Company Audit – CA Final Audit Question Bank

Company Audit – CA Final Audit Question Bank is designed strictly as per the latest syllabus and exam pattern.

Company Audit – CA Final Audit Question Bank

Appointment of Auditors

Question 1.
CA X is a partner in M/s AB & Associates and M/s MN & Associates simultaneously. M/s AB & Associates has completed its tenure of 10 years as an auditor in XYZ Ltd. immediately preceding the current financial year. It may be noted that the provisions for applicability of rotation of auditors are applicable to XYZ Ltd. Now, the company wants to appoint M/s MN & Associates as auditor for 5 years.

(a) Whether M/s MN & Associates is allowed to accept the appointment as auditor of XYZ Ltd.?
(b) Would your answer be different from above if CA X, being in-charge of M/s AB & Associates and certifying authority of financial statements of XYZ Ltd., retires from the partnership in M/s AB & Associates and joins M/s MN & Associates?
Answer:
Appointment of Firm as auditor having common Partner:
As per Second Proviso to sec. 139(2) of Companies Act, 2013, 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 present case, CA X is common partner in the firm AB & Associates and MN & Associates.

Conclusion: MN & Associates is disqualified for appointment as auditor of XYZ Ltd. for a period of 5 years.

Appointment of firm as auditor having one of partner was in-charge in previous audit firm:
As per Explanation given in Rule 6 of Companies (Audit & 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 present case, CA. X was incharge of M/s AB & Associates and certifying authority of financial statements of XYZ Ltd. Retires from the M/s AB 7 associates and joins MN & Associates.

Conclusion: MN & Associates is disqualified for appointment as auditor of XYZ Ltd. for a period of 5 years.

Question 2.
ABC Pvt. Ltd., a new company, incorporated on 01.07.2020 is engaged in the manufacturing business. On 30.07.2020, the Managing Director of ABC Pvt. Ltd. himself appointed CA Mohan, his daughter’s husband, as the first auditor of the company. You are required to –
(i) State the provisions of the Companies Act, 2013 relating to appointment of first auditor.
(ii) Comment on the action of the Managing Director.
Answer:
Appointment of First Auditor of Non-Govt. Company:

• Section 139(6] of the Companies Act, 2013 lays down that “the first auditor or auditors of a company shall be appointedby the Board of directors within 30 days fromthe date ofregistration of the company”.
• In the instant case, the appointment of CA Mohan, a practicing Chartered Accountant as first auditors by the Managing Director of ABC Pvt. 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, the Managing Director of ABC Pvt. Ltd. should be advised not to appoint the first auditor of the company.

Note: As the appointment of CA, Mohan as such is not valid, there is no relevance of any discussion with regard to his relationship with the managing director.

Question 3.
KM Pvt. Ltd., engaged in the manufacturing business of Silk Shirts, is a newly incorporated company dated 01.09.2020. On 28.09.2020, the members of KM Pvt. Ltd. themselves appointed CA Raj, a renowned practitioner, as the first auditor of the company opposing that Board is not authorised to appoint the auditor. You are required to comment on the action of the Members.
Answer:
Appointment of First Auditor of Non-Govt. Company:

• Section 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 3 0 days from the date ofregistration of the company”.
• In the case of failure of the Board to appoint the auditor, it shall inform the members of the company. The members of the company shall within 90 days at an extraordinary general meeting appoint the auditor. Appointed auditor shall hold office till the conclusion of the first annual general meeting.
• In the instant case, the appointment of CA Raj, a practicing Chartered Accountant as first auditors by the members of the company, opposing that Board is not authorised to appoint the auditor, is not in order

Conclusion: Appointment of CA Raj as first auditor, within 30 days of registration by the members of the company is not in order.

Question 4.
The first auditor of M/s Healthy Wealthy Ltd., a Government company, was appointed by the Board of Directors.
Answer:
Appointment of First Auditor of Govt. Company

• Section 139(7) of the Companies Act, 2013 lays down that in the case of a Government company or any other company owned or controlled, directly or indirectly, by the CG, or by any SG, or SGs, or partly by the CG and partly by one or more SGs, the first auditor shall be appointed by the CAG of India within 60 days of registration of the company.
• In case the CAG 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.
• Hence in the case of M/s Healthy Wealthy Ltd., being a government company, the first auditors shall be appointed by the CAG of India.

