Audit and Auditors – CA Inter Law Study Material

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

Audit and Auditors – CA Inter Law Study Material

Appointment of Auditors Sec.139

Question 1.
State the procedure for the following, explaining the relevant provisions of the Companies Act, 2013: 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.
Answer:
Procedure for appointment of First Auditor:
Sec. 139(6) of the Companies Act, 2013 deals with the provisions relating to appointment of first auditor. Accordingly:

First auditor of a company shall be appointed by the Board of Directors within 30 days of the registration of the company.
If the Board of Directors fails to appoint such auditor, it shall inform the members of the company, who shall within 90 days at an EGM appoint such auditor and such auditor shall hold office till the conclusion of the first AGM.

From the above provisions of law if the Board of Directors fails to appoint the first auditors within the
stipulated 30 days, it shall take the following steps:

Inform the members of the Company.
Immediately take steps to convene an EGM not later than 90 days.
Members shall at that EGM meeting appoint the first auditors of the company.
First auditors so appointed shall hold office upto the conclusion of the first AGM of the company.

Question 2.
M/s Krishna & Associates is an audit firm having 2 partners namely Mr. Krishna and Mr. Shyam. Mr, Shyam is also a partner of another audit firm named M/s Kukreja & Associates. M/s Krishna & Associates was appointed as the auditors in the company Golden Smith Ltd. (Listed company) for two consecutive periods of 5 years i.e. from year 2014 to year 2024. Whether Golden Smith Ltd. can appoint M/s Kukreja & Associates on expiry of tenure of M/s Krishna & Associates.
Answer:
Rotation of Audit Firm:
Sec. 139(2) of the Companies Act, 2013 deals with the provisions relating to rotation of auditors. Accordingly, no listed company or other prescribed companies, shall appoint or reappoint an audit firm as auditor for more than two terms of five consecutive years.

An audit firm which has completed its term, shall not be eligible for reappointment as auditor in the same company for five years from the completion of such term:

It is also provided that as on the date of appointment no audit firm having a common partner or 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.

In the given case, M/s Krishna & Associates were appointed as auditor in a listed company for two tenures. After expiry of two tenures, company wants to appoint M/s Kukreja & Associates as its audit firm.

Conclusion: Company cannot appoint M/s Kukreja & Associates as Mr. Shyam is the common partner between both the Audit firms. This prohibition is only for 5 years i.e. upto year 2029. After 5 years, company may appoint M/s Kukreja & Associates or M/s Krishna & Associates as its auditors.

Question 3.
Managing Director of PQR Ltd. himself wants to appoint Shri Ganpati, a practicing Chartered Accountant, as first auditor of the company. Comment on the proposed action of the Managing Director.
Answer:
Appointment of First Auditor:
As per Sec. 139(6) of the Companies Act, 2013, first auditor of a company shall be appointed by the Board of directors within 30 days from the date of registration of the company.

In the instant case, the appointment of Shri Ganpati, a practicing Chartered Accountant as first auditors by the Managing Director of PQR Ltd. by himself is in violation of Sec. 139(6) of the Companies Act, 2013, which requires the Board of Directors to appoint the first auditor of the company.

Conclusion: In view of the above, the Managing Director of PQR Ltd. cannot appoint the first auditor of the company himself.

Question 4.
Prakash Carriers Limited appointed Mr. Raman as its auditor in the Annual General Meeting held on 30th September, 2022. Initially, he accepted the appointment. But he resigned from his office on 31st October, 2022 for personal reasons. The Board of Directors seeks advice for filling up the vacancy by appointment of Mr. Albert as auditor.
Answer:
Filling up of Casual Vacancy:
As per Sec. 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor of a non-government company shall be filled by the BoD within 30 days.

If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also 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 AGM.

In the present case, as the auditor has resigned, the casual vacancy so created can be filled up by the Board. However, the appointment of Mr. Albert must be approved by the company by passing of an ordinary resolution at a general meeting of the company which must be convened by the Board within 3 months of the recommendation of the Board. Mr. Albert will be entitled to hold office till the conclusion of the next AGM.

Question 5.
Explain how the auditor will be appointed in the following cases:
(i) A Government Company within the meaning of Sec. 394 of the Companies Act, 2013. [RTP-May 18, MTP-March 19]
(ii) The Auditor of the company (other than government company) has resigned on 31st Dec., 2022, while the financial year of the company ends on 31st March, 2023. [RTP-May 18, MTP-Oct 19, Oct 21]
(iii) A Public Company whose shareholders include XYZ Bank (a nationalized bank) holding 18% of the subscribed capital of the company. [MTP-March 19]
Answer:
Appointment of Auditor:
(i) The appointment and reappointment of auditor of a Government Company is governed by the provisions of section 139 of the Companies Act, 2013 which are summarized as under:

The first auditor shall be appointed by the Comptroller and Auditor General of India within 60 days from the date of incorporation and in case of failure to do so, the Board shall appoint auditor within next 30 days and on failure to do so by Board of Directors, it shall inform the members, who shall appoint the auditor within 60 days at an EGM, such auditor shall hold office till conclusion of first AGM.

In case of subsequent auditor for existing government companies, the C&AG of India shall appoint the auditor within a period of 180 days from the commencement of the financial year and the auditor so appointed shall hold his position till the conclusion of the AGM.

(ii) The situation as stated in the question relates to the creation of a casual vacancy in the office of an auditor due to resignation of the auditor before the AGM in case of a company other government company.

As per Sec. 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor arising as a result of his resignation, such vacancy can be filled by the Board of Directors within 30 days thereof and in addition the appointment of the new auditor shall also 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 AGM.

(iii) In the given case as the total shareholding of the XYZ Bank is just 18% of the subscribed capital of the company, it is not a government company. Hence the provisions applicable to non-government companies in relation to the appointment of auditors shall apply. The auditor shall be appointed as follows:

The company shall, at the first AGM, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its 6th AGM and thereafter till the conclusion of every sixth meeting.
Before such appointment of auditor is made, the written consent of the auditor to such appointment, and a certificate from him or firm of auditors that the appointment, if made, shall be obtained from the auditor.
Further, the company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.

Question 6.
Lemon & Company, Chartered Accountants a Limited Liability Partnership firm with CA L, CA M and CA N as partners, is the statutory auditor of a listed company M/s Big Limited for past 6 years as on 1.04.2022.

CA M is also a partner in other Chartered Accountant firm Dew & Company, Chartered Accountants. Advise under the provisions of the Companies Act, 2013:
(1) Upto how many years can Lemon & Company continue as statutory auditors of M/s Big limited?
(2) What shall be the cooling-off period for Lemon & Company with respect to M/s Big Limited?
(3) Can Dew & Company be appointed as statutory auditors of M/s Big Limited and it’s another listed subsidiary M/s Dark Limited during such cooling-off period?
(4) Can Lemon & Company be appointed as internal auditors of M/s Big Limited and it’s another listed subsidiary M/s Dark Limited, during such cooling-off period? [RTP-Nov. 18]
Answer:
Rotation of Auditor and Cooling off period:
Sec. 139(2) of the Companies Act, 2013, deals with the provisions relating to rotation of auditor and provides the following:

Listed companies and other prescribed class or classes of companies (except OPC and small companies) shall not appoint or reappoint an audit firm as auditor for more than two terms of 5 consecutive years.
An audit firm which has completed its term [i.e. two terms of five consecutive years) shall not be eligible for reappointment as auditor in the same company for five years from the completion of such term.
Further, as on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as an auditor of the same company for a period of five years.

