Audit And Auditors – CA Inter Law Notes

Audit And Auditors – CA Inter Law Notes is designed strictly as per the latest syllabus and exam pattern.

Audit And Auditors – CA Inter Law Notes

Internal Audit – Section 138

Applicability of Internal Audit:
Following companies are required to appoint internal auditor to conduct internal audit of books of account of the company:

• Listed company.
• Unlisted public company having:
  • Paid up capital of ₹ 50 Cr. or more during preceding FY; or
  • Outstanding deposits of ₹ 25 Cr. or more at any time during preceding Financial Year.

In case of Public or Private company having:

• Turnover of ₹ 200 Cr. or more during preceding FY; or
• Outstanding loans or borrowing from Bank or Public Financial Institutions exceeding ₹ 100 Cr. or more at any time during preceding Financial Year.
  • Section 138 is applicable to specified IFSC public and IFSC private company if Articles of company provides for same.

Who Can Act As Internal Auditor?:

• Internal auditor shall be Chartered Accountant or a Cost Accountant or such other professional as may be decided by Board.
• Statutory auditor cannot act as internal auditor.
• Internal auditor may or may not be employee of company.
• Internal auditor may be either an individual or firm or body corporate.

Appointment of Internal Auditor:

• Internal auditor is appointed by Board of Directors at Board Meeting.
• Appointment of internal auditor cannot be made by means of circular resolution.
• However, there is no bar in making appointment at Board Meeting held through video conferencing.

Report:

• The internal auditor is required to report to Board.
• Audit Committee of the company or the Board shall, in consultation with the internal auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit.

Appointment Of First Auditor – Section 139:

Appointment of First Auditor in Case of Non-Government Company – Section 139(6):

Provisions:

• First auditor is appointed by Board of directors within 30 days of registration of company.
• If Board fails to appoint, it should inform members, who shall appoint first auditor within 90 days by Extraordinary General Meeting.
• First auditor will continue till auditor is appointed at first Annual General Meeting.

Procedure to appoint auditor at Board Meeting:

• Obtain certificate in writing from proposed auditor confirming his eligibility and consent to be appointed as auditor of company.
• Convey Board Meeting within 30 days from incorporation of company.
• Pass Board resolution for appointment for first auditor and fix his remuneration.
• Intimate to auditor and file Form ADT-1 to Registrar with in 15 days.

Procedure where auditor is not appointed by Board:

• Board intimate about failure to appoint first auditor within 30 days of incorporation of company.
• Board convey Board Meeting and fix date of Extraordinary General Meeting.
  (within 90 days from intimation by Board about failure)
• Issue notice of EGM to members.
• Hold EGM and pass resolution.
• Intimate auditor about his appointment.

In Case of Government Company or Government Controlled Company – Section 139(7):

Provisions:

• First auditor is appointed by Comptroller & Auditor General (CAG) within period of 60 days from registration.
• If CAG does not appoint auditor in 60 days, Board can appoint auditor in next 30 days.
  If Board fails to appoint auditor in 30 days, it should inform members who can appoint auditor at Extraordinary General Meeting within 60 days.
• Appointed auditor hold office till conclusion of first Annual General Meeting.

Important Note:

• Provision relating to appointment of auditor by CAG is similarly apply to company controlled by Government.
• Control include the right to appoint majority of directors or to control the management or policy decisions exercisable by a person(s), directly or indirectly including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

Procedure to appoint auditor at Board Meeting:

• Obtain certificate in writing from proposed auditor confirming his eligibility and consent to be appointed as auditor of company.
• Convey Board Meeting within 30 days from failure to appoint first auditor by CAG.
• Pass Board resolution for appointment for first director and fix his remuneration.
• Intimate to Auditor and file Form ADT-1 to Registrar within 15 days.

Procedure where auditor is not appointed by Board:
If Board fails to appoint first auditor within 30 days of getting information from CAG’s failure to appoint first auditor convey Board Meeting and fix date of Extraordinary General Meeting (within 60 days from intimation by Board about failure)

• Issue notice of EGM to members.
• Hold EGM and pass resolution.
• Intimate auditor about his appointment.

Provisions For Appointment of Auditor At First Agm:

In Case of Non-Government Company:

• Auditors of the company shall be appointed at first Annual General Meeting for maximum 5 years tenure (i. e. from 1st AGM to conclusion of 6th AGM) subject to ratification at every Annual General Meeting.
• Ratification is carried out by passing Ordinary Resolution at every Annual General Meeting.
• If the appointment is not ratified by members, Board of directors or audit committee should appoint another auditor. – Rule 3(7) of the Companies (Audit and Auditors) Rules, 2014
• Where at any Annual General Meeting, no auditor is appointed or reappointed, the existing auditor shall continue to be the auditor of company.

In Case of Government Company or Government Controlled Company:

• Comptroller and Auditor General is required to appoint auditor within period of 60 days from registration of Government Company.
• If CAG fails to appoint within 60 days of registration, Board of directors shall appoint auditor within 30 days.
• If Board fails to appoint auditor in 30 days, it shall inform members who shall appoint auditor within 60 days at EGM.
• Subsequent appointment (Le. appointment or re-appointment) of auditor should be made by CAG within 180 days from the commencement of financial year.
• Thus, in case of Government companies, auditor is appointed only for one year and not for five years.

Re-Appointment of Retiring Auditor – Section 139(9) &(10):
A retiring auditor may be re-appointed at an Annual General Meeting, if:

• He is not disqualified for re-appointment
• He has not given to the company a notice in writing of his unwillingness to be reappointed
• A Special Resolution has not been passed at the AGM appointed some other auditor or providing expressly that he shall not be re-appointed.

Procedure For Appointment of Auditor At Agm – Section 139

For Company Which Require to Constitute Audit Committee:

• Audit committee consider qualification and experience of auditor for appointment.
• Audit committee can call for other information from proposed auditor.
• After consideration, audit committee recommend the name of auditor to Board for consideration.
• If Board agree with recommendation of audit committee, it should further recommend name of auditor to members in Annual General Meeting.
• If Board disagree with recommendation of audit committee, it should refer back its commendation to committee for reconsideration with reasons for disagreement.
• If audit committee decide not to reconsider its original consideration, Board shall record the reason or its disagreement and send its own recommendation for consideration to members in Annual General Meeting.
• Auditor appointed at Annual General Meeting hold office from conclusion of that meeting to conclusion of 6th Annual General Meeting.
• Auditor should be intimated about his appointment.
• Form ADT-1 should be hied within 15 days from date of meeting.

For Company Which Do Not Require to Constitute Audit Committee:

• Board should consider qualification and experience of auditor for appointment. Board can call for other information from proposed auditor.
• After consideration, Board recommend the name of auditor to members for consideration.
• Auditor appointed at Annual General Meeting hold office from the conclusion of that meeting to conclusion of 6th Annual General Meeting.
• Auditor should be intimated about his appointment.
• Form ADT-1 should be hied within 15 days from date of meeting.

Conditions for Appointment and Notice to Registrar – Rule 4 of Companies (Audit and Auditors) Rules, 2014:
Auditor appointed should submit certificate that:

• He is eligible for appointment and is not disqualified for appointment under the Act, Chartered Accountants Act, 1949 and rules made thereunder.
• Proposed appointment is as per term provided under the Act.
• Proposed appointment is within the limits laid down by or under authority of the Act.
• The list of proceeding against the auditor or firm or partner with respect to professional matter of conduct, as disclosed in certificate, is true and correct.

Compulsory Rotation Of Auditor – Section 139

Applicability of Rotation of Auditor – Rule 5:
Following companies are compulsory required to follow rotation of auditors:

• Listed companies.
• All unlisted public companies having paid up capital of ₹ 10 crore or more.
• All private companies having paid up share capital of ₹ 50 crore or more.
• All unlisted public companies and private companies not covered under above limit but having public borrowing from financial institution, banks or public deposit of ₹ 50 crores or more.
  • Compulsory rotation of auditors is not applicable to OPC and Small companies.

