Here candidates were expected to identify that Saima (the auditor’s spouse) had rightfully disposed of the shares within
the required time limit and that holding of shares by the father of the person being appointed as auditor was not in
contravention to the provisions of the Companies Ordinance, 1984 and also that employment of the auditor’s spouse (Saima)
as GM Marketing was also not against any provision of the Ordinance.
The performance was average as many candidates failed to discuss all the three aspects specially the holding of shares of the
company by the auditor’s father.
Q.34 (a)
ML, and KL are associated companies (because holding’s other subsidiary is an associate).
Firm can be appointed as statutory auditor of KL only if:
 Shareholding of a partner of the firm in an associated company is disclosed at the time of appointment, and
16

 Share are disinvested within 90 days of appointment.
(b)
IJK and LMN are NOT associated companies because LMN holds 2 million ordinary shares out of total 13 million i.e.
15.38% which is below 20% (non-voting shares are not considered in determining status of company).
Bilal and Company can be appointed as statutory auditor of IJK Limited because:
 Spouse of auditor does not hold shares in IJK or any of its associated company.
 Spouse of auditor is not a director in IJK Limited or any of its holding/subsidiary.
In this question, the candidates were required to comment on two independent situations pertaining to appointment of
auditors.
(a) Generally, the students answered well. However, some of them mentioned different types of safeguards which were not
relevant in the given situation as the only remedy available in such a situation is to dispose of the shares of the subsidiary or
to decline the offer of appointment as auditors.
(b) The key issue which was tested in this part of the question was whether holding of non–voting shares is relevant in
determining that the two companies are associated companies or not. Majority of the students did not seem to know the
answer and tried to avoid this point.
Q.35 (a) If wife of a partner is a director and shareholder in a company which is subsidiary of proposed client:
Whether DC could accept audit:
DC cannot be appointed as statutory auditor of RL because spouse of a partner is a director in RL. As DC is disqualified for
RL, it is also disqualified for its holding company i.e. JL.
Circumstances under which DC could accept the audit:
If wife of Daud resigns from directorship of RL, DC can accept appointment of JL provided following further two
conditions are met:
1. Shareholding of wife of Daud in associated company (i.e. RL) shall be disclosed at time of appointment.
2. Shares shall be disposed off within 90 days of appointment.
Note for Students:
Do not recommend that DC can be appointed as statutory auditor if Daud divorces his wife. Although, legally acceptable
but this is not a practicable solution (for most of auditors).
(b) If wife of a partner is a director and shareholder in a company which is associated company of proposed
client:
DC can accept appointment as auditor of JL provided following two conditions are met:
1. Shareholding of wife of Daud in associated company (RL) shall be disclosed at time of appointment.
2. Shares shall be disposed off within 90 days of appointment.
Wife of a partner being director of an associated company does not cause disqualification of firm as auditor.
(c) If wife of a partner is a director and shareholder in a company which is unrelated of proposed client:
DC can accept appointment as auditor of JL, because there is no relationship between JL and RL (Director of a company
having less than 20% shares in another company does not make them associated). No action is required in this case.
Note: This question has been solved assuming Daud is a partner in DC.
Q.36 (a)
Currently, HC can continue as statutory auditor of SL because Mateen is not a partner in the firm.
However, Mateen should be promoted as partner only if:
 He has not been a director in an audit client in last three years or
 He does not hold shares in an audit client.
(b)
Firm can be appointed as statutory auditor of SFL because Hamid is neither a shareholder of the company nor indebted to
the company.
17

This question required the candidates to give their views on two outlined situations in light of the independence principles
applicable to an auditor. Most of the candidates extended reasonable response in line with the related professional
pronouncements. The common points that were missed are as follows:
(a) It was not appreciated that Mateen is presently a director in the firm and therefore the appointment of the firm is valid.
Holding of shares by Mateen would only be relevant when Mateen is made a Partner in the firm.
(b) Very few students could recognize that holding Term Finance Certificates and holding shares are two different things and
there is no restrictions in the Companies Ordinance, 1984 regarding holding of TFCs; hence the appointment of the firm was
in order.
Q.37 (a)
If auditor is a firm, report can be signed only by firm (i.e. by partners only) with the name of engagement partner on it. An
employee cannot be authorized to sign the report.
(b)
Rights:
1. Right to receive notice of annual general meeting.
2. Right to attend general meeting.
3. Right to speak at general meetings on audit related matters
4. Right to make representation in writing if change of auditor is proposed.
Duties:
In case of listed company, it is duty to auditor or a person authorized by him in writing to attend general meeting in which
financial statements and auditor’s report are considered.
(c)
There is no disqualification as spouse of director is only an employee in audit firm and not a partner, therefore, does not
come under disqualification of auditor as per Companies Act 2017.
(d)
Jafer & Co. can be appointed as statutory auditor of Brass Limited if concerned partner has not been a director in Brass
Limited in last three years.
Q.38 (i)
Murad, being a director in GL, is disqualified for appointment as statutory auditor in GL as well as its holding PL and PL’s
other subsidiary SL. Therefore, Delta and Company cannot be appointed as statutory auditor of SL.
(ii)
Murad and Company can be appointed as statutory auditor of SEP because the auditor is not indebted to the company as
the sum payable to utility company does not exceed period of 90 days.
(iii)
Issue of Sister of auditor as employee in PL:
There is no legal disqualification if sister of auditor is an employee in audit client.
Issue of Sister of auditor as shareholder in PL:
There is no legal disqualification if sister holds shares in audit client. However, as the shares have been transferred to
spouse of auditor after appointment, it disqualifies Beta & Company as statutory auditor of PL. a Casual vacancy has arises
which should be filled by Board within 30 days of its occurrence.
18

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