M.

Com (SEM-III)
COMPANY AUDIT

Company Audit

MASTERS OF COMMERCE
IN
ACCOUNTANCY & FINANCE
(SEMESTER-III)

SUBMITTED BY,

RACHINI PANDEY
SEAT NO:

JAI HIND COLLEGE

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M.Com (SEM-III)
COMPANY AUDIT

A ROAD, CHURCHGATE, MUMBAI - 400 020

DECLARATION

I, Miss. RACHINI PANDEY, student of M. Com. In

Accountancy & Finance of Semester - III (20142015) hereby declare that I have completed the
Project on COMPANY AUDIT.
The information submitted is true & original to the
best of my knowledge.

RACHINI PANDEY
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COMPANY AUDIT

SEAT NO:

COMPANY AUDIT
MASTERS OF COMMERCE
IN
ACOUNTANCY & FINANCE
SEMESTER III

IN PARTIAL FULFILLMENT OF

MUMBAI UNIVERSITY
FOR THE DEGREE
OF MASTERS OF COMMERCE IN
ACCOUNTANCY & FINANCE.

SUBMITTED BY,

RACHINI PANDEY
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M.Com (SEM-III)
COMPANY AUDIT

SEAT NO:

JAI HIND COLLEGE

A ROAD, CHURCHGATE, MUMBAI-400 020.

JAI HIND COLLEGE

A ROAD, CHURCHGATE, MUMBAI 400 020

CERTIFICATE
This is to certify that Ms. Rachini Pandey of
M.Com. In Accountancy & Finance Semester III
(20142015) has successfully completed the
project on Company Audit under the
guidance of Prof. Ms. Rachael George.

M.Com (SEM-III)
COMPANY AUDIT

Course Coordinator
Principal

Internal Examiner

External

Examiner

College Seal

INDEX
Sr.

TOPIC

Pg.

No.

No.

1)

INTRODUCTION.

2)

REQUIREMENTS OF COMPANY AUDIT.

3)

PREPARATION BALANCE-SHEET & PROFIT 13

AND LOSS STATEMENTS.

4)

DIRECTORS REPORT.
5

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COMPANY AUDIT

5)

AUDITORS OF COMPANIES.

19

6)

GENERAL CONSIDERATION IN COMPANY 23

AUDIT.

7)

EXAMPLE Cadbury India PLC.

26

8)

INRODUCTION & VISION OF COMPANY.

27

9)

VALUES OF COMPANY.

27

10)

SWOT & PEST ANAYSIS OF COMPANY.

28

11)

AUDITORS REPORT.

30

12)

ANNEXTURE OF AUDITORS REPORT.

32

13)

REPORT TO MEMBERS BY AUDITORS.

34

14)

RESPONSIBILITIES OF DIRECTORS AND 34

AUDITORS.

15)

REPORT OF INDEPENDENT REGISTERED 36

PUBLIC ACCOUNTING FIRM.

16)

CONCLUSION.

38

17)

REFERENCES.

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ACKNOWLEGEMENT
I sincerely thank the University for introducing a degree course in
M. Com for Accountancy and Finance. This has given us an
opportunity to gain knowledge on the insights of the Accountancy
and Finance industry. A special thanks to our esteemed Professor
Ms. Rachael George for guiding and inspiring me to compile my
efforts in this project on COMPANY AUDIT. I would also like
to thank my other M.COM Professors for helping me in compiling
information.

This project was highly educational and a great learning

experience.
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COMPANY AUDIT

M.Com (SEM-III)
COMPANY AUDIT

INTRODUCTION
A company is said to be an artificial person created by law having a separate legal entity distinct
from its shareholders. It cannot be directly managed by its owners, i.e., shareholders, because
they are very large in number having small holding and also scattered over a wide area. As such,
the management and control of the affairs of the company is done by other persons generally
known as directors. Hence, it becomes essential for a company to appoint an independent and
qualified person, i.e., an auditor, to verily and certify the truth and fairness of the financial
statements.

SPECIAL REQUIREMENTS OF COMPANY AUDIT

I.

Verification of the constitution and powers.

A company can function within the limits prescribed by the documents on the basis of which it
has been registered. It raises its capital from the public on certain conditions, specified in the
Prospectus. Before commencing business, to purchase a property or to have subscription to its
capital underwritten on this account, it is essential that the auditor, prior to starting the audit of a
company, shall examine:
a. The Memorandum of Association.
b. The Articles of Association.
c. Contracts entered into with vendors and other persons relating to purchase of property,
payment of commission, etc.
A company cannot enter into a contract before it has been registered. What is more, a public
company cannot commence business until the certificate of commencement of business has been
granted to it by the Registrar of Companies. It is, therefore, the duty of the auditor to take into
account, while examining the transaction entered into by the company, the dates when these were
entered into for confirming the validity.
With a view to carrying out the audit effectively, it is necessary that the auditor should know the
authority structure of the company. Under Section 291 of the Act, the Board of Directors of a
company are entitled to exercise all such powers, and to do all such acts and things, as the
company is authorized to do. However, the Board shall not exercise any power or do any act or
thing which is directed or required by any legislation (including the Companies Act) or by the
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memorandum or articles of the company, to be exercised or done by the company, in general

meeting.
Section 292 specifies six types of decisions that can be taken by the Board of Directors only in
Boards meetings. These relate to:
a. Making calls on partly paid shares,
b. Issue of debentures,
c. Borrowing monies otherwise than on debentures,
d. Investing the funds of the company and
e. Making loans.
The transaction barring the first three can be delegated to any of the following:
a. A committee of directors,
b. Managing director,
c. Manager,
d. Any other principal officer of the company or
e. Principal Officer of the branch office, in relation to the branch.
Apart from the above, a number of other functions are also carried out by the Board. A few of
such functions are stated herein by way of examples:
a. Adopting of accounts before the same submitted to the auditor for their report - Section
215.
b. Appointment of the first auditors and filling of casual vacancy - Section 224.
c. Investment in shares of companies within the limits specified in Section 372A.
d. Entering into contracts with persons who are directors of the company or related to or
associated with the directors as are specified in Section 297 of the Act.
Some of the matters which only the shareholders can sanction at a general meeting:
a. Appointment and fixation of remuneration of auditors in the annual general meeting Section 224.
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b. Declaration of dividends - Regulation 85, Table A.

c. Appointment of relatives of directors etc. to an office or place of profit in the company
under Section 314 of the Act.
d. Sale, lease or a disposal of the whole of the companys undertaking or a substantial part
of it and donations above a certain limits [Section 293(1)].

