Financial auditor is not concerned with propriety of business transactions. However, the exceptions to this rule are contained for audit of limited companies in_

 Options:

a) Section 227 (IA) of the Companies Act, 1956 b) Section 227 (IA) and section 227(4A) of the Act c) CARO, 2003 d) Section 227 (IA) and CARO, 2003

The Correct Answer Is:

d) Section 227 (IA) and CARO, 2003

Why “d) Section 227 (IA) and CARO, 2003” is the correct answer:

Financial auditors typically focus on verifying the accuracy and fairness of financial statements rather than evaluating the propriety of business transactions.

However, there are exceptions to this general principle, especially concerning the audit of limited companies.

Section 227(IA) of the Companies Act, 1956, and the Companies (Auditor’s Report) Order (CARO), 2003, play significant roles in ensuring that auditors pay attention to certain aspects related to the propriety of transactions in limited companies.

Section 227 (IA) of the Companies Act, 1956:

This section mandates that the auditor’s report of a company’s financial statements should state whether proper books of accounts have been maintained and if the financial statements comply with accounting standards.

While this section primarily emphasizes the accuracy and compliance aspects, it indirectly touches upon the propriety of transactions by necessitating the maintenance of proper records.

Companies (Auditor’s Report) Order (CARO), 2003:

CARO, 2003, issued by the Ministry of Corporate Affairs, outlines the specific matters that auditors of certain companies need to report on in their audit reports.

It includes various aspects, such as whether the company has disclosed the transactions that need to be entered into the register maintained under Section 301 of the Companies Act, 1956. This register contains particulars of contracts or arrangements in which directors are interested and should be inspected by the auditors.

The combination of Section 227 (IA) and CARO, 2003, creates a framework that directs auditors to consider the propriety of transactions in limited companies indirectly by ensuring proper record-keeping and disclosure of relevant transactions involving interested directors.

Why the other answers are not correct:

a) Section 227 (IA) of the Companies Act, 1956:

Section 227 (IA) of the Companies Act, 1956, primarily emphasizes the maintenance of proper books of accounts, accuracy in financial reporting, and adherence to accounting standards.

While these elements are essential for an effective financial audit, this section doesn’t explicitly mandate auditors to focus on the propriety of business transactions. It mainly deals with the accuracy and compliance aspects of financial statements rather than the ethical or moral aspects of transactions.

b) Section 227 (IA) and section 227(4A) of the Act:

Section 227(4A) of the Companies Act, 1956, mandates auditors to report on frauds or concerns related to the company’s affairs. However, similar to Section 227 (IA), it doesn’t specifically require auditors to evaluate the propriety of all business transactions.

While fraud detection is crucial, it doesn’t cover the broader spectrum of assessing the ethical or appropriateness aspects of business dealings.

c) CARO, 2003:

The Companies (Auditor’s Report) Order (CARO), 2003, issued by the Ministry of Corporate Affairs, outlines specific matters that auditors need to report on in their audit reports. These matters include related party transactions, defaults in loan repayments, and the maintenance of proper records.

However, CARO, 2003, doesn’t comprehensively cover all facets related to the propriety of business transactions. It focuses on specific areas like related party transactions and defaults but does not provide a holistic framework for evaluating the propriety of all transactions.

In essence, while each of these options addresses certain aspects relevant to financial audits and reporting requirements, none of them solely or comprehensively mandates the evaluation of the propriety of all business transactions for limited companies.

It’s the combined effect of Section 227 (IA) and CARO, 2003, that directs auditors to consider the propriety of transactions indirectly by ensuring proper record-keeping, compliance with accounting standards, and disclosure of relevant transactions involving interested directors, thereby providing a more comprehensive framework for audit assessments in this regard.

Related Posts

• When applying analytical procedures, an auditor could develop independent estimate of an account balance to compare it to-
• Which of the following statements is not true with respect to management representations obtained as per AAS-11?