Conclusion: The appointment of first auditors made by the Board of Directors of M/s Healthy Wealthy Ltd., is null and void.

Question 5.
Nick Ltd: is a subsidiary of Ajanta Ltd., whose 20% shares have been held by Central Government, 25% by Uttar Pradesh Government and 10% by Madhya Pradesh Government. Nick Ltd. appointed Mr. P as statutory auditor for the year. [MTP-Oct. 19]
Answer:
Appointment of Auditor of Govt. Company:
As per Sec. 2 (45] of the Companies Act, 2 013, a Government company is defined “as 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 of a Government Company as thus defined”.

Sec. 139(7) requires that the auditors of a government company shall be appointed or reappointed by the Comptroller and Auditor General of India.

In the given case Ajanta Ltd. is a government company as its 20% shares have been held by Central Govt., 25% by U.P. State Government and 10% by M.P. State Govt. Total 55% shares have sj* been held by Central and State Governments.

Nick Ltd. will also be a Government company, being subsidiary company of Ajanta Ltd. and hence the Auditor of Nick Ltd. can be appointed only by C & AG.

Conclusion: Appointment of ‘P’ is invalid and ‘P’ should not give acceptance to the Directors of Nick Ltd.

Question 6.
At the AGM of ICI Ltd., Mr. X was appointed as the statutory auditor. He, however, resigned after 3 months since he wanted to give up practice and join industry. State, how the new auditor will be appointed by ICI Ltd. and the conditions to be complied for.
Answer:
Filling of Casual vacancy:

• As per Sec. 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor may be filled by Board of Directors within thirty 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.

Conclusion: In this case, the casual vacancy has been created on account of resignation. Therefore, Board of Directors will have to fill the vacancy within thirty days and such appointment shall be approved by the company at the general meeting within three months of the recommendations of the board. The new auditor so appointed shall hold office only till the conclusion of the next AGM.

Question 7.
Due to the resignation of the existing auditor (s), the Board of directors of X Ltd. appointed Mr. Hari as the auditor. Is the appointment of Hari as auditor valid?
Answer:
Board’s Powers to Appoint an Auditor:

• As per Sec. 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor may be filled by Board of Directors within thirty 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.

Conclusion: Appointment of Hari by Board of Directors will be Valid if it is made within 30 days of casual vacancy and such appointment is approved by the company at a general meeting within three months of the recommendations of the Board.

Question 8.
At an AGM of a listed company, Mr. R a retiring auditor after completing the tenure of 5 consecutive years of his service claims that he has been reappointed automatically, as the intended resolution of which a notice had been given to appoint Mr. P, could not be proceeded with, due to Mr. P’s death.
Answer:
Restrictions over tenure of Auditor (Rotation of Auditor)

• As per Sec. 139(2) of the Companies Act, 2013, listed companies and other prescribed class of companies shall not appoint or reappoint an individual as auditor for more than one term of five consecutive years.
• Sec. 139(10) of Companies Act, 2013 provides that if no auditor is appointed or reappointed at AGM, existing auditor will continue.
• In the given case, notice has been given of an intended resolution to appoint some person or persons in the place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person or of all those persons, as the case may be, the resolution cannot be proceeded with.
• In the instant case, if Sec. 139(10) of the Companies Act, 2013 is invoked, it results into violation of Sec. 139(2). Hence, Mr. R cannot continue as auditor due to restrictions of Sec. 139(2).

Conclusion: Mr. R cannot continue as auditor of the company due to rotation provisions. Companies Act, 2013 does not provide any provision for such kind of situation, hence it can be concluded that vacancy arises in the office of auditor which need to be filled by company in EGM.

Question 9.
No AGM was held for the year ended 31st March, 2020, in XYZ Ltd., Mr. X is the auditor for the previous 5 years, whether he should continue to hold office for current year or not.
Answer:
Auditor’s position if no AGM is held:

• Sec. 139(1) of the Companies Act, 2013 provides that every 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 meeting.
• In case the AGM is not held within the period prescribed, the auditor will continue in office till the AGM is actually held and concluded.

Conclusion: Mr. X shall continue to hold office till the conclusion of the AGM.