II.

Matters which require sanction of the Central Government.

Loans to directors by a company other than banking or a finance company (Section 295). For
verifying the foregoing transactions and others authorized by the directors or shareholders, the
auditor should refer to the minutes of the meeting at which these have
been
considered.
Further, for judging the validity or otherwise of section accorded, the
relevant provision of law must be referred to. A few such instances are given below:
a. Appointment of Directors (Section 256).
b. Disqualifications of Directors (Section 274).
c. Conduct of Board Meeting (Sections 285-290).
d. General Powers of Board (Section 291).
e. Powers which the Board must exercise only at a meeting (Section 292).
f. Restriction on powers of the Board regarding disposal of the undertaking or part of it etc.
(Section 293).
g. Prohibitions and restrictions regarding political contributions (Section 293A).
h. Power of Board and other persons to make contributions to the National Defense Fund,
etc. (Section 293B).
i. Restriction on advancing loans to Directors, etc. (Section 295).
j. Restriction on a Director or his relative, a firm in which a director or relative is a partner;
or any other partner of the firm or a private company of which such a director is a
member or director to enter into a contract of sale or purchase of goods except
with the sanction of the Board of Directors (Section 297).

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k. Restriction on an interested director in participating in or voting at Boards proceedings

(Section 300).
l. Disclosure of interest by directors (Section 299).
m. Register of contracts, Companies or firms in which directors are inspected (Section 301).
n. Remuneration of directors (Section 309).
o. Restraint on a directors holding offices or places of profit (Section 314).
p. Restraint on payment of compensation for loss of office to a director (Sections 318 to
321).
q. Restriction on loans, etc., to companies under the same management (Section 370).
r. Regulation of inter-corporate loans and investments (Section 372A).
Books of Account are to be kept by a Company. Every company must maintain proper books of
accounts of its affairs. The following transactions must be entered in the books of accounts of the
company which must be kept at its registered office:a. All sums of money received and expended by the company and the matters in respect of
which the respect of which the receipt and expenditure took place;
b. All sales and purchases of goods by the company; and
c. The assets and liabilities of the company.
d. In the case of a company engaged in production, processing, manufacturing or mining
activities, such particulars relating to utilization of material or other items of cost as may
be prescribed relating to certain class of companies as the Central Government may
require.
The books of accounts must comply with the following conditions:a. The books must give a true and fair view of the state of affairs of the company or the
branch office, if any, and explain its transaction.
b. The books must be kept on accrual basis and according to double entry system of
accounting.
Every company must keep its books of account at its registered office. However, some of the
books of account may be kept at such other place in India as the Board of Directors may decide,
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provided a notice in writing giving full address of that other place along with requisite filing fee
is filed with the Registrar of Companies within seven of such decision.
If the company has a branch office, the books of account relating to transactions at the branch
office may be kept at that branch office, but proper summarized reports and statements must be
sent to the registered office or such other place where the books are kept, at intervals of not more
than three months. The books of account of the branch must give a true and fair view of the
affairs of the branch and clearly explain its transactions.
They must not conceal any transaction and also not disclose any transaction which is fictitious.
The books of accounts and other documents and records are open to inspection by any director
during business hours. Similarly, they are open to inspection by the Registrar of Companies or an
officer authorized by the Central Government.
These books and papers together with the vouchers pertaining to entries made must be
maintained for at least 8 years. It has been clarified by the Department of Company Affairs in
their Circular No. 2/83 dated 2/3/1983 that the books of account should be prepared and
maintained in indelible ink (and not in pencil).
The following persons are responsible for maintaining the books of accounts of a company:a. The managing director or manager;
b. If the company has neither a managing director nor manager, then every director of the
company;
c. Every officer and other employee who has been authorized and to whom responsibility to
maintain the books has been allotted by the Board of Directors.
If any of the persons referred to above fails to take all reasonable steps to maintain proper books
of accounts or has by his own willful act been the cause of any default by the company in this
respect, he is punishable with imprisonment up to six months or with fine which may extend to
Rs. 1,000 or with both. However, no person can be sentenced to imprisonment unless it is proved
that the contravention was committed by him willfully.

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Preparation of Balance Sheet and Profit and Loss Account.

The company has to prepare its balance sheet and profit & loss account from the books of
account maintained by it. Every Balance Sheet of a company must give a true and fair view of
the state of affairs of the company as at the end of the financial year and must be in the
prescribed format.
If the responsible for maintaining proper books of account fails to take all reasonable steps to
secure compliance by the company with the requirement of law relating to the form and contents
of the balance sheet, he is liable for each offence to imprisonment for a term extending up to six
months or to fine up to Rs.1, 000/- or to both.

Form of Balance Sheet.