Implementation:

• Provision relating to compulsory rotation of auditor is made applicable from 1st April 2014.
• Transition period of 3 years provided to the companies to comply with the mandatory rotation of auditor requirement, (i.e., on or before 31-3-2017)

Maximum Tenure:
For Individual auditor:

• Individual auditor can be appointed for one term of 5 consecutive years.
• To calculate term of 5 years, period for which auditor has held office as auditor prior to commencement of act is included for calculating period of 5 consecutive years. Following example explain the position in this regard:

Number of consecutive years for which an individual auditor has been functioning as auditor in the same company (in the first AGM held after 1st April 2014)	Maximum number of consecutive years after 1st April 2014 for which he may be appointed in the same company after transitional/grace period	Aggregate period which the auditor would complete in the same company in view of columns I and II
I	II	III
5 Years or more	3 Years  8 Years or more
4 Years	3 Years	7 Years
3 Years	3 Years	6 Years
2 Years	3 Years	5 Years
1 Year	4 Years	5 Years

For Firm or LLP as auditor: Audit firm including LLP can be appointed as auditor of company for not more than one term of 5 consecutive years. The firm or LLP can be re-appointed for another term of not more than 5 years (i.e. maximum total tenure of 10 years)

Following example explain rotation in case of audit firm:

Number of consecutive years for which an audit firm has been functioning as auditor in the same company (in the first AGM held after 1st April 2014)	Maximum number of consecutive years for which firm may be appointed in the same company (including transitional period)	Aggregate period which the firm would complete in the same company in view of columns I and II
I	II	III
10 Years or more	3 Years	13 Years or more
9 Years	3 Years	12 Years
8 Years	3 Years	11 Years
7 Years	3 Years	10 Years
6 Years	4 Years	10 Years
5 Years	5 Years	10 Years
4 Years	6 Years	10 Years
3 Years	7 Years	10 Years
2 Years	8 Years	10 Years
1 Year	9 Years	10 Years

Important Note:

• Auditor of same company means auditor of holding company, subsidiary company, subsidiary company or associate company.
• Audit firm shall include other firms whose name or trade mark or brand is used by the firm or any of its partner.
• If a partner, who is in charge of an audit firm and also certifies the financial statements of the company, retires from the said firm and joins another firm of chartered accountants, such other firm shall also ineligible to be appointed for period of 5 years.
• As per RBI, rotation needs to be made in every four years for banking companies. As per IRDAI, rotation needs to be made in every five years for insurance company. In both cases, cooling period is 2 years.

Cooling Off Period:

• If individual auditor has completed tenure of one term or audit firm which has completed tenure of 2 terms as above are subject to cooling off period of 5 years. This provision is not applicable to IFSC unlisted public company and IFSC Private company.
• It means same auditor or audit firm cannot be reappointed for next 5 years.
• If two or more audit firms have common partner(s), and one of these firms has completed 2 terms of 5 consecutive years, none of such audit firms shall be eligible for reappointment.

Casual Vacancy Of Auditor – Section 139(8)

When Casual Vacancy Arises?:

• The casual vacancy may arise because the auditor may become disqualified after his appointment or due to his death.
• If auditor appointed by members refuses to accept the appointment, it cannot be treated as ‘casual vacancy’ and fresh appointment at General Meeting is necessary.
• If no auditor is appointed or re-appointed, it does not result into casual vacancy.

Casual vacancy arising otherwise than resignation:

Non-Government Company:
Casual vacancies in office of auditor of Non-government Company is filled by Board of directors within 30 days.

Following steps should be taken:

• Obtain certificate in writing from proposed auditor confirming his eligibility and consent to be appointed as auditor of company.
• Convey Board Meeting and pass Board resolution for appointment for auditor and fix his remuneration.
• Intimate to auditor and file Form ADT-1 to Registrar within 15 days.

Government Company or Government controlled company:

• Casual vacancies in office of auditor of Government Company to be filled by CAG within 30 days.
• If CAG fails to fill casual vacancy, Board of director shall fill it up within next 30 days by taking following steps:
  • Obtain certificate in writing from proposed auditor confirming his eligibility and consent to be appointed as auditor of company.
  • Convey Board Meeting within 30 days from failure to appoint auditor to fill casual vacancy by CAG.
  • Pass Board resolution for appointment for auditor and fix his remuneration.
  • Intimate to auditor and file Form ADT-1 to Registrar within 15 days.

Casual Vacancy Arising Due to Resignation:

• Obtain certificate in writing from proposed auditor confirming his eligibility and consent to be appointed as auditor of company.
• Convey Board Meeting within 30 days of arising casual vacancy.
• Pass Board resolution for appointment of new auditor in place of old auditor and fix his remuneration.
• Intimate to auditor about his appointment.
• Issue notice for EGM within 3 months from date of recommendation of Board to the members of company.
• Convey EGM and pass resolution approving appointment of auditor already made by Board.
• Intimate Registrar.

Position in Case:
In case of joint auditors, if there is casual vacancy of one of Joint Auditor of the auditors, other auditors can act till Board fills the vacancy.

Resignation Of Auditor – Section 140

Procedure for Resignation:

• The auditor who has resigned from the company shall hie statement in Form ADT-3 to company as well as Registrar within 30 days of resignation.
• It should contain reasons and other relevant fact with regard to his resignation.
• Auditor of Government Company on resignation also file statement with CAG indicating reasons and other relevant facts with regard to his resignation.
• If auditor does not file statement, he is punishable with One not less than ₹ 50,000 or remuneration of auditor, whichever is less, but which may not more than ₹ 5 Lakhs.

Appointment of Auditor in Casual Vacancy: If casual vacancy is created by resignation of auditor in case of non-government company, appointment should be made at General Meeting within period of 3 months on recommendation of Board.

Removal Of Auditor Before Expiry Of His Term – Section 140 & Rule 7 Of Companies (Audit And Auditors) Rules, 2014

Removal of Audi-tor Before Term by Company:

• Auditor of Government and Non-government Company can be removed before expiry of his term by passing Special Resolution and prior approval of Central Government.
• Auditor sought to be removed should be given reasonable opportunity of being heard.

Procedure for Removal of Auditor by Company:

Board Resolution: Board resolution should be passed.

Application to CG:

• Application to Central Government is made in Form ADT-2 within 30 days of passing of Board resolution.
• Powers of Central Government are delegated to Regional Director.

General Meeting: Hold General Meeting within 60 days of receipt of approval of Central Government.

Intimation & Re-porting:
Intimate auditor who was removed with porting certified copy of resolution and approval of Central Government.

• File Form MGT-14 with Registrar with in 30 days of passing of resolution.

Important Note:
In case of specified IFSC unlisted public, IFSC Private company, if Central Government does not communicate, any decision within 60 days from the date of application, it would be deemed that Central Government has approved application and company can appoint new auditor at General Meeting convened within 3 months from expiry of 60 days.

Removal Or Change Of Auditor By Tribunal – Section 140

When Tribunal May Order?:
Tribunal may by order direct company to change its auditor:

• On its own motion; or
• On application by Central Government; or
• On application by any concerned person

Tribunal shall make such order, when it is satisfied that the auditor has directly or indirectly:

• acted in a fraudulent manner; or
• involved in any fraud by or in relation to the company or its directors or officers
• Application shall be made in Form NCLT 1.

Order of Tribunal: If Tribunal is satisfied on application made by Central Government, it may make order within 15 days that auditor shall not function as an auditor and the Central Government may appoint another auditor in his place.

Consequences of Order:

The auditor against whom final order has been passed by the Tribunal:

• shall not be eligible to be appointed as an auditor of any company for a period of 5 years from the date of passing of the order; and
• shall be liable for action under section 447 for fraud

Procedure For Appointment Of Auditor Other Than Retiring Auditor – Section 140

Special Notice:
Special notice is given for resolution at AGM for:

• Appointing person other than retiring auditor; or
• Providing expressly that retiring auditor shall not be re-appointed except where retiring auditor has completed consecutive tenure of 5/10 years, as case may be

Inform to Auditor and Members:

• Company should send copy of notice to retiring auditor.
• If notice is received well in advance, company should include same in the notice of AGM.

Representation By Auditor:

• Retiring auditor has right to make representation.
• If representation is made in writing with request to forward to members, company should forward it to members.
• If copy of representation is not sent because it is received too late or because of default of company, auditor may require it to be read out at AGM.
• If copy of representation of auditor is not sent to members, the copy shall be filed with ROC.