Conclusion: Applying the provisions as stated above, following conclusions may be drawn:

Lemon & Company can continue as statutory auditors of M/s Big Limited for 4 more years from 1.4.2022, i.e. they can continue in office only till 31.3.2026.
The cooling-off period shall be of 5 years.
Dew & Company cannot be appointed as a statutory auditor of M/s Big Limited during the cooling-off period of Lemon & Company, as CA. M is the common partner in both Lemon & Company and Dew & Company.

However, Dew & Company can be appointed as a statutory auditor of M/s Dark Limited (a listed subsidiary of M/s Big Limited), during the cooling-off period.

(4) As per Sec. 138(1) of the Companies Act, 2013, every listed company and other prescribed class of companies, shall be required to appoint an internal auditor, who shall either be a chartered accountant or a cost accountant, or such other professional (which may be either an individual or a partnership firm or a body corporate) as may be decided by the Board to conduct internal audit of the functions and activities of the company.

Accordingly, M/s Lemon & Company can be appointed as an internal auditors of M/s Big Limited and in its subsidiary M/s Dark Limited (a listed company). The provision of cooling off period as given u/s 139 of the Companies Act, 2013, shall not be applicable on the internal auditors.

Question 7.
A company includes the following shareholders also:
(i) Bank of Baroda (A Nationalized Bank) holding 12% of the subscribed capital in the company.
(ii) National Insurance Company Limited (carrying on General Insurance Business) holding 10% of the subscribed capital in the company.
(iii) Maharashtra State Financial Corporation (A Public Financial Institution) holding 8% of the subscribed capital in the company.

Advise the company, whether the provisions related to ‘appointment of auditor in case of Government Company* are applicable to it Discuss in the light of the provisions of the Companies Act, 2013. [MTP-Oct 19]
Answer:
Appointment of Auditor:
As per Sec. 139(5) of the Companies Act, 2013, in the case of a Government company, the Comptroller and Auditor General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of 180 days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting.

In the given case as the total shareholding of the three institutions adds up to 30% of the subscribed capital of the company; hence it is not a government company.

Conclusion: Provisions applicable to non-government companies in relation to the appointment of auditors shall apply.

Question 8.
Rupa Limited, a listed company appointed M/s. VG & ASSOCIATES an audit firm as Company’s auditor in the Annual General Meeting held on 30.09.2022. Explain the provisions of the Companies Act, 2013 relating to the appointment or reappointment of an auditor in relation to the tenure of an auditor. [May 18 (3 Marks)]
Answer:
Tenure of Auditor:
Sec. 139(2) of the Companies Act, 2013, provides that listed companies and other prescribed class or classes of companies (except one person companies and small companies) shall not appoint or reappoint:

an individual as auditor for more than one term of five consecutive years; and
an audit firm as auditor for more than two terms of five consecutive years.

An individual auditor who has completed his term (i.e. one term of five consecutive years) shall not be eligible for reappointment as auditor in the same company for five years from the completion of his term.

An audit firm which has completed its term (i.e. two terms of five consecutive years) shall not be eligible for reappointment as auditor in the same company for five years from the completion of such term.

Conclusion: In view of the above stated provisions, Rupa Limited, which is a listed company, can appoint M/s VG & ASSOCIATES an audit firm, for a term of 5 years, i.e. from the conclusion of the AGM held on 30.09.2022 to the conclusion of the AGM to be held in the year 2027.

Since M/s VG & ASSOCIATES is an audit firm, it can be reappointed as auditor for one more term of five years, i.e., upto the conclusion of the AGM to be held in 2032.

Question 9.
PKC Ltd,, wants to appoint Mr. Praveen Kumar, a practicing Chartered Accountant as the statutory auditor of the company and asked the proposed auditor to give a certificate in this regard. What are the contents of the certificate to be issued in accordance with the Companies (Audit & Auditor’s) Rules, 2014)? [May 18 (3 Marks)]
Answer:
Contents of the Certificate to be issued before appointment:
As per proviso to Sec. 139(1) of the Companies Act, 2013, before the appointment is made, a written consent of the auditor to such appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained.

Certificate by Auditor: As per Rule 4 of the Companies (Audit and Auditors) Rules, 2014, the person proposed to be appointed as auditor shall submit a certificate that:

(A) the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder;
(B) the proposed appointment is as per the term provided under the Act;
(C) the proposed appointment is within the limits laid down by or under the authority of the Act; and
(D) the list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.

The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141. Mr. Praveen Kumar, the proposed auditor has to give the above certificate to the company before accepting the appointment as the auditor of PKC Ltd.

Question 10.
CA. M is a partner in SM & Company (Chartered Accountants) and ML & Company (Chartered Accountants). SM & Company are statutory auditors of M/s. Global Ltd. (listed) for past seven years as on 1-04-2022. Advice under relevant provisions of the Companies Act, 2013:
(1) For how many more years SM & Company can continue as statutory auditors of M/s. Global Ltd. (listed)?
(2) Can ML & Company be appointed as statutory auditor of M/s. Global Ltd. during cooling off period for SM & Company? [Nov. 18 (4 Marks)]
Answer:
Rotation of Auditor and Cooling off period:
Sec. 139(2) of the Companies Act, 2013, deals with the provisions relating to rotation of auditor and provides the following:

Listed companies and other prescribed class or classes of companies (except OPC and small companies) shall not appoint or reappoint an audit firm as auditor for more than two terms of 5 consecutive years.
An audit firm which has completed its term [i.e. two terms of five consecutive years) shall not be eligible for reappointment as auditor in the same company for five years from the completion of such term.
Further, as on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as an auditor of the same company for a period of five years.

Conclusion: Applying the provisions as stated above, following conclusions may be drawn:

SM & Company are statutory auditors of M/s. Global Ltd. for past seven years as on 1.04.2022. Accordingly, SM & Company can continue as statutory auditors of M/s Global Ltd. for 3 more years i.e., till 31.03.2025.
ML & Company cannot be appointed as a statutory auditor of M/s Global Ltd. during the cooling- off period of SM & Company as CA M is the common partner in both ML & Company and SM & Company.

Question 11.
One fourth of the subscribed capital of AMC Limited was held by the Government of Rajasthan. Mr. Neeraj, a Chartered Accountant, was appointed as an auditor of the Company at the Annual General Meeting held on 30 April, 2022 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. [MTP-Oct 20]
Answer:
Appointment of Auditor in case of non-government company:
As per Sec. 2(45) of the Companies Act, 2013, the holding of 25% shares of AMC Ltd. by the Government of Rajasthan does not make it a government company. Hence, it will be treated as a non-government company.

As per Sec. 139 of the Companies Act, 2013, the appointment of an auditor by a company vests generally with the members of the company except in the case of the first auditors and in the filling up of the casual vacancy not caused by the resignation of the auditor, in which case, the power to appoint the auditor vests with the Board of Directors. The appointment by the members is by way of an ordinary resolution only subject to few exceptions where auditors are appointed by Special resolution.