Part 1 to Schedule VI of the Companies Act, 1956 gives the format in which the balance sheet is
to be prepared. The schedule specifies 2 types of formats, the horizontal format and the vertical
format. A company can prepare its balance sheet in either of the 2 formats. In the horizontal
format, the liabilities including the share capital are placed on the left side and assets of all types
on the right. The main heads in this form are arranged as under:
(a) Share Capital (a) Fixed assets
(b) Reserves and surplus (b) Investments
(c) Loans (c) Current assets, loans and advances
Current liabilities and (d) Miscellaneous expenditure to the provisions extent not
(d)
written off or adjusted
(e) Profit & Loss Account
Total:

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Table1: The main heads arrangement in the Form.

In the vertical format, the various heads of liabilities and assets are arranged vertically and
current liabilities are shown as deduction, from current assets. Whatever information which is
required to be given in the horizontal format must also be given in the vertical format.
Summarized prescribed vertical form of balance sheet is given below:
I. Sources of Funds.
(1)
(2)

Shareholders' funds
Loan funds
---------------------Total:
---------------------Table2: Summarized prescribed vertical form of balance sheet.

II. Application of Funds.

(1) Fixed assets
(2) Investments
(3) Current assets, loans and advances
Less: Current liabilities & provisions
(a) Miscellaneous expenditure to the extent not written off or
(4)
adjusted
(b) Profit & Loss Account
---------------------Total:
---------------------Table3: Summarized Application Form Structure.

The Central Government may, on the application or with the consent of the Board of Directors of
the company, by order, modify in relation to that company, any of the requirements as to matters
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COMPANY AUDIT

to be stated in the company's balance sheet or profit and loss account for adapting them to the
circumstances of the company.

Contents of Profit and Loss Account.

Though no format has been prescribed for the profit and loss account, Part II to Schedule VI of
the Companies Act, 1956 gives a list of items which must be disclosed in every profit & loss
account. Every profit and loss account of a company must give a true and fair view of the
company's profit or loss for the financial year for which it is drawn up.

Adoption of Balance Sheet and Profit & Loss Account.

The Board of directors must present to the shareholders of the company, the balance sheet and a
profit and loss account for the financial year at every annual general meeting.
In the case of companies which are not commercial organizations such as Section 25 companies,
instead if the profit & loss account, an income & expenditure account may be prepared. The
profit and loss account to be placed in the FIRST annual general meeting should relate to a
period beginning with the incorporation of the company and ending with a day, the interval
between which and the date of the meeting does not exceed nine months.
In case of subsequent annual general meetings, the profit and loss account should relate to a
period beginning with a day immediately after the period for which the preceding profit & loss
account was made and ending with a day, the interval between which and the date of the meeting
should not exceed six months. The financial year may be more or less than a calendar year, but it
must not exceed 15 months or with the special permission of the Registrar, 18 months.
If any director fails to take all reasonable steps to comply with the aforesaid requirements he is,
in respect of each offence liable to be punished with imprisonment up to six months or with fine
up to Rs.1,000/- or with both.

Authentication of Balance Sheet and Profit & Loss Account.

The balance sheet and profit & loss account of a company must be signed on behalf of the Board
of directors by two directors out of whom one must be the managing director, where there is one
and the manager, or secretary, if any. The balance sheet and profit and loss account must be
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approved by the Board of directors before they are submitted to the auditors for the purpose of
audit. The report of the auditors must be attached to the balance sheet and profit & loss account.
The company and every officer of the company who is in default with the above provisions shall
be punishable with the fine which may extend to Rs.500/-, if:
a. any copy of balance sheet and profit and loss account is issued, circulated or published,
without being signed as required ; or
b. any copy of balance sheet is issued, circulated or published, without there being annexed
or attached thereto, a copy each of the following :1. The profit and loss account;
2. Any accounts, reports or statements pertaining to subsidiary companies which are
required to be attached to the balance sheet,
3. The auditors' report; and
4. The Report of the Board of Directors.

Circulation of Balance Sheet and Auditors' Report.

A copy of every balance sheet, profit and loss account, auditors' report and every other document
required to be annexed or attached to the balance sheet must be sent not less than twenty-one
days before the general meeting to every member, to every trustee for debenture holders, and to
all other persons who are entitled to have a notice of general meetings.
In the case of a company not having a share capital, the above documents need not be sent to a
member, or debenture holder who is not entitled to have notice of general meetings.
In case of listed companies, the company may keep the aforesaid documents available for
inspection at its registered office during working hours for a period of twenty-one days before
the meeting and send to every member and trustee for debenture holders only a summarized
statement containing the salient features of these documents in the prescribed format.

Filing of Annual Accounts with the Registrar.

Every company must file with the Registrar within 30 days from the day on which the annual
accounts, auditors report and the directors report were presented at the annual general meeting,

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three certified copies of these documents signed by the managing director, manager or secretary
of the company or if there be none of these by a director of the company.
These accounts may be inspected and copies thereof may be obtained by any member of the
public at the Registrar of Companies on payment of the requisite fee. However, no person other
than a member of the company is entitled to inspect, or obtain copies, of the profit and loss
account in the case of the following types of companies :a. A private company which is not a subsidiary of public company;
b. A private company whose entire paid-up capital is held only by one or more bodies
corporate incorporated outside India; or
c. A private company which is deemed to be a public company by virtue of Section 43A, if
the Central Government directs that it is not in the public interest that any person other
than a member of the company should be entitled to inspect or obtain copies of the profit
and loss account of the company.
In case the annual general meeting of a company for any year has not been held, 3 copies of the
balance sheet and profit and loss account, duly signed, within thirty days from the latest day on
or before which that meeting should have been held in accordance with the provisions of the Act
must be filed with the Registrar of Companies. If for any reason, the annual general meeting
before which a balance sheet is laid does not adopt it, or is adjourned without adopting the
balance sheet or if the annual general meeting of a company for any year has not been held, a
statement of the fact and reasons thereof must also be annexed to the balance sheet and to the
copies thereof to be filed with the Registrar.
If default is made in complying with the above provisions, then the company and every officer of
the company who is in default shall be punishable with fine which may extend to Rs.50 for every
day during the period the default continues.