Company does not want to communicate representation:

• If company does not wish to send the representation to members or read at the General Meeting, the company or aggrieved party can apply to NCLT.
• Application shall be made in Form NCLT 1.
• If NCLT is satisfied that the right of representation is being misused by auditor, the NCLT may order that the representation may not be sent and need not be read out at the meeting.
  (Note: This provision is similarly applicable in case of removal of auditor)

General Meeting:

• Convey General Meeting and pass resolution.
• Intimate to concerned auditor and intimate Registrar.

Qualification Of Auditor – Section 141

Chartered Accountant: A person who is a Chartered Accountant within the meaning of Chartered Accountants Act, 1949 can only be appointed as an auditor.

Firm or LLP of CAs:
A firm of Chartered Accountants can be appointed as auditor only if its majority of partners are qualified to be appointed as auditor.

• LLP of Chartered Accountant can be appointed as auditor of company. LLP is not treated as body corporate for the purpose of appointment of auditor.
• Foreign LLP is disqualified to be appointed as auditor.
• If firm or LLP is appointed as auditor of company, only the partners who are Chartered Accountants in practice shall be authorized to act and sign on behalf of firm.

Hold COP: The Chartered Accountant must hold a ‘Certificate of Practice’ (COP) issued by Institute of Chartered Accountants of India.

Disqualification of Auditor – Section 141

Following person cannot be appointed as auditor, even if he is Chartered Accountant:

Body Corporate:

• A Company or body corporate.
• However, an Indian LLP can be appointed as auditor.

Officer or Employee of Company: An officer or employee of the company.

Example:
Ram is practicing CA, is a director of ABC Ltd. Ram is disqualified as he is director of company. Director is an officer of company as per section 2(59)

As per section 2(59) of Companies Act, 2013, the term ‘officer’ includes any director, manager or KMP. It also includes CFO and CEO. Thus, a director of a company cannot be appointed as auditor of the company. A partnership firm of auditors where director of the company is a partner also cannot be appointed, as a ‘partner’ of officer or employee cannot be appointed as auditor.

Partner or Employee of Officer of Company: A person who is partner, or who is in employment, of an officer or employee of the company.

Example:
Ram is practicing CA, is a director of ABC Ltd. Ram is disqualified as he is director of company. Director is an officer of company as per section 2(59). If he is partner in ABC & Co., a firm of CA. The other partners are Shyam and Rehman. Shyam and Rehman are disqualified to be auditors of ABC Ltd.

Interest, Security or Guarantee by Himself, Relative 6r His Partner:
A person who himself or his relative or partner:

• Is holding any security or interest in the company or its subsidiary company or holding company or associate company or subsidiary of such holding company. However, relative may hold security in company of face value not exceeding ₹ 1 Lakh. If relative holds security of face value exceeding ₹ 1 lakh of subsidiary company or associate company, disqualification is attracted.

Important Note:
In the event of acquiring any security or interest by relative in excess of above threshold limit, (i.e. ₹ 1 Lakh) corrective action to maintain the limit (₹ 1 Lakh) can be taken by the auditor within 60 days of such acquisition or interest. If corrective action is taken, auditor will not be disqualified.

Is indebted to company or its subsidiary or holding company or its associate company or subsidiary of such holding company for more than ₹ 5 Lakh.

Has given any guarantee or security in connection with indebtedness of any third person to the company or its subsidiary or holding company or associate company or subsidiary of such holding company for amount exceeding ₹ 1 Lakh.

Example:
If wife of CA holds security beyond the limit in the company or its subsidiary company or holding company or associate company, disqualification is attracted.

Business Relationship: A person or firm who has business relationship with company, or its subsidiary or its holding company or associate company or subsidiary of such holding company.

Important note:

• Business transactions include any transactions entered into for commercial purpose, except transaction in nature of professional services allowed to auditor as per Chartered Accountants Act, 1949.
• Commercial transactions which are in ordinary course of business of company at arm’s length-like sale of products or services to the auditor, as customer, in ordinary course of business, by companies engaged in the business of telecommunication, airlines, hospitals, hotels and such other similar businesses.

Fraud: A person convicted for fraud and 10 years not elapsed from date of conviction.

Relative Holding Position: A person whose relative is director or is in employment of company as director or KMP.

Providing Other Services: An auditor who render directly or indirectly any services as per section 144 to the company or its holding company or subsidiary company.

Person Also Dis-qualified For Subsidiary or Holding Company: If a person is disqualified to be auditor under any of the aforesaid clause, he will also be disqualified to be auditor of subsidiary or holding company of that company or subsidiary of that company’s holding company.

As Per Chartered Accountant Act, 1949:
As per Chartered Accountants Act, 1949, a member is disqualified if:

• He ceases to be a member of the Institute
• His certificate of practice is cancelled
• He is adjudged as having unsound mind
• He is un-discharged insolvent.

Disqualified After Appointment: If a person becomes disqualified after his appointment, he shall be deemed to have vacated his office.

Important Note:

• A statutory auditor of company can conduct tax audit.
• Internal auditor cannot act as statutory auditor.
• An auditor has restrictions on number of audits he can accept. He cannot accept audits beyond prescribed limit or number of audits. At present limit is 20 audits. Person cannot be appointed as auditor in more than 20 companies as auditor. However, audits of following companies are not included while counting limit of 20:
  • OPC
  • Dormant Company
  • Small Companies
  • Private companies having paid up capital less than ₹ 100 crores.

Remuneration Of Auditors – Section 142

First Auditor : If first auditor is appointed by the Board, the remuneration for first auditor shall be fixed by the Board.

Subsequent Auditor:
The remuneration of the auditor of company is fixed:

• In the General Meeting; or
• In such manner as may be decided in General Meeting

Government Company: In absence of any specific provision, the remuneration of auditor of government company is fixed in General Meeting.

Remuneration Includes:

• Remuneration fixed as above shall be in addition to fees payable to an auditor. It includes any expenses if any, incurred by auditor in respect of audit work.
• But, it does not include any remuneration paid to him for any other service rendered by him at the request of company.

Disclosure of Remuneration: The remuneration paid to auditors and amounts paid to auditor should be disclosed in profit and loss account or by way of a note in balance sheet.

Rights Or Power of Auditor – Section 143:

Right to Access Books:

• Auditors have a right of access at all times to the books and accounts and vouchers of the company, whether kept at head office of the company or elsewhere.
• Auditor of holding company has right to access records of all its subsidiaries and associate companies in so far as it relates to the consolidation of its financial statement.

Right to Receive Information & Communication:

• He is entitled to require all officers of the company to supply information and explanations as he thinks necessary for the performance of his duties as auditor.
• He is entitled to receive all communications and notices relating to General Meeting.
• If he is proposed to be removed, he has right to get notice for removal and he can make representation to the members.

Right to Attend Meeting : He has the right to attend any General Meeting and answer matter relating to audit or accounts.

Right to Visit Branch: He has right to visit branch office and right to access to books.

Right to Receive Remuneration: He has right to receive remuneration.

Right of Lien : He has right of lien on books of account, if fees for work has not been paid.

Duties of Auditor – Section 143

An auditor has to perform the following duties:

Audit Report:

• Duty to make an audit report to the members of company.
• He is required to submit his report to Board of directors and not required to send copy to each member.
• Duty to sign the audit report.

Make Adequate Disclosures: Duty to make adequate disclosures in the audit report regarding compliance of accounting standards.

Reason for Qualification:

• Duty to give reasons for qualifications or adverse remark.
• Qualification should be clear.

Internal Financial Control:
Duty to state whether company has adequate internal financial controls with reference to financial statement place in and operating effectiveness of such control in auditor’s report.

Audit report of following companies do not require auditor’s statement on adequacy of internal financial control:

• OPC or small company; or
• Private company which has turnover less than ₹ 50 cr. as per last audited financial statement and aggregate borrowings from bank or financial institutions or any body corporate at any point of time during the financial year is less than ₹ 25 cr.

Attend Meetings:

• Duty to attend the General Meeting and meetings of audit committee.
• Duty to attend General Meeting by himself or through his authorized representative who is qualified to be an auditor unless otherwise exempted by company. – Section 146

Reasonable Skill and Care:Duty to exercise reasonable skill and care in ascertaining the company’s books of account, balance sheet and profit and loss account.

