Audit of contracts Slide 3.3 What is Audit? Audit means to audere means to hear. Audits function is to hear and then form audit conclusion. Before forming an audit opinion, a thorough examination of the matter under audit is to be conducted so that the opinion once expressed by audit is not countered.

What is contract? Slide 3.3 »Contract is an agreement which is enforceable in Law as per the INDIAN CONTRACT Act,1872. »The contract must have the following elements: »1.An agreement, and 2. The agreement must be enforceable in Law

What is agreement? Slide 3.3 Section 2 (e) of the Indian contract Act, defines agreement as follows: Every promise and every set of promises, forming the consideration for each other is an agreement. Promise is defined in Section 2(b) of the Indian Contract Act which reads as under a proposal when accepted becomes a promise

Section 10 of the Act Slide 3.3 Specifies that all agreements are contracts, if they are made by free consent of parties competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void. An agreement becomes a contract only, if the following conditions are satisfied.

Contd…. Slide 3.3 The agreement must be made by the free consents of the parties The agreement must be made by parties, who are competent to contract. The agreement must be made for a lawful consideration and with a lawful object. The agreement must not be expressly declared to be void.

Legislation relevant to contracts The following legislation are relevant to deal with contracts Indian Contract Act, 1872.Sale of Goods Act, 1930 Insurance Act, 1938 Customs Act, 1962 Negotiable Instruments Act, 1938 Companies Act, 1956 Slide 3.3

Salient features of the Contract Act, 1872 Slide 3.3 Communication,acceptance and revocation of proposals <Communication--- it is complete when it comes to the knowledge of the person to whom it is made. <Communication of an acceptance is complete when it is put in a course of transmission to him so as to be out of the power of the acceptor( proposer )

Contd… Slide 3.3 When it comes to the knowledge of the proposer (Acceptor ) The communication of a revocation is complete-- as against the person who makes it when it is put into a course of transmission to the person to whom it is made so as to be out of the power of the person who makes ; When it comes to the knowledge(to whom made)

Revocation of proposals and acceptance Slide 3.3 A proposal may be revoked at any time before the communication of the acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.

How revocation is made? Slide 3.3 A proposal is revoked by the communication of notice of revocation by the proposer to the other party;by the lapse of the time prescribed in such proposal for its acceptance or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance;by the failure of the acceptor to fulfill a condition precedent to acceptance;by the death or insanity of the proposer

Quality of acceptance Slide 3.3 Acceptance must be absolute and unqualified Be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If it is not done,the proposer may within a reasonable time after the acceptance is communicated to him accept. Insist that his proposal be accepted.

Acceptance with conditions/ considerations Slide 3.3 Performance of the conditions of a proposal or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal.

Who are competent to contract? Slide 3.3 Every person is competent to contract who is of the age of majority according to the Law to which he is subject and who is of sound mind, and is not disqualified from contracting by any Law to which he is subject. If a person understands a contract and forms a rational judgement, then he is said to be of sound mind.

Consent, coercion, undue influence Slide 3.3 Two or more persons are said to consent when they agree upon the same thing in the same sense Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation,or mistake Coercion is committing or threatening to commit, any act forbidden, or unlawful detaining etc. to make a person agree

Undue influence, fraud etc. Slide 3.3 Where the relations subsisting between the parties are such that one can dominate the will of the other and can use that position to obtain an unfair advantage over the other, agreement has been said to be obtained under undue influence. Fraud means and includes-- the suggestion as a fact, of that which is not true, by one who does not believe to be true, the active

Contd… Slide 3.3 Concealment of a fact by one having knowledge or belief of the fact, a promise made without any intention of performing it, any other act fitted to deceive and any such act or omission as the law specifically declares to be fraudulent

Misrepresentation Slide 3.3 Means and includes-- the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes to be true-- any breach of duty which without an intent to deceive, gains an advantage to the person committing it or any one claiming under him by misleading another to his prejudice and making mistake in the contract.

