NEHRU ARTS AND SCIENCE COLLEGE
DEPARTMENT OF COMMERCE
E-LEARNING MATERIALS
CLASS
SUBJECT
: III B.COM CA & PA
: PRINCIPLES OF AUDITING
Unit – I
Auditing– Origin – Definition – Objectives – Types – Advantages and
Limitations – Qualities of an Auditor – Audit Programmes.
SECTION A
1.Audit is derived from the Latin word “AUDIRE” which means “to
hear”
2. The main objective of Auditing is to express expert opinion on
financial statements
3. Error of omission is one where a transaction has not been recorded
in the books of account either wholly or partially.
4. A Compensating error (or) Off-setting error is one which is
counter-balanced by any other error.
5. Error of Duplication arises when an entry in a book of original
entry has been made twice & has been posted twice.
6. Occasional audit is conducted whenever the need arises and the
client desires it to be carried out.
7. Vouch and Post audit is that where the auditor checks each and
every transactions right from its origin till they are posted.
8. The plan of action is called “Audit programme”
SECTION B
1. What are the advantages of auditing?
 Errors and frauds are located at an early date
 The auditing of accounts keep the accounts clerk regular and
vigilant
 In case of fire, the Insurance Co., may settle the claim on the
basis of previous audited Balance sheet
 Money can be easily borrowed on the basis of previous audited
Balance sheet
 In case of sale of a concern, valuation of assets and goodwill can
be easily done as the accounts have already been subject to audit
 It facilitates the settlement of a deceased partner
 The management may consult the auditor and seek his advice on
certain technical points
 Income tax Authorities accept the profit & loss A/c which has
been audited by qualified auditor
 Audited accounts are considered more or less correct by the
Sales tax Authorities
 If the accounts have been prepared on a uniform basis,accounts
of one year can be compared with other years.
 TUESDAY, DECEMBER 1, 2009
2.What are the Limitations of an audit?
.1. Reasonable cost. A limitations on the cost of an audit results in
selective testing or sampling, of the accounting records and
supporting data. In addition, the auditor may choose to test internal
controls and may obtain assurance from a well functioning system of
internal controls.
2. Reasonable length of time. the auditor's report on many public
companies is usually issued three or five weeks after the balance sheet
date. This time constraint may affect the amount of evidence that can
be obtained concerning events and transactions after the balance sheet
date that may have an effect on the financial statements. Moreover,
there is a relatively short time period available for resolving
uncertainties existing at the statement date.
3. Alternative accounting Principles. Alternative accounting
principles are permitted under GAAP. Financial statement users must
be knowledgeable about a company's accounting choices and their
effect on financial statements.
4. Accounting Estimates. Estimates are an inherent part of the
accounting process, and no one, including auditors, can foresee the
outcome of uncertainties. Estimate range from the allowance for
doubtful accounts and an inventory obsolescence reserve to
impairment tests of fixed assets and goodwill. An audit can not add
exactness and certainly to financial statements when these factors do
not exist.
3.What is Audit programme?what are its advantages?
Audit programme represents an outline of procedures to be
followed to support an opinion on financial staements. It is
the auditor's plan of action.
In other words, it provides a plan of the work of
examination and a set of audit procedures
ADVANTAGES OF AUDIT PROGRAMME
1. Every essential part of the work of audit can be duly carried on
and there is less chance of its being overlooked or omitted.
2. The auditor may easily know about the progress of the work
done at any point by simply looking at the program.
3. Complete coverage of audit work without any duplication.
4. Responsibilities can be fixed.
5. Division of work among the juniors can be easily made.
6. In case of any junior going on leave or leaving the work, there
will be minimum dislocation of work.
7. It serves as a guide for future references.
8. Audit work can start immediately and the work can be easily
planned and phased out.
9. It serves as a ready check-list of procedures to be applied and the
work already finished.
10. Supervision and control of the work can be undertaken in a
planned manner.
11. The auditor is able to work more efficiently while carrying out
audit of several concerns simultaneously.
12. Audit program establishes a uniformity of work to be achieved
during the process of audit.
13. Audit program is very useful for final review, especially before
signing the audit report.
14. Audit program acts as a good evidence for the work performed
during the course of audit.
15. It can be presented in the court of law if and when necessary to
prove that there has been no negligence and the work has been
completed.
4.What are the disadvantages of Audit programme?
DISADVANTAGES
1. The audit work conducted becomes too mechanical.
2. Audit program is suitable only for large audits.
3. Audit program cannot be established for every type of business
concern.
4. Audit program may lose the initiative and interest, of the audit
staff as they have to do what they are asked to do and not what they
feel like doing.
5. The audit, program, however, thorough may not be completed
and certain items may be left from being checked.
6. It needs change every year and if changes not made it may
become too rigid in nature.
7. Procedures may be adopted which may not be suitable or
appropriate to the circumstances of the client.
8. New matters of importance arising in the business concern may
be overlooked.
SECTION C
1. What are the objectives of auditing?
The objectives of an audit may broadly be classified as:
1. Primary Objectives
2. Secondary objectives.
Primary Objectives:
The main purpose of audit is to judge the reliability of the financial
statements and the supporting accounting records for a particular
financial period. The Companies Act, 1956 requires that the auditor
of a company has to state whether in his opinion the accounts disclose
a true and fair view of the state of company's affairs, profit and Loss
Account and Balance Sheet of the state of affairs of a business, the
auditor carries out a process of examination and verification of books
of accounts and relevant documents. Such an examination will enable
the auditor to report to his client on the financial condition and
working results of the organization. While carrying out the
examination of the various books of accounts, relevant documents and
evidences, the auditor may came across certain errors and frauds.
Despite such a possibility the detecting of errors and frauds is an
incidental object. However, laymen have always associated the
detection of errors and frauds as the main function of an auditor
which is not true. At the same time audit also discloses how far the
accounting system adopted in the organisation is adequate and
appropriate in recording the various transactions as well as the
weakness of these systems.
Secondary Objectives:
As stated above, an auditor has to examine the books of accounts and
the relevant documents in order to report on the financial condition of
the business. In the process of such an investigation of accounts
certain errors and frauds may be detected. These are discussed under
the following two heads:
A. Detection and Prevention of Errors
B. Detection and Prevention of Frauds
Detection and prevention of Errors: Various types of errors are
mentioned below:
1. Clerical Errors: Such an error arises on account of wrong
posting. For example, an amount received from Thomas is credited to
Sunny. Though there is wrong posting still the trial balance will
agree. Clerical errors are of three types as follows:
i) Errors of Commission: There errors are caused due to wrong
posting either wholly or partially of the amount in the books of
original entry or ledger accounts or wrong calculations, wrong
totaling, wrong balancing, and wrong casting of subsidiary books.
For example Rs. 500 is paid to a vendor and the same is recorded in
the cash book. While posting to the ledger, the Vendor's account is
debited by Rs. 500. It may be due to carelessness of the clerk. Most
of the errors of commission are reflected in the trial balance and these
can be discovered by routine checking of the books.
ii) Errors of Omission: Such errors arise when the transactions are
not recorded in the books of original entry or posted to the ledger.
For example, sales are note recorded in the sales book or omission to
enter invoices in the purchase book. For example Rs. 200 is paid to a
vendor. The entry in the cash book is made on the credit side but
posting to the vendor side is omitted. Errors due to entire omission
will not affect the trial balance whereas errors due to partial omission
will affect the trial balance and can be detected.
iii) Compensating Errors: When two or more errors are committed
in such a way that the result of these errors on the debits and credits is
nil, they are referred to as a compensating errors. For example, Anil's
account which was to be debited for Rs. 500 was credited for Rs. 500
and similarly, Sunil's account which was to be credited for Rs. 500
was debited for Rs.500. These two mistakes will nullify the effect of
each other. Both the sides of the trial balance are equally affected.
As such, these errors are difficult to locate unless detailed
investigation is undertaken.
2. Errors of Principle: Such errors are committed when some
fundamental principle of accounting is not properly observed in
recording transaction. For example, if there is incorrect allocation of
expenditure or receipt between capital and revenue or when closing
stock is over-valued. Though trial balance will not disagree, the
Profit and Loss Account may be very much affected. Sometimes,
such errors are committed deliberately to falsify the accounts or
unintentionally due to lack of knowledge or sound principles of
accounting. Thus, a thorough examination is to be done to locate
such errors.
Detection and Prevention of Frauds: Frauds are always committed
deliberately and intentionally to defraud the proprietors of the
organization. If the frauds remain undetected, they may affect the
opinion of the auditor on the financial condition and the working
results of the organization. It is, therefore, necessary that the auditor
should exercise utmost care to detect such frauds.
2.What are the types of Audit?
Types of Audits and Reviews:
1.
2.
3.
4.
5.
6.
7.
Financial Audits or Reviews
Operational Audits
Department Reviews
Information Systems Audits
Integrated Audits
Investigative Audits or Reviews
Follow-up Audits
Financial Audit
A historically oriented, independent evaluation performed for the
purpose of attesting to the fairness, accuracy, and reliability of
financial data. CSULB's external auditors, KPMG, perform this type
of review. CSULB's Director of Financial Reporting coordinates the
work of these auditors on our campus.
Operational Audit
A future-oriented, systematic, and independent evaluation of
organizational activities. Financial data may be used, but the primary
sources of evidence are the operational policies and achievements
related to organizational objectives. Internal controls and efficiencies
may be evaluated during this type of review.
Department Review
A current period analysis of administrative functions, to evaluate the
adequacy of controls, safeguarding of assets, efficient use of
resources, compliance with related laws, regulations and University
policy and integrity of financial information.
Information Systems (IS) Audit
There are three basic kinds of IS Audits that may be performed:
1. General Controls Review
A review of the controls which govern the development,
operation, maintenance, and security of application systems in a
particular environment. This type of audit might involve
reviewing a data center, an operating system, a security software
tool, or processes and procedures (such as the procedure for
controlling production program changes), etc.