Accounting Standards: Duty to comply with accounting standards and auditing standards.

Report Fraud:

• Duty to report to Central Government, if he has reason to believe that an offence involving fraud is committed or has been committed against company by officer or employee. (Explained in detail in next table)
• If auditor or cost auditor does not report fraud committed knowingly or with intention to deceive company, its shareholders or tax authorities, he is punishable with fine which shall not be less than ₹ 50,000 but which may extend to ₹ 25 lakh or 8 times the remuneration of the auditor, whichever is less.

Important note:

• Auditor is required to report fraud against company by officers or employees.
• He is not required to report frauds on company by outsiders or third parties.
• At the same time fraud by company to outsider is outside scope of reporting under section 143.

How To Report Fraud By Auditor – Section 143

Fraud of ₹ 1 Cr. or More: If auditor has sufficient reason and information to believe that offences involving fraud of ₹ 1 crore or more has been committed against the company by officers or its employee, he shall report the matter to:

Board or Committee: Board or Committee within 2 days of his knowledge of fraud and seek their clarification within 45 days.

Report to Central Government:

• Central Government with his report along with clarification received from Board or audit committee within 15 days.
• If Board or audit committee fails to reply, forward his report within 60 days from the date of knowledge of fraud.

How to make report?

• Report shall be sent to the secretary, MCA in sealed cover by Registered Acknowledgement Due or Speed post followed by an email in confirmation of same.
• Report shall be on letter head of auditor and signed by auditor with seal. It should indicate membership number.
• Report shall be made in Form ADT-4

Fraud Less Than ₹ 1 Cr.:
Auditor shall report following matter to Audit Committee or to the Board within 2 days of his knowledge of the fraud where amount involved in fraud is less than ₹ 1 crore:

• Nature of Fraud with description;
• Approximate amount involved; and
• Parties involved

Disclosure in Board’s Report: The above details of each of the fraud reported to the Audit Committee or the Board shall be disclosed in the Board’s Report.

Important Note:
This provision applies to cost auditor and secretarial auditor also.

Special Provisions For Government Company

Supplementary Audit:

• CAG has right to conduct supplementary audit of financial statement of company within 60 days from the date of receipt of audit report under section 143(5).
• CAG can authorise any person to conduct supplementary audit.
• Such authorised person has same rights and obligations as the auditor who has submitted the report.

Test Audit:

• Irrespective of audit conducted by auditor appointed by CAG, the CAG can himself conduct test audit of any company.
• Provisions of section 19A of the Comptroller and Auditor-General’s (Duties, Powers and Conditions of Service) Act, 1971 shall apply to the report of such test audit.

Audit Of Branch – Section 143(8)

Definition of Branch – Section 2(14):

• Branch’ means any establishment described as a branch by the company.
• Act leaves it to company to designate or undesignated any establishment of company as branch office.

Branch Auditor:

• Audit of branch can be conducted by the company’s auditor himself or a separate ‘branch auditor’ may be appointed.
• The ‘branch auditor’ must also be a qualified person.
• Even if a branch auditor appointed, the company auditor is entitled to visit the branch office and has right of access to all books and accounts and vouchers at the branch office.

Audit of Foreign Branch:

• In case of foreign branch, the foreign auditor should be qualified to act as auditor as per law of that country or by the company’s auditor.
• In case of branch of bank outside India, the company auditor may be given access only to copies of books and account of the branch which are transmitted to the principal office of the company in India.

Power & Duty of Branch Auditor:

• The branch auditor has same powers as available to company auditors in respect of the branch.
• The branch auditor will prepare report on accounts of the branch and send it to company’s auditors.
• This will be suitably incorporated in the audit report of main auditor, i.e. company’s auditor.
• Remuneration of branch auditor may be fixed in the General Meeting or by Board of Directors, if authorised by the company in General Meeting.

Auditor Can Not Render Certain Services – Section 144:

Auditor appointed by company can provide to the company only such other services as are approved by the Board of directors or Audit Committee.

Services not Allowed:
However, auditor appointed by company cannot provide following services directly or indirectly to company or its holding or subsidiary company:

• Accounting and book keeping
• 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

What is indirect service?:
Providing indirectly services means providing service by his relative, partner or through associate entity or any other entity wherein he has significant influence or control.

Auditor’s Report:

Auditor’s Report Section 143(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 the Companies Act, 2013, to be laid before the company in the General Meeting.
• The auditor shall make a report to the members of the company that the accounts, financial statements give a true and fair view of the state of the company’s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.

Apart from the points discussed above, auditor’s report shall also state:

• Whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements
• Whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him.
• Whether the report on the accounts of any branch office of the company audited under sub-section (8) of Section 143, by a person other than the company’s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report.
• Whether the company’s balance sheet, profit and loss account and cash flow statement dealt with in the report are in agreement with the books of account and returns.
• Whether, in his opinion, the financial statements comply with the accounting standards.
• The observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company.
• Whether any director is disqualified from being appointed as a director under section 164(2).
• Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith.
• Whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.
• Such other matters as may be prescribed
• As per Rule 11 of the Companies (Audit and Auditors) Rules, 2014, include their views and comments on the following matters, namely:
  • Whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statements
  • Whether the company has made provision, as required under any law or accounting standards, for material foreseeable losses, if any, on long term contracts including derivative contracts.
  • Whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company.
• Auditor shall comment about existence of adequate financial control system and its operating effectiveness.
• An auditor has to submit his report in respect of ‘Corporate Governance’ in case of listed company.

Sign-Section 145: The auditor’s report shall be signed by the person appointed as an auditor of the company.

Qualifications to be Read in General Meeting:
The qualifications, observations or comments on financial statement, which have any adverse effect on the functioning of the company mentioned in the auditor’s report shall be read before the General Meeting and open to inspection by any member of company.

Cost Audit – Section 148

When Cost Audit is Necessary?:

• Central Government may direct to conduct cost audit in respect of companies engaged in the production of such goods or providing such services and have a net worth or turnover as may be prescribed.
• If company is regulated by any Special Act then Central Government can direct to conduct cost audit only after consulting with regulatory body constituted under Special Act.
• Company is required to maintain cost records in Form CRA-1.
• If cost audit is ordered, it will be in addition to statutory audit conducted.

Important Note:
Requirement of cost audit shall not apply to company:

• Whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue
• Which is operating in SEZ
• Which is engaged in generation of electricity for captive consumption
  • However, these companies are required to maintain cost records, if they are covered to maintain cost records.

Qualification: The cost auditor shall be a Cost Accountant within the meaning of the Cost and Works Accountants Act, 1959.

Disqualifications:
All disqualifications applicable to statutory auditor are equally applicable to cost auditor.

• The statutory auditor or internal auditor of the company shall not be appointed as the cost auditor.
• If the cost auditor, after his appointment, becomes subject to any of the above disqualifications, he shall be deemed to have vacated his office.
• An employee of any of the partners of a firm of chartered accountants which is appointed as statutory auditor of company under section 139 of Companies Act, 2013 shall not be appointed as a cost auditor.

Procedure for Appointment & Remuneration:

In case Audit Committee constituted:

• Cost auditor is appointed by Board on recommendations of audit committee, if company is required to constitute audit committee.
• In this case, remuneration is also recommended by audit committee which is considered and approved by Board and ratified subsequently by shareholders.

No Audit Committee: Cost auditor is appointed by Board, if company is not required to constitute audit committee. In this case, remuneration is decided by Board and ratified by shareholders subsequently.

Time limit for Appointment: Company which is required to conduct cost audit shall appoint Cost Auditor within 180 days of commencement of financial year.

Written consent & certificate: Before appointment, written consent and certificate should be obtained from cost auditor.

Notice of appointment:

• Company should hie notice of appointment in Form CRA-2 in 30 days.
• Appointment is deemed to be confirmed, unless contrary is heard within 30 days from date of appointment.
• Issue letter of appointment to cost auditor.

Casual vacancy: Any casual vacancy in the office of the Cost Auditor, whether due to resignation, death or removal, shall be filed by the Board of Directors within 30 days of occurrence of such vacancy and company shall inform the Central Government in Form CRA-2 within 30 days of appointment.