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Directors' Report.
The report of the Board of Directors must be attached to every balance sheet presented at the
annual general meeting. The report must contain information regarding the following matters:a. The state of affairs of the company
b. The amount, if any, which it proposes to carry to any reserves in such balance sheet
c. The amount of dividend recommended
d. Details of any material changes and commitments, if any, affecting the financial position
of the company which have occurred between the end of the financial year of the
company to which the balance sheet relates and the date of the report
e. Conservation of energy, technology absorption, foreign exchange earnings and outgo.
f. Names, designations and other particulars of all employees drawing more than Rs.
50000/- p.m. in the company
g. Details necessary for a proper understanding of the state of the company's affairs and
which are not, in the Board's opinion, harmful to the business of the company or of any of
its subsidiaries, in respect of changes which have occurred during the financial year :i.

In the nature of company's business;

ii.

In the company's subsidiaries or in the nature of the business carried on by them;

and

iii.

Generally in the classes of business in which the company has an interest.

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AUDITORS OF COMPANY.

Auditors of Government Companies.

The auditor of a Government company is appointed or re-appointed by the Central Government
on the advice of the Comptroller and Auditor-General of India provided that the audit would
be within the number of acceptable audits available to each auditor.
The Comptroller & Auditor General of India has the power:a. To direct the manner in which the company's accounts are to be audited by the auditor so
appointed and to give such auditor instructions in regard to any matter relating to the
performance of his functions as such.
b. To conduct supplementary or test audit of the company's accounts by such person or
persons or persons as he may authorize in this behalf; and for the purpose of such audit,
to require additional information to be furnished to any person or persons so authorized,
on such matters, by such person or persons, and in such form, as the Comptroller and
Auditor-General may, by general or special order, direct.
The auditor must submit a copy of his audit report to the Comptroller and Auditor-General of
India who shall have the right to comment upon or supplement, the audit report in such manner
as he may think fit. Any such comments upon, or supplement to, the audit report must be placed
before the annual general meeting of the company at the same time and in the same manner as
the auditors' report.

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Auditors of Other Companies.

It is the duty of the auditor conduct the audit of the books of accounts of the company and to
make his report to the members of the company on the accounts examined by him, and on every
balance sheet, every profit and loss account and on every other document declared by the Act to
be part of or annexed to the balance-sheet or profit and loss account and laid before the company
in general meeting during his tenure of office. The auditors report, besides other things
necessary in any particular case, must expressly statea. Whether, in his opinion and to the best of his information and according to explanation
given to him, the accounts give the information required by the Act and in the manner as
required;
b. Whether the balance-sheet gives a true and fair view of the company's affairs as at the
end of the financial year and the profit and loss account gives a true and fair view of the
profit or loss for the financial year;
c. Whether he has obtained all the information and explanations required by him for the
purposes of his audit;
d. Whether in his opinion, the profit & loss account and balance sheet referred to in his
report comply with the accounting standards recommended by the Institute of Chartered
Accountants of India;
e. Whether, in his opinion, proper books of account as required by law have been kept by
the company, and proper returns for the purposes of his audit have been received from the
branches not visited by him;
f. Whether the company's balance sheet and profit and loss account dealt with by the report
are in agreement with the books of account and returns.
In case any of the above matters is answered in the negative or with a qualification, the auditor's
report must state the reason for the same. Where the auditor is unable to express any opinion in
answer to a particular question, his report shall indicate such fact together with the reasons why
it is not possible for him to give an answer to such question.
The Central Government is empowered to issue orders requiring the auditor to include in his
report a statement on such matters as may be specified. In exercise of this power the Central
Government has issued an order called "The Manufacturing and other Companies (Auditor's
Report) Order, 1975. It is the duty of the auditor to comply with this order when making his
report to the shareholders.
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Only the person appointed as auditor of the company or where a firm of auditors is so appointed,
only a partner of that the firm practicing in India, can sign the auditor's report or sign or
authenticate any other document of the company required by law to be signed or authenticated
by the auditor.

Inter Corporate Loans and Investments.

A company cannot:a. Make any loan to any other body corporate,
b. Give guarantee or security in connection with any loan made by any person to another
body corporate and
c. Acquire, by subscription, purchase or in any other manner, securities in any other body
corporate exceeding 60 % of its paid up share capital and free reserves or 100 % of its
free reserves, whichever is more, unless approved by a special resolution passed at a
general meeting of members.
The Board of the company may give a guarantee without being previously authorized by a
special resolution of members if all the following conditions are satisfied:a. A Board resolution is passed to this effect,
b. There exist exceptional circumstances which prevent the company from obtaining
previous authorization by special resolution and
c. The Board resolution is confirmed within 12 months in a general meeting or its next
Annual general meeting, whichever is earlier.

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Notice of such resolution must clearly indicate the specific limits, the particulars of the body
corporate in which the investment / loan / guarantee / security is proposed, the purpose of the
investment / loan / guarantee / security, sources of funding, etc.
No investment / loan / guarantee / security may be made or given unless the Board resolution
sanctioning it is with the consent of all directors present at the meeting and prior approval of the
public financial institution ( if any term loan is outstanding ) is obtained.
Approval of the public financial institution is not required if the investment / loan / guarantee /
security is with the 60 % limit as mentioned above and there has been no default in repaying the
term loan and / or interest thereon.
No loan can be made at a rate of interest lower than the bank rate prescribed by the Reserve
Bank of India.
A company which has defaulted in repaying public fixed deposits cannot make or give any
investment / loan / guarantee / security unless the fixed deposit is fully repaid along with interest
due as per the terms and conditions of the fixed deposit.
A register of such inter-corporate loans and investments must be maintained giving the relevant
details.
The above provisions do not apply to:i.