2. Application Controls Review
A review of controls for a specific application system. This
would involve an examination of the controls over the input,
processing, and output of system data. Data communications
issues, program and data security, system change control, and
data quality issues are also considered.
3. System Development Review
A review of the development of a new application system. This
involves an evaluation of the development process as well as the
product. Consideration is also given to the general controls over
a new application, particularly if a new operating environment
or technical platform will be used.
Integrated Audit
This is a combination of an operational audit, department review, and
IS audit application controls review. This type of review allows for a
very comprehensive examination of a functional operation within the
University.
Investigative Audit
This is an audit that takes place as a result of a report of unusual or
suspicious activity on the part of an individual or a department. It is
usually focused on specific aspects of the work of a department or
individual. All members of the campus community are invited to
report suspicions of improper activity to the Director of Internal
Auditing Services on a confidential basis. Her direct number is 562985-4818.
Follow-up Audit
These are audits conducted approximately six months after an internal
or external audit report has been issued. They are designed to evaluate
corrective action that has been taken on the audit issues reported in
the original report. When these follow-up audits are done on external
auditors' reports, the results of the follow-up may be reported to those
external auditors.
3.What are the qualities of an Auditor?
QUALITIES OF AN AUDITOR
1.Independence
An auditor should be independent to work without the fear of
management. He must report to owner fairly with all material facts.
He should confidently argue on weak points of management
without their influence. He is liable to prove the truth of statements
so he must not work under the direction of client’s staff or third
party.
2. Integrity/ Honesty
Lord Justice Lindley has said: “An auditor must be honest, i.e. he
must not certify what he does not believe to be true, and he must take
reasonable care and skill before he believes what he certifies is true.”
(In re London and General Bank, 1895).
3.Objectivity
An auditor must have an impartial or neutral personality. His
biased behavior may lead to organizational conflicts so he
should pave the way between management and owners. One
single favored statement may cause endless breakdown of
business.
4. Professional Competence
Conceptual skills in auditor assure the high level perfection in
his work performed. He should be well conversant with
accounting rules, generally accepted accounting principles and
above all business practices in action. An auditor should have
full knowledge about Tax Laws, Banking Laws, Insurance Laws
and Business Laws etc.
Lord Justice Romer “if an auditor has, even in one instance,
fallen short of the strict duty of an auditor, he cannot, I
apprehend, be excused merely because in general he has
displayed the highest degree of care and skill.”
5. Confidentiality
In no case auditor is allowed to leak out the secrets of business,
that is why working papers (internal records) collected from
client’s staff are to be kept in safe custody although the property
of auditor.
6. Professional behavior … ethical
Attitude, behavior, knowledge of auditor must be in positive
direction. Mind should process activities to solve the problem
rather creating. Such behavior creates environment of
cooperation and team spirit.
7. Technical standards
Ail the international auditing standards should be well on the
tips of auditor so that audit is in compliance of standards and to
minimize the deviation in between the lines. Multinational
culture enforces audit personnel to follow ISA to avoid
contradictions of concepts.
8. Detector of errors and frauds
An auditor should be very keen and expert “in detecting errors
and frauds. Like a watchdog, he must encircle all vicious and
bad areas well in time.
9. Knowledge of business
Auditor should have sufficient knowledge of the business whose
financial position is to be certified. He must familiarize himself
with organizational processes so that technical terms and heads
of accounts used in financial statements are clear to him. He
should know about internal control system of organization,
manual or computer based techniques used and nature of
documents and records prepared by management.
10.
Ability to plan
An auditor should be a good planner. He should decide that
which task is to be completed in what time? An uphill task of
auditor is to enable himself to prepare audit program to jot down
his step-by-step activities.
11.
Experienced
Old wise says that nothing better than experience to gain and
retain success. How an auditor can be cheated who audited
several organizations as a statutory requirement?
12.
Foresighted
Auditor has not to work for a day or two in auditing profession
so he should work by keeping eyes on future as well. Audit plan
made by an auditor for one industry is helpful in future while
conducting the audit of similar industries.
13.
Goodwill maker
Auditor makes the repute of a company where he conducted
audit. On the basis of audited accounts that company can easily
take loans, can deal with insurance agents suppliers, creditors
etc.
14.
Initiative and creative
Auditor should introduce new ways and techniques of checking.
Accountants usually become familiar with auditor and his way
to precede so every time changing methods of checking will not
allow accountants to commit errors and frauds.
15.
Sincere
An auditor should be sincere only with the client and not with
the management or third party. If auditor utilizes his
professional skill in the interest of other than appointing
authority; that will be considered a fraudulent conduct.
16.
Leadership
Many junior and senior clerks work under the entire control of
Principal auditor. He should supervise them with the full spirit
of leadership. Auditor should cooperate and coordinate with his
staff to complete work with the job satisfaction of workers.
17.
Qualified
Companies Ordinance, 1984, and other related national laws
require that at least in audit of public owned businesses, an
auditor must be a chartered accountant (CA) within the meaning
of Chartered Accountancy Act, 1961.
18.
Reliability
Auditor should rely on the statements given by accountant he
should not be suspicious unless and until circumstances make
him suspicious.
UNIT –II
Unit – II
Internal Control – Internal Check and Internal Audit –Audit Note
Book – Working Papers. Vouching
– Voucher – Vouching of Cash Book – Vouching of Trading
Transactions – Vouching of Impersonal
Ledger.
1.
2.
3.
4.
5.
SECTION A
Internal Auditor is appointed by the Management
Statutory Auditor is appointed by the Shareholders.
The act of establishing the accuracy and authenticity of entries
in the account books is called Vouching.
Day book (or) Sales book records only credit sales
Contigent liability is one which may or may not arise in the
future
SECTION B
1.Explain the mechanism/criteria for good internal check?
 Division of work
 Job rotation
 Authority levels
 Separation of Custody & Recording
 Accounting controls
2.What is Audit Note Book?What are its contents?
An audit notebook is one in which the auditor makes notes of all
important items that he comes across in course of his audit work.
Contents of Audit Note Book:.
 Particulars of the vouchers and invoices which could not
produced at the time of audit, points which could not be
satisfactory answered and which required further clarification,
explanation and meaning of the technical terms pertaining to
that particular business, information and explanation received
during the course of audit, a record of the work done at each
visit, schedule of investments.
 Debtors, creditors and important legal points affecting the rights
of directors, shareholders, partners etc and points which must be
incorporated in the audit report are content of audit note book.
 A copy of audit program is also kept in this note book.
The mistakes and errors discovered.
 Alist of books of account maintained by the client.
 Accounting method followed in the business
 Date of commencement and Completion of the audit.
3.What is working papers?what are its objectives?
Working paper are those records kept by the auditor of the
procedures applied, the tests performed, the information obtained, and
the pertinent conclusions reached in the audit.
Objective of working papers
 to aid the auditor in providing reasonable assurance that an
adequate audit was done in accordance with GAAS.
 Working papers give a basis for planning the audit, a
record of the evidence accumulated, results of tests, data
for determining the proper type of audit report and
 a basis for review by supervisors.
6. what is a voucher? What is vouching?
Voucher:
A voucher is a documentary evidence in support of a transaction
in the books of accounts
Vouching:
 The act of examining vouchers is referred to as vouching.
 It is the practice followed in an audit, with the objective of
establishing the authenticity of the transactions recorded in
the primary books of account.
 It essentially consists of verifying a transaction recorded in
the books of account with the relevant documentary evidence
and the authority on the basis of which the entry has been
made;
 And also confirming that the amount mentioned in the
voucher has been posted to an appropriate account which
would disclose the nature of the transaction on its inclusion in
the final statements of account.
SECTION C
1.Explain the system of internal check regarding cash receipt & payment.
Cash receipts procedures:Cash receipts should be checked because it has a great scope for
misappropriation of cash if there is no well organized system of internal
check.
The following system of internal check may be adopted for cash receipts:1) All incoming mails should be opened under the supervision of a person who
has norelation with accounts and administration;
2) Every receipt of cash should be entered in a rough cash book in the
presence of aresponsible person;
3) All cheques received should be immediately cashed;
4) All incoming cheques and postal orders should be cancelled by means of
stamp with acrossing of ³Not Negotiable-Account Payee Only´;
5) All cash receipts should be acknowledged by issuing printed receipts with
counterfoilsor carbon copies;
6) Receipts should be signed by responsible official and counter signed by the
cashier;
7) Receipts should be consecutively numbered;
8) Unused receipts should be kept under lock and key;
9) Spoiled receipts should be cancelled and should be preserved along with
counterfoils;
10) If some alteration is made in the receipts already written, it should be
properly initialed;
11) No blank counterfoils should be accepted;
12) Automatic till¶s or cash register must be used for checking purpose;
13) All cash receipts should be deposited in the bank immediately;
14) Cashier should not access to the ledgers;
15) Bank reconciliation statement should be prepared periodically by a person
other than cashier.
Cash payments procedures:1) Person making payment should be different from person receiving cash;
2) All payments should be made by cheque except petty cash payments;
3) Unused cheque book should be under the custody of a responsible person;
4) Person responsible for preparing cheques should be clearly specified;
5) As and when cheque is prepared, the relevant bill should be stamped
³PAID´;
6) Only authorized person should sign the cheque;
7) No cheques should be signed in advance;
8) Each cheque should be accounted for and cancelled cheque should be
preserved;
9) Bank reconciliation statement should be prepared at regular intervals.
3. what is contigent liability?What are the duties of an auditor
regarding it?
Contingent Liabilities
The term 'contingent liabilities' refers to obligations relating to past
transactions or other events or conditions that may arise in
consequence of one or more future events which are presently deemed
possible but not probable. Contingent liabilities may or may not
crystallize into actual liabilities. If they do become actual liabilities,
they give rise to a loss or an expense. The uncertainty as to whether
there will be any legal obligation differentiates a contingent liability
from a liability that has crystallized.
