Duties of an Auditor of a Company having branches

A company having a small number of branches may come across any one of the following three situation:

1. That the accounts of the branches are not received by the Head Office.

2. The accounts of some of the branches have been received but are not audited as they were received too late.

3. The accounts of some of the branches have been received and audited but as certain requirements have not been complied with, the auditors could not submit their report or the auditors did not agree to treat the said account as audited accounts as certain requirements were still to be complied with.

As there is a time limit within which the audited accounts have to be placed before the General Body Meeting for adoption, the accounts of such branch offices were not included in the Annual Accounts and a note was given to the following effect:

(a) Some of the branch accounts have not been included because these are yet to be received.

(b) Some of a branch accounts have not been included because these are yet to be audited.

(c) Some of the branch accounts received though audited are not included in absence of compliance of certain requirements.

On the above facts (i) whether the accounts so certified can be taken as the “Annual Accounts” and (ii) whether the auditor is justified in giving an unqualified report to the effect that the accounts show a “true and fair” view of the affairs of the company.

Opinion April 22, 1977

It is not clear from the query whether the branch auditor has been appointed u/s 228(3) of the Companies Act or whether it is the Statutory Auditor appointed u/s 224 of the Companies Act, who has to carry out the audit of the branch. Under Section 209(2), the Statutory Auditor is required to satisfy himself that adequate returns at periodical intervals have been received before certifying that proper books of accounts have been maintained.

With regard to the first question, it may be pointed out that Section 210 enjoins the Board of Directors to place before the company in general meeting pursuant to Section 166 the Balance Sheet and Profit & Loss Account of the company for the relevant period. The fact that the accounts so placed before the general meeting are not complete in some respects may not justify the conclusion that such accounts are not “ annual accounts” within the meaning of Section 210.

With regard to the second question, the provisions of Section 228(1) of the Act are clear that the accounts for a branch have to be audited unless necessary exemption has been obtained under sub-section 4 of that section. If the accounts of a branch which are required to be audited are not audited, or if audited but not incorporated in the accounts of the company, then the provisions of Sections 218 and 227 of the Companies Act would be attracted. It may be pointed out that u/s 227(3)(bb), the Statutory Auditor is required to state whether the Report on the accounts of any branch office audited by a person other than the Statutory Auditor had been forwarded to him by the concerned branch auditor, and if so, how he has dealt with such accounts in preparing his Report. It is thus clear that if the accounts of the branch are not incorporated in the accounts certified by the Statutory Auditor, such accounts would not be complete, as required by the provisions of Section 210. Such a situation would call for a qualification in the Report of the Statutory Auditor. The manner and extent of qualification will depend upon the facts of each case, including materiality of the accounts of the branches.

In the opinion of the Committee, a note on the accounts in the manner referred to in the query hereinbefore would not amount to proper compliance with the requirements of law. If the management decides to incorporate the accounts of the branch without getting the same audited either by separate branch auditor or by the Statutory Auditor himself, the Auditor concerned would require to qualify his Report. If the accounts certified by the statutory auditor are so qualified, then he is not responsible for any contravention of any of the provisions of the Companies Act.

In this connection, attention may be drawn to the Statement on Qualifications in Auditor’s Report, published by the Institute, Paragraphs 9.1 to 11.2 of this publication deal with some of the important aspects involved in branch audit report.

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