Conclusion: Appointment is valid under the Companies Act, 2013. Contention of Mr. Sanjay is not tenable.

Question 12.
The Board of Directors of Moon Light Limited, a listed company appointed Mr. Tel, Chartered Accountant as its first auditor within 30 days of the date of registration of the Company to hold office from the date of incorporation to conclusion of the first Annual General Meeting (AGM). At the first AGM, Mr. Tel was reappointed to hold office from the conclusion of its first AGM till the conclusion of 6th AGM. In the light of the provisions of the Companies Act, 2013, examine the validity of appointment/reappointment in the following cases:
(i) Appointment of Mr. Tel by the Board of Directors.
(ii) Reappointment of Mr. Tel at the first AGM in the above situation.
(iii) In case Mr. Bell, Chartered Accountant, was appointed as auditor at the first AGM to hold office from Die conclusion of its first AGM till the conclusion of 5th AGM. Le,, 4 years tenure, [Nov. 20 (6 Marks), RTP-Nov. 21, MTP-March 22]
Answer:
Appointment of Auditor:
As per Sec. 139(6) of the Companies Act, 2013, the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within 30 days from the date of registration of the company and such auditor shall hold office till the conclusion of the first AGM.

As per Sec. 139(1) of the Companies Act, 2013, every company shall, at the first AGM, appoint an individual or a firm as an auditor of the company who shall hold office from the conclusion of 1st AGM till the conclusion of its 6th AGM and thereafter till the conclusion of every 6th AGM.

As per Sec. 139(2) of the Companies Act, 2013, no listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or reappoint an individual as auditor for more than one term of five consecutive years.

Conclusion: Based on the above stated provisions, following conclusion may be drawn:
(i) Appointment of Mr. Tel by the Board of Directors is valid as per the provisions of Sec. 139(6).

(ii) Appointment of Mr. Tel at the first AGM is valid due to the fact that the appointment of the first auditor made by the Board of Directors is a separate appointment and the period of such appointment is not to be considered, while Mr. Tel is appointed in the first AGM, which is for the period from the conclusion of the 1st AGM to the conclusion of the 6th AGM.

(iii) Auditor appointed shall hold office from the conclusion of 1st AGM till the conclusion of 6th AGM i.e., for 5 years. Hence, appointment of Mr. Bell, which is for 4 years, is not in compliance with the said legal provision, so his appointment is not valid.

Question 13.
Shivam Limited is incorporated on 1.1.2022. The company wants to appoint its first auditor. Please enumerate to the company the relevant provisions of the Companies Act, 2013 with respect to the appointment of first auditor. [MTP-March 21]
Answer:
Appointment of First Auditor:
As per Sec. 139(6) of the Companies Act, 2013, the first auditor of a company, other than a Government Company, shall be appointed by the Board of directors within 30 days of the date of registration of the company and the auditor so appointed shall hold office until the conclusion of the first AGM.

If the Board fails to exercise its powers i.e. appointment of first auditor, it shall inform the members of the company and the company may appoint the first auditor within 90 days at an extraordinary general meeting (EGM) and such auditor shall hold office till the conclusion of the first AGM.

Question 14.
Shiv Limited is incorporated on 3.10.2022. The company is having a paid-up share capital of ₹ 5 crores. Following are key shareholders of the company:

Name of the Party holding shares	Amount (in ₹)
Central Government	1.50
Punjab Government	1.23
Others	2.27

The first auditor of the company has been appointed by file Board of Directors on 31.10,2021. The members of the company have objected to such an appointment by the Board of Directors. According to the members, only the members can appoint the first auditor. Advise the company on file validity of such appointment as per the provisions of the Companies Act, 2013. Also, advise whether the contention of members of the company is correct |MTP-April 21]
Answer:
Appointment of First Auditor of Government company:
As per Sec. 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 any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.

As per Sec. 139(7) of the Companies Act, 2013, in the case of a Government company, the first auditor shall be appointed by the C&AG of India within 60 days from the date of registration of the company and in case the C&AG does not appoint such auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next 30 days; and in the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform the members of the company who shall appoint such auditor within next 60 days at an EGM, who shall hold office till the conclusion of the first annual general meeting.

In the given question, Shiv Limited is a government company as 54.6% [(1.5 + 1.23]/5= 54.6%] of the share capital is held by Central government and State Government (Punjab Government).

Thus, the first auditor of Shiv Limited shall be appointed by the C&AG of India within 60 days from the date of registration. Thus, the appointment of first auditor by Board of Directors on 31.10.2021 is not valid. The Board of Directors can appoint the first auditor in case the C&AG does not appoint such auditor within the said period of period 60 days.

The Board of Directors of the company shall appoint such auditor within the next 30 days. In the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform the members of the company who shall appoint such auditor within the 60 days at an EGM, who shall hold office till the conclusion of the first annual general meeting.

Conclusion: Contention of members that its only the members who can appoint the first auditor of the Government company, is not correct.

Question 15.
Maya Limited is a public company. Maharashtra Bank (a nationalized bank) is a shareholder holding 18% of the subscribed capital of the company. Explain how the following shall be appointed: (i) First auditor (ii) Subsequent auditor. [MTP-April 21]
Answer:
Appointment of Auditor:
As per Sec. 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 any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.

In the given case, the total shareholding of the Maharashtra Bank in Maya Limited, is just 18% of the subscribed capital of the company. Hence, Maya Limited is not a government company. Hence, the provisions applicable to non-government companies in relation to the appointment of auditors shall apply.

The auditor shall be appointed as follows:
(i) First Auditor: As per Sec. 139(6) of the Companies Act, 2013, the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within 30 days from the date of registration of the company and in the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall within 90 days at an EGM appoint such auditor and such auditor shall hold office till the conclusion of the first AGM.

(ii) Subsequent Auditor: Company shall, at the first AGM, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its 6th AGM and thereafter till the conclusion of every 6th AGM.

Before such appointment of auditor is made, the written consent of the auditor to such appointment, and a certificate from him or firm of auditors that the appointment, if made, shall be obtained from the auditor: Further, the company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.

Question 16.
State the provisions of the Companies Act, 2013 relating to appointment of First Auditor of a Government Company. [July 21 (3 Marks)]
Answer:
Appointment of First Auditor of Government company:

As per Sec. 139(7) of the Companies Act, 2013, in the case of a Government company, the first auditor shall be appointed by the Comptroller and Auditor General of India (CAG) within 60 days from the date of registration of the company.
In case the CAG does not appoint first auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next 30 days.
Further, in the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform the members of the company who shall appoint such auditor within 60 days at an Extra ordinary General Meeting, who shall hold office till the conclusion of the first annual general meeting.

Question 17.
Mr. Yash is a partner and in charge of PQR firm. The firm is appointed as an auditor firm of A.K. Company Limited (Listed company). Mr. Yash retires from PQR firm and after some time join Gupta & Gupta firm as a partner, on 20.05.22. In the general meeting of the company held on 15.06.22, the company appointed Gupta & Gupta firm as next auditor of the company. Do you think the company has adhered to the provision of appointing Gupta & Gupta as auditor for the company, under the Company Act, 2013? Explain? [MTP-Oct. 21]
Answer:
Appointment of Auditor:
As per Sec. 139(2) of the Companies Act, 2013, no listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or reappoint:
(a) an individual as 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.