The following general procedures may be useful in verifying
contingent liabilities.
(a) Review of minutes of the meetings of board of
directors/committees of board of directors/other similar body.
(b) Review of contracts, agreements and arrangements.
(c) Review of list of pending legal cases, correspondence relating to
taxes, duties, etc.
(d) Review of terms and conditions of grants and subsidies availed
under various schemes.
(e) Review of records relating to contingent liabilities maintained by
the entity.
(0 Enquiry of, and discussions with, the management and senior
officials of the entity.
(g) Representations from the management.
The auditor should verify that contingent liabilities do not include
any items which require an adjustment of relevant assets or liabilities.
UNIT – III
Verification and Valuation of Assets and Liabilities – Auditor’s
position regarding the
valuation and verifications of Assets and Liablities – Depreciation –
Reserves and Provisions– Secret Reserves.
1.
2.
3.
4.
5.
SECTION A
Verification means proving the truth (or) confirmation.
Floating assets are those assets which are acquired for resale or
converting them in to cash.
Intangible assets are those which cannot be seen or touched.
If the land has been mortgaged, the auditor should examine the
Mortgage deed
Inscribed stock is that type of stock where no certificate by the
issuing authority is issued to the purchaser of such stock.
SECTION B
1.State the object of verification and valuation of assets from the point
of view of an auditor of a Limited Company.
Object of Verification of asset:
The object of verification of assets is the satisfaction by the auditor as
to its existence, proper disclosure, proper valuation and correct
ownership on the balance sheet. The following are the main objects of
the verification.
1. Certify the Ownership
The object of verification is to certify the ownership. The document
deeds, vouchers and agreements etc can obtain the real ownership.
2. Position of Assets
The audit by the verification of the assets in the business the assets
may be mortgaged or pledged for borrowing money. The auditor has
to check that the same has been written in the balance sheet in the
proper way.
3. Existence of Assets
The object of the verification is to ascertain the existence of the
assets. The existence of assets is stated in the proper but there may be
the assets be sold, stolen or destroyed. In this case the auditor has to
check the assets physically.
4. Detect Fraud
Another purpose of verification is to find out the frauds if conducted.
In come cases the assets may be stole or misused. The auditor can
verify the real position of assets. The responsibilities of fraud are to
be the management.
5. Verify Possesssion
The purpose of verification is to check the possession of the assets.
The assets should be safeguarded the assets of the business is used for
the business only. The possessions of the assets are in the
management.
6. True and Fair View
Another object of the verification is to determine the true and fair
view about the business financial statements. After the verification it
is confirmed that the financial statements are according to the
requirements and is fact.
7. Depreciation Plans
Another purpose of the verification is the examination of the
depreciation of assets of the business. The auditor has to check that
the proper state the depreciation is charge on the assets according to
the accounting principal. As the life of each assets is different, so the
depreciation is charged as per rule.
8. Valuation of Assets
The object of the verification is also to check the assets valuation.
Which does the management value. The auditor has to fine that the
valuation is true and according to the accounting principal.
9. Valuation of Liabilities
The management determines the valuations of the liability. The object
of verification is to check that the valuation is the true and according
to the accounting principals.
10. Evaluation Methods
The object of the verification is to the check the methods of
evaluation. To evaluate the recorded items the compliance and
substantive test are applied. According to the business requirements
the auditor can rely upon anyone method from above.
11. Recording Methods
The object of the verification is to determine the method of recording
of the both sides of the balance sheet as the assets and liabilities. The
auditor has check that all types of assets recorded separately and the
depreciation is deducted and the value of asset is charged according to
the rule.
12. Internal Control
To evaluate the internal control is also the object of the verification.
The business management is efficient if the internal control is
effective. And if the internal control is not effective the assets cannot
be used properly.
13. Arithmetic Accuracy
Another object of the verification is to note down the arithmetical
accuracy of the balance sheet. All the recording of the transactions,
their posting of totals, sub-totals, addition and depreciation must
required the calculation. The auditor has to require the accuracy of the
figure work.
14. Treatment of Items
The object of the verification is to check that the different items have
been treated correctly as the treatment of the taxes and discount etc.
15. Current Period
The object of verification is to check that the transactions of the
business are related to the current year for which the audit work is
being done.
2.What are the causes for Depreciation?
The major causes of depreciation are as follows:
1. Wear And Tear
wear and tear refer to a decline in the efficiency of asset due to
its constant use. When an asset losses its efficiency, its value
goes down and depreciation arises. This is true in case of
tangible assets like plant and machinery, building, furniture,
tools and equipment used in the factory.
2. Effusion Of Time
The value of asset may decrease due to the passage of time even
if it is not in use. There are some intangible fixed assets like
copyright, patent right, and lease hold premises which decrease
its value as time elapse.
3. Exhaustion
An asset may loss its value because of exhaustion too. This is
the case with wasting assets such as mines, quarries, oil-wells
and forest-stand. On account of continuous extraction, a stage
will come where mines and oil-wells get completely exhausted.
4. Obsolescence
Changes in fashion are external factors which are responsible
for throwing out of assets even if those are in good condition.
For example black and white televisions have become obsolete
with the introduction of color TVs, the users have discarded
black and white TVs although they are in good condition. Such
as loss on account of new invention or changed fashions is
termed as obsolescence.
5. Other Causes
Market value and accident of an asset are other causes of
depreciation which decrease in the value of assets.
3. What is Sinking Fund?How it is created?
A fund into which a company sets aside money over time, in order
to retire its preferred stock, bonds or debentures. A fund into which
a company sets aside money over time, in order to retire its
preferred stock, bonds or debentures. In the case of bonds,
incremental payments into the sinking fund can soften the financial
impact at maturity. Investors prefer bonds and debentures backed
by sinking funds because there is less risk of a default.
The creation of a sinking fund is a method of amortization or
extinguishment of a debt not yet matured, and is as binding on the
debtor organization (obligor) as any other provision of the contract.
A sinking fund is usually placed in the hands of a sinking fund trustee
named under the terms of a mortgage deed. It may be invested in
three ways: deposited in a bank to bear interest, invested in bonds of
other organizations, and invested in bonds of the issuing organization.
Since there is the opportunity for mismanagement of sinking fund
investments, it is usually considered safer to apply sinking fund
payments to the purchase of the company’s own bonds being
amortized, thus extinguishing the very debt for which the sinking fund
was created.
There are three ways in which a sinking fund may be invested in a
company’s own bonds: purchasing and keeping alive parts of other
issued, purchasing and keeping alive parts of the issue being
amortized, and purchasing and cancelling parts of the issue being
amortized. The latter method is usually considered the best since it
not only decreases fixed charges, but increases the equity of the
owners and strengthens the security of the bondholders. It also
prevents mismanagement of the sinking fund and tends to stabilize the
price by making a market for the bonds.
SECTION C
1.What is Secret Reserve?How it is created?
A secrete reserve is a reserve that is created but not stated in a balance
sheet. There are various ways of creating secrete reserves. The banks
insurance companies and other financial institutions wants to win
public confidence for there successful working. These business
concerns can create secret reserves. It is a technique to show poor
financial position to reveals and in case of need such reserves are
available to meet crisis.
There are merits and demerits of such reserves. The auditor can
examine the existence of such a situation. The amount may not be
high.
A secret reserve is created by the following methods:
1. By under valuation of assets much below their cost or
market value, such as investment, stock in trade, etc.
2. By not writing up the value of an asset, the price of
which has permanently gone up.
3. By creating excessive reserve for bad and doubtful debts
or discount on sundry debtors.
4. By providing, excessive depreciation on fixed assets.
5. By writing down goodwill to a nominal value.
6. By omitting some of the assets altogether from balance
sheet.
7. By changing capital expenditure to revenue account and
thus showing the value of assets to be less than their
actual value.
8. By overvaluing the liabilities.
9. By the inclusion of fictitious liabilities.
10. By showing contingent liabilities as actual liabilities
2. What are the methods of Depreciation?
Straight-line depreciation
Straight-line depreciation is the simplest and most-often-used
technique, in which the company estimates the salvage value of the
asset at the end of the period during which it will be used to generate
revenues (useful life) and will expense a portion of original cost in
equal increments over that period. The salvage value is an estimate of
the value of the asset at the time it will be sold or disposed of; it may
be zero or even negative. Salvage value is also known as scrap value
or residual value.
Declining-balance method (or Reducing balance method)
Depreciation methods that provide for a higher depreciation charge in
the first year of an asset's life and gradually decreasing charges in
subsequent years are called accelerated depreciation methods. This
may be a more realistic reflection of an asset's actual expected benefit
from the use of the asset: many assets are most useful when they are
new. One popular accelerated method is the declining-balance
method. Under this method the book value is multiplied by a fixed
rate.
Activity depreciation
Activity depreciation methods are not based on time, but on a level of
activity. This could be miles driven for a vehicle, or a cycle count for
a machine. When the asset is acquired, its life is estimated in terms of
this level of activity. Assume the vehicle above is estimated to go
50,000 miles in its lifetime. The per-mile depreciation rate is
calculated as: ($17,000 cost - $2,000 salvage) / 50,000 miles = $0.30
per mile. Each year, the depreciation expense is then calculated by
multiplying the rate by the actual activity level.
Units of time depreciation
Units of time depreciation is similar to units of production, and is
used for depreciation equipment used in mine or natural resource
exploration, or cases where the amount the asset is used is not linear
year to year.
A simple example can be given for construction companies, where
some equipment is used only for some specific purpose. Depending
on the number of projects, the equipment will be used and
depreciation charged accordingly.
