WBCHSE HS Commercial Law and Preliminaries of Auditing cheat sheet

Contract = agreement enforceable by law (s.2(h)); agreement = promise or set of promises with consideration (s.2(e)); promise = proposal accepted (s.2(b)).

Essentials under s.10: offer, acceptance, lawful consideration, capacity, free consent, lawful object, and not expressly void.

Offer (s.2(a)): must be communicated (s.4) and may be specific or general; it must intend legal consequences.

Acceptance (s.2(b)): absolute and unqualified (s.7); counter-offer destroys the original offer; silence is not acceptance.

Communication of acceptance is complete against the proposer when posted, against the acceptor when it reaches the proposer (s.4); revocation of acceptance is complete against the proposer when it reaches him.

Consideration (s.2(d)): at the desire of the promisor; may move from a third party (Chinnaya v. Ramayya); past, present or future; need not be adequate (s.25 Expl. II).

Exceptions to no consideration, no contract: natural love and affection (written and registered), past voluntary services, time-barred debt, completed gift, and agency (s.25, s.185).

Void agreement (s.2(g)) is not enforceable; void contract becomes unenforceable later; voidable contract (s.2(i)) is enforceable at the option of the aggrieved party.

Competence under s.11: age of majority (18; 21 if a guardian of property is appointed under the Guardians and Wards Act), sound mind, and not disqualified by law.

Minor's agreement is void ab initio (Mohori Bibee v. Dharmodas Ghose); no ratification on attaining majority.

A minor can be a beneficiary or promisee, can enforce a contract for his benefit, and may be admitted to the benefits of partnership (s.30 Indian Partnership Act, 1932).

Minor's estate is liable for necessaries supplied (s.68); the minor is not personally liable.

Sound mind (s.12): capacity to understand the contract and form a rational judgment about its effect on his interests.

Persons disqualified by law include alien enemies, foreign sovereigns (unless they submit), convicts, and insolvents (contracts vest in the Official Receiver).

A person of unsound mind may contract during lucid intervals; a contract by a lunatic is void.

Free consent (s.14) is absent when caused by coercion (s.15), undue influence (s.16), fraud (s.17), misrepresentation (s.18), or mistake (ss.20-22).

Coercion (s.15): committing or threatening an act forbidden by the IPC or unlawful detaching of property; consent obtained is voidable; the burden of proof lies on the party avoiding.

Undue influence (s.16): active trust or authority used to obtain unfair advantage; burden shifts to the dominant party to prove the transaction was fair; presumption applies to pardanashin women.

Fraud (s.17): false statement made knowingly, without belief in its truth, or recklessly; the deceived party may rescind or claim damages; silence is fraud where there is a duty to speak.

Misrepresentation (s.18): innocent false statement; the aggrieved party may rescind or insist on performance and claim damages in lieu.

Mistake: bilateral mistake of fact on a matter essential to the agreement makes it void (s.20); unilateral mistake is generally not voidable, except mistake as to identity or nature of the document.

Unlawful object/consideration (s.23): forbidden by law, defeats provisions of law, fraudulent, injurious to person or property, or immoral; agreements in restraint of trade (s.27), marriage (s.26), and legal proceedings (s.28) are void.

Performance (s.37): obligation to perform or offer to perform unless dispensed with; tender must be unconditional and made at the proper time and place.

Discharge modes: performance, mutual agreement (novation, rescission, alteration, remission), impossibility (s.56), lapse of time, operation of law, and breach.

Supervening impossibility (s.56) covers destruction of subject matter, death or incapacity in personal contracts, change of law, and outbreak of war; commercial frustration applies where the object is frustrated.

Anticipatory breach (s.39): the promisee may rescind and sue immediately or wait until the due date; on waiting, the contract remains alive.

Remedies: rescission (s.75), damages (s.73), specific performance (Specific Relief Act, 1963), injunction, and quantum meruit.

Hadley v. Baxendale rule: damages for natural consequences arising in the usual course, plus special losses within the contemplation of both parties at the time of contract.

Mitigation duty: the injured party must take reasonable steps to reduce loss; nominal damages are awarded where no loss is proved; liquidated damages must be a genuine pre-estimate (s.74).

Indemnity (s.124): promise to save another from loss caused by the conduct of the promisor or any other person; has two parties; may cover contingent loss.

Guarantee (s.126): promise to discharge the liability of a third party on his default; three parties (surety, principal debtor, creditor); must be in writing and signed.

Surety's liability is co-extensive with the principal debtor's (s.128); the creditor may sue the surety without exhausting remedies against the debtor.

Discharge of surety: variance in terms without consent (s.133), release of the principal debtor (s.134), composition or promise not to sue (s.135), loss of security (s.141), and invalidation of the guarantee.

Bailment (s.148): delivery of goods for a purpose on return or disposal; bailee must take reasonable care (s.151) and not use goods inconsistently (s.154); bailor bears extraordinary loss (s.152).