Any loan / guarantee / security made or given by :a. A banking company or an insurance company or a housing finance company in
the ordinary course of its business or a company established with the object of
financing industrial enterprises or providing infrastructural facilities.
b. A company whose principal business is the acquisition of shares, stocks,
debentures or other securities.
c. A private company unless it is a subsidiary of a public company.

ii.

Investment made under Rights issue of securities.

iii.

Loan made by holding company to its wholly subsidiary company.

iv.

Guarantee or security given by a holding company for loan to its wholly owned
subsidiary.
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v.

Acquisition of securities by a holding company in its wholly owned subsidiary.

Audit report is the presentation of collected and considered facts. It is prepared in such a way
that hose people who do not have information about the mater of the report can be informed
clearly in brief. According to Section 27 (2) of Companies Act, it is auditors duty to verify the
accounts of the company carefully and give a report about whether the accounts present true and
fair condition of the Company or not ?
Auditor is the representative of shareholders; therefore it is his moral duty to take care of
shareholders interest. Generally, shareholders do not know the real condition of the company.
They are not capable for it. So, auditor should verify whether the money of shareholders is
properly managed? That money is not used illegally or for personal purpose, the management is
done according this. He should minutely verify the accounts of that company. Finally, he has to
present in his report before shareholders whether the profit-los account and balance sheet of the
company gives true and fair economic condition of the company. Let he auditor not had any new
information in the presented accounts but the real importance lies in giving the report after
verifying the truthfulness and clarity.
In the case of London and General Bank, justice had stated the auditor was liable for not giving
proper report o the shareholders. Auditors report proves very useful to those who have lent
money to the company, banks who have sanctioned loans for short or long term and finance
company.

General Consideration in Company Audit.

These have to be determined on a consideration of:
a. Objectives of audit;
b. Various provisions in the Companies Act, 1956, especially those concerning accounts and
audit; and
c. The scope of the report that the auditor of a company is required to make in pursuance of
the provisions contained in section 227 of the Act.
The objectives of an audit are:
a. Verification of statements of account so as to express an opinion;
b. Detection of errors and frauds; and
c. Prevention of occurrence of errors and frauds.
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Detection and prevention of frauds and errors were originally regarded as the main objectives of
an audit. While conducting the audit, the auditor is expected to bear in mind the possibility of
existence of a fraud or other irregularity in accounts. Nonetheless, he is not expected to conduct
the audit with the objective of discovering all frauds or irregularities, for if that is to be done, the
audit would take an unduly long time and the cost of it would be quite out of proportion to its
benefit.
Nevertheless, it is expected that the auditor would be vigilant and watchful and whenever he
comes across a circumstance which arouses his suspicion, he should find out whether a fraud, or
irregularity, in fact does exist and, if so, whether it is sufficiently material to necessitate
qualifications of the audit report.
It is generally accepted that the auditor is not an insurer and does not guarantee that the books of
account truly reflect the companys affairs.
The auditor, thus, is principally responsible for carrying out his duties by exercising due care and
skill in consonance with the professional standards. If, despite the fact, any fraud or irregularity
in accounts remains undetected, he cannot be held liable for the failure to detect it. Moreover,
since the management is primarily responsible for safeguarding the assets and property of the
company, the auditor, while framing his audit program, is entitled to rely upon the internal
controls in this regard instituted by the management based on a proper evaluation.
It would be observed that Companies Act, 1956 also does not contemplate that an auditor is
responsible for the detection of errors and frauds, except when they are so material as to vitiate
the opinion expressed by him that statements of account exhibit a true and fair state of affairs.
The auditor is required to verify the final statements of account; also to check or verify all the
matters affecting them so as to ensure fully that they exhibit a true and fair state of affairs of the
business of the company. For the purpose, he may either carry out a detailed examination of the
books or relying on the internal control measures in operation, after testing their strength, merely
test the accuracy of transaction recorded therein.
It is permissible for an auditor to verify the accuracy of transactions recorded in the books of
account by the application of test checks, if he is satisfied that the system of internal control, in
operation, is adequate and satisfactory.

Constitutional Documents.
The auditor, before commencing a company audit, shall undertake Verification of the
constitution and powers. This he can verify from various documents, decisions taken in board
meeting, decisions in shareholders meeting etc.
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Any companys functions and powers are limited to the documents on the basis of which it has
been registered. Prospectus is the most important document that the company requires to raise
capital from public. The auditor also needs to check various transactions taken place before
commencement of business e.g., any property purchased etc. thus, prior to setting any audit, the
auditor shall examine following constitutional documents:
a. Memorandum of association,
b. Articles of association,
c. Contracts entered into with vendors and other persons relating to purchase of property,
payment of commission etc.
d. Certificate of commencement by business &
e. Certificate of registration etc.
A company, before registration, cannot enter into contract also without obtaining Certificate of
Commencement of business from the registrar of Companies. Therefore, the auditor is required
to take into account his duty to examine the transactions entered into by the company; the dates
when these were entered into for confirming the validity. The auditor should be aware of the
authority structure of the company so as to carry out audit effectively. Section 291 empowers the
Board of Directors to exercise all such powers and undertake all such Acts; the company is
authorized to do. But, the auditor should see to it that the Board has not done any ultra-virus Acts
i.e. not exercised any power nor done any act which is not permitted by Memorandum or Articles
of the company.
Method: While transfer of shares is brought about by delivery of a proper instrument of transfer
(viz, transfer deed) duly stamped and executed, transmission of shares is done by forwarding the
necessary documents (such as a notarized copy of death certificate) to the company.
NOTE: The next page will provide a brief view regarding the final audit. The companys
example is practically analyzed and reported briefly.