An individual auditor who has completed his term shall not be eligible for reappointment as auditor in the same company for five years from the completion of his term. An audit firm which has completed its two terms shall not be eligible for reappointment as auditor in the same company for five years from the completion of such terms.

As per Rule 6 of the Companies (Audit and Auditors) Rules, 2014. 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 be ineligible to be appointed for a period of five years.

In the given case, Mr. Yash has retired from PQR firm and joined Gupta & Gupta firm. Mr. Yash was a partner in PQR firm, where he certifies the financial statement of the company, and retires from the said firm and joins Gupta & Gupta firm.

Conclusion: Gupta & Gupta firm will also be ineligible, to be appointed as auditor firm for a period of 5 years.

Question 18.
Managing Director of ABC Ltd himself appointed Mr. Aakash, a practicing chartered accountant as first auditor of the company. Is it a valid appointment? Also explain the provisions of the Companies Act, 2013, in this regard? [Dec 21 (2 Marks)]
Answer:
Appointment of First Auditor of Non-Govt Company:
Sec. 139(6) of the Companies Act, 2013 lays down that “the first auditor or auditors of a company shall be appointed by the Board of directors within 30 days from the date of registration of the company”.

In the instant case, the appointment of Mr. Aakash, a practicing Chartered Accountant as first auditors by the Managing Director of ABC Ltd. by himself is in violation of Section 139(6) of the Companies Act, 2013, which authorizes the Board of Directors to appoint the first auditor of the company.

Conclusion: In view of the above, appointment of Mr. Aakash as first auditor by the Managing Director of ABC Ltd. is not valid.

Question 19.
Referring the provisions of the Companies Act, 2013, regarding appointment of auditors, answer the following:
(i) XYZ Ltd. is a newly established company owned by the Central Government. State the provisions regarding appointment of its first auditor,
(ii) Mr, Kamal is the Auditor of XYZ Limited, which is a government company. He has resigned on 31st December, 2022 while the financial year of the company ends cm 31st March, 2023. Explain the provisions regarding filling of such vacancy. Would your answer differ if it is other than a government company? [Dec. 21 (5 Marks}]
Answer:
(i) Appointment of first auditor of government company:

Sec. 139(7) of the Companies Act, 2013 lays down that in the case of a Government company, the first auditor shall be appointed by the C&AG of India within 60 days of registration of the company.
In case the C&AG of India does not appoint such auditor within the said period, the BOD of the company shall appoint such auditor within the next 30 days.
In the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform the members of the company who shall appoint such auditor within the 60 days at an EGM.

(ii) Filling of Casual Vacancy:
As per Sec. 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor of a government company be filled by the C&AG of India within 30 days. But if the C&AG does not fill the vacancy within the said period the Board of Directors shall fill the vacancy within next 30 days.

In case of a non-government company, any casual vacancy in the office of an auditor may be filled by Board of Directors within 30 days. However, if casual vacancy has been created by the resignation of the auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the board.

The auditor so appointed shall hold office till the conclusion of the next annual general meeting.

Removal, Resignation of Auditor and Giving of Special Notice (Sec. 140)

Question 20.
State the procedure for the following, explaining the relevant provisions of the Companies Act, 2013: Removal of Statutory Auditor (appointed in last AGM) before the expiry of his term.
Answer:
Removal of Statutory Auditor before the expiry of his term:
Sec. 140(1) of the Companies Act, 2013 prescribes procedure for removal of auditors. Accordingly, the auditor appointed u/s 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the C.G. in that behalf in the prescribed manner.

It is also provided that before taking any action u/s 140(1), the auditor concerned shall be given a reasonable opportunity of being heard.

Hence, in terms of Sec. 140 (1) of the Companies Act, 2013 read with Rule 7 of the Companies (Audit & Auditors) Rules, 2014, the following steps should be taken for the removal of an auditor before the completion of his term:
(a) The application to the Central Government for removal of auditor shall be made in Form ADT- 2 and accompanied with prescribed fees.
(b) The application shall be made to the C.G. within 30 days of the resolution passed by the Board.
(c) The company shall hold the general meeting within 60 days of receipt of approval of the Central Government for passing the special resolution.

Question 21.
Examine the validity of the following with reference to the provisions of the Companies Act, 2013: Mr. Suresh, a Chartered Accountant, was appointed by the Board of Directors of AB Limited as the First Auditor. The company in General Meeting removed Mr. Suresh without seeking the approval of the Central Government and appointed Mr. Gupta as Auditor in his place? [MTP-Aug. 18]
Answer:
Removal of Statutory Auditor before the expiry of his term:
Sec. 140(1) of the Companies Act, 2013 prescribes procedure for removal of auditors. Accordingly, the auditor appointed u/s 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the C.G. in that behalf in the prescribed manner.

It is also provided that before taking any action u/s 140(1), the auditor concerned shall be given a reasonable opportunity of being heard.

Conclusion: Removal of Mr. Suresh without seeking the approval of the Central Government and appointed Mr. Gupta as Auditor in his place is not valid.

Question 22.
Mr. Honest, an auditor of MM Company Ltd. has colluded with the company for a fraud. The Central Government has applied to Tribunal about the said fraud by Mr. Honest. State the provisions of the Companies Act, 2013 regarding the steps that can be taken by Tribunal when it finds that the auditor of a company has acted in a fraudulent manner. [MTP-Aug. 18]
Answer:
Steps to be taken by Tribunal when auditor acts in a fraudulent manner:
Sec. 140(5) of the Companies Act, 2013 deals with the Tribunal Power in case an auditor acts in a fraudulent manner: Accordingly:

(i) The Tribunal either suo moto or on an application made to it by the C.G. or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors.

(ii) If the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within 15 days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place.

Question 23.
AB & Associates, a firm of Chartered Accountants was reappointed as auditors at the Annual General Meeting of X Ltd. held on 30.09.2021. However, the Board of Directors recommended to remove them before expiry of their term by passing a resolution in file Board Meeting held on 31.03.2022. Subsequently, having given consideration to the Board recommendation, AB & Associates were removed at the general meeting held on 2S.0S.2022 by passing a special resolution subject to approval of the Central Government.

Explaining the provisions for removal of second and subsequent auditors, examine the validity of removal of AB & Associates by X Ltd. under the provisions of the Companies Act, 2013. [July 21 (5 Marks)]
Answer:
Removal of auditor before expiry of tenure:
Sec. 140(1) of the Companies Act, 2013 prescribes procedure for removal of auditors. Accordingly, the auditor appointed u/s 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the C.G. in that behalf in the prescribed manner.

It is also provided that before taking any action u/s 140(1), the auditor concerned shall be given a reasonable opportunity of being heard.

Conclusion: In the instant case, the decision of X Ltd. to remove AB & Associates, auditors of the company at the general meeting held on 25.05.2022 subject to approval of Central Government is not valid. The Approval of the Central Government shall be taken before passing the special resolution in the general meeting.