Voidability of agreements sans free consent Slide 3.3 Agreement for which free consent has been obtained by coercion, fraud or misrepresentation is also a contract voidable at the option of the party whose consent was so caused.Similarly, in the case of consent obtained by undue influence can also be made void at the option of the party whose consent was so obtained

Effect of mistake as to law Slide 3.3 A contract is not voidable because it was caused by a mistake as to any law in force ; but a mistake as to a law not in force has the same effect as a mistake of fact A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to matter of fact.

Consideration Slide 3.3 Consideration is one of the essentials of a contract The consideration should be lawful. Otherwise the contract becomes void Objects should also be lawful. If not, void. However, an agreement without consideration is not void if it is in writing that no consideration is required.

Agreement in restraint of marriage is void Slide 3.3 Agreement restraining a marriage is void except for a minor.Similarly agreement in restraint of trade which is lawful is also void. Agreement to prevent legal action is void. Agreement, the meaning of which is not certain, or capable of being made certain, is void

Contingent contracts Slide 3.3 They are contracts to do or not to do some thing, if some event collateral to such contracts does or does not happen. Contingent agreements to do or not to do anything, if an impossible event happens, are void whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.

Obligation Slide 3.3 Promises made in the agreement are for performance.They bind the parties. The parties must perform the promises. This is the obligation.If the performance is dispensed with by the provisions of the Act, the promise is to be performed.

Refusal to accept offer Slide 3.3 When a promiser has made an offer of performance and it has not been accepted, the promiser is not responsible for non- performance. Time and place of performance of the contract are to be specified in the contract and they are binding on the promiser and promisee unless otherwise mentioned.

Reciprocal promises Slide 3.3 They are promises made by both promiser and promisee and they are bound to be performed by both. If one is not ready other need not perform and vice versa. When the event is prevented by the promiser or promisee in a reciprocal contrat the party prevented can make the contract void

Time -the essence of contract Slide 3.3 Time is the essence of the contract. In case a party fails to perform the contract on or before the time specified, the contract becomes voidable to the extend the contract has not been performed and compensation can be claimed by the aggrieved party. In case of contracts where time is not the essence of the contract, it is not voidable.

Impossible contracts. Slide 3.3 An agreement to do impossible things is void ab-initio. A contract to do an act which, after the contract is made becomes impossible, or, by reason of some event which the promiser could prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Contract not to be performed Slide 3.3 If the parties to a contract agree to substitute a new contract for it or to rescind or alter it, the original contract need not be performed If an agreement is found to be void and any person has received advantage from such a contract then the person receiving the benefit has to restore the benefit to the other party from whom the benefit has been received.

Reimbursement Slide 3.3 If necessaries are supplied by a person to another who is not capable of entering into contract then the person supplying the necessaries shall be reimbursed. Similarly, a person making payment on behalf of another, who is legally bound to pay, is also entitled to reimbursement

Responsibility of finder of goods Slide 3.3 A person finding goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee. A person to whom money has been paid, or anything delivered, by mistake or under coercion must repay or return it.

Breach of contract Slide 3.3 When a contract is broken, then the party suffering loss is entitled to compensation from the party responsible for breaking the contract The quantum of compensation if it has been specified in the contract itself, is payable in the event of a contract getting breached. In the absence of such a stipulation the quantum has to be arrived at

Rescinding of contract Slide 3.3 A party rightfully rescinding a contract is entitled to compensation for any damage or loss which he has suffered. Here also the compensation,if specified in the contract, can be asked for. Otherwise the quantum has to be arrived at as per an accepted formula.

Contract of indemnity Slide 3.3 A contract by which one party promises to save the other from loss caused to him by the conduct of the promiser himself, or by the conduct of any other person, is called a contract of indemnity The indemnity holder is entitled to recover the cost of compensation in the case of failure of the promiser to honour the promise.

Contract of guarantee Slide 3.3 A contract of guarantee is a contract to perform the promise or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the surety. The surety has to make good the loss or he has to compensate the defaulted amount in the event of the principal person making default