Question 10.
M/s Young & Co., a Chartered Accountant firm, and Statutory Auditors of Old Ltd., is dissolved on 1.4.2020 due to differences of opinion among the partners. The Board of Directors of Old Ltd. in its meeting on 6.4.2020 appointed another firm M/s Sharp & Co. as their new auditors for one year.
Answer:
Filling of Casual Vacancy:

• As per Sec. 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor may be filled by Board of Directors within thirty 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.

Conclusion: In the instant case the action of the board of directors in appointing M/s Sharp & Co. to fill up the casual vacancy due to dissolution of M/s Young & Co., is correct.

However, the board of directors are not correct in giving them appointment for one year. M/s Sharp & Co. can hold office until the conclusion of next AGM only.

Question 11.
X Ltd. is an unlisted public company. Its balance sheet shows paid up share capital of ₹ 7.5 crore and public deposits of ₹ 70 crores. The company appointed M/s ABC & Co., a CA firm, as the statutory auditor in its AGM held at the end of September 2020 for 11 years. Comment.
Answer:
Rotation of Auditor & Cooling Off Period Provisions:

• As per Section 139(2) of the Companies Act, 2013, no listed company or a company belonging to such class or classes of companies as prescribed, shall appoint or re-appoint-
  • 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.
• Rule 5 of Companies (Audit and Auditors) Rules, 2014, prescribes the following classes of companies (excluding OPC and small companies) for the purpose of rotation:
  a. ’ all unlisted public companies having paid up share capital of ₹ 10 crore or more;
  b. all private limited companies having paid up share capital of ₹ 50 crore or more;
  c. all companies having paid up share capital of below threshold limit mentioned above, but having public borrowings from financial institutions, banks or public deposits of ₹ 50 crores or more.
• In the given case, X Ltd. is an unlisted public company having paid up share capital of ₹ 7.50 crore and public deposits of ₹ 70 Crore, the provisions relating to rotation of auditor will be applicable.

Conclusion: X Ltd. cannot appoint the auditor for more than two terms of five consecutive years each, i.e. M/s ABC & Co. shall hold office from the conclusion of this meeting upto conclusion of 6th AGM to be held in the year 2025 and thereafter can be re-appointed as auditor for one more term of five years i.e. upto year 2030. As a result, the appointment of M/s ABC & Co. made by X Ltd. for 11 years is void.

Question 12.
While auditing, CA Mr. X, the statutory auditor of Y Ltd. encounters exceptional circumstances that bring into question his ability to continue performing the audit. Considering it appropriate, CA Mr. X resigned from the office of auditor of Y Ltd. Due to the resignation of the existing auditor, the Board of Directors of Y Ltd. itself appointed CA Mr. Y, a practicing Chartered Accountant, as the statutory auditor till the conclusion of 6th meeting.
You are required to state the provisions related to rilling of casual vacancy as per the Companies Act, 2013 and comment upon the validity of appointment made by the Board.
Answer:
Filling of Casual Vacancy: ,
As per Section 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor shall-
(i) In the case of a non-government company, be filled by the Board of Directors within 30 days. But, 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 the auditor so appointed shall hold the office till the conclusion of the next AGM.

(ii) In the case of a government company, the casual vacancy be filled by the CAG of India within 30 days. But if the CAG does not fill the vacancy within the said period the Board of Directors shall fill the vacancy within next 30 days.

In the given case, CA Mr. X, the statutory auditor of Y Ltd. has resigned from the office of auditor. Therefore, such casual vacancy can be filled by the Board of Directors subject to approval by the company at a general meeting convened within 3 months of the recommendation of the Board.

Conclusion: The appointment of CA Mr. Y made by the Board of Directors without the approval of the company at a general meeting is invalid and further, if appointment is approved by the company, CA Mr. Y can hold office only till the conclusion of the next AGM.