Question 24.
Abhiyogic Ltd. having 1,000 members with paid-up capital of ₹ 1 crore, decided to hold its Annual General Meeting (AGM) on 21st August; 2022, and it received a notice on 2nd July, 2022, from its 60 members holding paid-up capital of ₹ 7 lakhs, in aggregate, for a resolution to be passed at the AGM for appointing Vedya & Co., as its auditor from F.Y. 2022-23 onwards, instead of its existing auditor, Chepal & Co. which was originally appointed for 5 years term and had completed its 4 years term. Such a notice for resolution was forthwith send by the company to Chepal & Co. which gave its representation in writing to the company along with a request for its notification to the members of the company, but it was received too late (3 days before the meeting) by the company.

In the context of aforesaid facts, please answer the following question(s):
(a) Whether the said notice was given by adequate number of members within the prescribed time limit to Abhiyogic Ltd.?
(b) Whether the company was bound to send to its members such representation made by Chepal & Co. and if it could not have been send, then In such case, what was the responsibility{ies) of the company? [RTP-May 22]
Answer:
(a) Special Notice by the members:
As per Sec. 140(4) of the Companies Act, 2013, resolution for appointment of an auditor other than the retiring auditor at an AGM requires special notice.

As per Sec. 115 of the Companies Act, 2013, read with rule 23 of Companies (Management and Administration) Rules, 2014, where, by any provision contained in this Act or in the Articles of Association of a company, special notice is required for passing any resolution, then the notice of the intention to move such resolution shall be given to the company by such number of members holding not less than 1% of the total voting power, or holding shares on which an aggregate sum of not less than ₹ 5 lakh, has been paid-up.

The aforementioned notice shall be sent by members to the company not earlier than 3 months but at least 14 days before the date of meeting at which the resolution is to be moved, exclusive of the day on which the notice is given and the day of the meeting.

Here, Abhiyogic Ltd. is having 1,000 members with paid-up capital of ₹ 1 crore, and it received a notice from its 60 members holding paid-up capital of ₹ 7 lakhs, in aggregate, on 2nd July, 2022 for a resolution to be passed at the AGM to be held on 21st August, 2022.

As the members who gave the notice hold more than ₹ 5 lakhs in the paid-up capital of the company, they were eligible to give such notice. Further, the notice should have been given not earlier than 3 months but at least 14 days before the date of meeting – 21st August, 2022, and the notice was given on 2nd July, 2022 i.e. within the prescribed time limit.

Conclusion: It can be concluded that the notice was made by adequate number of members within the prescribed time limit to Abhiyogic Ltd.

(b) Representation by the Auditor:
As per Sec. 140(4) of the Companies Act, 2013, where notice is given of a resolution appointing as auditor a person other than a retiring auditor and the retiring auditor makes with respect thereto representation in writing to the company (not exceeding a reasonable length) and requests its notification to members of the company, the company shall, unless the representation is received by it too late for it to do so,-

in any notice of the resolution given to members of the company, state the fact of the representation having been made; and
send a copy of the representation to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representation by the company.

In the present case, Abhiyogic Ltd. received the representation made by Chepal & Co. too late and accordingly it was not bound to send such representation to its members even though it was requested by Chepal & Co. to do so.

Further, as per Sec. 140(4) of the Companies Act, 2013, if a copy of the representation is not sent as aforesaid because it was received too late or because of the company’s default, the auditor may (without prejudice to his right to be heard orally) require that the representation shall be read out at the meeting such a copy of representation thereof shall be filed with the Registrar.

Accordingly, Abhiyogic Ltd., apart from giving to right to be heard orally to Chepal & Co. shall also made the representation read out at the AGM, if so required by Chepal & Co., and shall also file such representation with the Registrar, respectively.

Eligibility, Qualifications and Disqualifications of Auditors (Sec. 141)

Question 25.
Mr. A, a Chartered Accountant, is a partner of a firm and has been appointed as an auditor of Laxman Ltd. in the Annual General Meeting of fire company held in September 2022, in which he accepted the assignment Subsequently, in January 2023 he offered B, another Chartered Accountant, who is the Manager Finance of Laxman Ltd., to join the firm of A as a partner.
Answer:
Disqualification as to partner of employee:
Sec. 141(3)(c) of the Companies Act, 2013 prescribes that any person who is a partner or in employment of an officer or employee of the company will be disqualified to act as an auditor of a company.

Sec. 141(4) of the Companies Act, 2013 provides that an auditor who becomes subject, after his appointment, to any of the disqualifications specified in Sec. 141(3), he shall be deemed to have vacated his office as an auditor.

Conclusion: In the present case, Mr. A, auditor of M/s Laxman Ltd., offered Mr. B to join Mr. A as partner. Mr. B is Manager Finance of M/s Laxman Limited. If Mr. B joins firm of Mr. A, Mr. A will be disqualified by Sec. 141(3)(c) and, therefore, he shall be deemed to have vacated office of the auditor of M/s Laxman Limited.

Question 26.
“BC & Co.” is an audit firm having partners “Mr. B” and “Mr. C” and “Mr. A”, relative of “Mr. C”, is holding securities of “MWF Ltd.” having face value of f 1,01,000. Whether “BC & Co.” is qualified for appointment as auditor of “MWF Ltd.”?
Answer:
Disqualifications as to security:
As per Sec. 141(3)(d)(i) of the Companies Act, 2013, an auditor is disqualified to be appointed as an auditor if he, or his relative or partner holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company.

However, Rule 10 of the Companies (Audit and Auditors) Rules, 2014, states that a relative of an auditor may hold securities in the company of face value not exceeding ₹ 1 lakh.

Conclusion: In the instant case BC & Co., will be disqualified for appointment as an auditor of MWF Ltd. as the relative of Mr. C i.e. partner of BC & Co., is holding the securities in MWF Ltd. which is exceeding the limit mentioned in proviso to Sec. 141(3)(d)(i).

Question 27.
“ABC & Co.” is an audit firm having partners “Mr, A”, “Mr. B” and “Mr. C”, Chartered Accountants. “Mr. A”, “Mr. B” and “Mr. C” are holding appointment as an auditors in 4,6 and 10 companies respectively.
(i) Provide the maximum number of audits remaining in the name of “ABC & Co.”
(ii) Provide the maximum number of audits remaining in the name of individual partner i.e. Mr. A, Mr. Band Mr. C.
Answer:
Ceiling on Number of Audit:
As per Sec. 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for appointment as an auditor if he is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such person or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 companies.

This limit of 20 company audits is per person. In the case of an audit firm having 3 partners, the overall ceiling will be 3 × 20 = 60 company audits. Sometimes, a chartered accountant is a partner in a number of auditing firms. In such a case, all the firms in which he is partner or proprietor will be together entitled to 20 company audits on his account.

Conclusion:
(i) ABC & Co. can hold appointment as an auditor of 40 more companies as computed below:
Total Number of Audits available to the Firm = 20 × 3 = 60
Number of Audits already taken by all the partners
In their individual capacity = 4 + 6 + 10 = 20
Remaining number of Audits available to the Firm = 40

(ii) Mr. A can hold: 20 – 4 = 16 more audits.
Mr. B can hold: 20 – 6 = 14 more audits and
Mr. C can hold: 20 – 10 = 10 more audits.

