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Test 4 - Solution

This document contains a suggested solution to 8 questions regarding the appointment and duties of statutory auditors under the Companies Act 2017 in Pakistan. Some key points addressed include: who has the authority to appoint auditors, qualifications and disqualifications of auditors, the auditor's duties to report to members and not directors, and situations where an auditor or audit firm would be eligible or ineligible for appointment.

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Muhammad Imran
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29 views

Test 4 - Solution

This document contains a suggested solution to 8 questions regarding the appointment and duties of statutory auditors under the Companies Act 2017 in Pakistan. Some key points addressed include: who has the authority to appoint auditors, qualifications and disqualifications of auditors, the auditor's duties to report to members and not directors, and situations where an auditor or audit firm would be eligible or ineligible for appointment.

Uploaded by

Muhammad Imran
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Suggested Solution

Test – 4 Date: November 26, 2021

Q. 1 (a)
(i)Directors cannot appoint Murad & Co because 90 days have passed since incorporation. Now, the appointing authority rests
with SECP.

(ii)The remuneration of the first auditor shall be fixed by the board or by the Commission, if the auditors are appointed by the
board or the Commission, as the case may be.

(b)
1. if company fails to appoint the first auditors within ninety days of incorporation, or
2. if company fails to appoint subsequent auditors at an annual general meeting; or
3. if company fails to fill up a casual vacancy within thirty days of occurrence of the vacancy; or
4. if appointed auditors are unwilling to act as auditors of the company;
5. if a disqualified person is appointed as auditor,

Q. 2
Whether appointment can be accepted Why
(i) Yes Because Companies Act prohibits shareholding by spouse and minor
child only.
(ii) Yes Because only spouse of a director is disqualified for appointment as
statutory auditor.

Q. 3 (a)
Although, as newly formed company, first auditor is appointed by Directors; however, auditor does not have a contractual
relationship directly with directors. Auditor has a duty to report only to members. Auditor is appointed by directors on behalf of
company and rights and duties of statutory auditor are governed by Companies Act 2017, and not by directors.

(b)
Directors cannot remove auditor in their capacity as directors. Statutory auditor can be removed only by members through special
resolution.

(c)
Auditor cannot accept audit engagement on such terms and conditions, as they are in contradiction to requirements of Companies
Act 2017. Auditor should ask directors to change terms and conditions of agreement to make them in accordance with Act. Only
after that, auditor can accept engagement.

Q. 4
a) False (in general meeting, only members appoint auditor)
b) False (if auditor is not appointed in AGM, SECP may appoint auditor)
c) False (powers and duties of auditor are determined by Companies Act 2017 and cannot be limited by management)
d) False (appointment of auditor is compulsory if private company has a paid up capital of more than 1 million)
e) True (Companies Act 2017 restricts only spouse of directors, to be appointed as auditor)
f) False (auditor cannot hold own shares after appointment as auditor)

Q. 5 (a)
If auditor is a firm, report can be signed only by firm (i.e. by partners only) with the name of engagement partner on it. An
employee cannot be authorized to sign the report.
(b)
There is no disqualification as spouse of director is only an employee in audit firm and not a partner, therefore, does not come
under disqualification of auditor as per Companies Act 2017.

(c)
Jafer & Co. can be appointed as statutory auditor of Brass Limited if concerned partner has not been a director in Brass Limited in
last three years.

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Suggested Solution
Q. 6 (i)
Murad, being a director in GL, is disqualified for appointment as statutory auditor in GL as well as its holding PL and PL’s other
subsidiary SL. Therefore, Delta and Company cannot be appointed as statutory auditor of SL.

(ii)
Murad and Company can be appointed as statutory auditor of SEP because the auditor is not indebted to the company as the sum
payable to utility company does not exceed period of 90 days.

Q. 7 (a)
Issue of spouse of auditor as shareholder in audit client:
AFL & Company can be appointed as statutory auditor of SL, because shareholding by spouse of the auditor has been disposed
within 90 days of appointment (there is no violation of the law if father of auditor holds shares in audit client).

Issue of spouse of auditor as employee in audit client:


Auditor is qualified for appointment as his spouse, Saima, is not a director in SL.
(b)
IJK and LMN are NOT associated companies because LMN holds 2 million ordinary shares out of total 13 million i.e. 15.38% which
is below 20% (non-voting shares are not considered in determining status of company).

Bilal and Company can be appointed as statutory auditor of IJK Limited because:
 Spouse of auditor does not hold shares in IJK or any of its associated company.
 Spouse of auditor is not a director in IJK Limited or any of its holding/subsidiary.

Q. 8
1. Firm should communicate its consent to company before AGM. (1 mark)
2. Ensure that removal of predecessor auditor and appoint of firm is in accordance with legal requirements. (1 mark)
3. Prepare and submit engagement letter to the client. (1 mark)

(subject to the maximum of 3.0 marks)

(THE END)

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