UNIT 4
AUDIT OF COMPANIES
What is an Auditor?
An auditor is a person authorized to review and verify the accuracy of financial records and ensure that companies comply with tax laws. They protect businesses from fraud, point out discrepancies in accounting methods and, on occasion, work on a consultancy basis, helping organizations to spot ways to boost operational efficiency. Auditors work in various capacities within different industries.
How Auditors are used
Auditors assess financial operations and ensure that organizations are run efficiently. They are tasked with tracking cash flow from beginning to end and verifying that an organization’s funds are properly accounted for.
In the case of public companies, the main duty of an auditor is to determine whether financial statements follow generally accepted accounting principles (GAAP). To meet this requirement, auditors inspect accounting data, financial records and operational aspects of a business and take detailed notes on each step of the process, known as an audit trail.
Once complete, the auditor’s findings are presented in a report that appears as a preface in financial statements. Separate, private reports may also be issued to company management and regulatory authorities as well.
According to Provisions of Section 141(1) of the Companies Act, 2013 “a person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant within the meaning of Chartered Accountants Act, 1949 and holds a valid Certificate of Practice.
It has been further provided that the firm shall also considered to appointed by its firm name whereof majority of partners practicing in India are qualified for appointment as auditor of a company.
According to Provisions of Section 141(2) of the Companies Act, 2013, a firm including limited liability partnership who are chartered accountants shall be authorised to act as auditor and sign on behalf of the such limited liability partnership or firm.
Summary: A person shall appointed as an auditor if he is chartered accountant within the meaning of Chartered Accountants Act, 1949 and holding valid certificate of practice and acting in capacity as
a) Individual
b) Partnership Firm
c) Limited Liability partnership
According to Provisions of Section 141(3) of the Companies Act, 2013, following persons shall not be eligible as auditor of the company: ‐
a) A body corporate other than LLP registered under the LLP Act, 2008
b) An officer or employee of the company.
c) A person who is partner or who in the employment, of an officer or employee of the company.
d) A person who or his relative or partner
- Is holding any security/interest in the company or its subsidiary or of its holding or associate company or subsidiary of such holding company. It has been further provided that a relative may hold security or interest in the company of face value not exceeding one lac rupees.
- Is indebted to the company or its subsidiary, or its holding or associate company or subsidiary of such holding company, in excess of Rs. 5 lacs rupees
- Has given guarantee or provide any security in connection with the indebtness of any third person to the company or its subsidiary, or its holding or associate company or a subsidiary of such holding company for value in excess of Rs. 1 lacs.
e) A person or a firm who (whether directly or indirectly) has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company.
Here the business relationship shall be construed as any transactions enter into for a commercial purpose except: ‐
- Commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm by the professional bodies regulated such members.
- Commercial transactions which are in ordinary course of business of the company at arm’s length price as customer.
f) A person whose relative is a director or is in the employment of the company as a director or key managerial personnel.
g) A person
- Who is in full time employment elsewhere or
- a person or a partner holding appointment as its auditor is at the date of such appointment or reappointment holding appointment as auditor for more than 20 companies.
h) A person who has been convicted by a court of an offence involving fraud and a period often years has not elapsed from the date of such conviction.
i) Any person whose subsidiary or associate company or any other form of entity is engaged as on the date of appointment in consulting or specialised services in reference to provision of Section 144 of the Companies Act, 2013.
Further According to Provisions of Section 141(4) of the Companies Act, 2013, where a person appointed as auditor of the company incurs any of the disqualification mentioned in Section 141(3) of the Companies Act, 2013 after his appointment, he shall vacate his office as such auditor and such vacancy shall be deemed to be casual vacancy in the officer of the auditor.
It must be noted that the aforesaid provisions are applicable to all types of auditors i.e. cost auditors, statutory auditors and secretarial auditors.
1. Every Company shall at the First Annual General Meeting appoint an Individual or firm as an Auditor who shall hold office from the conclusion of this meeting until the conclusion of sixth Annual general Meeting. Provided that Company shall place the matter relating to such appointment for ratification by members at every Annual General Meeting. Further provided that before such appointment Company should obtain the written consent from the Auditor and certificate which shall indicate the criteria as mentioned in Section.141. Company shall file the said appointment with the Registrar of Companies in e-Form ADT-1 within 15 days from the date of appointment.
2. No listed Company or a company belonging to such class or classes of companies as may be prescribed shall appoint or re-appoint: a. An Individual as an Auditor for more than one term of Five consecutive years and b. An Audit firm as auditor for more than two terms of five consecutive years Provided that an Individual or audit firm who has completed their term as mentioned in Sec. 139(2) (b) shall not be eligible for appointment as auditor in the same Company for five years from the completion of such term. Further provided that no audit firm having a common partner/Partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years. Every Company existing on or before the commencement of this act, which is required to comply with this Section shall within three years from the date of commencement of said Act shall comply the provision of this Act.