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CADBURY-INDIA
Introduction:
The Cadburys Inc has taken the opportunity to offer us a broader view of chocolate category.
The Cadbury Indias no.1 Chocolate is able to share with their market insights based upon
unparalleled breath of chocolate experience. Cadbury is a multinational company and the
Cadbury dairy milk is a brand of chocolate which is made by Cadbury. Cadbury made different
types of chocolates and other products which is sold in several countries around the world. It first
sold its products in United States in 1905.
Cadbury has grown from strength to strength with new technologies being introduced to make
the Cadbury confectionary business, one of the most efficient in the world. The merge in 1969
with Schweppes and the subsequent development of the business have led to Cadbury
Schweppes taking the lead in both, the confectionary and soft drink market intact UK and
becoming a major force in the international market. Cadbury Schweppes today manufactures
product in 60 countries and a trade in staggering 120. The Cadbury story is a fascinating story of
a family business that grew in one of the biggest, most loved chocolate brand in the world. A
story that you will remember as the story of The taste of life.
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Vision of Cadbury:
A. Be the worlds BIGGEST and BEST confectionery company.
B. Purpose: Creating brands people love.
C. Their vision in to action:
i.
Governing objective: To deliver superior shareowner returns.
ii.
Priorities: Growth, efficiency capability
Growth: Their growth priority is represented by the mantra Fewer, Faster, Bigger, Better.
They focus on a number of advantaged global and regional brands, invest in getting their new
product developments into more markets faster, use joined up commercial and marketing
programs to have a bigger impact and underpin the whole plan by executing their initiatives
better.
Efficiency: Their efficiency priority recognizes that it is not enough to grow; they must also be
more profitable. They maintain a relentless focus on cost and efficiency by reducing central
functions and costs; consolidating their businesses and reconfiguring their manufacturing and
distribution. Their vision in to action will help increase their margins to mid-teens by 2011 with
the aim of delivering mid-term margins by 2011.
Capability: Their capability priority ensures they continue to invest in the right organization and
skills to win. They have simplified and strengthened their organization to a pure-play
confectionery business. They manage their commercial strategies on a global basis through their
three categories of chocolate, gum and candy and strong functional leadership.

Values of Cadbury:
They are performance driven, values led. Throughout changing times, their constant values have
inspired us to be pioneers in business and in corporate responsibility. They help ensure they are
proud of their company and are critical to their core purpose of creating brands people love.
Their values are:
Performance: They are passionate about winning. They compete in a tough but fair way.
They are ambitious, hardworking and make the most of their abilities. They are prepared
to take risks and act with speed.
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Quality: They put quality and safety at the heart of all of their activities their products,
their people, their partnerships and their performance.
Respect: They genuinely care for their business and their colleagues. They listen,
understand and respond. They are open, friendly and they coming. They embrace new
ideas and diverse customs and cultures.
Integrity: They always strive to do the right thing. Honesty, openness and being
straightforward characterize the way they do business. They have clear principles and do
what they say they will do.
Responsibility: They take accountability for their social, economic and environmental
impact. In this way they aim to make their business, their partners and their communities
better for the future.

SWOT and PEST Analysis of Cadbury India PLC.

SWOT Analysis:
Strength:
a. Very strong brand equity in India.
b. Due to its 54 years presence in India has deep penetration 2100 distributors; 450,000
retailers, 60 mid urban (22%) customers.
c. Three sectors; Chocs (70% share), Confec (4%), food drinks (14% - leader in brown
segment).
d. Low cost of production due to economic of scale. That means higher profits. Better
market penetration.
e. Second best manufacturing location throughout Cadbury Schweppes.
Weakness:
a. Poor technology in India compared to current international technologies (Godiva, Mozart,
Fazer, Dint, Naushans, etc...)
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b. Ltd. Key products, only one central brand (CDM). Pralines range totally wising in India.
c. Make in India tag once the economy opens up wore and imports rush in.
Opportunities:
a. Tremendous scope for per capita consumption (160 gms. of 8 10 kg)
b. Increasing per capita national income resulting in higher disposable income.
c. Growing middle class and growing urban population.
d. Increasing gifts cultures.
e. Substitute to Mithais with higher calories/cholesterol.
f. Increasing departmental stores concept impulse @ at cash counters.
g. Globalization: optimal use of global Cadbury Schweppes.
Threats:
a. Major: Due to low cost and highest brand equity, it is success in India.
b. Minor: Globalization will bring in better brands for upper end of the market (Liest,
Monarch, Godiva, etc).
Conclusion:
Will lose market share with globalization but will remain brand leader.

PEST Analysis:
P: Since the budget range is decontrolled, no political effects are envisaged.
E:
a. Increasing per capita income resulting in higher disposable income.
b. Growing middle class/urban population increase in demand.
c. Low cost of production better penetration.
S:
a. Per capita consumption expected to increase fashion.
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b. Increasing gifts culture increase in demand.

c. Lower cholesterol than Mithais (sweet meat) subsbstitute demand.
T: Will have to reinforce technology to international levels once India is a free economy.

Future prospective:
Good growth in Chocolate (up 7%), led by continued strong performances in UK, India and
South Africa. Improved growth in Gum (up 4%) and Candy (up 11%) reflecting strong
performances in emerging markets and growth in North America and Europe.
Excellent growth in Britain & Ireland (up 10%) and emerging markets (South America up 18%,
Asia and Middle East and Africa up 14%). Improved momentum increases our confidence in
good revenue growth in 2010 and 2011 Marketing investment as a percentage of sales was
10.4% on a constant currency basis reflecting the benefits of media deflation.