Removal Before Expiry of Term:

• Cost auditor can be removed before expiry of his term after passing Board resolution.
• He should be given reasonable opportunity of being heard and reason for removal should be recorded.
• Cost auditor can himself resign.

Powers and Duties:

• A cost auditor shall have the same powers and duties as those of a statutory auditor.
• In addition, cost auditor is required to comply with cost standards.

Cost Audit Report:

• Cost auditor is required to submit his report to Board in Form CRA-3.
• After receiving the cost audit report, company shall furnish full information and explanations on every reservations or qualifications to Central Government within 30 days of receipt of cost audit report in Form CRA-4.
• If Central Government requires any further information then it is the duty of company to furnish such information within given time.
• Cost Auditor is required to forward his report duly signed to Board of company within 180 days from the end of financial year.

CARO 2016

Applicability: The Companies (Auditor’s Report) Order, 2016 is applicable to every company including foreign company.

Non-Applicability:
The order is not applicable to:

• Banking company
• Insurance company
• Section 8 company
• One person company and Small company
• Private company, not being a subsidiary or holding of a public company, when its:
  • Paid up capital and reserves-surplus not more than ₹ 1 crore as at Balance sheet date, and
  • Total borrowing from bank or Financial Institute, at any point of time during financial year does not exceed ₹ 1 crore; and
  • Total revenue, including revenue from discontinuing operations, does not exceed ₹ 10 crore.
• CARO, 2016 shall not apply to the auditor’s report on consolidated financial statements.

Practice Questions

Question 1
Which type of companies are subject to audit by Comptroller and Auditor General of India? Is there any need for having statutory audit by professional auditors? State the legal position in this regard.
Answer:
Government company and company controlled by government are subject to audit by auditor appointed by CAG. Generally, chartered accountants in practice can conduct statutory audit. However, supplementary audit can be conducted by any person authorised by CAG.

Question 2.
Distinguish between ‘Statutory audit’ and ‘Internal audit’.
Answer:

Statutory audit	Internal audit
Statutory auditor (except first auditor) is appointed by shareholders of company.	Internal auditor is appointed by Board of directors.
Qualifications are prescribed for statutory auditor under Companies Act, 2013.	No qualification is prescribed for internal auditor.
The main objective of statutory audit is to form opinion on financial statement of company for year under review.	The main objective of the internal audit is to detect and prevent errors and fraud,
Statutory auditor submits his report to shareholders at General Meeting.	Internal auditor submits his report to management of company.
To remove statutory auditor before expiry of his term, permission of Central Government is required to be obtained.	Central Government permission is needed to remove internal auditor.

Question 3.
A casual vacancy has arisen in the office of auditor in Kiran Ltd., which is a company controlled by the Central Government. The Comptroller and Auditor General of India (CAG) has failed to appoint auditor to fill’ up the casual vacancy within the stipulated time as required under the provisions of the Companies Act, 2013. What remedy is available to the company in this regard under the provisions of the Act?
Answer:
In the case of company whose audit is conducted by auditor appointed by CAG, any casual vacancy in the office of auditor is filed in by CAG within 30 days. If CAG fails to appoint auditor in 30 days, Board of company shall appoint auditor in next 30 days.

Question 4.
The Chairman wants to appoint his brother’s son as the statutory auditor of the company and the audit fees is likely to be around ₹ 6 lakhs per annum. The proposed appointee holds about 30% of the paid up share capital of the company. He wants to know whether approval is possible in any way.
Answer:
As per section 141 of Companies Act, 2013, a person whose relative is director or is in employment of company as director or key managerial personnel cannot be appointed as statutory auditor of company.
Rule 4 of the Companies (Specification of Definitions Details) Rules, 2014 provides that following person shall be relative of another, if he or she is related to another in following manner:

• Father;
• Mother;
• Son;
• Son’s wife;
• Daughter;
• Daughter’s husband;
• Brother;
• Sister.

Proposed appointee should not hold any security of company or its holding or its subsidiary company.

In the given case, the Chairman wants to appoint his brother’s son as an auditor. Brother’s son is not covered under the definition of relative and therefore the provisions of section 141 are not attracted. But, brother’s son, who is proposed to be appointed as auditor is holding 30% shares of company. Person holding shares in company cannot be appointed as auditor of company. His approval as auditor is possible, if he transfer or sell his all shares to someone.

Question 5.
Mr. Sanjay, a Chartered Accountant in full-time practice, was acting as the Statutory Auditor of a Public Limited Company, till it was wound up. Sanjay was appointed as the Liquidator for purposes of winding up ‘ proceedings. Decide.
Answer:
A CA in practice can act as a Liquidator of a Company, subject to ICAI’s Regulations. However, a CA cannot act both as liquidator and Auditor of the Company at the same time. When a CA acts as a liquidator, the Statement of Accounts to be filed under section 348( 1) should be audited by a qualified Chartered Accountant other than the Chartered Accountant who is the Liquidator of the Company.

Applying above provisions, the appointment of Mr. Sanjay, Chartered Accountant, to carry out both the functions as a Liquidator and as an Auditor will not be proper, having regard to the concept of Auditor’s independence. Thus, Mr. Sanjay, cannot act as both the Liquidator and the Auditor.

Question 6.
One of the Joint Auditors appointed by the Company in its AGM has resigned. Comment.
Answer:
Resignation of one of the Joint Auditors constitutes a casual vacancy. Since it is caused by resignation, another auditor may be appointed in his place by the Board and approved bv the company in a General Meeting within 3 months of Board recommendation.

Alternatively, if one of the Joint Auditors has resigned, the other Joint Auditor validly appointed by the company in its AGM can continue the audit work.

Question 7.
W Ltd. was incorporated on 1st August. Mr. A, who is related to the Chairman of the company, is appointed as Auditor of the company by the Board of Directors at its first meeting held on 4th September. Is the appointment valid?
Answer:
As per section 141 of Companies Act, 2013, a person whose relative is a director or is in the employment of the company as a director or Key Managerial Personnel, is not eligible for appointment as Auditor. Hence, Mr. A, who is related to the Chairman is not eligible for appointment.

The Board can appoint the first auditor within 30 days from the date of incorporation of the company. In this case, the first auditor should have been appointed within 30 days, i.e. on or before 31st August. Therefore, the appointment of Mr. A by the Board on 4th September is invalid.

Question 8.
Whether the appointment of Cost Auditor shall be for a period of 5/10 years like that of the Statutory Auditor as prescribed under section 139?
Answer:
No. The concepts of cost auditor and statutory auditor are completely different from each other.

Question 9.
An auditor of a company signed the balance sheet, profit and loss account and schedules/notes and furnished the Auditors Report on the same date on which the reports were signed by the directors on behalf of the Board. One of the directors raised objection stating that the audit cannot be completed and certified in a day. Do you agree with the director and if not, why?
Answer:
Auditor of company has right to access at all-time books of account and other relevant document necessary for conduct of audit of company. This right indicate that auditor commence his work of checking vouchers and other books of account immediately after his appointment to save time. He is not required to wait till financial year gets over.

In view of the above, it can be said that if auditor signs the balance sheet on same date on which the directors have approved it, it would not be appropriate to raise objection that the auditor has not performed efficiently without necessary evidence on records.

Question 10.
Answer the following by explaining the provisions of the Companies Act, 2013 relating to ‘internal audit’ :
(i) Whether a private company is mandatorily required to appoint an internal auditor?
(ii) Who may be appointed as an internal auditor? Whether a Practising Company Secretary (PCS) can be appointed as an internal auditor?
Answer:
(i) No, private company is not required to appoint internal auditor.
(ii) Yes, practicing Company Secretary can be appointed as an internal auditor.