Pledge (s.172): bailment of goods as security for a debt; pawnee may retain goods until payment (s.173) and may sell after notice on default (s.176).

Pledge is a special kind of bailment where consideration is a loan; the pawnee has no right to use the pledged goods.

Agency (s.182): the agent acts to create a legal relationship between the principal and a third party; consideration is not necessary (s.185).

Creation: express agreement, implied conduct, estoppel, holding out, necessity, and ratification (s.196) of an unauthorised act.

Agent's duties: conduct business per instructions (s.211), render accounts (s.213), communicate in difficulty (s.214), and not make secret profit (s.215-216).

Agent's rights: lien (s.221), indemnity for lawful acts (s.222-223), and remuneration when the act is complete (s.219).

Termination (s.201): revocation by principal, renunciation by agent, completion, death or insanity of either party, or insolvency of the principal.

Agency of necessity arises in emergencies to protect the principal's property; an irrevocable agency exists where the agent has an interest in the subject matter (s.202).

An agent cannot delegate (s.190) except where custom or the nature of work permits, or the principal consents.

Sale (s.4): transfer of property in goods for a price; agreement to sell transfers property in future or on a contingency.

Goods (s.2(7)) include actionable claims, stocks, shares, growing crops, and things attached to or forming part of the land agreed to be severed.

Condition (s.12(2)) is essential to the main purpose; breach gives a right to repudiate and claim damages. Warranty (s.12(3)) is collateral; breach gives damages only.

Implied conditions: title (s.14), sale by description (s.15), quality or fitness for purpose (s.16(1)), merchantability (s.16(2)), and sample (s.17).

Implied warranties: quiet possession (s.14(b)) and freedom from encumbrances (s.14(c)).

Caveat emptor: no implied condition as to quality unless the buyer relies on the seller's skill, the goods are bought by description from a dealer, or usage of trade applies (s.16).

Doctrine of caveat venditor under s.16(2) applies where goods are bought by description from a seller who deals in such goods.

No property passes in unascertained goods until ascertained (s.18); in specific goods, property passes when the parties intend (s.19); under a contract for sale of specific goods in a deliverable state, property passes on contract (s.20).

Rule of nemo dat quod non habet (s.27): a seller without title cannot transfer a better title, except under sale by a mercantile agent, estoppel, or sale by a joint owner.

Risk prima facie passes with property (s.26); exceptions arise from delay by either party, and where delivery is delayed by the buyer.

Delivery may be actual, symbolic, or constructive; acceptance of delivery is not acceptance of goods (s.42).

Unpaid seller (s.45): price unpaid and seller retains possession, or the buyer becomes insolvent.

Unpaid seller's rights against the goods: lien (s.47), stoppage in transit (s.50), and resale (s.54); rights against the buyer personally: suit for price (s.55) and damages.

Stoppage in transit applies when the buyer is insolvent and the goods are in transit; notice of stoppage goes to the carrier (s.52).

Negotiable instrument: a promissory note, bill of exchange, or cheque (s.13); freely transferable by delivery or endorsement and delivery, with the holder taking free from defects (s.51).

Promissory note (s.4): an unconditional written promise to pay a sum certain, signed by the maker, to a specified person or bearer.

Bill of exchange (s.5): an unconditional written order to pay, signed by the maker, directing a person to pay to a specified person or bearer.

Cheque (s.6): a bill of exchange drawn on a banker, payable on demand; includes truncated cheques; crossed cheques are payable only through a bank.

Parties: maker and payee (note); drawer, drawee, acceptor, payee, endorser and endorsee (bill); drawer, drawee-banker, payee (cheque).

Holder in due course (s.9): obtains possession for consideration, before maturity, in good faith, without notice of defect in the transferor's title.

Noting and protest (ss.99-104) record dishonour of a bill; a cheque dishonoured for insufficiency of funds attracts s.138 liability subject to notice within 30 days and complaint within one month.

Audit: independent examination of books of account and vouchers to verify that the financial statements give a true and fair view.

Primary objective: expression of opinion on financial statements; secondary objectives: detection and prevention of fraud and error, and helping management.

Statutory audit is mandated by statute (e.g., Companies Act, 2013); internal audit is by employees for management; external audit is by an independent auditor.

Other types: continuous audit, final or annual audit, interim audit, balance sheet audit, cost audit, tax audit, government audit, and management audit.

Advantages include detection of fraud and error, reliability of accounts, and access to credit; limitations include reliance on estimates and sampling.

Auditor's independence means independence of mind and appearance; he is not an insurer of the accounts and does not guarantee accuracy.

An auditor must obtain reasonable assurance, not absolute assurance, because of inherent limitations of audit and internal control.

Audit programme: a written plan listing audit procedures and the time to be spent; it is a tool of control, and its form depends on the size and nature of the business.