Question 13.
C.A. Ashwin was appointed as auditor of Bristol Ltd. for the year 2020-21. Since he declined to accept the appointment, the Board of Directors appointed CA John as the Auditor in place of C.A. Ashwin and the appointment was accepted by C.A. John. Discuss. [May 15 (4 Marks)]
Answer:
BOD Powers to fill the Vacancy:

• Board of Directors of the company has been empowered to appoint the auditor other than first auditor in case any casual vacancy arises in the office of auditor. [Sec. 138(8)]
•  The present case does not fall u/s 139(8); hence BOD does not have power to fill up the vacancy.
• Under the circumstances, it may be deemed that no auditor appointed at AGM and provisions of Sec. 139(10) may be invoked which provides that where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.
• Further, Clause (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949 provides that a member in practice shall be deemed to be guilty of professional misconduct if he accepts an appointment as auditor of a company without first as certaining from it whether the requirements of Sections 139 and 140 of the Companies Act, 2013, in respect of such appointment have been duly complied with.
• In the present case, appointment of Mr. John by Board of Directors is notin line with the provisions of Sec. 139 of Companies Act, 2013.
• Vacancy so remains due to non-acceptance by Mr. Ashwin can only be filled by the Company in General Meeting.

Conclusion: Board of Directors are not authorised to fill up the vacancy in case the auditors appointed at the AGM refuse to accept the appointment.

Mr. John will be guilty of professional misconduct by virtue of clause 9 of Part 1 of First Schedule of Chartered Accountants Act, 1949.

“ICAI Examiner Comments”
Candidates have not touched upon Clause (9) of Part I of the First Schedule to the Chartered ; Accountants Act, 1949 regarding professional misconduct for accepting the audit without complying with the provisions of Companies Act, 2013.

Question 14.
M/s 10 Ltd. is registered with Registrar of Companies on 1st of May 2020. The company’s 27% of paid up share capital is held by Central Government; 28% by State Government and the remaining 45% by public. The Board of Directors appointed RMG, Chartered Accountants as statutory auditors for the financial year 2020-21 by passing a resolution at the Board Meeting held on 25th May, 2020. Comment whether appointment is valid or not. [May 16 (4 Marks)]
Answer:
Appointment of First Auditor of Government Company:
As per Sec. 2 (45) of the Companies Act, 2 013, a Government company is defined “as 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 of a Government Company as thus defined”.

As per Sec. 139(7) of Companies Act, 2013, in the case of a Government company or any other company owned or controlled, directly or indirectly, by the CG, or by any SG, or SGs, or partly by the CG and partly by one or more SGs, the first auditor shall be appointed by the CAG of India, within 60 days of registration of company.

In case the CAG of India does not appoint such auditor within the said period, the BOD of the company shall appoint such auditor within 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 60 days at an EGM.

In the present case, 55% of share capital is held by Central Government and State Government, hence it is a case of Government Company and the first auditor need to be appointed by CAG within 60 days of registration of company.

Conclusion: Appointment of First Auditor within 60 days of registration of government company by Board of Directors is not valid.

Question 15.
M/s. ABC & Co. is an audit firm having partners Mr. A, Mr. B and Mr. C, whose tenure as statutory auditor in R Ltd. a listed entity, has expired as per the Companies Act, 2013. M/s XY is another audit firm which is appointed as the statutory auditor of R Ltd. for the subsequent year. Mr. A joins M/s. XY as partner, 3 months after it was appointed as the statutory auditor of R Ltd. Comment. [May 17 (5 Marks)]
Answer:
Applicability of Rotation provisions:
Sec. 139(2) of Companies Act, 2013 provides that no listed company or other prescribed companies, shall appoint or re-appoint 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 re-appointment 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 present case, on completion of tenure of M/s ABC & Co., retiring auditor, company has appointed M/s XY as their auditor. After three months of appointment of XY Ltd. as auditor, Mr. A, joins M/s XY as partner. As per provisions of Sec. 139(2), incoming auditor shall not be eligible for appointment in case of common partner as on date of appointment. But in this case, there were no common partner as on date of appointment. Mr. A joins after 3 months of appointment.

Conclusion: Applying the provisions of Sec. 139(2), no issue arises as there were no common partners as on date of appointment.

Note: Interpretation of this provision appears to be against the intention of law, which intends for the cooling off period of retiring auditor for a period of 5 years in case of listed and other prescribed companies.