Question 28.
Examine the validity of the following with reference to the provisions of the Companies Act, 2013:
(i) “Mr. A”, a practicing Chartered Accountant, is holding securities of”XYZ ltd,” having face value of ₹ 900. Whether Mr. A is qualified for appointment as an Auditor of “XYZ Ltd.”?
(ii) “Mr. P” is a practicing Chartered Accountant and “Mr. Q”, the relative of “Mr. P”, is holding securities of “ABC Ltd.” having face value of ₹ 90,000. Whether “Mr. P” is Qualified from being appointed as an Auditor of “ABC Ltd.”? [MTP-Oct 18]
Answer:
Disqualification as to Security:
As per Sec. 141(3)(d)(i) of the Companies Act, 2013, an auditor is disqualified to be appointed as an auditor if he, or his relative or partner holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company.

However, Rule 10 of the Companies (Audit and Auditors) Rules, 2014, states that a relative of an auditor may hold securities in the company of face value not exceeding ₹ 1 lakh.

Conclusion: Based on the above stated provisions, following conclusions may be drawn:

Mr. A. is holding security of ₹ 900 in the XYZ Ltd, therefore he is not eligible for appointment as an Auditor of “XYZ Ltd”.
Mr. Q. (relative of Mr. P, an auditor), is having securities of ₹ 90,000 face Value in the ABC Ltd., which is within the limit of ₹ 1,00,000. Therefore, Mr. P will not be disqualified to be appointed as an auditor of ABC Ltd.

Question 29.
Mrs. Sita, wife of CA ‘Arjun’ the statutory auditor of Stellar Builders Limited, acquired shares in the company for a face value of ₹ 75,000 on 15th March, 2022. CA ‘Arjun’, issued his audit report on 25th April, 2022, Examine the validity of this transaction under Ifre Companies Act, 2013. Would your answer he different if face value of the shares have been ₹ 1,50,000 (Market value ₹ 95,000)? [RTP-Nov. 18]
Answer:
Disqualification as to Security:
As per Sec. 141(3)(d)(i) of the Companies Act, 2013, a person who, or his relative or partner is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company, shall not be appointed as an auditor of the company.

However, Rule 10 of the Companies (Audit and Auditors) Rules, 2014, states that a relative of an auditor may hold securities in the company of face value not exceeding ₹ 1 lakh.

In the given case Mrs. Sita, wife of CA Arjun acquired shares in Stellar Builders Limited, in which he was a statutory auditor on 15th March, 2022.

Conclusion: As the securities held by Mrs. Sita is within the prescribed limit of ₹ 1 lakh, such a transaction is valid.

However, answer will be different in case where the face value of acquired shares is 1,50,000. In that case:

Corrective action to maintain the limit specified (i.e., 1 lakh) shall be taken by the auditor within 60 days of such acquisition, or
Auditor has to vacate his office.

Question 30.
Examine the following situations in the light of the Companies Act, 2013:
(i) Mr. Ayush, a Chartered Accountant has been appointed as an auditor of X Ltd. in the Annual General Meeting of the company held in Sep., 2022, in which he accepted the assignment. Subsequently, in fan., 2022 he joined B, as a partner for the consultancy firm of Mr. B. Mr. B is also working as a Finance Executive of X Ltd.
(ii) “Mr. Abhi”, a practicing Chartered Accountant, is holding securities of “Abhiman Ltd.” having face value of ₹ 1,000. Whether Mr. Abhi is qualified for appointment as an Auditor of Abhiman Ltd? [MTP-March 19, May 20; RTP-May 19]
Answer:
(i) Disqualification as to partner of employee:

As per Sec. 141(3)(c) of the Companies Act, 2013, any person who is a partner or in employment of an officer or employee of the company will be disqualified to act as an auditor of a company.
As per Sec. 141(4) of the Companies Act, 2013, an auditor who becomes subject, after his appointment, to any of the disqualifications specified in Sec. 141(3), he shall be deemed to have vacated his office as an auditor.

Conclusion: In the present case, Ayush, an auditor of X Ltd., joined as partner with consultancy firm where B is also a partner and B is also the Finance executive of X Ltd. Hence, Ayush has attracted Sec. 141 (3) (c) and therefore, he shall be deemed to have vacated office of the auditor of X Limited.

(ii) Disqualification as to Security:

As per Sec. 141(3)(d)(/) of the Companies Act, 2013, an auditor is disqualified to be appointed as an auditor if he, or his relative or partner holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company.
In the present case, Mr. Abhi. is holding security of ₹ 1000 in the Abhiman Ltd, therefore, he is not eligible for appointment as an auditor of Abhiman Ltd.

Question 31.
New Limited appointed an individual firm, Naresh & Company, Chartered Accountants, as Auditors of the company at the Annual General Meeting held on 30 Sep., 2022, Mrs. Reena, wife of Mr. Naresh, invested in the equity shares face value of ₹ 1 lakh of New Limited on IS October, 2022. But Naresh & Company continues to function as statutory auditors of the company. Advice, Naresh & Company on the continuation of such appointment, as per provisions of the Companies Act, 2013. [MTP-Aug. 18, April 19; RTP-May 20, Nov. 20]
Answer:
Disqualification of auditor:

As per Sec. 141(3)(d) (i) of the Companies Act, 2013, a person who, or his relative or partner holds any security of the company or its subsidiary or of its holding or associate company or a subsidiary of such holding company, which carries voting rights, such person cannot be appointed as auditor of the company.
However, Rule 10 of the Companies (Audit and Auditors) Rules, 2014, states that a relative of an auditor may hold securities in the company of face value not exceeding ₹ 1 lakh.
In the case Mr. Naresh, Chartered Accountants, did not hold any such security. But Mrs. Reena, his wife held equity shares of New Limited of face value ₹ 1 lakh, which is within the specified limit.
Further Section 141(4) provides that if an auditor becomes subject, after his appointment, to any of the disqualifications specified in Sec. 141(3), he shall be deemed to have vacated his office of auditor.

Conclusion: Naresh & Company can continue to function as auditors of the Company even after 15 October, 2022 i.e. after the investment made by his wife in the equity shares of New Limited.

Question 32.
Mr. Rant brother of CA Shyam, a practicing chartered accountant, acquired securities of M/s Cool Ltd. having market value of ₹ 1,20,000 (face value ₹ 95,000). State whether CA Shyam is qualified to be appointed as a statutory auditor of M/s. Cool Ltd. [Nov. 18 (2 Marks), MTP-Oct. 21]
Answer:
Disqualification of auditor:
As per Sec. 141(3)(d)(i) of the Companies Act, 2013, a person who, or his relative or partner holds any security of the company or its subsidiary or of its holding or associate company or a subsidiary of such holding company, which carries voting rights, such person cannot be appointed as auditor of the company.

However, Rule 10 of the Companies (Audit and Auditors) Rules, 2014, states that a relative of an auditor may hold securities in the company of face value not exceeding ₹ 1 lakh.

Conclusion: Mr. Shyam is qualified to be appointed as a statutory auditor of M/s Cool Ltd. as the value of securities held by his brother (relative) is of face value of ₹ 95,000 in the said company, which is within the prescribed limit.