[edit] Group depreciation method
Group depreciation method is used for depreciating multiple-asset
accounts using straight-line-depreciation method. Assets must be
similar in nature and have approximately the same useful lives.
Composite depreciation method
The composite method is applied to a collection of assets that are not
similar, and have different service lives. For example, computers and
printers are not similar, but both are part of the office equipment.
Depreciation on all assets is determined by using the straight-linedepreciation method.
Unit – IV
Audit of Joint Stock Companies – Qualification – Dis-qualifications –
Various modes of
Appointment of Company Auditor – Rights and Duties – Liabilities of
a Company Auditor –
Share Capital and Share Transfer Audit – Audit Report – Contents
and Types.
SECTION A
1. The first auditor is appointed by the Board of Directors.
2. When the auditors are not appointed at the annual general meeting,
Central Government appoints a person to fill the vacancy.
3. The accounts of the branches of the company are audited by the
company statutory auditor.
4. The right of lien of an auditor is particular
5. The auditor should send his report to the shareholders
SECTION B
1What are the Qualifications of an Auditor?
Following persons are qualified to be appointed as auditor of a
company.
1. Practicing Chartered Accounts (Sec 226 (1)J)
A person shall not be qualified for appointment as auditor of a
company unless he is a chartered accountant within the meaning of
the chartered accountant act 1949.
A chartered accountant means a person who is the member of the
institute of chartered accountant of Pakistan. He will be Deemed to be
in practice. When individually or in partnership with other chartered
accountants in practice he for consideration received or to be
received.
Practice of Accountancy
He engages himself in the practice of accountancy.
Verification
He offers to perform or performs the services involving the auditing
or verifications of the financial transactions, books of accounts or
records or the preparation, verification or certification of financial
accounting and related statement or holds himself out to the public as
an accountant.
Professional Services
He renders the professional services or assistance in or about matters
of principal or detail relating to accounting procedure to the
recording, presentation or certification of financial facts or data.
Renders the Services
Renders the services as, in the opinion of the council are or may be
renders by a chartered accountant in practice.
2. Certified Auditor (Sec 226 (2))
A part from practicing chartered accountants, a person holding a
certificate under the restricted auditor's certificate rules, 1965 is
also qualified to be appointed as auditor of a company. Such
certified auditors are subject to the rules framed in this behalf by
the central Government.
The object of the provisions as to qualified is to ensure that only
persons of proven worth and standing and under the discipline of
a statutory body, are appointed as auditor.
2. What are the Disqualifications of an Auditor?
The following person cannot become the auditor of the company
according section 254.

A body corporate

An officer or employee of the company

A person who is the employment of an officer or employee of
the company.

A person who is indebted to the company for an amount
exceeding Rs. 1000 or who has given any guarantee of any third
person to the company for an amount exceeding Rs. 1000.

The spouse of a director of the company.

A person who was a director other officer or employee of the
company at any time during the preceding three years.

A person who is a partner of a director, officer or employee of a
company
According to Section 226(4) a person shall not be qualified for
appointment as auditor of any body corporate. Further if the auditor
already holds the appointment as auditor in the specified number of
companies as per Section {Section 224(1-13)}, he will be disqualified
for further appointment as auditor in any other company.
3.How an Auditor can be appointed?
The directors appoint the first auditor of the company. The auditor
then holds office until the end of the first meeting of the company at
which its accounts are laid before the members. At that meeting the
members of the company can re-appoint the auditor, or appoint a
different auditor, to hold office from the end of that meeting until the
end of the next meeting at which accounts are laid.
However, private companies can pass an 'elective resolution' not to
lay accounts before the members in a general meeting. If this is done,
then the auditor has to be re-appointed, or a new one appointed, at
another meeting of the company's members that must be held within
28 days of the accounts being sent to the members.
Private companies can also pass an elective resolution dispensing
with the need to appoint an auditor every year. If that happens, the
auditor already appointed remains in office without further formality
until a resolution is passed to re-introduce annual appointment or to
remove him or her as auditor.
4.What are the Rights and Duties of a company Auditor?
Powers/Rights of an Auditor :
i) Right of access to books of account and vouchers 255(1).
ii) Right to receive information and explanations.
iii) Right of access to books and papers of branch 255(2).
iv) Right to receive notices of general meetings and to attend those
meetings. (255(6)).
v) Right to make representation where another person is being
appointed as auditor. (253(3)).
Duties of an Auditor :
a) Duties of auditor under section. (255(3)) are:
i) To give a report to the members on the accounts, books of account,
balance sheet and
profit and loss account examined by him. (255(3)).
ii) Where any matter reported upon is answered in the negative or
with a qualification the
report shall include reasons for such qualification with factual
position.
iii) To include in the report of the company such matters as directed
by the Federal
Government.
iv) To attend those general meetings of a listed company, either
himself or through authorized
person, in which the balance sheet, profit and loss account and the
auditors' report are to
be considered.
b) To make report for inclusion in prospectus. (Section 53 read with
Part I of Schedule II).
c) To certify receipts and payments account in the statutory report
(Section 157).
d) To make report on declaration of solvency in case of voluntary
winding up.
e) To exercise reasonable care and skill in carrying out his duties and
make such inquiries as
considered necessary
SECTION C
1.What are the Liabilities of an Auditor?
The liabilities of auditors of a company can be studied under
following heads:
a) Civil Liabilities.
Civil liabilities mean the disputes over losses caused to one party by
acts of another. The civil liabilities of an
auditor can be for:i) Negligence ii) Misfeasance
i) Liability for Negligence (under law of agency)
Auditor being agent of the Shareholders is required to carry out his
duties with reasonable care and skill. If
he fails to do so, he is liable to make good any loss caused to the
third party.
ii) Liability for Misfeasance
The term misfeasance means breach of duty. If auditor does
something wrong in the performance of his
duties resulting in a financial loss to the company, he is guilty of
misfeasance.
For example auditor’s duties are laid down in section 255 of the
Companies Ordinance, 1984. If auditor
does not perform his duties properly and the company suffers loss he
is liable for misfeasance.
b) Criminal Liabilities.
If auditor fails to comply with the requirements of Sections 157, 255
or 257, he shall be punishable with fine
up to Rs. 100,000/-. If he knowingly makes a false report for profit to
himself or to put another person to a
disadvantage or loss for a material consideration, he shall also be
punishable with imprisonment for a period
of one year.
If charges of forgery are brought against an auditor, he may be liable
to imprisonment for a term which may
be extended to 2 years or fine up to Rs. 20,000 or both.
2.What is an Audit Report? What are its content?
The Auditor's report is a formal opinion, or disclaimer thereof, issued
by either an internal auditor or an independent external auditor as a
result of an internal or external audit or evaluation performed on a
legal entity or subdivision thereof (called an “auditee”).
CONTENTS
3.What are the different types of Audit report?
External auditors review the financial transactions of all publicly
traded companies annually and render an opinion regarding the
fairness and accuracy of the financial statements. Privately held
companies may also hire external auditors to review their
financial transactions and report on the fairness of the
information reported. Auditors use several different types of
reports to share their findings and have different reasons for
using each report.
UNQUALIFIED REPORT
o
Auditors issue unqualified reports after they review the
financial records of a business and conclude that the financial
statements present the financial information in accordance with
generally accepted accounting principles. The unqualified report
consists of three paragraphs: introductory, scope and opinion.
The introductory paragraph states that the responsibility of the
financial statements rests with management. The scope
paragraph states the audit was conducted in accordance with
generally accepted auditing standards. The opinion paragraph
states the auditors' opinion that the financial statements are
presented accurately.
QUALIFIED REPORT
o
Auditors issue qualified reports when they feel they are
limited in their ability to express an unqualified opinion.
Auditors issue qualified reports for two reasons. They either feel
the scope of the audit limits their ability to offer an unqualified
opinion in a particular area, or they feel there is a potential for
specific items in the financial statements that are not presented
in accordance with generally accepted accounting principles. In
a qualified report, an explanatory paragraph exists following the
scope paragraph. The explanatory paragraph details the
limitation in scope or the items that are potentially misstated.
ADVERSE REPORT
o
Auditors issue an adverse report when they feel that the
financial statements are not being presented in accordance with
generally accepted accounting principles. Auditors express an
adverse opinion when the departure from generally accepted
accounting principles is so severe that a qualified opinion will
not suffice. Auditors need to include an additional paragraph in
the report explaining the reason they are issuing an adverse
opinion. The explanatory paragraph should also contain the
impact of the departure on the financial statements.
Unit V
Investigation – Objectives of Investigation – Audit of Computerised
Accounts – Electronic Auditing – Investigation under the provisions
of Companies Act.
SECTION A
1.
Investigation involves inquiry in to the
accounts of a business for a special purpose.
2.
Investigation of accounts of a joint stock
company is not compulsory.
SECTION B
1.What are the differences between Investigation and Audit?
INVESTIGATION
AUDIT
 The purpose of investigation
varies from business to
business.
 The purpose of audit is to
determine the true and fair
view.
 The investigation relates to
critical checking of
particular records.
 The audit relates to
checking of all books
and record.
 The investigation may be
conducted on behalf of
owners and outsiders like
investors
 Audit is conducted on
behalf of owners only. The
appointment is made by
them
 Investigation work can be
completed through cent
percent checking
 Audit work may be
completed through test
checking.
 The investigation has no
time limit. It may relate to
many years.
 The audit of accounts is
made for a particular time
period.
 The investigator may or
may not be a chartered
accountant.
 The auditor is must a
chartered accountant.
 The investigator is
voluntary.
 The auditor work is
compulsory under law
for companies and other
concern.
2.Write about audit of Computerised Accounting.
Governmental agencies have been introducing computers in various
operations in recent years for the purpose of swift processing of
increasing amount of operations as well as their adequate control.
