Express your views on following cases:
a) Annual General Meeting of Nepal Petro Limited failed to appoint auditor for the fiscal year 2066-67. The Board of Directors appointed the previous auditor reasoning that the previous auditor has conducted audit for two consecutive years only and hence he is eligible. (4 Marks December 2010)
b) Managing Director of East Nepal Bank Limited tells you that since AGM has appointed you as Auditor of the Company and every shareholder knows it, there is no necessity of executing
/signing audit engagement letter. Express your view on this matter.
a) Only the Annual General of a Company can appoint Auditor as per Company Act 2063 as per Section 111. The Board of Directors is empowered to appoint auditors only before the first annual general meeting. In the given case, the board of directors cannot continue the previous auditor though he may be eligible as the board of directors cannot appoint auditors. As per Section 113 of the Act, only the Office of the Company Registrar can appoint auditor on request of the Board of Directors.
b) Though the auditor is appointed AGM, it generally appoints for statutory audit of financial statements only and it is appointed under relevant act. However, an Audit Engagement Letter executed for the purpose as Terms of Audit Engagement” states that the auditor and the client should agree on the terms of the engagement. The agreed terms would need to be recorded in an audit engagement letter or other suitable form of contract. It is in the interest of both client and auditor that the auditor sends an engagement letter, preferably before the commencement of the engagement, to help in avoiding misunderstandings with respect to the engagement. The engagement letter documents and confirms the auditor’s acceptance of the appointment, the objective and scope of the audit, the extent of the auditor’s responsibilities to the client and the form of any reports.
The principle contents shall be:
The objective of the audit of financial statements.
Management’s responsibility for the financial statements.
The scope of the audit, including reference to applicable legislation, regulations or pronouncements of the Institute of Chartered Accountants of Nepal (ICAN).
The form of any reports or other communication of results of the engagement
The fact that because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatement may remain undiscovered.
Unrestricted access to whatever records, documentation and other information requested in connection with the audit.