Removal of Auditor

Question 16.
Comment: “M/s. PQR, audit firm has been re-appointed as sole statutory auditor of a listed company in the ACM, where till last year M/s. LMN, audit firm was also one of the joint auditors along with M/s. PQR. One tenure of consecutive five years of both the firms get completed in the mentioned 1 AGM. Mention the steps that should be taken by M/s. PQR before commencing the audit”.
Answer:
Appointment of Sole Auditor:
When one of the joint auditors of the previous years is considered for re-appointment by the members as the sole auditor for the next tenure, it is similar to non-re-appointment of one of the retiring joint auditors. As per Sec. 140(4) of the Companies Act, 2013, special notice shall be required for a resolution at an AGM appointing as auditor a person other than a retiring auditor or providing expressly that a retiring auditor shall not be re-appointed, except where the retiring auditor has completed a consecutive tenure of five years or, as the case may be, ten years, as provided u/s 139(2).

Accordingly, provisions of the Companies Act, 2013 to be complied with are as under:

1. Special Notice: Ascertain that special notice u/s 140(4) of the Companies Act, 2013 was received by the company from requisite number of members (1% of total voting power or paid up capital not less than ₹ 5 Lacs) at least 14 days before the AGM date.
2. Sending copy of notice: Check whether the said notice has been sent to all the members at least 7 days before the date of the AGM.
3. Contents of Notice: Verify that the notice contains an express intention of a member for . proposing the resolution for appointing a sole auditor in place of both the joint auditors who retire at the meeting but are eligible for re-appointment.
4. Notice to Auditor: Ensure that the notice has also been sent to the retiring auditor.
5. Sending the Representation: Verify whether any representation, received from the retiring auditor was sent to the members of the company.
6. Consideration of representation: Verify from the minutes book whether the representation received from the retiring joint auditor was considered at the AGM.

In addition to requirements of Companies Act, 2013, auditor is required to ensure compliance of Clauses 8 and 9 of Part I of First Schedule to Chartered Accountants Act, 1949.

Question 17.
PQR Company Ltd. removed their first auditor by passing a resolution in the meeting of the Board of Directors for his removal without obtaining prior approval from the Central Government. Offer your comments in this regard.
Answer:
Removal of first Auditor:

• As per Sec. 140(1) of the Companies Act, 2013, an 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 prior approval of the Central Government.
• For this purpose, an application to the Central Government for removal of auditor shall be made in Form ADT-2 and shall be accompanied with prescribed fees.
• The application shall be made to the Central Government within thirty days of the resolution passed by the Board.
• The company shall hold the general meeting within sixty days of receipt of approval of the Central Government for passing the special resolution.
• In the instant case the first auditor appointed by the Board of Directors was removed by a resolution in the meeting of the Board of Directors inspite of the Special resolution of the Company and without the prior approval of the Central Government in that behalf.

Conclusion: Removal of Auditor is Invalid as Special Resolution has not been passed and approval of Central Govt, not obtained.

Question 18.
What are the professional obligations of the auditor who has resigned from the audit before completion of his term due to non-co-operation of the Management in completing certain audit procedures? [Nov. 14 (5 Marks)]
Answer:
Professional Obligations in case of resignation by auditor:

• Section 140(2) of Companies Act, 2013 requires that the auditor who has resigned from the company shall file within a period of 30 days from the date of resignation, a statement in the prescribed form (ADT-3) with the company and the Registrar.
• In case of Government companies, such statement is also required to be filed with the Comptroller and Auditor-General of India.
• Statement must indicate the reasons and other facts as may be relevant with regard to his resignation.
• Section 140(3) of Companies Act, 2013 provides that if the auditor does not comply with Sec. 140(2), he shall be punishable with fine of ₹ 50,000 or the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of ₹ 500 for each day after the first during which such failure continues, subject to a maximum of ₹ 5 lakh.