3. Subject to the provisions of this Act, members of a company may resolve to provide that:
a. In the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members.
b. The audit shall be conducted by more than one auditor.
4. The central government may by rules, prescribe the manner in which the companies shall rotate their auditors in pursuance of sect. 139(2).
5. Notwithstanding anything contained in Sec. 139(1), the first auditors of the company other than the Government Company shall be appointed by the Board of Directors from the date of registration, in case of the Board to perform the said act they should inform to the members of the Company, who shall within 90 days at an Extra ordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the First Annual General Meeting.
6. In the case of Government Company as mentioned in Sec.139 (5) Comptroller and Auditor General of India shall within 60days from the date of registration appoint the Auditor, if they fail to do so, the Board should appoint the Auditor within 30days, if Board is also unable to perform, then members should appoint the Auditors within 60 days at an Extra-Ordinary General Meeting who shall hold office till the conclusion of first annual general meeting.
I. In case of the Company other than Company as mentioned in Sec.135 (5) be filled by the Board of Directors within 30days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall be approved by the company at a general meeting convened within 3 months of the recommendation of the Board and he shall hold the office till the conclusion of the next Annual general meeting.
II. In case of a Company whose accounts are subject to audit by an Auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within 30days.
7. Provide if the Comptroller and Auditor General of India doesn’t not fill the vacancy within the said period, the Board shall fill the vacancy within the next 30 days.
8. Subject to the provisions of Sec. 139(1) and the rules made there under, a retiring auditor may be re-appointed at an annual general meeting, if:
- He is not disqualified for re-appointment
- He has not given the company a notice in writing of his unwillingness to be re-appointed; and
- A special resolution has not been passed at the meeting appointing some other auditor or expressly mentioning that he shall not be re-appointed.
9. Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the Company.
10. Whereas a Company which is required to form an Audit committee as required under section 177, then all the appointment including appointment of Auditor through Casual vacancy can be made, after taking into account the recommendation of such committee.
1. The auditor appointed under section.139 may be removed before the expiry of his tenure only by a special resolution of the company, after obtaining the previous approval of the Central Government. Provided before taking action as mentioned, the said Auditor should be given a reasonable opportunity of being heard.
2. The auditor who has resigned from the Company shall file within a period of 30 days from the date of resignation in e-form ADT-3 with the Registrar and in case of the Companies as mentioned in Sec.135 (5), the auditor shall also file such statement with the comptroller and auditor-general of India, indicating the reason and other facts as may be necessary.
3. If the auditor doesn’t comply with the above mentioned Section it will be punishable with fine which shall not be less than 30,000/- but which may extend to 5,00,000/-
4. (i) Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor or proving that a retiring auditor shall not be re-appointed, except where the retiring auditor has completed a consecutive tenure of five years or ten years as the case may be, as mentioned in Section.135 (2).
(ii) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.
(iii) Where notice is given of such a resolution and the retiring auditor makes representation in writing to the company (within the reasonable time) and request the Company to forward the same to the members unless the representation is received too late:
a. Any notice of the resolution given to members of the Company, state the fact of the representation made by the Auditor.
b. Send a copy of the representation to every member to whom notice has been sent.
- If the copy of the representation is not sent because it has been received too late or on behalf of the Company’s default then the same thing has to be read at the ensuing meeting.
- If the copy of representation is not sent, then the same has to be filed with the registrar.
- If the tribunal is satisfied on an application by the Company or an auditor that the rights conferred by the auditor has been abused then copy of the representation need not be sent and need not be read out at the meeting.
5. The tribunal either suo motu or an application made to it by Central Government or by any person concerned , if it is satisfied that auditor has acted in fraudulent manner, it may by order , direct the company to change the same and within 15 days direct the Company to appoint another Auditor.
1. The Remuneration of Auditor may be fixed in the general meeting or in such manner as may be determined. Although the Board can fix the remuneration of First Auditor.
2. The Expenses which is paid to the auditor is in addition to the audit we he carries out in the Company.
Power and duties of auditors and auditing standards as per Section.143
1. Every auditor of a company shall have a right of access at all times to the books of accounts and vouchers of the company, whether kept at the registered office of the Company or at any other place and he shall be entitled to require from the officer such information as may be required.
2. The Auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this act, to be laid before the company in general meeting and the report shall after taking into account auditing standard and matters which is required shall be included in the audit report.