Auditors report of Cadbury India PLC.

In the auditors report of year end-2009 all the possible details are covered up and noted down
briefly. Further details can be learnt from the following enlisted detail report.
1. We have audited the Balance Sheet of Cadbury India Limited and also the Profit and Loss
Account and the Cash Flow statement for the year ended on that date, annexed there after the
financial statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audit.
2. We conducted our audit in accordance with auditing standards generally accepted in India.
Those Standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
3. As required by the Companies (Auditors Report) Order, 2003, issued by the Central
Government of India in terms of sub-section (4A) of section 227 of the Companies Act, 1956, we
enclose in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the said
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order.
4. Further to our comments in the Annexure referred to above, we report that:
a.

We have obtained all the information and explanations which to the best of our
knowledge and belief were necessary for the purposes of our audit.

b.

In our opinion, proper books of account as required by law have been kept by the
Company, so far as appears from our examination of those books.

c.

The Balance Sheet, Profit and Loss Account and Cash Flow Statement dealt with by
this report are in agreement with the books of account.

d.

In our opinion, the Balance Sheet, Profit and Loss Account and Cash Flow Statement
dealt with by this report comply with the accounting standards referred to in sub section (3C) of Section 211 of the Companies Act, 1956.

e.

On the basis of written representations received from the Directors and taken on record
by the Board of Directors, we report that none of the directors are disqualified as on
December 31, 2009 from being appointed as a director in terms of clause (g) of subsection (1) of Section 274 of the Companies Act, 1956.

f.

In our opinion and to the best of our information and according to the explanations
given to us, the accounts give the information required by the Companies Act, 1956, in
the manner so required and give a true and fair view in conformity with the accounting
principles generally accepted in India:
i.

In the case of the Balance Sheet, of the state of affairs of the Company as at
December 31, 2009;

ii.

In the case of the Profit and Loss Account, of the profit of the Company for
the year ended on that date; and

iii.

In the case of the Cash Flow Statement, of the cash flows for the year ended
on that date.

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Annexure to the Auditors Report:

(Referred to in paragraph 3 of the report of even date)
1. The nature of the Companys business / activities for the year are such that the requirements
of items (iii), (vi), (x), (xii), (xiii), (xiv), (xv), (xvi), (xviii), (xix) and (xx) of paragraph 4 of the
Order are not applicable to the Company.
2. In respect of its fixed assets:
a.

The Company has maintained proper records showing full particulars, including
quantitative details and situation of fixed assets.

b.

Some of the fixed assets were physically verified during the year by the
management in accordance with a program of verification which, in our
opinion, provides for physical verification of all the fixed assets at reasonable
intervals. According to the information and explanations given to them, no
material discrepancies were noticed on such verification.

3. In respect of its inventories:

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a. As explained to them, inventories were physically verified during the year by the
management at reasonable intervals.
b. In teams opinion and according to the information and explanations given to us,
the procedures of physical verification of inventories followed by the
management were reasonable and adequate in relation to the size of the Company
and the nature of its business.
c. In teams opinion and according to the information and explanations given to
them, the Company has maintained proper records of its inventories and no
material discrepancies were noticed on physical verification.
4. In their opinion and according to the information and explanations given to them, there is an
adequate internal control system commensurate with the size of the Company and the nature of
its business for the purchase of inventory and fixed assets and for the sale of goods and services.
Team had not observed any continuing failure to correct major weaknesses in the internal control
system.
5. In respect of contracts and arrangements entered in the register maintained in pursuance of
Section 301 of the Companies Act, 1956, to the best of our knowledge and belief and according
to the best of the information and explanations given to them the particulars of contracts or
arrangements that needed to be entered into the register have been so entered.
6. In teams opinion, the Company has an adequate internal audit system commensurate with the
size of the Company and the nature of its business.
7. Team had broadly reviewed the books of account and records maintained by the Company in
respect of malted foods, pursuant to the order made by the Central Government for the
maintenance of cost records under Section 209(1)(d) of the Companies Act, 1956 and are of the
opinion that, prima facie, the prescribed accounts and records have been made and maintained.
The auditing team, however, not made a detailed examination of the records with a view to
determining whether they are accurate or complete. To the best of the knowledge and according
to the information and explanations given to them, the Central Government has not prescribed
the maintenance of cost records for any other product of the Company.
8. Statutory and other dues: According to the information and explanations given to them, the
Company has generally been regular in depositing undisputed statutory dues, including Provident
Fund, Investor Education and Protection Fund, Employees State Insurance, Income-tax, Service
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Tax, Sales-tax, Wealth Tax, Custom Duty, Excise Duty and any other material statutory dues with
the appropriate authorities during the year.
9. According to the information and explanations given to them, the teams are of the opinion
that the Company has not defaulted in the repayment of dues to financial institutions / banks.
10. According to the cash flow statement and other records examined by them and the
information and explanations given to them, on an overall basis, funds raised on short-term basis
have, prima facie, not been used during the year for long-term investment.
11. to the best of our knowledge and belief and according to the information and explanations
given to company, no material fraud on or by the Company was noticed or reported during the
year.

Independent Auditors report to the members of Cadbury India PLC.

The team had audited the Group and Parent Company financial statements (the "financial
statements") of Cadbury plc for the year ended 31 December 2008 which comprise the Group
Income Statement, the Group Statement of Recognized Income and Expense, the Group and
Parent Company Balance Sheets, the Group and Parent Company Cash Flow Statement, Group
Segmental reporting (a) to (d) and the related notes 1 to 40.
These financial statements have been prepared under the accounting policies set out therein. We
have also audited the information in the Directors' Remuneration Report that is described as
having been audited.
This report is made solely to the Companys members, as a body, in accordance with section 235
of the Companies Act 1985. Our audit work has been undertaken so that we might state to the
Companys members those matters we are required to state to them in an auditors report and for
no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Companys members as a body, for our
audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and Auditors.