Question 33.
Examine whether the following persons are eligible for being appointed as auditor under the provisions of the Companies Act, 2013:
(i) ‘Mr. Prakash’ is a practicing Chartered Accountant and ‘Mr. Aakash’, who is a relative of ‘Mr. Prakash’ is holding securities of ‘ABC Ltd.’ having face value of ₹ 70,000 (market value ₹ 1,10,000). Directors of ABC Ltd. want to appoint Mr. Prakash as an auditor of the company.
(ii) Mr, Ramesh is a practicing Chartered Accountant indebted to MNP Ltd. for f 6 lakh. Directors of MNP Ltd. want to appoint Mr. Ramesh as an auditor of the company.
(iii) Mrs. KV) spouse of Mr. Kumar, a Chartered Accountant, is the store keeper of PRC Ltd. Directors of PRC Ltd. want to appoint Mr. Kumar as an auditor of the company. [Nov. 19 (6 Marks)]
Or
Examine whether the following persons are eligible for being appointed as auditor under the provisions of the Companies Act, 2013:
(i) Mr. Ray is a practicing Chartered Accountant indebted to ABC Ltd. for ₹ 6 lakh. Directors of ABC Ltd. want to appoint Mr. Ray as an auditor of the company. Can ABC Ltd. do so?
(ii) Mrs. Kavita spouse of Mr. Kumar, a Chartered Accountant, is the store keeper of PRC Ltd. Directors of PRC Ltd. want to appoint Mr. Kumar as an auditor of the company. [MTP-Nov. 21]
Answer:
Eligibility to be appointed as auditor of a company:
(i) As per Sec. 141(3)(d)(i) of the Companies Act, 2013, an auditor is disqualified to be appointed as an auditor if he, or his relative or partner holding any security of or interest in the company or its subsidiary, or of its holding or associate company ora subsidiary of such holding company. However, Rule 10 of the Companies (Audit and Auditors) Rules, 2014, states that a relative of an auditor may hold securities in the company of face value not exceeding ₹ 1 lakh.

In the present case, Mr. Aakash (relative of Mr. Prakash, an auditor), is having securities of ABC Ltd. having face value of ₹ 70,000, which is within the prescribed limit. Therefore, Mr. Prakash will not be disqualified to be appointed as an auditor of ABC Ltd.

(ii) As per section 141(3)(d)(ii) of the Companies Act, 2013 an auditor is disqualified to be appointed as an auditor if he or his relative or partner is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ₹ 5 lakhs.

In the instant case, Mr. Ramesh will be disqualified to be appointed as an auditor of MNP Ltd. as he indebted to MNP Ltd. for ₹ 6 lakhs.

(iii) As per section 141(3)(f) of the Companies Act, 2013, an auditor is disqualified to be appointed as an auditor if a person whose relative is a director or is in the employment of the company as a director or a key managerial personnel.

In the instant case, Mrs. KVJ spouse of Mr. Kumar (Chartered Accountant) is the store keeper (not a director or KMP) of PRC Ltd., hence Mr. Kumar will not be disqualified to be appointed as an auditor in the said company.

Question 34.
Three chartered accountants, Mr. Robert, Mr. Ram and Mrs. Rohini, formed a Limited Liability Partnership under the Limited Liability Partnership Act, 2008 in die name of ‘R & Associates LLP’, practicing chartered accountants. SR Ltd. intends to appoint ‘R & Associates LLP’ as auditors of the company. Examine the validity of the proposal of SR Ltd. to appoint ‘R & Associates LLP’, a body corporate, as an auditor of the company as per (he provisions of the Companies Act, 2013. [Jan. 21 (3 Marks)]
Answer:
Eligibility to be appointed as auditor of a company:
As per the provisions of Section 141 (3) of the Companies Act, 2013 read with Rule 10 of Companies (Audit and Auditors) Rules, 2014, a body corporate other than a LLP registered under the LLP Act, 2008 shall not be qualified for appointment as auditor of a company.

In the given case, proposal of SR Ltd. to appoint ‘R & Associates LLP’ as auditors of the company is valid as the restriction marked for appointment as auditor for a body corporate is not applicable to LLP.

Question 35.
Mr. Raman, a Chartered Accountant, was appointed as an auditor of Surya Distributors Ltd., in the AGM of the company held in August, 2022, in which he accepted the assignment. Later on in November, 2022, he joined as a partner in the Consultancy firm where Mr. Som is also a partner. Mr. Som is also working as a finance executive of Surya Distributors Ltd. Explaining the provisions of the Companies Act, 2013, decide whether Mr. Raman is required to vacate the office as an auditor. [Dec. 21 (2 Marks)]
Answer:
Persons not eligible to be appointed as auditor:
As per Sec. 141(3) of the Companies Act, 2013, a person is not be eligible for appointment as an auditor of a company if he is a partner, or is in the employment, of an officer or employee of the company.

As per Sec. 141(4) of the Companies Act, 2013, where a person appointed as an auditor of a company incurs any of the disqualifications mentioned u/s 141(3) after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.

In the given case, Mr. Raman, was appointed as an auditor of the company, in the AGM. After that he joined as a partner in the Consultancy firm where Mr. Som is also a partner. Mr. Som is also working as a finance executive of the company.

Conclusion: Based on the provisions of Sec. 141(3) and 141(4) as stated above, it can be concluded that Mr. Raman is required to vacate the office.

Question 36.
Advise as per the provisions of the Companies Act, 2013, with regard to appointment of auditor:
(i) Mr, Shepra is a practising Chartered Accountant. He holds shares in X Limited. The nominal value of these shares is ₹ 50,000. Whether X Limited can appoint Mr. Shepra as auditor?
(ii) Mr. Showik, a practising Chartered Accountant has business relationship with Primus Hotels Limited. The hotel used to provide services to Mr. Showik frequently, on the same price as charged from other customers. Whether Primus Hotels Limited can appoint Mr. Showik as its auditor? [MTP-March 22]
Answer:
Eligibility to be appointed as auditor of a company:
(i) As per Sec. 141(3)(d)(i) an auditor is disqualified to be appointed as an auditor if he, or his relative or partner holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company.

In this case Mr. Shepra, a practicing Chartered Accountant holding shares in X Limited cannot be appointed as auditor of X Limited.

(ii) Sec. 141(3) of the Companies Act, 2013 read with Rule 10 of the Companies (Audit and Auditors) Rules, 2014 provides that a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company, shall not be eligible for appointment as an auditor of a company.

The term business relationship shall be construed as any transaction entered into for a commercial purpose except-
(a) commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under the Act and the Chartered Accountant Act, 1949 and the rules or the regulations made under those Act;

(b) commercial transactions which are in the ordinary course of business of the company at arm’s length price – like sale of products or services to the auditors, as customer, in the ordinary course of business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses.

In the given situation, since the transaction is at arm’s length price so Mr. Showik can be appointed as an auditor of Primus Hotels Limited.