3. The auditor report shall state:
a. Whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of audit. In case proper information are not received then the details thereof and effect of such information on the financial statement should be stated in the auditor’s report
b. Whether proper books of accounts as required by law is maintained or not and whether proper returns adequate for the purpose of audit have been received from the branches not visited by him or not.
c. Whether the report in respect of a branch which is audited by the auditor other than company auditor has been sent to him
d. Whether the company balance sheet and profit and loss account are in agreement with the books of accounts and returns
e. Whether financial statement comply with the accounting standards
f. The observations and comments of the auditor on the financial transactions or matters which have adverse effect on the company
g. Whether any director is disqualified to be appointed as a director
h. Any qualifications, reservations or adverse remarks in respect of the maintenance of the books of accounts or other matters connected herewith
i. Whether the company has adequate internal financial control system in place and operative effectiveness of such control.
j. Whether the company has disclosed the impact of any pending litigation if any in the financial statement
k. Whether the company has made provision in respect of any material foreseeable losses as required by law or accounting standards including the derivative contracts
l. Whether the company has made delay in transferring the amount required to be transferred to the Investor Education and Protection Fund by the company.
Sec 143(4)
Where any of the matters required to be included in the audit report under this section is answered in negative or with a qualification then in that case auditor is required to state the reasons of such reservations and negative remark
Sec 143(5)
In case of Govt company the C&AG will appoint the auditor to conduct the audit of the company. The C&AG will also give the directions and the manner in which the accounts of the govt company are required to be audited by the auditor. The auditor then after completing the audit will issue an audit report to the C&AG which will include all the matters which are stated above. In additions to these matters the auditor of the govt company shall state in his audit report the direction issued by C&AG, the actions taken there upon and its impact on the accounts and financial statement of the company.
Sec 143(6)
On receipt of audit report of the govt company the C&AG can carry out supplementary audit with 60 days from the date of receipt of such audit report. He may also comment upon the audit report. The audit report should be sent to every person to whom copies of audited financial statement are sent and the copy of such audit report shall also be place at the AGM
Sec 143(7)
In case of Govt Company the C&AG may require that the test audit of the company should be conducted.
Sec 143(8)
Branch is in India - The audit of such branch can be done by the Company auditor or by any other person qualified to be appointed as an auditor as per Sec 139 Branch is in some other countries -The audit of such branch shall be conducted by an accountant or by any such person qualified to be appointed as an auditor as per the laws of that country. The branch auditor should prepare a report on the books of accounts of the branch audited by him and send a copy of such audit report to the company auditor.
Sec 143(9)
The auditor shall comply with the accounting standards.
Sec 143(10)
The Central Government may prescribe the standards of auditing, as prescribed by ICAI..
Sec 143(11)
The Central Govt may in consultation with the National Financial Reporting Authority direct that the audit report in case of specific class of companies shall include a statement on such matters as may be specified therein.
Sec 143(12)
If an auditor of the company in the course of performance of his duties as auditor has reason to believe that an offence involving fraud is being or has been committed against the company by an officer or the employee of the company then the auditor should immediately report the matter to the central govt within such time and in such manner as may be prescribed.
The auditor should forward his report to the board or the audit committee as the case may be immediately after he comes to know about the fraud seeking their reply or observations within 45 days.
On receipt on such reply or observations of the board or the audit committee the auditor should forward his report along with the reply or observations of the board or the audit committee and his comments on such reply or observations to the central govt within 15 days.
In case no reply or observations has been received by the auditor from the board or the audit committee then in that case the auditor should send the audit report along with a note containing the details of his report that was earlier forwarded to the board or the committee for which he has failed to receive any comments or observations.
Sec 143(14)
The provision of this section shall apply to the cost auditor conducting cost audit and the company secretary doing secretarial audit.
Sec 143(15)
If the Chartered accountant , company secretary or the cost auditor do not comply with any of the provisions of this act then he will be punishable with a fine which shall not be less than Rs. 1 lakh but which can be extend to Rs. 25 lakh.
Any auditor appointed by the Company should provide only those services which will be approved by the Board of Directors or Audit committee, as the case may be, but which may not include the below mentioned services:
- Accounting and book keeping services.
- Internal audit
- Design and implementation of any financial information system.
- Actuarial services.
- Investment advisory services.
- Investment banking services.
- Rendering of outsourced financial services.
- Management services.
- Any other kind of services as may be prescribed.
The person appointed as an auditor of the Company can sign the Auditor’s report or sign or certify any other document of the Company and present the same before the general meeting and shall be open for member’s inspection.
All the notices and other communications relating to the general meeting shall be forwarded to auditor and he can attend either by himself or through his authorised representative and has the right to be heard at such meeting.
If any of the provisions of Sec 139 to 146 is contravened, the Company shall be punishable with Fine which shall not be less than 25,000/- but which may extend to 5,00,000/- and every officer of the Company who is in default shall be punishable with imprisonment for a term which may extend to one year or fine of not less than 10,000/- which may extend to 1,00,000/- or with both.