Advantages of an audit programme: work is divided, progress is monitored, and no area is missed; a disadvantage is mechanical adherence and rigidity.

Working papers: records of the audit procedures performed, evidence obtained, and conclusions reached; they must be complete, orderly, and confidential.

Purposes of working papers: support the audit report, aid in review and continuity, and defend the auditor in a negligence claim.

Audit evidence must be sufficient and appropriate; reliability increases with external sources, documentary form, and the auditor's own inspection.

Techniques: inspection, observation, inquiry, confirmation, recalculation, re-performance, and analytical procedures.

Audit sampling: applying procedures to less than 100% of items so that each sampling unit has a chance of selection; sampling risk is the risk that the auditor's conclusion differs from a 100% examination.

Statistical sampling uses random selection and probability theory; judgmental sampling relies on the auditor's experience.

Rights: access to books and vouchers at all times, right to obtain information and explanations, right to receive notice of and attend general meetings, and right to remuneration.

Duties: comply with auditing standards, make a report to members, verify the accounts, and report on fraud noticed during the audit.

Statutory duties under the Companies Act, 2013 include reporting on proper books of account, the balance sheet and profit and loss account, and compliance with accounting standards.

Liability to the client: for negligence, breach of duty, and misfeasance; liability to third parties arises in tort for negligence where a duty of care exists.

Criminal liability arises from dishonest certification, abetment of fraud, or wilful misstatement.

Audit report forms: unqualified (clean), qualified, adverse, and disclaimer of opinion.

A qualified report states the reason for qualification; an adverse report means the accounts do not give a true and fair view; a disclaimer states the auditor is unable to form an opinion.

The auditor's report must state whether the accounts comply with the applicable financial reporting framework and whether proper books of account have been kept.

When a condition is treated as a warranty (s.13): the buyer waives the condition or elects to treat the breach as a breach of warranty.

Buyer's remedies: damages for non-delivery (s.57), specific performance (s.58), breach of warranty (s.59), and recovery of the price on failure of consideration (s.62).

Seller's remedies: suit for price (s.55), damages for non-acceptance (s.56), and resale (s.54).

Acceptance of goods occurs when the buyer intimates acceptance, does an act inconsistent with the seller's ownership, or retains goods beyond a reasonable time (s.42).

A sale by sample requires the bulk to correspond with the sample, the buyer to have a reasonable opportunity to compare, and the goods to be free from latent defects (s.17).

Auction sale: the sale is complete when the hammer falls; the seller may bid only if he expressly reserves the right (s.64).

Negotiation (s.14): transfer of an instrument to a holder so as to constitute the transferee the holder; by delivery for a bearer instrument, and by endorsement plus delivery for an order instrument.

Endorsement (s.15) must be signed and on the instrument; blank endorsement has no endorsee named; restrictive endorsement excludes further negotiation.

Holder (s.8): a person entitled in his own name to possession and to receive the amount; a holder in due course has a better title than the transferor.

Liability of the maker of a note is primary; the drawer of a bill is liable only if the drawee defaults and the instrument is dishonoured with due notice.

Acceptor (s.33): by accepting, the drawee becomes primarily liable; acceptance must be written and signed on the bill.

Notice of dishonour (s.91) must be given to the drawer and endorsers; failure discharges them, except in the cases in s.98.

Payment in due course (s.10) discharges the instrument and the parties.

A good audit programme is written, flexible, reviewed periodically, and approved by the auditor-in-charge before the audit begins.

An audit programme should be prepared after studying the internal control system and the client's business, not from a standard template alone.

An audit notebook records points requiring attention and queries; it is not a substitute for working papers.

Permanent working papers include the engagement letter, memorandum and articles, organisation chart, and accounting policies; current working papers relate to the year under audit.

Working papers are the auditor's property; they may be inspected by the client only with the auditor's consent, and remain confidential.

Sampling risk is controlled by increasing sample size; non-sampling risk is controlled by proper planning, supervision, and direction.

Materiality determines the extent of testing; the auditor may use the previous year's figures and interim results as a guide.

An unmodified opinion states the financial statements give a true and fair view; a modified opinion is qualified, adverse, or a disclaimer.

A qualified opinion is issued where misstatements are material but not pervasive, or where sufficient evidence cannot be obtained but the effect is not pervasive.

An adverse opinion is issued where misstatements are both material and pervasive; a disclaimer where the auditor cannot obtain sufficient evidence and the effect is material and pervasive.

The report must include the title, addressee, auditor's opinion, basis for opinion, responsibilities of management and the auditor, and the signature with date.

Key Audit Matters are reported for listed companies under SA 701; the Going Concern section under SA 570 is separate.

The auditor's report is dated not earlier than the date on which the auditor has obtained sufficient appropriate evidence.

An auditor may be liable for negligence to third parties where the report is issued knowing it will be relied upon for a specific purpose (Hedley Byrne principle).