Even in the very limited fields directly related to accounting matters
alone, many computers have been used in tax collection, financing
operation, insurance operation, pension operation, inventory control,
construction cost estimation among others.
With the introduction of computers, conventional accounting systems
and methods using papers, pens and abacuses have undergone drastic
changes, therefore exerting a great impact on internal control and
audit trails in following audit procedures. That is, auditors can no
longer depend on visible records but check the existence of adequate
internal control system which ensures accuracy of operations; the
number of records which can be read only when processed by
computers is increasing while intermediary and legible records which
existed in conventional manual accounting processes are decreasing
in number; also there are many cases in which audit trails are not
available. Therefore, audit procedures had to be revised to cope with
these problems.
The Board of Audit of Japan has been using computers in conducting
audit for the purpose of swift and accurate processing of massive
amount of data as well as drawing logical judgment, in an attempt to
deal with computerized accounting systems.
Section c
1.What are the methods of Computerized Auditing?
The following are methods and practices of computerized auditing so
far employed by the Board of Audit.
Procedures for computerized auditing
(i)
Preparation for computer processing
After an organisation to be audited by using computers is selected, the
content of its operations as well as documents on computerized
systems are to be examined.
The following are kinds of data to be obtained for examination
a. Types of computers in use as well as how they have been
introduced,
b. types and contents of programs,
c. types, contents and formats of data files,
d. types, contents and formats of output,
e. procedure manuals describing operations (operation manuals
and others),
f. organisational chart and staffing table of the computer
department (manager, SE, programmer, operator, key punch
operator and others), and
g. information on data in general (period of storing data, number of
cases, recording modes and others).
After examining these documents, the Board will decide if
computerized processing can be applied for specific items to be
audited. If it is confirmed possible, the Board will determine to what
extent it can be applied.
(ii)
Preparation of a check list
Based on the examination described in (i), lists of items to be
inspected (check list) are prepared. Lists may be prepared by picking
out adequate items from existing general inspection manuals or by
studying operation manuals of the organization under audit and
deciding on items to be checked. Check lists are usually prepared by
combination of these two methods.
These check lists are classified into some groups and placed in the
order of priority in order to facilitate preparation of audit programs.
(iii)
Data processing
There are some preparatory works to be done prior to actual
processing by computer. External works include acquisition of data
files to be processed, rental of computers and employment of SE and
other supporting staff. Internal works include study on processing
schedule, assignment of personnel, designing of input and output data
formats, system designing as well as preparation of block diagrams
and others, coding, card punching and debugging. These works may
be completed one after another, or be carried out simultaneously. In
order to well manage the progress of these works, a time schedule
should be prepared beforehand to make sure that each work is
completed as has been planned.
Reports on the result of computerized audit processing will be
analyzed and studied. Then an additional step such as preparation of
letters of inquiry may be taken to bring the audit finding into the
annual audit report, if necessary.
Advantages in using Computers for auditing are listed as follows.
1. Once programs are prepared, a massive amount of data can be
analyzed rapidly.
2. Since items to be audited can be extracted under certain
conditions, less time is required for auditing.
3. Even if data are added or revised, they can be processed by
changing programs.
4. Since the same method can be repeated when the same items are
audited a few years later, auditors can confirm changes made
during the years.
By making use of these advantages of computer systems, auditors can
cope with computerized accounting systems and at the same time they
can expand the scope of audit, improve the quality of audit and reduce
the amount of clerical works as well.
3.what is an Electronic Auditing?What are its benefits?
Electronic auditing is the same as computer-assisted auditing
where electronic records are used to complete all or part of the audit.
BENEFITS:
The decision of whether the Department can pursue an electronic
audit instead of a hard copy audit is based on the nature of the
taxpayers’ records. Electronic audits generally reduce the
collective effort needed by the taxpayer and the Department to
complete the audit. In many instances detail audit procedures can
be performed using the electronic data in the same amount of time
as it takes to perform a sample, making the audit results more
accurate.
In addition, stratified statistical sampling can be performed on
electronic records. Stratified statistical sampling allows for
measurement of audit risk and is therefore more defensible in
court.
NEHRU ARTS AND SCIENCE COLLEGE
DEPARTMENT OF COMMERCE CA/PA
E-LEARNING
CLASS
SUBJECT
: III B.COM CA & PA
: BANKING AND INSURANCE LAW
Unit – I
Banker and Customer – Definition – Relationship - Functions of Commercial Banks –
Recent Developments in Banking,
SECTION A
1. A banker is one who does banking business
2. The relation between a banker and a customer is that of a debtor and creditor.
3. If the account is overdrawn the banker becomes the creditor.
4. Savings bank serves as a reservoir for collecting small and scattered savings.
5. Commercial bank is essentially meant for providing short term credit to trade and
industry.
SECTION B
1.Who is a banker and a customer?
Banker:
According to Sec. 2 of the Bill of Exchange Act, 1882, ‘banker includes a
body of persons, whether incorporated or not who carry on the business
of banking.’
Customer:
It is generally believed that any individual or an organisation, which
conducts banking transactions with a bank, is the customer of bank.
2.What are the circumstances under which a banker can disclose
information of customer’s account?
Circumstances under which banker can disclose information of
customer's account:
A bank can disclose information regarding customer's account to a
person(s) under the following circumstances.
(a)Under compulsion of law.
(b)Under banking practices.
(c)For protecting national interest.
(d)For protecting bank’s own interest
(e)Under express or implied consent of the customer
Disclosure under compulsion of law:
Banks disclose information to various authorities who by virtue of powers
vested in them under provisions of various acts require banks to furnish
information about customer’s account.
SECTION C
1.Explain the relationship between a banker and a customer.
The relationship between a bank and its customers can be broadly
categorized in to General Relationship and Special Relationship.
If we look at Sec 5(b) of Banking Regulation Act, we would notice that
bank’s business hovers around accepting of deposits for the purposes of
lending. Thus the relationship arising out of these two main activities are
known as General Relationship. In addition to these two activities banks
also undertake other activities mentioned in Sec.6 of Banking Regulation
Act. Relationship arising out of the activities mentioned in Sec.6 of the act
is termed as special relationship.
General Relationship:
Debtor-Creditor: When a 'customer' opens an account with a bank, he
fills in and signs the account opening form. By signing the form he enters
into an agreement/contract with the bank. When customer deposits
money in his account the bank becomes a debtor of the customer and
customer a creditor. The money so deposited by customer becomes
bank’s property and bank has a right to use the money as it likes. The
bank is not bound to inform the depositor the manner of utilization of
funds deposited by him. Bank does not give any security to the depositor
i.e. debtor. The bank has borrowed money and it is only when the
depositor demands, banker pays. Bank’s position is quite different from
normal debtors.
Banker does not pay money on its own, as banker is not required to repay
the debt voluntarily. The demand is to be made at the branch where the
account exists and in a proper manner and during working days and
working hours.
The debtor has to follow the terms and conditions of bank said to have
been mentioned in the account opening form.
In the past while opening account some of the banks had the practice of
giving a printed handbill containing the terms and conditions of account
along with the account opening form. This practice has since been
discontinued. For convenience and information of prospective customers a
few banks have uploaded the account opening form, terms and conditions
for opening account, rate charge in respect of various services provided
by the bank etc., on their web site.
While issuing Demand Draft, Mail / Telegraphic Transfer, bank becomes a
debtor as it owns money to the payee/ beneficiary.
2. Creditor–Debtor: Lending money is the most important activities of a
bank. The resources mobilized by banks are utilized for lending
operations. Customer who borrows money from bank owns money to the
bank. In the case of any loan/advances account, the banker is the
creditor and the customer is the debtor. The relationship in the first case
when a person deposits money with the bank reverses when he borrows
money from the bank. Borrower executes documents and offer security to
the bank before utilizing the credit facility.
In addition to opening of a deposit/loan account banks provide variety of
services, which makes the relationship more wide and complex.
Depending upon the type of services rendered and the nature of
transaction, the banker acts as a bailee, trustee, principal, agent, lessor,
custodian etc.
Special Relationship:
1. Bank as a Trustee:
As per Sec. 3 of Indian Trust Act, 1882
‘ A "trust" is an obligation annexed to the ownership of property, and
arising out of a confidence reposed in and accepted by the owner, or
declared and accepted by him, for the benefit of another, or of another
and the owner.’ Thus trustee is the holder of property on behalf of a
beneficiary.
As per Sec. 15 of the ‘Indian Trust Act, 1882 ‘A trustee is bound to deal
with the trust-property as carefully as a man of ordinary prudence would
deal with such property if it were his own; and, in the absence of a
contract to the contrary, a trustee so dealing is not responsible for the
loss, destruction or deterioration of the trust-property.’ A trustee has the
right to reimbursement of expenses (Sec.32 of Indian Trust Act.).
In case of trust banker customer relationship is a special contract. When a
person entrusts valuable items with another person with an intention that
such items would be returned on demand to the keeper the relationship
becomes of a trustee and trustier. A customer keeps certain valuables or
securities with the bank for safekeeping or deposits certain money for a
specific purpose (Escrow accounts) the banker in such cases acts as a
trustee. Banks charge fee for safekeeping valuables
2. Bailee – Bailor:
Sec.148 of Indian Contract Act, 1872, defines "Bailment" "bailor" and
"bailee".
A "bailment" is the delivery of goods by one person to another for some
purpose,
upon a contract that they shall, when the purpose is accomplished, be
returned or
otherwise disposed of according to the directions of the person delivering
them.
The person delivering the goods is called the "bailor". The person to
whom they
are delivered is called, the "bailee".
Banks secure their advances by obtaining tangible securities. In some
cases physical possession of securities goods (Pledge), valuables, bonds
etc., are taken. While taking physical possession of securities the bank
becomes bailee and the customer bailor. Banks also keeps articles,
valuables, securities etc., of its customers in Safe Custody and acts as a
Bailee. As a bailee the bank is required to take care of the goods bailed.
