1.18     Query

Conduct of supplementary audit u/s 619 (2) where a special

Investigation has also been ordered by the management

1.Auditors appointed under section 619(2) of the Companies Act, 1956 have discovered the following, while conducting preliminary investigation for their audit:

(i)         that there was no effective internal central system operating in the company, and

 

(ii)        that there was a change in the management of the company subsequent to the period under audit and the present management had ordered a special investigation for the year under audit. This investigation was also being conducted by a chartered accountant.

2.In this context, the querist has sought the opinion on the following issues:

(i)         What is the statutory auditor’s duty, vis-à-vis the special investigation ordered, before and immediately after the latter’s commencement?

 

(ii)        Should the statutory auditor take cognizance of the contents of the investigation report? Would any independent verification on the part of the statutory auditor be called for on the matters covered by the investigation?

 

(iii)       Should the statutory auditor finalise his report without waiting for the special investigation report?

 

(iv)       Is any particular qualification called for in such cases?

 

(v)        If the management refuses access to the special investigation records can the auditor qualify his report stating that the necessary explanation and information for the purpose of audit was not provided?

(vi)       What are the norms for conducting audit under these circumstances?

 

Opinion                                                           September 27,1983

The point-wise opinion of the Expert Advisory Committee on the issues raised by the querist is as under:

(i)Neither the Companies Act, 1956 nor any other law has prescribed duties of the statutory auditor in a situation where the management of the company has ordered a special investigation. However, the auditor is expected to follow the normal audit procedures in such situations which are discussed below.

(ii)The statutory auditor should take cognizance of the contents of the investigation report and if he is satisfied about their relevance to his own work, he can consider them for forming his own opinion. However, whether he should verify any matter covered by the special investigation, would depend upon the auditor’s extent of reliance on the work of the other accountant conducting the investigation which in turn would depend on factors like the auditor’s assessment of the competence of the other accountant in the context of the special investigation, the tests and procedures adopted by the other accountant during the conduct of his investigation etc.

(iii)The statutory auditor can finalise his report without waiting for the special investigation report. In this context, it may be noted that the coverage by an auditor is not as detailed as that by a special investigator. Therefore, if a fraud is discovered by the latter after the completion of the statutory audit, “it does not necessarily mean that the auditor has been negligent or that he has not performed his duties competently. The auditor does not guarantee that once he has signed the report on the accounts no fraud exists. If he has conducted his audit by applying due care and skill in consonance with the professional standards expected of him and has exercised reasonable skill and care, the auditor would not be responsible for not having discovered the fraud.” (Para 1.12 at page 4 of the ‘Statement on Auditing Practices’ (1982) issued by the Research Committee of the Institute of Chartered Accountants of India). If however, the investigation was being undertaken to detect a suspected fraud, the statutory auditor will have to take due care in conducting his audit and also, if the circumstances so demand, report about the matter if the investigation is not completed before he submits his report.

(iv)The statutory auditor is not required to make any particular qualification under such circumstances. He may however qualify his own report on the basis of the findings of the special investigation report, which is for him an audit evidence, but he continues to be responsible for forming and expressing his opinion.

(v)If the management refuses access to the records of special investigation, the auditor should qualify his report stating that the necessary information and explanations sought by him for the purpose of audit were not supplied. Where the results of the special investigation are not available at the time of the finalisation of the statutory auditor’s report due to various reasons e.g., the work on the investigation has not progressed much or the investigator’s report is still at the draft stage, the statutory auditor may mention in his report that the management had ordered a special investigation, the report on which was awaited.

(vi)Since the special investigation records form part of the records of the company, the statutory auditor should consider them if he is satisfied about their relevance to his own audit, and perform necessary audit procedures, if he considers necessary.

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