Question 11.
Manohar, the auditor of Belle Ltd. appointed by the company in its last General Meeting has resigned from the office of auditor of the company for some personal reasons. Referring to the provisions of the Companies Act, 2013, answer the following:
(i) Who is the competent authority to accept and approve the resignation?
(ii) State the manner in which the vacancy caused by Manohar’s resignation shall be filled in. (CS December 2015)
Answer

Question 12.
Amol & Co. a proprietary firm of Amol, a Chartered Accountant in practice, has been appointed as the statutory auditor by a private limited company. Subsequently, it came to light that Mrs. Amol has been holding less than 1% of the shares of that company. Will this vitiate the appointment of the statutory auditor?
Answer:
As per section 141 of Companies Act, 2013 a person who himself holding any security or interest in the company or its subsidiary company or holding company or associate company is not eligible for appointment of auditor of company. The number of shares or types of security held by him is immaterial. He becomes disqualified.

However, relative of the person proposed to be appointed as auditor may ‘ hold security in company of face value not exceeding ₹ 1 Lakh. Wife of person proposed to be appointed as auditor is covered within meaning of relative.
In present case, Mrs. Amol is holding securities. Amol & Co., can be appointed as auditor.

Question 13.
Sanjay, a Chartered Accountant, is the financial controller of Sonik Industries (Pvt.) Ltd. for the last five years. The company now wants to appoint him as the statutory auditor of the company. Examining the provisions of the Companies Act, 2013, advise whether the company can appoint Sanjay as its statutory auditor.
Answer:
A person who is a Chartered Accountant within meaning of Chartered Accountants Act, 1949 and holding valid certificate of practice can be appointed as statutory auditor of company if he is not disqualified to be appointed as auditor as per section 141.

As per section 141, a person who is of Beer or employee of company cannot be appointed as statutory auditor of company. However, person can be appointed as statutory auditor of company if he has resigned as an employee or officer of company. Referring to the language of question, it can be said that now Sanjay is not employee or officer of company. He can be appointed as statutory auditor of company provided he fulfils other requirements under Companies Act, 2013.

Past Examination Questions

Question 1.
The paid up capital of AJD Ltd. is ₹ 10 crores consisting of 70 lakh equity shares of ₹ 10 each fully paid up 30 lakh preference shares of ? 10 each, fully paid up. Nationalized bank, LIC and IDBI hold among themselves 30 lakh equity shares and 25 lakh preference shares. With reference to the provisions of the Companies Act, 2013, examine whether AJD Ltd. is a government company. Explain the manner in which you would proceed in the matter of appointment of auditors for the said company. (CA May 1998)
Or
The aggregate shareholding of nationalised banks, LIC and IDBI exceeded 55% of the paid up share capital of the company. How will the auditors of the company be appointed? (CA November 1994)
Answer:
If Central Government or State Government or both hold at least 51 % of shares of company, it is Government Company. Share capital includes equity and preference shares.

In the given case, no share is held by Central or State Government. Therefore company is not Government Company. Appointment of auditors will be made by the shareholders at Annual General Meeting for one term of maximum five years subject to ratification at every Annual General Meeting.

Question 2.
Examine the validity of the following with reference to the provisions of the Companies Act, 2013:
Mr. Prakash, a Chartered Accountant in full time practice was appointed as the auditor of ABC Ltd., a company which is a subsidiary of DGH Ltd. and DGH Ltd. has another subsidiary called PKM Ltd. Mr. Prakash had taken a loan of ₹ 25,000 from PKM Ltd. and the loan is outstanding as on the date of his appointment as auditor of ABC Ltd. (CA May 1998)
Answer:
As per section 141 of Companies Act, 2013, if person is holding any security of or interest in company or its subsidiary or holding or associate company or subsidiary of holding company is not eligible for appointment of auditor of company.

But person himself or his relative or partner who is indebted to company or its subsidiary or holding company or its associate company for more than ₹ 5 Lakh is not disqualified to be appointed as auditor of company. – Section 141

Applying above provisions to given situation, since ABC Ltd. is a subsidiary of DGH Ltd. which is the holding company of PKM Ltd. to whom Mr. Prakash is indebted for a sum within limit of ₹ 5 Lakhs hence his appointment as the auditor of ABC Ltd. is in order.

Question 3.
The auditor made certain adverse comments on the audited financial statements of a government company. Explain with reference to the relevant provisions of the Companies Act, 2013 whether it is possible for the government company to revise the audited but unadopted financial statements in the light of the adverse comments made by the auditor of India and also whether it is necessary for the Board of directors to give explanations in the Board’s report in respect of such adverse comments. (CA May 2000 Modified)
Answer:
The original financial statements may be revised to remove reservations of auditor. Such revised statements should be resubmitted to the auditors before placing them at the Annual General Meeting. Original set of financial statements should be returned to auditor. Auditor should also make an adequate disclosure about revision of financial statements.

As per section 134 of Companies Act, 2013 Board of directors is required to give full explanation and comments on every reservation, qualification or adverse remark by auditor in Board’s report.

In the given case, company has not complied with provision of section 134. Company is liable for fine which is not less than ₹ 50,000 but not exceed than ₹ 25 Lakhs. Every officer in default is liable for imprisonment for term which may extend to 3 years or with fine which is not less than ₹ 50,000 but not exceed than ₹ 5 Lakhs, or with both.

Question 4.
Rao & Rao, a firm of Chartered Accounts have to be appointed as the , auditors of Freebee Ltd. in place of Shah & Shah, the Chartered Accounts.
Explain the steps to be taken with regard to the appointment and payment of remuneration to the auditors. (CA November 2001)
Or
CRE Ltd., a Government Company wants to appoint Parasnath & Co. as its auditors for the period of 2014-2015. State with reference to the provisions applicable to Government Companies, the procedure to appoint the auditors. (CA November 2009)
Answer:
to understand provisions relating to appointment of auditors. Special notice is required to be given. for provisions on payment of remuneration to auditors.

Question 5.
On the basis of the information given below, advise M/s XYZ Ltd. about the provisions applicable for the appointment of Auditors.

Date of Incorporation	3.10.2012
Date of Receipt of Certificate of Commencement of Business	18.10.2012
Nominal value of Equity shares held	(₹ In Lakhs)
Uttar Pradesh Government	11,600
Central Government	8,000
Bharat Heavy Electricals Ltd.
(A Corporation controlled by the Central Government)	8,000
Private Sector Companies	8,800
Indian Mutual Funds	4,000
Foreign Financial Institutions	4,000
Individual Members	3,600
Total	48,000

(CA November 2002 Modified)
Answer:
As per the details available from given question, 40.8% of total share capital is held by Government in XYZ Ltd., calculation of which are shown hereunder:

Percentage	Nominal value of shares	(In Lakh ₹)
Uttar Pradesh Government	24.1	11,600
Central Government	16.7	8,000
Total	40.8	19,600

XYZ Ltd. is non-government company as government hold less than 50% of total share capital of company. Auditor in XYZ Ltd. should be appointed by the shareholders at Annual General Meeting for one term of maximum five years.

Question 6.
What is the liability of an auditor for failure to point out in his report that dividend is paid out of capital? (CA May 2003)
Answer:
An auditor who is party to such payment of improper dividend is liable to proceedings by action. In case of winding up, he is liable to misfeasance.
As per section 147 of Companies Act, 2013, for non-complying duty, auditor is liable for punishment with fine of not less than ₹ 25,000 and not more than ₹ 5 lakh or four times remuneration of auditor, whichever is less. If auditor has contravened any provisions with knowledge or to deceive shareholders, creditors or tax authorities, he is punishable with imprisonment up to 1 year and with fine, which shall not be less than ₹ 50,000 but which may extend to ₹ 25 lakh rupees or 8 times the remuneration of the auditor, whichever is less.

• Refund the remuneration received from company; and
• Pay for damages to company or authorities or other person because of incorrect or misleading statement in his audit report.

Question 7.
Can an auditor be disqualified for indebtedness in the following cases?
(a) Where he is recovering his fees on a progressive basis even though the job is not complete.
(b) Where the auditor’s firm has purchased goods from the auditee company and not paid for them for over six months. (CA May 2003)
Answer:
(a) The Auditor cannot be said to be indebted as per section 141 of Companies Act, 2013 when he is receiving his fees on progressive basis even though the job is not complete. Moreover, person who is proposed to be appointed as auditor can be indebted to company or its subsidiary or holding company or its associate company for not more than ₹ 5 Lakh.