3.Lessor and Lessee:
Sec.105 of ‘Transfer of property Act 1882’ defines lease, Lessor, lessee,
premium and rent. As per the section
“A lease of immovable property is a transfer of a right to enjoy such
property, made for a certain time, express or implied, or in perpetuity, in
consideration of a price paid or promised, or of money, a share of crops,
service or any other thing of value, to be rendered periodically or on
specified occasions to the transferor by the transferee, who accepts the
transfer on such terms.”
Definition of Lessor, lessee, premium and rent :
(1)The transferor is called the lessor,
(2)The transferee is called the lessee,
(3)The price is called the premium, and
(4)The money, share, service or other thing to be so rendered is called
the rent.”
Providing safe deposit lockers is as an ancillary service provided by banks
to customers. While providing Safe Deposit Vault/locker facility to their
customers bank enters into an agreement with the customer. The
agreement is known as “Memorandum of letting” and attracts stamp duty.
The relationship between the bank and the customer is that of lessor and
lessee. Banks lease (hire lockers to their customers) their immovable
property to the customer and give them the right to enjoy such property
during the specified period i.e. during the office/ banking hours and
charge rentals. Bank has the right to break-open the locker in case the
locker holder defaults in payment of rent. Banks do not assume any
liability or responsibility in case of any damage to the contents kept in the
locker. Banks do not insure the contents kept in the lockers by customers.
4. Agent and Principal:
Sec.182 of ‘The Indian Contract Act, 1872’ defines “an agent” as a
person employed to do any act for another or to represent another in
dealings with third persons. The person for whom such act is done or who
is so represented is called “the Principal”.
Thus an agent is a person, who acts for and on behalf of the principal and
under the latter’s express or implied authority and the acts done within
such authority are binding on his principal and, the principal is liable to
the party for the acts of the agent.
Banks collect cheques, bills, and makes payment to various authorities
viz., rent, telephone bills, insurance premium etc., on behalf of
customers. . Banks also abides by the standing instructions given by its
customers. In all such cases bank acts as an agent of its customer, and
charges for theses services. As per Indian contract Act agent is entitled to
charges. No charges are levied in collection of local cheques through
clearing house. Charges are levied in only when the cheque is returned in
the clearinghouse.
5. As a Custodian: A custodian is a person who acts as a caretaker of
some thing. Banks take legal responsibility for a customer’s securities.
While opening a dmat account bank becomes a custodian.
6. As a Guarantor: Banks give guarantee on behalf of their customers
and enter in to their shoes. Guarantee is a contingent contract. As per sec
31,of Indian contract Act guarantee is a " contingent contract ".
Contingent contract is a contract to do or not to do something, if some
event, collateral to such contract, does or does not happen.
It would thus be observed that banker customer relationship is
transactional relationship.
Termination of relationship between a banker and a customer:
The relationship between a bank and a customer ceases on:
(a) The death, insolvency, lunacy of the customer.
(b) The customer closing the account i.e. Voluntary termination
(c) Liquidation of the company
(d) The closing of the account by the bank after giving due notice.
(e) The completion of the contract or the specific transaction.
2.What are the duties of a banker?
Duties of a banker:
A 'Banker' has certain duties vis-à-vis his customer. These are:
(a)Duty to maintain secrecy/confidentiality of customers' accounts.
(b)Duty to honour cheques drawn by customers on their accounts and
collect cheque,
bills on his behalf.
(c)Duty to pay bills etc., as per standing instructions of the customer.
(d)Duty to provide proper services.
(e)Duty to act as per the directions given by the customer. If directions
are not
given the banker has to act according to how he is expected to act.
(f)Duty to submit periodical statements i.e. informing customers of the
state of the
account
(g)Articles/items kept should not be released to a third party without due
authorization by the customer
Duty to maintain secrecy:
Banker has a duty to maintain secrecy of customers' accounts.
Maintaining secrecy is not only a moral duty but bank is legally bound to
keep the affairs of the customer secret. The principle behind this duty is
that disclosure about the dealings of the customer to any unauthorized
person may harm the reputation of customer and the bank may be held
liable. The duty of maintaining secrecy does not cease with the closing of
account or on the death of the account holder.
As per Sec. 13 of “Banking Companies Acquisition and Transfer of
Undertakings Act 1970”“Every corresponding new bank shall observe, except as otherwise
required by law, the practices and usages customary among bankers,
and, in particular, it shall not divulge any information relating to or to the
affairs of its constituents except in circumstances in which it is, in
accordance with law or practices and usages customary among bankers,
necessary or appropriate for the corresponding new bank to divulge such
information.”
Maintaining secrecy is implied terms of the contract with the customer
which bank enters into with the customer at the time of opening an
account.
Bank has not only to maintain secrecy of transactions, but secrecy is also
to be maintained in respect of operations through ATM/ debit cards. Bank
has also to maintain secrecy of user ID pins with due care so that it does
fall in wrong hands.
Failure to maintain secrecy:
Bank is liable to pay damages to the account holder for loss of money and
reputation if it fails in its duty to maintain secrecy and discloses
information relating to a customer's account or conduct of the account to
any unauthorized person.
Bank can also be liable to the third party if its wrongful disclosure harms
the interest of the third-party. If bank Knowingly furnishes wrong
information
There has been a misrepresentation
Over estimation of favourable opinion .
2.What are the functions of Commercial banks?
Commercial bank's function can be categorized into two types.
1. Primary or Principal Function
2. Secondary or Ancillary function
1. Primary or Principal Function:
Primary or principal functions of a commercial bank are three types
A. Acceptance of Deposit
B. Lending
C. Investment
A) Acceptance of Deposit: An important function of commercial
banks is to attract deposit from the public. Those people who have
cash account and want their safety; they deposit that amount of banks.
Commercial banks accept deposits every class and source and take
responsibility to repay the deposit in the same currency whenever
they are demanded by depositors.
B) Lending: Another function of commercial banks is to make loans
and advance out of the deposit receive in various forms. Bank Apply
the accumulated public deposits to productive uses by way of loans
and advances, overdraft and cash credits against approved securities.
C) Investment: Now a days commercial banks are also involved in
Investment. Generally investment means long term and medium term
investments.
2. Secondary or Ancillary function:
Secondary or Ancillary functions of Commercial Banks are two types:
A. Agency Services
1) Collection and Payment of Cheques
2) Standing Instruction
3) Acting as correspondence
4) Collecting of bills- electricity, gas, WASA, telephone etc.
5) Purchase and Sales of stocks/ share-act as a banker to issue
B. Miscellaneous or General Services:
1) Safe Custody- bailee
2) Lockers-trustee
3) Remittance facilities –DD, TT, MT and PO
4) Advisory services
5) Providing Credit reports
6) Opening L/C
7) Demand in ForEx/ Travers Cheque only Authorized Dealer
branches
8) Complete service in Foreign Trade
9) Other Services: Debit Card, Credit Card, On-line banking SMS
banking
10) Creation of Credit: a multiplier effect, Deposit creates credit and
credit creates deposits – derivative deposit.
Beside these activities, commercial bank may perform further tasks,
all its activities are guided by its authority for the betterment of the
company or for society.
Unit – II
Negotiable Instrument Act - Crossing - Endorsement - Material Alteration –
Payment of cheques : Circumstances for dishonor - Precautions and Statutory
Protection of Paying and Collecting Banker.
SECTION A
1. The negotiable instrument means a written document that creates a
right in favour of some person and which is freely transferable.
2. Cheque is always payable on demand.
3. Cheque is a Bill of Exchange drawn on a specified banker and not
expressed to be payable otherwise on demand.
SECTION B
1.What is a Negotiable Instrument?
A "negotiable instrument" means a promissory note, bill of exchange
or cheque payable either to order or to bearer.
A negotiable instrument is a document guaranteeing the payment of
a specific amount of money, either on demand, or at a set time.
According to the Negotiable Instruments Act, 1881 in India there are
just three types of negotiable instruments i.e., promissory note, bill of
exchange and cheque.
More specifically, it is a document contemplated by a contract, which
(1) warrants the payment of money, the promise of or order for
conveyance of which is unconditional; (2) specifies or describes the
payee, who is designated on and memorialized by the instrument; and
(3) is capable of change through transfer by valid negotiation of the
instrument.
As payment of money is promised subsequently, the instrument itself
can be used by the holder in due course as a store of value; although,
instruments can be transferred for amounts in contractual exchange
that are less than the instrument’s face value (known as
“discounting”).
2. What
are the statutory protection for a paying and collecting
Banker?
The bank on which a cheque is drawn (the bank whose name is
printed on the cheque) and which pays the amount for which the
cheque is written and deducts that sum from the customer's
account is a paying banker.
Statutory Protection to the Paying Banker :
o
o
o
Sec 85 (1)- order cheques- payment in due course[Sec 10]
Sec 85 (2)- bearer cheque-payment in due course
Payment in due course: apparent tenor,good faith, without
negligence, person in possession
Statutory Protection to Collecting Banker :
o
o
o
o
o
o
Sec 131:
-Goodfaith & without negligence
-Payment for a customer
-Crossed cheques
-agent for collection
-Prior crossing
SECTION C
1.What is crossing of cheques?What are its types?
Any cheque crossed with two parallel lines means that the check can
only be deposited directly into an account with a bank and cannot be
immediately cashed by a bank over the counter. By using crossed
checks, cheque writers can effectively protect the cheques they write
from being stolen and cashed
CROSSING OF CHEQUES
Cheques can be of two types:1. Open or an uncrossed cheque
2. Crossed cheque
Open Cheque
An open cheque is a cheque which is payable at the counter of the
drawee bank on presentation of the cheque.
Crossed Cheque
A crossed cheque is a cheque which is payable only through a
collecting banker and not directly at the counter of the bank. Crossing
ensures security to the holder of the cheque as only the collecting
banker credits the proceeds to the account of the payee of the cheque.
