Chapter 03

1
Chapter 03 Statutory Audits
2
Regulatory Framework

• Depends on
• Company Legislation
• 1995 No 15 SL Acc Aud Stds Act
• Common regulations
• Specific Acts (E.g. Environmental)
• Corporate Governance requirements
• SEC requirements
• Industry specific regulations
• International regulations
• Other ICASL professional requirements and
  pronouncements (SLAPs, UITF, Code of Ethics etc.)

3
Corporate Governance

• Definition The system by which companies are
  directed and controlled (Cadbury Report)
• Guidance mainly from US and Canada
• Following reports/ statements are important for
  historical development
• Cadbury report
• Greenbury report
• Higgs report
• CISCO report
• Combined code
• Revised code by FRC

4
Sri Lankan Context

• So far two reports have been issued as code of
  best practices
• On Board of Directors
• On Audit Committees
• It is voluntary in Sri Lanka but compulsory for
  UK listed companies

5
Code of Best Practice on BOD (Highlights)

• Every public company should be headed by an
  effective board, which should lead the control of
  the company
• A clear division of responsibilities should exist
  in running the company and the board
• There should be a board balance between executive
  and non executive directors (1/3rd Non
  executive element)

6
Code of Best Practice on Audit Committees
(Highlights)

• Definition A committee consisting primarily of
  non executive directors which is able to view a
  company's affairs in a detached and independent
  way and liaise effectively between the main board
  of directors and the external auditors
• The main role of an audit committee is to oversee
  the financial reporting system of a company with
  a view to safeguard the interests of shareholders
  and all other stakeholders

7
Auditing Company Legislation

• 1982 No 17 Company Act specifies
• The FS has to be audited
• Appointment, removal, resignation and retirement
  of auditors
• Rights, duties and necessary qualifications
• The change of the role of the auditor
• The primary role is to express an opinion on the
  true and fairness of the FS
• Detecting and reporting on fraud is expected by
  the public

8
Auditing Company Legislation

• The change of the role of the auditor (contd..)
• This leads to the concept of expectation gap
• The trend of international legislation is more
  towards the requirements of the users

9
Appointment of Auditors

• 1982 No 17 Co Act specifies following provisions
• Qualifications
• Public Ltd and Peoples Companies can be audited
  only by ICASL members who are having a practicing
  certificate
• Private Ltd companies can be audited by following
  parties as well.
• Members of the SL Accounting Service
• Members of the SL Auditing Service
• Bearers of the Higher Diploma certificate of
  Lanka Technical College
• Retired assessors of the Inland Revenue
  Department
• Members of the other accepted professional bodies

10
Appointment of Auditors

• Disqualifications Following parties are
  disqualified to act as a statutory auditor
• An officer or servant of the company
• A servant of an officer or partner of the company
• A body corporate (legal person)
• Why?
• 1 2 Not independent
• 3 Due to Limited liability

11
Provisions for Appointment/ Reappointment of
Auditors under Co Act

• The first auditors of a company can be appointed
  by the directors of such company
• Such auditors will hold office till the first AGM
• A new or the existing auditor may be reappointed
  by the members of the company
• If no new auditor is appointed the existing
  auditor is automatically reappointed

12
Provisions for Appointment/ Reappointment of
Auditors under Co Act

• But, the existing auditor may not be reappointed
  in following situations
• A resolution has been passed expressly stating
  that the existing auditor will not be reappointed
• The existing auditor disqualifies himself to act
  as a statutory auditor
• Existing auditor communicates in writing his non
  willingness to be reappointed
• In case of resignation or death
• The directors can fill the vacancy in case of
  resignation or death but the new auditor will
  hold office till the next AGM

13
Provisions for Removal of an Existing Auditor

• A special notice is required to remove an
  existing auditor
• A special notice is a notice which requires a
  notification prior to 28 days
• The auditor also should be sent such notice
  simultaneously
• The existing auditor can make representations
  against such removal notice and if such
  representations are given to the company prior to
  14 days in writing, the company will have to send
  each member a copy of it.

14
Provisions for Removal of an Existing Auditor
(Cotd..)

• If the company received such notice after 14 days
  or the company failed to send such copies to its
  members the auditor is entitled (has a right to)
  make oral representations at the AGM
• The Above Company Regulations are due to
• Protect the statutory auditors independence and
  objectivity so that the mgt cannot hire and fire
  auditors at their wish

15
Statutory Auditors Duties Rights

• The main duty (role) of a statutory auditor under
  Company Act is to submit a report (containing an
  opinion) on the matters specified in VII schedule
  of the Company Act
• Rights of a Statutory Auditor
• To verify books, accounts, vouchers and other
  repots as necessary and to obtain information and
  explanations from company officers
• To receive notices, participate and make
  representations in any general meeting which
  matters relating to audit is discussed