Question 37.
Gajendra Ltd. was incorporated In 1995 in the town of Alwar. Its main business is manufacturing tiles, ft is in the process of appointing statutory auditors for the financial year 2022-23.
Advise whether the following persons are qualified to be appointed as statutory auditor of the Gajendra Ltd:
(i) Maninder, a qualified Chartered Accountant, holds equity shares of nominal value of ₹ 2,00,000 of Narender Ltd., which is an associate company of Gajendra Ltd.
(ii) Dinesh, a qualified Chartered Accountant, whose son owes Gajendra Ltd. a sum of ₹ 99,000
(iii) Rajender, a qualified Chartered Accountant, who has been convicted in the year 2006 by a Court for an offence involving fraud. [MTP-April 22]
Answer:
Eligibility to be appointed as auditor of a company:
(i) As per Sec. 141(3)(d)(i) of the Companies Act, 2013, read with Rule 10 of the Companies (Audit and Auditors) Rules, 2014, a person is disqualified to be appointed as an auditor if he, or his relative or partner holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company.

Hence, Maninder is disqualified to be appointed as an auditor in Gajendra Ltd. as he holds securities in the Narender Ltd. (associate company of Gajendra Ltd.)

(ii) As per Sec. 141(3)(d)(ii) a person is disqualified to be appointed as an auditor if he, or his relative or partner is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ₹ 5 Lacs.

Hence, Dinesh is not disqualified as the limit of indebtedness for the auditor or his relative is exceeding ₹5,00,000 and in this case Dinesh’s son owes only ₹ 99,000.

(iii) As per Sec. 141(3)(h), a person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction, shall not be qualified to be appointed as an auditor of a company.

Though Rajender was convicted by a court for an offence involving fraud but as a period of 10 years have elapsed, hence, Rajendra is qualified to be appointed as statutory auditor of Gajendra Ltd.

Remuneration of Auditors (Sec, 142)

Question 38.
HD Software Private Limited is engaged in the business of providing software services. The company appointed its statutory auditors. The engagement letter was signed with a clause that fee to be mutually decided. However, the remuneration was not finalised. Directors of the company seeks your advice for provisions related to remuneration of directors as per the provisions of the Companies Act, 2013. [May 22 (5 Marks)]
Answer:
Provisions relating to Remuneration of Auditors:
Provisions relating to remuneration of auditors are covered u/s 142 of the Companies Act, 2013. Accordingly, remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein. The remuneration of the first auditor appointed by BoD may be fixed by BoD.

The remuneration shall, in addition to the fee payable to an auditor, include the expenses, if any, incurred by the auditor in connection with the audit of the company and any facility extended to him.

Remuneration does not include any remuneration paid to him for any other service rendered by him at the request of the company.

Powers and Duties of Auditors (Sec. 143)

Question 39.
MNO Ltd. is a listed company engaged in the business of trading of various products. The company also plans to start manufacturing of certain products which are currently traded.

During the course of its audit, the auditors completed all the procedures related to audit of financial statements. However, the auditor got stuck on one procedure because of which audit has not got concluded.

Auditors are waiting for certain additional information – Directors report and Management Discussion and Analysis (MD&A) for their review. However, the management is not ready with this information and wants the auditors to complete their work without review of this information. Please advise as per the legal requirements.
Answer:
Auditor’s duties as to issue of audit report and examining additional information:

Requirement of the auditors regarding additional information i.e. Directors report and MD&A without which they have not been able to conclude the audit doesn’t look valid.
The auditor is required to audit the financial statements and express an opinion on the same. The auditor does not audit these additional information.
Hence the auditor should conclude the work without delaying because of this additional information.

Question 40.
NSH Ltd. is engaged in the business of retail and is listed on National stock exchange. The company recently acquired a business undertaking to expand its business. During the year, certain transactions amounting to thousands of rupees were carried out by the empioyees/Directors of the company which the management found suspicious and appointed a forensic consultant to carry out their review. Pursuant to this review process, certain suspect transactions were identified by the management and the management reported these transactions to the appropriate authorities. During the course of statutory audit, such transactions were also made known to the statutory auditors. How should the auditor deal with such matter?
Answer:
Auditor’s duties to deal with suspicious transactions:
As per Sec. 143(12) of the Companies Act, 2013, the auditor is required to report to the Audit Committee or to the Board of Directors and, where applicable, to the Central Government an offence of fraud in the company by its officers or employees only if he is the first person to identify/note such instance in the course of performance of his duties as an auditor.

In this case, the suspicious transactions have been identified by the management first and information about the same has been given by the management to the auditor.

Accordingly, the auditor should report about this matter to the Audit Committee/Board of Directors but the auditor would not be required to report the same to Central Government.

Question 41.
State the provisions of the Companies Act, 2013 regarding Hie signing of the Audit report by the Auditors of the company. [MTP-March 18]
Answer:
Signing of Audit Report:
Section 145 of the Companies Act, 2013 provides for auditors to sign audit reports, etc. According to
this section:
(i) The person appointed as an auditor of the company shall sign the auditor’s report or sign or certify any other document of the company in accordance with the provisions of Sec. 141(2) (i.e. in case of firm including LLP, only Chartered Accountants are authorised to act and sign).

(ii) The qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditor’s report shall be read before the company in general meeting and shall be open to inspection by any member of the company.

Question 42.
What are the rights of the auditor of a company in respect of attending the General Meeting. [MTP-Oct. 18]
Answer:
Rights and duties of the auditor as to general meetings:
Sec. 146 of the Companies Act, 2013 deals with the provisions relating to auditors rights and duties as to attend general meeting. Accordingly:

All notices of, and other communications relating to, any general meeting shall be forwarded to the auditor of the company.
The auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorised representative, who shall also be qualified to be an auditor, any general meeting.
The auditor shall have right to be heard at such meeting on any part of the business which concerns him as the auditor.

Question 43.
The Board of Directors of A Ltd. requested its Statutory Auditor to accept the assignment of designing and implementation of suitable financial information system to strengthen the internal control mechanism of the Company. How will you approach to this proposal, as an Statutory Auditor of A Ltd., taking into account the consequences, if any, of accepting this proposal? [May 19 (3 Marks), RTP-May 21]
Answer:
Auditor not to render certain services:

As per Sec. 144 of the Companies Act, 2013, an auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be.
But such services shall not include designing and implementation of any financial information system.
In the said instance, the Board of directors of A Ltd. requested its Statutory Auditor to accept the assignment of designing and implementation of suitable financial information system to strengthen the internal control mechanism of the company. As per the above provision said service is strictly prohibited.
In case the Statutory Auditor accepts the assignment, he will attract the penal provisions as specified in Sec. 147 of the Companies Act, 2013.
In the light of the above provisions, it is advised to the Statutory Auditor not to take up the above stated assignment.

Punishment for Contravention (Sec. 147)

Question 44.
ABC & Co., Chartered Accountants, are statutory auditors of Moon Exports Limited. In an inquiry, it is proved that ‘A’, one of the partners of the firm has acted in fraudulent manner and colluded in fraud to its partners. Explain the consequences of such act under the provisions of the Companies Act, 2013. [May 22 (5 Marks)]
Answer:
Responsibility for fraudulent acts:
As per Sec. 147(5) of the Companies Act, 2013, where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally.

However, in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable.

Audit and Auditors – CA Inter Law Study Material

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