When two parallel transverse lines, with or without any words, are
drawn generally, on the left hand top corner of the cheque. A crossed
cheque does not effect the negotiability of the instrument. It can be
negotiated the same way as any other negotiable instrument.
TYPES OF CROSSING:
There are two types of negotiable instruments:• General Crossing
• Special Crossing
• Account Payee or Restrictive Crossing
• ‘ Not Negotiable ‘ Crossing
Cheque crossed generally
Where a cheque bears across its face an addition of the words “and
company” or any abbreviation thereof, between two parallel
transverse lines, or of two parallel transverse lines simply, either with
or without the words “not negotiable”, that addition shall be deemed a
crossing, and the cheque shall be deemed to be crossed generally.
Cheque crossed specially
Where a cheque bears across its face an addition of the name of a
banker, either with or without the words “not negotiable”, that
addition shall be deemed a crossing, and the cheque shall be deemed
to be crossed specially, and to be crossed to that banker.
Account Payee or Restrictive Crossing
This crossing can be made in both general and special crossing by
adding the words Account Payee. In this type of crossing the
collecting banker is supposed to credit the amount of the cheque to
the account of the payee only. The cheque remains transferable but
the liability of the collecting banker is enhanced in case he credits the
proceeds of the cheque so crossed to any person other than the payee
and the indorsement in favour of the last payee is proved forged.The
collecting banker must act like a blood hound and make proper
enquiries as to the title of the last indorsee from the original payee
named in the cheque before collecting an 'Account Payee' cheque in
his account.the same can be done by place slanted parallel line in the
top most left corner of the cheque...... in writing over their A/C
payee's only.
Not Negotiable Crossing
The words 'Not Negotiable' can be added to General as well as
Special crossing and a crossing with these words is known as Not
Negotiable crossing.The effect of such a crossing is that it removes
the most important characteristic of a negotiable instrument i.e. the
transferee of such a crossed cheque cannot get a better title than that
of the transferor ( cannot become a holder in due course ) and cannot
covey a better title to his own transferee, though the instrument
remains transferable.
Consequence of a bank not complying with the
crossing:
A bank's failure to comply with the crossings amounts to a breach of
contract with its customer. The bank may not be able to debit the
drawer's account and may be liable to the true owner for his loss.
2.What is dishonour of a cheque?What are the reasons for dishonour?
DISHONOUR OF A CHEQUE
The relation between a banker and his customer is that of a
debtor and a creditor. Money deposited will always belong to the
customer and the bank will be bound to return its equivalent to
the customer or to any person to his order. But in certain cases a
banker refuses to honour his customers cheque. When the
payment of the cheque is refused by the bank, it is said to be
dishonoured.
REASONS FOR DISHONOUR
A cheque may be dishonoured under the following circumstances.
i. When balance to the credit of the customer is insufficient to
meet the cheque.
ii. When money deposited cannot be withdrawn on demand in the
case of fixed deposit.
iii. When the customer closes the account before the cheque is
presented for encashment.
iv. When the cheque is not properly drawn.
v. If the cheque is crossed but presented on counter for the
payment.
vi. When the cheque is post dated.
vii. If death information of the A/C holder is received.
viii. If the A/C holder is declared insolvent by the law.
ix. If the A/C holder has stopped the payment.
x. If the signature on the cheque is different with the specimen
signature.
xi. If the amount written in figures is different from the amount
written in words.
xii. If the cheque is presented for payment at a branch other than
the one where the customer has the account.
Unit – III
Insurance : Meaning - Functions - Principles : General, Specific and
Miscellaneous.
Classification of Insurance: Based on Nature, Business and Risk –
Impact of LPG on Indian
Insurance Industry.
SECTION A
1. Marine insurance is the oldest form of insurance
2. The intimation of the proposers intention to buy insurance
is the offer.
3. Insurers readiness to undertake the risk stated is the
Acceptance
SECTION B
1.What is insurance?
In law and economics, insurance is a form of risk management
primarily used to hedge against the risk of a contingent, uncertain
loss. Insurance is defined as the equitable transfer of the risk of a
loss, from one entity to another, in exchange for payment. An
insurer is a company selling the insurance; an insured, or
policyholder, is the person or entity buying the insurance policy.
The insurance rate is a factor used to determine the amount to be
charged for a certain amount of insurance coverage, called the
premium.
2.Explain the Principles of Insurance.
MAIN PRINCIPLES OF INSURANCE:






Utmost good faith
Indemnity
Subrogation
Contribution
Insurable Interest
Proximate Cause
UTMOST GOOD FAITH (UBERRIMAE FIDES)
As a client it is your duty to disclose all material facts to the risk
being covered. A material fact is a fact which would influence the
mind of a prudent underwriter in deciding whether to accept a risk for
insurance and on what terms. The duty to disclose operates at the time
of inception, at renewal and at any point mid term.
INDEMNITY
On the happening of an event insured against, the Insured will be
placed in the same monetary position that he/she occupied
immediately before the event taking place. In the event of a claim the
insured must:



Prove that the event occurred
Prove that a monetary loss has occurred
Transfer any rights which he/she may have for recovery from
another source to the Insurer, if he/she has been fully
indemnified.
SUBROGATION
The right of an insurer which has paid a claim under a policy to step
into the shoes of the insured so as to exercise in his name all rights he
might have with regard to the recovery of the loss which was the
subject of the relevant claim paid under the policy up to the amount of
that paid claim. The insurer’s subrogation rights may be qualified in
the policy.
In the context of insurance subrogation is a feature of the principle of
indemnity and therefore only applies to contracts of indemnity so that
it does not apply to life assurance or personal accident policies. It is
intended to prevent an insured recovering more than the indemnity he
receives under his insurance (where that represents the full amount of
his loss) and enables his insurer to recover or reduce its loss.
CONTRIBUTION
The right of an insurer to call on other insurers similarly, but not
necessarily equally, liable to the same insured to share the loss of an
indemnity payment i.e. a travel policy may have overlapping cover
with the contents section of a household policy. The principle of
contribution allows the insured to make a claim against one insurer
who then has the right to call on any other insurers liable for the loss
to share the claim payment.
INSURABLE INTEREST
If an insured wishes to enforce a contract of insurance before the
Courts he must have an insurable interest in the subject matter of the
insurance, which is to say that he stands to benefit from its
preservation
and
will
suffer
from
its
loss.
In non-marine insurances, the insured must have insurable interest
when the policy is taken out and also at the date of loss giving rise to
a claim under the policy.
Section c
1. What are the functions of Insurance?
Basic functions of Insurance
1. 1.Primary Functions
2. 2.Secondary Functions
3. 3.Other Functions
Primary functions of insurance



Providing protection – The elementary purpose of insurance is
to allow security against future risk, accidents and uncertainty.
Insurance cannot arrest the risk from taking place, but can for
sure allow for the losses arising with the risk. Insurance is in
reality a protective cover against economic loss, by apportioning
the risk with others.
Collective risk bearing – Insurance is an instrument to share the
financial loss. It is a medium through which few losses are
divided among larger number of people. All the insured add the
premiums towards a fund and out of which the persons facing a
specific risk is paid.
Evaluating risk – Insurance fixes the likely volume of risk by
assessing diverse factors that give rise to risk. Risk is the basis
for ascertaining the premium rate as well.

Provide Certainty – Insurance is a device, which assists in
changing uncertainty to certainty.
Secondary functions of insurance



Preventing losses – Insurance warns individuals and
businessmen to embrace appropriate device to prevent
unfortunate aftermaths of risk by observing safety instructions;
installation of automatic sparkler or alarm systems, etc.
Covering larger risks with small capital – Insurance assuages the
businessmen from security investments. This is done by paying
small amount of premium against larger risks and dubiety.
Helps in the development of larger industries – Insurance
provides an opportunity to develop to those larger industries
which have more risks in their setting up.
Other functions of insurance



Is a savings and investment tool – Insurance is the best savings
and investment option, restricting unnecessary expenses by the
insured. Also to take the benefit of income tax exemptions,
people take up insurance as a good investment option.
Medium of earning foreign exchange – Being an international
business, any country can earn foreign exchange by way of issue
of marine insurance policies and a different other ways.
Risk Free trade – Insurance boosts exports insurance, making
foreign trade risk free with the help of different types of policies
under marine insurance cover.
Insurance provides indemnity, or reimbursement, in the event of an
unanticipated loss or disaster. There are different types of insurance
policies under the sun cover almost anything that one might think of.
There are loads of companies who are providing such customized
insurance policies.
Unit – IV
Legal dimension of Insurance : Insurance Act, 1938 – Life Insurance Act , 1956
– General
Insurance Business Act, 1932 – Consumer Protection Act,1986.
SECTION A
1.Life insurance business in india was Nationalised with effect from
January 19,1956.
2.IRDA Act was passed in the year 1999.
3. The General insurance Corporation of India was formed on 22nd
Nov,1972.
SECTION B
1.Legal dimension of Insurance Act,1938:
Corporate Governance is understood as a system of financial and other controls
in a corporate entity and broadly defines the relationship between the Board of
Directors, senior management and shareholders. In case of the financial sector,
where the entities accept public liabilities for fulfillment of certain contracts, the
relationship is fiduciary with enhanced responsibility to protect the interests of
all stakeholders. The Corporate Governance framework should clearly define
the roles and responsibilities and accountability within an organization with
built-in checks and balances. The importance of Corporate Governance has
received emphasis in recent times since poor governance and weak internal
controls have been associated with major corporate failures. It has also been
appreciated that the financial sector needs to have a more intensive governance
structure in view of its role in the economic development and since the safety
and financial strength of the institutions are critical for the overall strength of
the financial sector on which the economic growth is built upon. As regards the
insurance sector, the regulatory responsibility to protect the interests of the
policyholders demands that the insurers have in place, good governance
practices for maintenance of solvency, sound long term investment policy and
assumption of underwriting risks on a prudential basis. The emergence of
insurance companies as a part of financial conglomerates has added a further
dimension to sound Corporate Governance in the insurance sector with
emphasis on overall risk management across the structure and to prevent any
contagion.
