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BRANCH AUDIT [Section 228]

Written by ravi vyas on . Posted in Company Audit

Meaning of “Branch Office”

Section 2(9) of the Companies Act, 1956 defines the expression “Branch office” and

accordingly, “Branch Office” in relation to a company means—

(a) any establishment described as a branch by the company; or

(b) any establishment carrying on either the same or substantially the same activity as

that carried on by the head office of the company; or

(c) any establishment engaged in any production, processing or manufacture, but does

not include any establishment specified in any order made by the Central Government

under section 8.

Vide Circular F. No. 8/16(1)/61-PR, the term “branch office” includes any

establishment engaged inany production, processing or manufacture. Branch Office of a

company registered under the Companies Act, 1956 may be located in India or

elsewhere.

Power of the Central Government to declare an establishment not to be a branch

office

The Central Government may, by order, declare that in the case of any company, any

establishment carrying on either the same or substantially the same activity as that

carried on by the head office of the company, or any establishment engaged in any

production, processing or manufacture, shall not be treated as a branch office of the

company for all or any of the purposes of the Companies Act, 1956. [Section 8]

Appointment of auditor for branch office in India

Where a company has a branch office, the accounts of that office shall be audited by the

company’s auditor appointed under section 224 or by a person qualified for

appointment as auditor of the company under section 226.

Appointment of auditor of branch office situated outside India

In case a company has a branch office and branch office is situated outside India, the

accounts of such office shall be audited by any of the following persons:—

(a) company’s auditor, or

(b) a person qualified for appointment as auditor of the company under section 226, or

(c) an accountant duly qualified to act as an auditor of the accounts of the branch office

in accordance with the laws of the country.

Right of company’s auditor in relation to branch audit

Where the accounts of any branch office are audited by a person other than the

company’s auditor, the company’s auditor—

(a) shall be entitled to visit the branch office, if he deems it necessary to do so for the

performance of his duties as auditor; and

(b) shall have a right of access at all times to the books and accounts and vouchers of

the company maintained at the branch office.

Members in general meeting may appoint separate branch auditor

Where a company in general meeting decides to have the accounts of a branch office

audited otherwise than by the company’s auditor, the company in that meeting shall for

the audit of those accounts appoint a person qualified for appointment as auditor of the

company under section 226, or where the branch office is situated in a country outside

India, a person who is either qualified as aforesaid or an accountant duly qualified to act

as an auditor of the accounts of the branch office in accordance with the laws of that

country, or authorise the Board of directors to appoint such a person in consultation

with the company’s auditor. [Section 228(3)(a)]

Branch auditor shall have the same powers and duties as the company’s auditor

The person appointed as branch auditor shall have the same powers and duties in

respect of audit of the accounts of the branch office as the company’s auditor has in

respect of the same. [Section 228(3)(b)]

Books of accounts of branch office

An enquiry was made as to the true meaning of the word “accounts” in terms of section

228(3)(c) of the Companies Act, read with rule 6(a) of the Companies (Branch Audit

Exemption) Rules, read with section 209. It was felt that the accounts maintained in the

branch office would necessarily depend largely on the type of business or activity

carried in the branch, and no principles of universal applicability could obviously be

laid down. However, it was pointed out that the auditor concerned must satisfy himself

that proper books of account under section 209 were being maintained at the branch. It

was also felt that the formal audit certificate in respect of the audit of the branch office

account should be worded, where a branch was run as an independent unit carrying on

manufacturing business or trading activities in the same form as visualised in sections

227(2) and (3) as if the branch itself were a separate company.

In respect of branches where only a certain type of activity was carried on e.g., sales

depot, or purchase depot, the form of the audit certificate prescribed in sections 227(2)

and (3) of the Act would have to be modified or adopted to suit the type of activity

carried on at the branch, the books of account maintained there and the nature of

returns sent from the branch to the registered office of the company. It was felt that, in

any case, two requirements in addition to the other requirements of section 227 that

might be applicable to any particular branch would have to be complied with, namely

the auditor should certify that:—

(i) proper books of account have been kept at the branch;

(ii) that the accounts of returns of the branch show a true and fair view of the working

of the branch.

Report of branch auditor

The branch auditor shall prepare a report on the accounts of the branch office examined

by him and forward the same to the company’s auditor, who shall, while preparing the

auditor’s report, deal with thesame in such manner, as he considers necessary. [Section

228(3)(c)]

Vide Circular No. 10(l)-CL-VI/6l, dated 27-4-1961, the branch/internal auditor shall

forward his report on the accounts of the branch direct to the statutory auditor. If the

statutory auditor required any explanation/comments from the management in regard

to the branch audit report, he would no doubt do so before making the observations in

his audit report. He should also sent a copy of the branch audit report to the Board of

directors simultaneously with the the statutory auditor.

Remuneration of branch auditor

The branch auditor shall receive such remuneration and shall hold his appointment

subject to such terms and conditions as may be fixed either by the company in general

meeting or by the Board of directors of so authorised by the company in general

meeting. [Section 228(3)(d)]

Power of the Central Government to grant exemption from branch audit

Section 228(4) vests overriding powers in the Central Government to make rules

providing for the exemption of any branch office from the provisions of section 228 to

the extent specified in the rules. In making such rules, the Central Government shall

have regard to all or any of the following matters, namely:—

(a) the arrangement made by the company for the audit of accounts of the branch office

by a person otherwise qualified for appointment as branch auditor even though such

person may be an officer or employee of the company;

(b) the nature and quantum of activity carried on at the branch office during a period of

three years immediately preceding the date on which the branch office is exempted

from the provisions of section 228;

(c) the availability at a reasonable cost of a branch auditor for the audit of accounts of

the branch office;

(d) any other matter which in the opinion of the Central Government justifies the grant

of exemption to the branch office from the provisions of section 228.

Source:-www.caclubindia.com

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