1.22     Query

Relation between statutory main auditor

and statutory branch auditor

1. Now-a-days, in most of the large public sector companies there are more than one auditor of which one is the main auditor and others are termed and treated as the branch auditors. The same system of audit is prevalent in nationalised banks also. According to the querist, each and every auditor has his own area of operation and there is no overlapping except that the main auditor has the responsibility of consolidating the accounts and reports signed by the branch auditors. The branch auditors report to their main auditors. Thus, in the view of the querist, the difference between the two is only in respect of the assignment entrusted upon and reporting and there is no question of superiority or inferiority. The report and accounts signed by a branch auditor are finalised after detailed discussions with the branch management and agreed to by both.

2.In the above context, the querist has sought the opinion on the Expert Advisory Committee on the following issues:

         (i) Whether the main auditor, while consolidating the reports of the branch auditors, can disregard any qualification given by a branch auditor?

        (ii) Whether the main auditor has any professional obligation to refer the matter to the concerned branch auditor before finalising his consolidated report?

        (iii) Whether the main auditor can be held liable for professional misconduct for not referring the matter to the concerned branch auditor?

         (iv) Whether branch auditor has any right to ask for reasons for not incorporating his qualification in the report from the main auditor?

         (v) Whether the main auditor is duty bound to give explanations for not incorporating certain qualifications in the consolidated report?

         (vi) Whether the main auditor can ignore the qualifications given by a branch auditor in his report and that too without referring to the branch auditor?

         The querist has further desired that in giving thought to the above points, the matters of routine nature like non-provision for depreciation, audit fee, income tax liability, etc. (which are normally taken care of at the time of consolidation) may be disregarded by the Committee.

                                                                Opinion                                              August 11, 1987

1.The Committee notes that Section 228(c) of the Companies Act, 1956 provides that “the branch auditor shall prepare a report on the accounts of the branch office examined by him and forward the same to the company’s auditor who shall, in preparing the auditor’s report, deal with the same in such manner as he considers necessary” (emphasis supplied by the Committee).

2.The Committee further notes that section 227 (3) of the Act provides that the auditor’s report shall state “whether the report on the accounts of any branch audited under section 228 by a person other than the company auditor has been forwarded to him as required by clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the auditor’s report”. In this regard, the Institute of Chartered Accountants of India obtained a legal opinion on “whether a statement in the auditor’s report that he has dealt with the branch auditor’s report in such manner as he considers necessary” will be sufficient compliance with these provisions. According the said opinion, the company auditor “has to make disclosure of anything in regard to the branch which he thinks is not in order and which has come to his notice”.

3.The Committee also notes that Institute’s Statement on Qualifications in Auditor’s Report, after making reference to Section 228 (c) reproduced in para 1 above, states as below in para 3.27.

“If the branch auditor’s report contains any qualifications, the company’s auditor should normally include them in his own report unless he is satisfied that either-

(i) the objections of the branch auditor have been met while preparing the accounts of the company or during the conduct of the company’s audit; or

(ii) the matter on which the qualification is made is not material in the context of the company’s accounts as a whole; or

(iii) in the light of information and explanations given to him which were not available to the branch auditor, he is satisfied that the qualification is not called for.”

4. The Committee further notes that the Institute’s Statement on the Responsibility of Joint Auditors, states in paras 25 and 27, as below:

“25. The statutory auditors are entitled to make such enquiries as they think fit from the Branch Auditors. In making these inquiries, the statutory auditors will have regard to the materiality of the accounts of the branch and any other circumstances affecting the operations of the company. An auditor of a branch office should comply with request for information from the statutory auditors, recognizing that such a request results not from a doubt as to the competence of the branch auditor but from a legal duty cast upon the statutory auditors to ensure that the accounts give a true and fair view and also give the information required by the Companies Act in the manner required by the said Act.”

“27. It is possible that under certain circumstances the statutory auditors may find it necessary to make a specific qualification arising out of the branch auditor’s report. Such qualification may arise, for example with regard to the scope of the audit carried out by the branch auditors or specific matters which are brought out by the branch auditors as a result of their work. If it becomes necessary for the statutory auditors to qualify their report in regard to such matters, the qualification should be made in specific terms. In appropriate circumstances, where the amounts involved in respect of the branch are sufficiently material, or the nature of the qualification so requires, it may be necessary for the statutory auditors to withhold the expression of an opinion on the truth and fairness of the accounts.”

5.The Committee also notes that the Chartered Accountants Act 1949 does not specifically provide for professional misconduct in the event a branch auditor gives a qualified report on the accounts of the branch and the statutory main auditor does not qualify his report and/or he expresses his opinion without making a reference to the concerned branch auditor. However, there are certain clauses in the Act which may have relevance in this regard. “In particular, attention is drawn to the following clauses in Part I of the Second Schedule to the Chartered Accountants Act, 1949: “A Chartered Accountants in practice shall be deemed to be guilty of professional misconduct, if he…….

(5) fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary to make financial statement not misleading.

(6) fails to report a material mis-statement known to him to appear in a financial statement with which he is concerned in a professional capacity.

(8) fails to obtain sufficient information to warrant the expression of an opinion or his exceptions are sufficiently material to negate the expression of opinion.

(9) fails to invite attention to any material departure from the generally accepted procedure of audit applicable in the circumstances.*

 6. On the basis of the above, the opinion of the Committee, on the issues raised by the querist in para 2 of the query, is as below:

(i) The main auditor should not normally disregard a qualification given by a branch auditor unless he is satisfied that (a) the objections of the branch auditor have been met while preparing the accounts of the company or during the conduct of the company’s audit; or (b) the matter on which the qualification is made is not material in the context of the company’s accounts as a whole; or (c) in the light of information and explanations given to him which were not available to the branch auditor, he is satisfied that the qualification is not called for.

(ii) The main auditor does not have any professional obligation to refer the matter to the concerned branch auditor before finalising his consolidated report if he is satisfied on the basis of the information or explanations available with him, that such a reference is not necessary for the purpose of expression of his opinion.

(iii) If the main auditor drops a qualification contained in the branch auditor’s report, he does so only at his own responsibility. However, the main auditor cannot be held liable for professional misconduct for not referring the matter to the concerned branch auditor in that respect.

(iv) The branch auditor does not have any right to ask for reasons for not incorporating his qualification in the report of the main auditor.

(v) The main auditor is required to disclose in his report anything in regard to the branch which he thinks is not in order and which has come to his notice, provided the information is material in relation to the accounts as a whole.

(vi) Please see answer to (i) and (ii) above.

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  * Para 3.4 of the Institute’s Statement on Qualification in Auditor’s Report.