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CA Intermediate · Auditing and Ethics · Special Features of Audit of Different Type of Entities

While auditing Lakshya Co-operative Credit Society, a society registered under a State Co-operative Societies Act, the auditor finds that the bye-laws prescribe a specific method for creating a reserve fund out of net profit before any dividend is distributed. Which of the following is the most appropriate audit response?

The auditor should verify that the transfer to the reserve fund has been made as required by the Co-operative Societies Act, rules and bye-laws before any dividend is declared. A co-operative society is governed by its own statute and bye-laws, not by the Companies Act provisions on dividend.

  1. AIgnore the bye-laws, as only the Companies Act 2013 governs the appropriation of profit
  2. BVerify that the appropriation of profit to the reserve fund has been made as required by the Act, rules and bye-laws before any dividend is declaredCorrect
  3. CAccept the management's decision to pay dividend first and transfer to reserve later if profits permit
  4. DAdvise the society to follow the bye-laws of another society for the reserve fund

Explanation

A co-operative society's audit is governed by the State Co-operative Societies Act, rules and bye-laws. The auditor must check that statutory and bye-law appropriations to reserve fund are made before dividends or other distributions. The Companies Act does not govern a society's profit appropriation, and paying dividend first would breach the bye-laws.

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