The accounts of the branch office of a company are required to be audited either the company’s auditor appointed under section 224 or a person qualified for appointment as contemplated section 226 or, where the branch office is situated in a foreign country, either the company’s auditor or a person qualified as aforementioned or an accountant duly qualified to act as an auditor in accordance with the laws of that foreign country [section 228(1)]. In case they are audited a person other than the company’s auditor, the latter would have a right to visit branch office, if necessary, and also to have access at all times to the books and accounts and vouchers maintained at the branch office except in the case of a banking company having foreign branch office, in which case it would be sufficient if the auditor of the company is allowed access to such copies of and extracts from the books and accounts of the branch as have been transmitted to the head office in India [section 228(2) and proviso therein].
A company may at general meeting decide whether it shall have accounts of its branch office audited a person other than the company’s auditor. Upon such a decision being taken, the company may either appoint a person who may be a person qualified under section 226 or, in the case of a foreign branch a person qualified according to the laws of that country to audit the accounts of the branch or authorise the Board of Directors to appoint such an auditor in consultation with the company’s auditor. The auditor so appointed in either case will have the same powers and duties as the statutory auditor and will be paid such remuneration as the company in general meeting or the Board may fix. It will be the duty of the branch auditor to prepare a report on the accounts of the branch office examined him and to forward the same to the company’s auditor who shall, while preparing his report deal with the same in such manner as he considers necessary [section 228(3)]. When the accounts of the branch are audited a person other than the company’s auditor, there is need for a clear understanding of the role of such auditor and the company’s auditor in relation to the audit of the accounts of the branch and the audit of the company as a whole; also, there is great necessity for a proper rapport between these two auditors for the purpose of an effective audit. In recognition of these needs, the Council of the Institute of Chartered Accountants of India have dealt with these issues in AAS 10, “Using the Work of Another Auditor” . It makes clear that in certain situations, the statute governing the entity may confer a right on the principal auditor to visit a component and examine the books of account and other records of the said component, if he thinks it necessary to do so. Where another auditor has been appointed for the component, the principal auditor would normally be entitled to rely upon the work of such auditor unless there are special circumstances to make it essential for him to visit the component and/or to examine the books of account and other records of the said component. Further, it requires that the principal auditor should perform procedures to obtain sufficient appropriate audit evidence, that the work of the other auditor is adequate for the principal
auditor’s purposes, in the context of the specific assignment. When using the work of another auditor, the principal auditor should ordinarily perform the following procedures:
- advise the other auditor of the use that is to be made of the other auditor’s work and report and make sufficient arrangements for co-ordination of their efforts at the planning stage of the audit. The principal auditor would inform the other auditor of matters such as areas requiring special
consideration, procedures for the identification of inter-component transactions that may require disclosure and the time-table for completion of audit; and
- advise the other auditor of the significant accounting, auditing and reporting requirements and
obtain representation as to compliance with them.
The principal auditor might discuss with the other auditor the audit procedures applied or review a written summary of the other auditor’s procedures and findings which may be in the form of a completed questionnaire or check-list. The principal auditor may also wish to visit the other auditor. The nature, timing and extent of procedures will depend on the circumstances of the engagement and the principal auditor’s knowledge of the professional competence of the other auditor. This knowledge may have been enhanced from the review of the previous audit work of the other auditor.
Exemptions to Branches: To prevent any hardship, the Central Government has been emto make Rules so as to exempt branch offices from audit to extent as is specified in the Rules [section 228(4)]. In exercise of the powers conferred section 228(4) the Central Government has framed certain rules, entitled. “The Companies (Branch Audit Exemption) Rules, 1961”. These rules are summarised below :
(1) Exemption based on quantum of activity – If a company, carrying on any manufacturing, processing or trading activity, has a branch office whose average of the ‘quantum of activity’ i.e. the aggregate value of the goods and articles produced, manufactured or processed, or the aggregate value of the goods or articles sold and of service rendered, or the amount of the expenditure, whether of a revenue or capital nature, incurred a branch office of a company during a financial year, (i.e., the financial year of the company in respect of which exemption from branch audit is to be determined) does not exceed Rs. 2 lakhs or 2% of the average of the total turnover of the company including all its branches and other offices and the earnings from services rendered and from any source during the same period, whichever is higher, the branch office shall be exempted from the provisions of section 228. It may be noted that in any such case, the auditors of the company shall have the rights referred to in section 229(2) relating to the audit of accounts of the branch office (Rules 2 and 3). For this exemption there is no necessity to make any application.
(2) Grant of exemption in certain other cases – When an application for exemption is made to the Central Government, it may, after making the necessary inquiry, exempt the branch office from the provisions of audit in section 228 on any one of the following grounds, viz.
- that the company carrying on activities other than those of manufacturing or processing, or trading, has made satisfactory arrangements for the security and check, at regular intervals, of the accounts of the branch office a responsible person competent to scrutinise and check the accounts;
- that the company has made arrangements for the audit of the accounts of the branch office a person otherwise qualified for appointment as branch auditors, even though such a person is an employee of the company;
- that having regard to the nature and the quantum of activity carried on at the branch office or for any other reason a branch auditor is not likely to be available at a reasonable cost; and
- that, for any other reason, the Central Government is satisfied that exemption may be granted.
A copy of the Central Government’s order or exemption is required to be forwarded to the company which shall forthwith send a copy thereof to the auditor of the company and shall also cause it to be read before the next general meeting (Rule 4). (3) Condition of exemption in certain cases – In every case in which an exemption is granted on the ground referred to in clause (ii) of the foregoing paragraph, the company shall afford such a person access, at all the times, to the books, accounts and vouchers maintained at the branch office and also shall furnish him with such information and explanation as he may require. Such a person, during the period of exemption, is required to prepare in respect of each financial year, a report on the accounts of the branch office examined him, as well as, to forward the same to the company’s auditor. A certificate to the effect that no material change had taken place in the arrangements made for the audit of the accounts of the branch office shall have to be attached to the balance sheet for each financial year. Such a certificate shall be signed the manager or secretary of the company and two directors, one of whom shall be managing director where there is one (Rule 6).