The Insurance Regulatory and Development Authority (IRDA) has outlined in
general terms, governance responsibilities of the Board in the
management of the insurance functions under various Regulations
notified by it covering different operational areas. It has now been
decided to put them together and to issue the following comprehensive
guidelines for adoption by Indian insurance companies. These guidelines
are in addition to provisions of the Companies Act, 1956, Insurance Act,
1938 and requirement of any other laws or regulations framed thereunder.
Where any provisions of these guidelines appear to be in conflict with the
provisions contained in any law or regulations, the legal provisions will
prevail. However, where
Exposure Draft on Corporate Governance-May2009.doc 1
the requirements of these guidelines are more rigorous than the provisions of
any law, these guidelines shall be followed.
2.What is consumer Protection Act?
The consumer protection Act, 1986, provides for the better protection of consumers.
Unlike existing laws which are punitive or preventive in nature, the provisions of this
Act are compensatory in nature. The act is intended to provide simple, speedy and
inexpensive redressal to the consumers' grievances, award relief and compensation
wherever appropriate to the consumer. The act has been amended in 1993 both to
extend its coverage and scope and to enhance the powers of the redressal
machinery
3.What are the extent of consumer protection act?
EXTENT AND COVERAGE OF CONSUMER PROTECTION ACT :





The Act applies to all goods and services unless specifically exempted by the
Central Government.
It covers all the sectors whether private, public or cooperative.
The provisions of the Act are compensatory in nature.
The provisions of this Act are in addition to and not in derogation of the
provisions of any other law for the time being in force.
The Act envisages establishment of Consumer Protection Councils at the
Central and State levels, whose main objects will be to promote and protect
the rights of the consumers
SECTION C
1. What are the Objectives of guidelines of insurance act?
The objective of the guidelines is to ensure that the structure,
responsibilities and functions of Board of Directors and the senior
management of the company fully recognize the expectations of all
stakeholders as well as those of the regulator. The structure should take steps
required to adopt sound and prudent principles and practices for the
governance of the company and should have the ability to quickly address
issues of non-compliance or weak oversight and controls. These guidelines
therefore amplify on certain issues which are covered in the Insurance Act,
1938 and the regulations framed thereunder and include measures which are
additionally considered essential by IRDA for adoption by insurance
companies.
The guidelines accordingly address the various requirements broadly
covering the following major structural elements of Corporate Governance
in insurance companies:• Governance structure
• Board of Directors
• Control functions
• Control functions
• Senior management:
o CEO & other senior functionaries
o Role of Appointed Actuaries
o External audit – Appointment of Statutory Auditors
• Disclosures
• Outsourcing
• Relationship with stakeholders
• Interaction with the Supervisor
• Whistle blowing policy
In these guidelines, the reference to the “Board” would apply
to the “Board of Directors” and “Senior Management” to the team of
personnel of the company with core management functions. Normally, this
would include officials at one level below Executive Director including
Functional Heads. In regards to insurers, the Appointed Actuary has a
special executive and statutory role.
Unit - V
IRDA - Mission - Composition of Authority - Duties, Powers and Functions Powers of
Authority - Duties, Powers and Functions- Powers of Central Government in
IRDA
Functioning
SECTION A
1.IRDA Act was passed in the year 1999.
2.Unit linked Insurance plan is governed by IRDA.
SECTION B
1.Explain about IRDA.
The Insurance Regulatory and Development Authority (IRDA) is a
national agency of the Government of India, based in Hyderabad. It was
formed by an act of Indian Parliament known as IRDA Act 1999, which
was amended in 2002 to incorporate some emerging requirements.
Mission of IRDA as stated in the act is "to protect the interests of the
policyholders, to regulate, promote and ensure orderly growth of the
insurance industry and for matters connected therewith or incidental
thereto."
2.What are the Objctives of IRDA?
1. To protect the interest of and secure fair treatment to policyholders.
2. To bring about speedy and orderly growth of the insurance industry
(including annuity and superannuation payments), for the benefit of the
common man, and to provide long term funds for accelerating growth of
the economy.
3. To set, promote, monitor and enforce high standards of integrity,
financial soundness, fair dealing and competence of those it regulates.
4. To ensure that insurance customers receive precise, clear and correct
information about products and services and make them aware of their
responsibilities and duties in this regard.
5. To ensure speedy settlement of genuine claims, to prevent insurance
frauds and other malpractices and put in place effective grievance
redressal machinery.
6. To promote fairness, transparency and orderly conduct in financial
markets dealing with insurance and build a reliable management
information system to enforce high standards of financial soundness
amongst market players.
7. To take action where such standards are inadequate or ineffectively
enforced.
8. To bring about optimum amount of self-regulation in day to day working
of the industry consistent with the requirements of prudential regulation.
SECTION C
1.What are the duties,powers and functions of IRDA?
Section 14 of IRDA Act, 1999 laysdown the duties,powers and functions of
IRDA
1. Subject to the provisions of this Act and any other law for the time being
in force, the Authority shall have the duty to regulate, promote and ensure
orderly growth of the insurance business and re-insurance business.
2. Without prejudice to the generality of the provisions contained in subsection (1), the powers and functions of the Authority shall include,
1. issue to the applicant a certificate of registration, renew, modify,
withdraw, suspend or cancel such registration;
2. protection of the interests of the policy holders in matters
concerning assigning of policy, nomination by policy holders,
insurable interest, settlement of insurance claim, surrender value of
policy and other terms and conditions of contracts of insurance;
3. specifying requisite qualifications, code of conduct and practical
training for intermediary or insurance intermediaries and agents;
4. specifying the code of conduct for surveyors and loss assessors;
5. promoting efficiency in the conduct of insurance business;
6. promoting and regulating professional organisations connected
with the insurance and re-insurance business;
7. levying fees and other charges for carrying out the purposes of this
Act;
8. calling for information from, undertaking inspection of, conducting
enquiries and investigations including audit of the insurers,
intermediaries, insurance intermediaries and other organisations
connected with the insurance business;
9. control and regulation of the rates, advantages, terms and
conditions that may be offered by insurers in respect of general
insurance business not so controlled and regulated by the Tariff
Advisory Committee under section 64U of the Insurance Act, 1938
(4 of 1938);
10.specifying the form and manner in which books of account shall be
maintained and statement of accounts shall be rendered by insurers
and other insurance intermediaries;
11.regulating investment of funds by insurance companies;
12.regulating maintenance of margin of solvency;
13.adjudication of disputes between insurers and intermediaries or
insurance intermediaries;
14.supervising the functioning of the Tariff Advisory Committee;
15.specifying the percentage of premium income of the insurer to
finance schemes for promoting and regulating professional
organisations referred to in clause (f);
16.specifying the percentage of life insurance business and general
insurance business to be undertaken by the insurer in the rural or
social sector; and
17.exercising such other powers as may be prescribed from time to
time.
2.What are the powers of Central Government in IRDA?
i.Power of Central Government to issue directions
ii.Power of Central Government to supersede Authority
Power of Central Government to issue directions
(1) Without prejudice to the foregoing provisions of this Act, the Authority
shall, in exercise of its powers or the performance of its functions under this
Act, be bound by such directions on questions of policy, other than those
relating to technical and administrative matters, as the Central Government may
give in writing to it from time to time:
PROVIDED that the Authority shall, as far as practicable, be given an
opportunity to express its views before any direction is given under this subsection.
(2) The decision of the Central Government, whether a question is one of policy
or not, shall be final.
Power of Central Government to supersede Authority
(1) If at any time the Central Government is of the opinion-
(a) that, on account of circumstances beyond the control of the Authority,
it is unable to discharge the functions or perform the duties imposed on it
by or under the provisions of this Act; or
(b) that the Authority has persistently defaulted in complying with any
direction given by the Central Government under this Act or in the
discharge of the functions or performance of the duties imposed on it by
or under the provisions of this Act and as a result of such default the
financial position of the Authority or the administration of the Authority
has suffered; or
(c) that circumstances exist which render it necessary in the public
interest so to do,
the Central Government may, by notification and for reasons to be specified
therein, supersede the Authority for such period, not exceeding six months, as
may be specified in the notification and appoint a person to be the Controller of
Insurance under section 2B of the Insurance Act, 1938, if not already done:
PROVIDED that before issuing any such notification, the Central Government
shall give a reasonable opportunity to the Authority to make representations
against the proposed supersession and shall consider the representations, if any,
of the Authority.
(2) Upon the publication of a notification under sub-section (1) superseding the
Authority,(a) the Chairperson and other members shall, as from the date of
supersession, vacate their offices as such;
(b) all the powers, functions and duties which may, be or under the
provisions of this Act, be exercised or discharged by or on behalf of the
Authority shall, until the Authority is reconstituted under sub-section (3),
be exercised and discharged by the Controller of Insurance; and
(c) all properties owned or controlled by the Authority shall, until the
Authority is reconstituted under sub-section (3), vest in the Central
Government.
(3) On or before the expiration of period of supersession specified in the
notification issued under sub-section (1), the Central Government shall
reconstitute the Authority by a fresh appointment of its Chairperson and other
members and in such case any person who had vacated his office under clause
(a) of sub-section (2) shall not be deemed to be disqualified for reappointment.
(4) The Central Government shall cause a copy of the notification issued under
sub-section (1) and a full report of any action taken under this section and the
circumstances leading to such action to be laid before each House of Parliament
at the earliest.