(b) In this case the auditor of the company is said to be indebted, if the amount outstanding from him regarding goods and services purchase from the company audited by him exceeds ₹ 5 Lakh irrespective of the nature of purchase or period of credit allowed to other customer. Upto ₹ 5 Lakh indebtedness is allowed.

Question 8.
The financial statement of a listed company have not been prepared in accordance with some of the applicable accounting standards. Examine the responsibility of the directors and auditors in this regard under the Companies Act, 2013. (CA May 2003 Modified)
Or
XYZ Limited did not prepare its financial statement for financial year in conformity with some of the mandatory Accounting Standards. You are required to state with reference to the provisions of the Companies Act, 2013, the responsibilities of directors and statutory auditor of the company in this regard. (CA May 2007)
Answer:
As per section 129(5) of Companies Act, 2013, if the financial statements / are not prepared as per accounting standards, the company shall disclose in financial statements the following:

• the deviation from the accounting standards
• the reasons for such deviation
• the financial effect, if any, of such deviation
  As per section 129 of Companies Act, 2013 Managing Director, Whole time Director in charge of finance, Chief Financial Officer or any other person charged by Board is duty bound to comply requirement of AS. In absence of these persons, all directors are liable for non-comply with AS.

Every auditor should comply with applicable accounting standards. Further, the Board’s report shall include a Directors’ Responsibility Statement, indicating therein that on the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures.

The auditor shall state in his report that the annual accounts comply with accounting standards referred to in section 133 of Companies Act, 2013.

Question 9.
How would you deal with the following situation in the matter of appointment of Auditors? The shareholding of L.I.C. and U.T.I. increased from 23% to 27% of the subscribed share capital of the company after issue of notice of the Annual General Meeting, but before the date of the Annual General Meeting. (CA November 2003)
Answer:
As per section 139 of Companies Act, 2013, auditor of company other than Non-government Company is appointed by passing Ordinary Resolution by members at Annual General Meeting for one term of maximum period of 5 years. Appointment of auditor is required to be ratified at every Annual General Meeting bv passing Ordinary Resolution.

Shareholding of LIC & UTI increased from 23% to 27% does not impact in any way on method of appointment of auditor in company. Fresh notice of the meeting is not required and auditor can be appointed by passing Ordinary Resolution.

Question 10.
Explain, how the auditor will be appointed in the following cases:
(i) A Government Company within the meaning of Section 2(45) of the Companies Act, 2013.
(if) The Auditor of the company has resigned on 31 st December, 2014, while the financial year of the company ends on 31st March, 2015.
(iii) A company, whose shareholders include the following:
(a) Bank of Baroda (A Nationalised Bank) holding 12% of the subscribed capital in the company.
(b) National Insurance Company Limited (carrying on General Insurance Business) holding 10% of the subscribed capital in the company.
(c) Maharashtra State Financial Corporation (A Public Financial Institution) holding 8% of the subscribed capital in the com-pany. (CA May 2004)
Answer:
(i) Auditor of Government Company (i.e. appointment or re-appointment) should be made by CAG within 180 days from the commencement of financial year.
(ii) Casual vacancies in office of auditor of Non-government Company is filled by Board of directors within 30 days. But if such vacancy is created by resignation of auditor, appointment should be made at General Meeting within period of 3 months on recommendation of Board.

Question 11.
State the procedure for the following, explaining the relevant provisions of the Companies Act, 2013:
(i) Appointment of first auditor, when the Board of Directors did not appoint the first auditor within one month from the date of registration of the company.
(ii) Removal of statutory auditor (appointed in Annual General Meeting) before the expiry of his term.
What difference it would make, if the Auditor was first auditor appointed by the Board of Directors? (CA November 2004 Modified)
Answer:
(i) Section 139 of Companies Act, 2013 lays down that the first auditor of a company shall be appointed by the Board of Directors within one month of the date of registration of the company. If the Board of Directors fails to exercise its power, the company in Extraordinary General Meeting should appoint the first Auditor within 90 days.
Subsequent Auditor of a company is appointed at Annual General Meeting by members for one term of maximum five years subject to ratification of appointment at every Annual General Meeting by passing Ordinary Resolution.

(ii) Auditor of government and non-government company can be removed before expiry of his term by passing Special Resolution and prior approval of Central Government. Auditor sought to be removed should be given reasonable opportunity of being heard. Following steps should be taken to remove auditor before expiry of his term:

• Board resolution should be passed.
• Application to Central Government is made in Form ADT-2 within 30 days of passing of Board Resolution.
• Hold General Meeting within 60 days of receipt of approval of Central Government.

Question 12.
One of the members of ADB Ltd. has proposed the name of Mr. Fame for appointment as a Director of the Company in the Annual General Meeting under Companies Act. Mr. Fame is one of the partners of the Fame & Fame, Chartered Accountants, who are the retiring auditors of the company. But the audit of the company is being looked after by another partner of the firm. Examine whether Fame & Fame can be reappointed as auditors, if Mr. Fame is appointed as Director. (CA May 2006)
Answer:
Mr. Fame is appointed as a director of the company ‘Fame and Fame’ cannot be reappointed as company’s auditors. It is so because a director is an officer of the company within the meaning of section 2(59) of the Companies Act, 2013 and the audit firm becomes disqualified under section 141 of Companies Act, 2013. It is immaterial that the audit of the company is being looked after by another partner of the firm and not by Mr. Fame. Therefore, if Mr. Fame is appointed as a director of the company, ‘Fame and Fame’ cannot be reappointed as company’s auditors.

Question 13.
Ram & Company was appointed as auditor of ABC Ltd. at the Annual General Meeting held on 30th September, 2014. Can Ram & Co. continue as auditor of the company in case the next Annual General Meeting has not been held in time? What would be the position in case the next Annual General Meeting was held on 30th September, 2014, but adjourned without considering the business of appointment or re-appointment of auditor? (CA November 2006 Modified)
Or
Examine the validity of the following appointments with reference to the provisions of the Companies Act, 2013:
Dalauda Cement Limited appointed CA Naresh as statutory auditor of the company at the Annual General Meeting held on 30th September, 2014. The next Annual General Meeting was held on 30th September, 2014 but it was adjourned to 30th November, 2014 for consideration of the financial statements for the year ended 31st March, 2014. CA Naresh continued to function as statutory auditor of the company. Decide. (CA November 2012 Modified)
Answer:
Auditor is appointed at the Annual General Meeting to the conclusion of the 6th Annual General Meeting subject to ratification at every Annual General Meeting. It means auditor can be appointed by members for maximum one term of 5 years at time. In the given question, it is not clarified that whether auditor is appointed by members at Annual General Meeting is for 5 years or less number of years. Therefore, the tenure of office of the auditor does not expire on the last date on which the Annual General Meeting was due to be held in terms of section 139 of Companies Act, 2013. Hence, Ram & Co. can continue as auditor even if the AGM , for the year 2014 has not been held in time.

In case AGM for 2014 was held on 30th September, 2014 that adjourned without considering the business of appointment or reappointment of auditor, the tenure of Ram & Co. will continue as auditor.

Question 14.
Mewar Instrumentations Limited is a subsidiary of a Government Company. The Comptroller and Auditor General of India appointed Sobman & Company to conduct an audit of Mewar Instrumentations Limited. Discuss, under the provisions of the Companies Act, 2013 whether the Comptroller and Auditor General’s power to appoint an auditor for the said subsidiary company is in order? (CA May 2010)
Answer:
As per section 2(45) of the Companies Act, 2013, Government Company means any company in which not less than 51 % of the paid-up share capital is held by the Central Government or by State Government or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a Government Company.
As such a Government Company includes subsidiary to a Government Company. So the contention of XYZ Ltd. that they are mere subsidiary of the Government Company and CAG do not have power to appoint auditor of company is not correct.

Question 15.
Parkash Carriers Limited appointed Mr. Raman as its auditor in the Annual General Meeting held on 30th September 2014. Initially, he accepted the appointment. But he resigned from his office on 31st October 2014 for personal reasons. The Board of Directors seeks your advice for filling up the vacancy by appointment of Mr. Albert as auditor. Advice. Also suggest the procedure to be adopted in case Mr. Albert is proposed to be removed from his office before the expiry of his term. (CA November 2009 Modified)
Or
A is the Auditor of B & Co. Ltd. Board of Directors decided to remove A on certain grounds. Please indicate what procedure is to be followed to remove A? Advise the Board. (CA November 2010 Modified)
Answer:
Casual vacancies in office of auditor of non-government company is filled by Board of directors within 30 days. But if such vacancy is created by resignation of auditor, appointment should be made at General Meeting within period of 3 months on recommendation of Board. – Section 139(8).
Thus, in the present case, the company may convene an Extraordinary General Meeting to appoint Mr. Albert as its auditor consequent upon the resignation by Mr. Raman.

