UNIT III
Audit of Companies
Q1) Who is a company auditor?
A1) 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.
Q2) How is a company auditor appointed?
A2) Appointment of Auditor
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:
a) He is not disqualified for re-appointment
b) He has not given the company a notice in writing of his unwillingness to be re-appointed; and
c) 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.
Q3) What are the powers and duties of a company auditor?
A3) 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 Government 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 government 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 government 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 government 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 Government 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 Government 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 government 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.
Q4) What are the civil liabilities of a company auditor?
A4) CIVIL LIABILITY
Negligence means breach of duty. An auditor is an agent of the shareholders. He has to perform his professional duties. He should take reasonable care and skill in the performance of his duties. If he fails to do so, liability for negligence arises. An auditor will be held liable if the client has suffered loss due to his negligence. It should be noted that an auditor will not be liable to compensate the loss or damage if his negligence is not proved.
2. Liability for Misfeasance:
Misfeasance means breach of trust. If an auditor does something wrongfully in the performance of his duties resulting in a financial loss to the company, he is guilty of misfeasance. In such a case, the company can recover damages from the auditor or from any officer for breach of trust or misfeasance of the company. Misfeasance proceedings can be initiated against the auditor for any untrue statement in the prospectus or in the event of winding up of the company.
Q5) Describe the liabilities of an auditor under Companies Act.
A5) Liabilities under Companies Act-
The following are the liabilities of an auditor under the provisions of the Companies Act.
An auditor shall be held liable to compensate every person who subscribes for any shares or debentures of a company on the faith of the prospectus containing an untrue statement made by him as an expert. The auditor shall be liable to compensate him for any loss or damages sustained by him by reason of any untrue statement included therein. The auditor may escape from liability if he proves that:
Q6) Describe the criminal liabilities of an auditor under Companies Act.
A6) Criminal Liability of Auditor under Companies Act:
1. Untrue statement in Prospectus [Sec.34]
The auditor is liable when he authorizes a false or untrue prospectus. When a prospectus includes any untrue statement, every person who authorizes the issue of prospectus shall be imprisoned for a period of six months to ten years or with a fine, which may be three times the amount involved in the fraud or with both.
2. Non compliance by auditor [Sec.143 and 145]:
If the auditor does not comply regarding making his report or signing or authorization of any document and makes wilful neglect on his part he shall be punishable with imprisonment upto one year or with fine not less than Rs. 25,000 extendable to Rs. 5,00,000.
3. Failure to assist investigation [Sec.217 (6)]:
When Central Government appoints an Inspector to investigate the affairs of the company, it is the duty of the auditor to produce all books, documents and to provide assistance to the inspectors. If the auditor fails to do so he shall be punishable with imprisonment upto one year and with fine up to Rs.1, 00,000.
4. Failure to assist prosecution of guilty officers [Sec.224]:
An auditor is required to assist prosecution when Central Government takes any action against the report submitted by the Inspector. If he fails to do so, he is found guilty and is punishable.
5. Failure to return property, books or papers [Sec.299]:
When a company is wound up the auditor is supposed to be present and subject himself to a private examination by the court and is also liable to return to the court any property, books or papers relating to the company. If the auditor does not comply, he may be imprisoned.
6. Penalty for falsification of books [Sec.336]:
An auditor when destroys, mutilates, alters or falsifies or secrets any books of account or document belonging to the company. He shall be punishable with imprisonment and also be liable to fine.
7. Prosecution of auditor [Sec.342]:
In the course of winding up of a company by the Tribunal, if it appears to the Tribunal that an auditor of the company has been guilty of an offence, it shall be the duty of the auditor to give all assistance in connection with the prosecution. If he fails to give assistance he shall be liable to fine not less than Rs. 25,000 extendable upto Rs. 1,00,000.
8. Penalty for deliberate act of commission or omission [Sec.448]: If an auditor deliberately make a statement in any report, certificate, balance sheet, prospectus, etc which is false or which contains omission of material facts, he shall be punishable with imprisonment for a period of six months to ten years and fine not less than amount involved in fraud extendable to three times of such amount.
Q7) Describe the criminal liabilities of an auditor under Indian Penal Code.
A7) Criminal Liability under Indian Penal Code
If any person issues or signs any certificate relating to any fact which such certificate is false, he is punishable as if he gave false evidence. According to Sec.197 of the Indian Penal Code, the auditor is similarly liable for falsification of any books, materials, papers that belongs to the company.
Q8) Describe the liabilities of an auditor under Income Tax Act.
A8) Criminal Liability under Indian Penal Code
If any person issues or signs any certificate relating to any fact which such certificate is false, he is punishable as if he gave false evidence. According to Sec.197 of the Indian Penal Code, the auditor is similarly liable for falsification of any books, materials, papers that belongs to the company.
Q9) Describe the liabilities of an auditor towards third parties.
A9) Liability towards Third Parties-
There are number of persons who rely upon the financial statements audited by the auditor and enter into transactions with the company without further enquiry viz. creditors, bankers, tax authorities, prospective shareholders, etc.
1. Liability for Negligence:
It has been held in the court that auditor is not liable to third parties, as there is no contract between auditor and third parties. He owes no duty towards them.
2. Liability for Frauds:
The third parties can hold the auditor liable, if there is fraud on the part of auditor even if there is no contractual relationship between auditor and third parties. In certain cases negligence of auditor may amount to fraud for which he may be held liable to third parties. But it must be proved that auditor did not act honestly and he knew about it.
Q10) What are the provisions for removal of a company auditor?
A10) 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.
5. The tribunal either sue moto 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.
