Internal Audit

Conducting the Audit of a Public Limited: Who does it and how?

A public company has a separate legal entity that permits its shares to be traded on the market for the public to take a position in it according to section 2(71) of the Companies Act, 2013. It is compulsory for a Public Limited Company to show its financial position, i.e., balance sheet and estimation, to the public to maintain transparency and neutrality. Therefore, according to the Companies Act, a public limited company must get its accounts audited by the Chartered Accountant (CA) or persons eligible to act as auditors. Auditing the public limited’s primary objective is determining whether a Company is providing the correct representation of its financial state of affairs and complying with the Companies Act. It can be determined by examining the information provided to the auditor, such as books of account, statements of bank account, and financial statements.

A public limited company must go through an audit process for each financial year. It does not matter what nature of business public limited conducts or irrespective of turnover; the public companies must get their Books audited for each financial year.

The companies must get their annual accounts audited annually by independent auditors according to Section 143 of the Companies Act 2013^[1]. In the audit of a Public Limited, the auditors examine the company’s books of accounts, company transactions during the year, and every other relevant document.

During the audit of a public limited, verify that the financial statements are free from material misstatements and are fairly presented.

The opinions prepared by the auditors on the financial statements are available to the investors and other interested parties.

The main objective of the limited public audit is to provide reasonable assurance to investors, capital market participants, and policymakers so they can invest in the company and take appropriate investment decisions based on Auditor’s Report.

Who can be the auditor of a Public Limited Company?

The persons who can be appointed as an auditor of a public company:

• An Independent Chartered Accountant (CA) with a Certificate of Practice (COP).
• A Firm of Chartered Accountants
• The firm with features of a Limited liability partnership can be appointed as an auditor of the company with the condition that most partners should be practising in India.

What is the procedure for conducting the audit of Public Limited Company?

The procedure to conduct an audit of Public Limited is as follows:

1. Examination of Minutes:
   The auditor examined the respective company’s minutes book, primarily related to the books of accounts.
2. Examination of profit and loss Accounts:
   The auditor conducting an audit of a public limited must verify and compare the profit and loss account with the previous year’s audited financial statements to find the cause of deviation between the two periods.
3. Comparison of expenses:
   The Auditor compares the changes in the expenses between the two periods and checks the cause of variations during the two periods under audit.
4. Variation:
   The Auditor checks the reason for any deviation in the gross net profit and pays attention to the valuation of closing stock.
5. Valuation of Assets:
   The Auditors verify whether there is any substantial change in the fixed assets compared with the previous year, especially regarding the valuation of assets.
6. Enquiry in a variation of asset:
   • The auditor inquires about variations in current assets compared to the previous years,
   • checks whether any material discrepancies have been found
   • And how the company dealt with them in the books of accounts.
7. Examination of pre-payment and Accruals:
   The Auditors check for any material alteration in the pre-payments and accruals, identify those variations and report to the client to make proper adjustments in the books of accounts.
8. Examination of other items:
    The Auditor checks whether there is any change in the other items of the balance sheet and whether there is any deviation or substantial change from the familiar figure in the balance sheet.
9. Verification of other assets and Liabilities:
   The Auditor must verify the assets and liabilities owed by the company in their name and report it according to the requirement of CARO, 2020.
10. Commitment and losses:
    The Auditors review whether any capital is present in the company. If any subsequent loss may arise, the auditor checks whether the company has made an appropriate provision.

Conclusion

A Public Limited Company is a separate legal business entity offering shares to be traded on the stock exchange for the general public as per the companies act. To maintain transparency, a company must present its financial position and status to the general public. The auditor inspects the books of account to ensure that they are accurate. Auditing a private limited company is an annual compliance requirement under the Act and Company Law Rules, 2013.

Also Read:
Characteristics of Public Limited Company
Difference Between Private and Public Limited Company
How to Convert a Private Limited Company to Public Limited Company?