Removal of Mr. Albert before expiry of his term:
Auditor of government and non-government company can be removed before expiry of his term by passing Special Resolution and prior approval ” of Central Government. Auditor sought to be removed should be given reasonable opportunity of being heard. Company is required to following procedure for removal:

• Board resolution should be passed.
• Application to Central Government is made in Form ADT-2 within 30 days of passing of Board resolution.
• Hold General Meeting within 60 days of receipt of approval of Central Government.

Question 16.
Examine the validity of the following appointments with reference to the provisions of the Companies Act, 2013:
Yashodharman Granites Limited reappointed Suresh & Company, a firm of Chartered Accountants, as auditors of the company at the Annual General Meeting held on 30th September, 2013. The wife of one of the partners of Suresh & Company acquired large number of equity shares in Yashodharman Granites Limited on 5th October, 2013. But Suresh & Company continue to function as statutory auditors of the company. (CA November 2012 Modified)
Answer:
As per section 141 of Companies Act, 2013a person who himself holding any security or interest in the company or its subsidiary company or holding company or associate company is not eligible for appointment of auditor of company. However, relative of the person proposed to be appointed as auditor may hold security in company of face value not exceeding ₹ 1 Lakh. Wife of partner of audit firm is covered within meaning of relative.

In the given question, it is not clearly mentioned about face value of securities held by wife of Mr. Suresh. Assuming that she is not holding or not acquired shares of more than ₹ 1 Lakh face value, it can be said that Suresh & Co. can continue to act as statutory auditor of company even after 5th October, 2013.

Question 17.
One-fourth of the subscribed capital of AMC Limited was held by the Government of Rajasthan. Mr. Neeraj a qualified Chartered Accountant was appointed as an auditor of the Company at the Annual General Meeting held on 30th April 2013 by an Ordinary Resolution. Mr. Sanjay, a shareholder of the Company objects to the manner of appointment of Mr. Neeraj on the ground of violation of the Companies Act, 2013. Decide, whether the objection of Mr. Sanjay is tenable? Also examine the consequences of the above appointment under the said Act. (CA November 2013 Modified)
Answer:
When Government of Rajasthan is holding 1 /4th of capital of company, it is not Government Company. Holding of shares by public financial institutions, Government companies, Central Government, State Governments, State Financial Institutions, Nationalized bank, Nationalized General Insurance Company, either singly or together hold 25% or more shares in a company do not in any way make difference in status of company. Hence, appointment of auditors should be made in same manner like auditor of any non-government company is appointed.

Appointment of Auditor in any non-government company is made by passing Ordinary Resolution for one term of maximum period of 5 years subject to ratification of same at every General Meeting. -Section 139 As appointment is made as per provision and therefore it is valid.

Question 18.
On recommendation of the Board of directors of D JA Company Limited, Mr. R is appointed at the company’s Annual General Meeting held on 1st October 2014 as company’s auditor for period of 10 years. A resolution to this effect was passed unanimously with no vote against the resolution.
Explaining the provisions of the Companies Act, 2013 relating to the appointment and re-appointment of auditors:
(i) Examine the validity of the above resolution
(ii) What shall be your answer in case of an audit firm M/s. R & Associate is appointed as the company’s auditor? (CA November 2014)
Answer:
I. Resolution passed by company is not valid because company cannot appoint any person as its auditor for period more than 5 years at time. After five years, if company and its shareholder wish, they may re-appoint same auditor for another period of 5 years subject to compliance of other provisions of Companies Act, 2013.
II. Answer will be same even if audit firm M/s. R & Associate is appointed as auditor as auditor can be appointed for one term of maximum five years at Annual General Meeting. This provision is equally applicable whether auditor is individual or firm.

Question 19.
PQR Ltd. is an unlisted public company having paid up share capital of ₹ 80 crores during the preceding financial year 2014-15. The turnover of the company was ₹ 110 crores for the same period. Referring to the provisions of the Companies Act, 2013, answer the following:
(i) Is it mandatory for the above company to appoint an internal auditor for the financial year 2015-2016?
(ii) What are the qualifications of the Internal Auditor? (CA May 2015)
Answer:
(i) As per section 138 of Companies Act, 2013, appointment of Internal Auditor is compulsory for following unlisted company, which has:

• Paid up capital of ₹ 50 Crores or more during preceding financial year; or
• Turnover of ₹ 200 Crores or more during preceding financial year.
  As PQR Ltd. attract threshold of paid up capital during preceding financial year, it is mandatory to appoint Internal Auditor for financial year 2015-16.

(ii) Chartered Accountant or a Cost Accountant or such other professional as may be decided by Board can be appointed as internal auditor. However, statutory auditor cannot be appointed as internal auditor of company. Employee of company can be appointed as internal auditor.

Question 20.
List out three matters on which an auditor of company has to express his views and comments in his report as per the Companies (Audit and Auditors) Rules, 2014 (CA May 2015)
Answer:

Question 21.
The auditor of Organic Foods Ltd. accepted the Certificate from Mr. Rohan who is the manager, a person of knowledge, competence and high reputation, as to the value of the stock in trade. The valuation of stock referred to above was found to be grossly overstated for several years in the balance sheets of the company. As a result of the over valuation, dividends were paid out of capital. The Auditor did not examine the books of account very minutely. If they had done so and compared the amount of stock at the beginning of the year, with the purchases and sales during the year, they would have noticed the over valuation. The company subsequently went into liquidation and the auditors were sued to make good the loss caused by the wrongful payment of dividends based on the balance sheets figures. Based on the above facts, you are required to decide, with reference to the provisions of the Companies Act, 2013 and the decided case laws, the following issues:
(I) Whether the Auditors of the company will be liable for the loss caused to the company by the wrongful payment of dividends based on the Balance Sheets duly audited by the Auditors.
(II) What are the statutory duties of the Auditors in this regard? (CA November 2015)
Answer:
Section 143 of Companies Act, 2013, prescribes duties of an auditor of company. Statutory auditor is required to make report to the members of the company on the accounts examined by him and on financial statement of the company along with every document annexed to it. The auditor has duty towards members of company to state that whether accounts give a true and fair view of affairs of company at the end of financial year.

It is duty of statutory duty of auditor to report members of company, if during course of his audit work, he has discovered any illegal or fraud or violation of applicable accounting standards by company. Auditor stands in fiduciary position in relation to the shareholders. He must act in the best interest of company as well as shareholders of company. In case, if there arises any suspicion or probe, he is required to go to bottom of transaction. In normal circumstances, he is justified in believing expert ‘ and experienced servants of company. He cannot be assumed detective or investigation officer.

Based on the above proposition in the case of Kingston Mill Co., it was held that Auditor can be held liable and it is not duty of auditor to take stock.

Question 22.
Explain the law laid down under the Companies Act, 2013 in respect of filing of annual financial statements with Registrar of Companies in the following two situations who is liable for the default.
i. Where financial statements of the company are filed with the ROC after 10 months from its due date;
ii. Where financial statements are not at all filed by the company with the ROC? (CA May 2016)
Answer:
As per section 137 of Companies Act, 2013 every company is required to file financial statements with Registrar within 30 days from the date of Annual General Meeting. If financial statements are not filed within 30 days, filing may be done within 300 days with additional filing fees. If company fails to file even within 300 days with additional fees, following penal consequences take place:

• Company is punishable with fine of ₹ 1000 per day for every day during which the default continues, but shall not be more than ₹ 10 lakhs; and
• Managing Director or Chief Financial Officer is punishable with imprisonment, which may extend to 6 months or with fine of not less than ₹ 1 lakh but which extend to ₹ 5 lakhs.
  If the company has neither Managing Director nor Chief Financial Officer, all directors are responsible.