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The Directors' responsibilities for preparing the Annual Report, the Directors' Remuneration
Report and the financial statements in accordance with applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of
Directors' Responsibilities.
The responsibility is to audit the financial statements and the part of the Directors' Remuneration
Report to be audited in accordance with relevant legal and regulatory requirements and
International Standards on Auditing (UK and Ireland).
The report gives an opinion to whether the financial statements give a true and fair view and
whether the financial statements and the part of the Directors' Remuneration Report to be audited
have been properly prepared in accordance with the Companies Act 1985 and, as regards the
Group financial statements, Article 4 of the IAS Regulation. The team also report to you whether
in our opinion the information given in the Directors' Report is consistent with the financial
statements. The information given in the Directors' Report includes that specific information
presented elsewhere in the document that is cross referred from the Business Review section of
the Directors' Report.
In addition it reports if, in teams opinion, the Company has not kept proper accounting records,
if they have not received all the information and explanations we require for our audit, or if
information specified by law regarding Directors' remuneration and other transactions is not
disclosed.
It reviews whether the Corporate Governance Statement reflects the Company's compliance with
the nine provisions of the 2006 Combined Code specified for the review by the Listing Rules of
the Financial Services Authority, and it reports if it does not. They are not required to consider
whether the board's statements on internal control cover all risks and controls, or form an opinion
on the effectiveness of the Group's corporate governance procedures or its risk and control
procedures.
It reads the other information contained in the Annual Report as described in the contents section
and consider whether it is consistent with the audited financial statements. It considers the
implications for the report if we become aware of any apparent misstatements or material
inconsistencies with the financial statements. The responsibilities do not extend to any further
information outside the Annual Report.

Basis of Audit Opinion.

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The team conducted audit in accordance with International Standards on Auditing (UK and
Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis,
of evidence relevant to the amounts and disclosures in the financial statements and the part of the
Directors' Remuneration Report to be audited. It also includes an assessment of the significant
estimates and judgments made by the Directors in the preparation of the financial statements, and
of whether the accounting policies are appropriate to the Group's and Company's circumstances,
consistently applied and adequately disclosed.
They planned and performed our audit so as to obtain all the information and explanations which
are considered necessary in order to provide with sufficient evidence to give reasonable
assurance that the financial statements and the part of the Directors' Remuneration Report to be
audited are free from material misstatement, whether caused by fraud or other irregularity or
error. In forming our opinion it also evaluated the overall adequacy of the presentation of
information in the financial statements and the part of the Directors' Remuneration Report to be
audited.

In teams opinion:
the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by
the European Union, of the state of the Groups affairs as at 31 December 2008 and of its profit
for the year then ended; the parent company financial statements give a true and fair view, in
accordance with IFRSs as adopted by the European Union as applied in accordance with the
provisions of the Companies Act 1985, of the state of the parent company's affairs as at 31
December 2008;the financial statements and the part of the Directors' Remuneration Report to be
audited have been properly prepared in accordance with the Companies Act 1985 and, as regards
the Group financial statements, Article 4 of the IAS Regulation; and the information given in the
Directors' Report is consistent with the financial statements.

Report of Independent Registered Public Accounting Firm.

To the Board of Directors and Shareholders of Cadbury PLC. The team had audited the
accompanying consolidated balance sheets of Cadbury plc and subsidiaries (the Company) as
of 31 December 2008, 2007 and 2006, and the related consolidated income statements,
consolidated statements of recognized income and expense, consolidated statements of changes
in equity and consolidated cash flow statements for each of the years then ended. These financial
statements are the responsibility of the Companys management. The responsibility is to express
an opinion on these financial statements based on our audits.
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It conducted audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. It believes that our audits provide a reasonable basis for our opinion.
In teams opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Cadbury PLC and subsidiaries as of 31 December 2008, 2007 and 2006,
and the results of their operations and their cash flows for each of the years then ended, in
conformity with International Financial Reporting Standards (IFRS) as adopted for use in the
European Union and IFRS as issued by the International Accounting Standards Board (IASB).
As discussed in Note 1 to the consolidated financial statements, the accompanying financial
statements and the related notes have been retrospectively restated for the adoption of the revised
IAS 1 Presentation of Financial Statements in 2009, the change in the composition of the
Companys reportable segments implemented in 2009 and the misclassification between cash
and cash equivalents and short-term investments.
It had also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Companys internal control over financial reporting as of
31 December 2008, based on the criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated 26 March 2009 expressed an unqualified opinion on the Companys internal
control over financial reporting.

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Conclusion:
Every Company registered under Companies Act 1956; need to do its audit every year, which is
known as statutory audit. During the company audit, the auditor discusses his observations with
those charged with governance, such as the audit committee of the company, before finalizing
the report. The auditor should be firm in his opinion, and exercise his independence at this level.
This part of the audit is critical, and calls for resilience on the part of the auditor.
An audit report, being a public document, should be drafted skillfully. The code of conduct
prohibits an auditor from divulging any information received by him in the course of his
professional assignment, unless legally required so to do.
Therefore, the auditor shouldn't hesitate to take the help of a legal expert on whether to include
certain comments in his report. And at last he submit the reports with adverse, modified or with
qualified opinion.

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REFERENCES:
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.

www.icai.org
www.caclubindia.com
www.mca.gov.in
www.knowledgebible.com
www.icaiknowledgegateway.org
www.investopedia.com
www.managementparadise.com
www.google.co.in
www.cadbury.in

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