Question 19.
Elucidate the power of tribunal to change the auditor of a company if found acted in a fraudulent manner as provided under sub-section (5) of section 140 of the Companies Act, 2013. [MTP-April 18]
Or
Write short note on: Direction by Tribunal [p case auditor acted in a fraudulent manner. [May 18 – Old Syllabus (4 Marks)]
Or
The Auditor of M/s Quick Limited succumbed to the pressure of the Management in Certifying the financials with an over stated figure of turnover by not adhering to the cut-off principles of the time scale for the transaction of the year. On taking cognizance of this act of the Auditor, the Tribunal under the companies Act, 2013 initiated the proceedings against him. Briefly list the powers of the tribunal in this respect including those relating to making orders against the auditor found to be guilty. [May 18 – New Syllabus (4 Marks)]
Or
Anvisha Ltd. is a company engaged in the business of software development. It is one of the largest companies in this sector with a turnover of ₹ 25,000 crores. The operations of the company are increasing constantly, however, the focus of the management is more on cost cutting in the coming years to improve its profitability. In respect of the financial statements of the company which are used by various stakeholders, some fraud was observed in respect of assets reported therein due to which those stakeholders suffered damages. As a result, those stakeholders applied to Tribunal for change of auditor on the basis that auditor is colluded in the fraud.
Elucidate the power of tribunal to change the auditor of a company if found acted in a fraudulent manner as provided under sub-section (5) of section 140 of the Companies Act, 2013. [MTP-Oct. 19, RTP-Nov. 19]
Or
On the advice of Management of M/s Quick Ltd., the auditor of the Company overlooked and did not report on shifting of certain current year’s sales transactions to the next year. The National Company Law Tribunal (NCLT) wants to take action against you. Describe the powers of the NCLT under Section 140(5) of the Companies Act, 2013 for such action and consequences to the auditor. [Nov. 19 – Old Syllabus (5 Marks)]
Answer:
Power of Tribunal in case Auditor acted in a Fraudulent Manner:
Sec. 140(5) of the Companies Act, 2013, provides that the Tribunal either suo motu or on an application made to it by the Central Government 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.

However, 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.

It may be noted that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447 of the said Act.

It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its director or officers.

Qualifications and Disqualifications of Auditor (Sec. 141)

Question 20.
“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.”?
Would your answer be different, if instead of Mr. A, Mr. B the step father of Mr. A is holding the securities.
Answer:
Disqualification as to Security: ,
As per section 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.

However, the relative of the auditor may hold the securities or interest in the company of face value not exceeding ₹ 1,00,000.

Conclusion: In the present case, Mr. A. is holding security of ₹ 900 in the XYZ Ltd., therefore he is not eligible for appointment as an Auditor of “XYZ Ltd”.

However, in second case, Mr. A is eligible, as relative may hold securities of face value upto ₹ 1 Lac.

Question 21.
“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.”?
Or
Mr. P, a practicing Chartered Accountant, has been offered for appointment as an auditor of ABC Ltd., a leading company. Later on, Mr. Q, the step-brother of Mr. P, purchased securities of the company having face value of ₹ 90,000. Comment, whether Mr. P may accept the offer of appointment as an auditor?
Answer:
Disqualifications as to Securities:

• As per section 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.
• However, the relative of the auditor may hold the securities or interest in the company of face value not exceeding ₹ 1,00,000.

Conclusion: In the present case, Mr. Q (relative of Mr. P, an auditor), is having securities of ₹ 90,000 face Value in the ABC Pvt. Ltd., which is as per requirement of proviso to section 141(3)(d)(i), Therefore, Mr. P will not be disqualified to be appointed as an auditor of ABC Ltd.

Question 22.
“BC & Co.” is an Audit Firm having partners “Mr. B” and “Mr. C”, and “Mr. A” the relative of “Mr. C”, is holding securities of”MWF Ltd.” having face value of? 1,01,000. Whether “BC & Co.” is qualified from being appointed as an Auditor of “MWF Ltd”?
Answer:
Disqualifications as to security:

• As per section 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.
• However, the relative of the auditor may hold the securities or interest in the company of face value not exceeding of ₹ 1,00,000.

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 section 141(3)(d)(i).

Question 23.
A, a chartered accountant has been appointed as auditor of Laxman Ltd. in the ACM of the company held in Sep. 2020, which assignment he accepted. Subsequently in January, 2021 he joined B, another chartered accountant, who is the Manager Finance of Laxman Ltd., as partner.
Answer:
Disqualification as to partner of employee:

• Section 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) 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, A, an auditor of M/s Laxman Ltd., joined as partner with B, who is Manager Finance of M/s Laxman Limited, 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 24.
An auditor purchased goods worth ₹ 501,500 on credit from a company being audited by him. The company allowed him one month’s credit, which it normally allowed to all known customers.
Answer:
Disqualification as to indebtedness:

• Section 141(3)(d) of the Companies Act, 2013 specifies that a person shall be disqualified to act as an auditor if he is indebted to the company for an amount exceeding ₹ 5 Lacs.
• Where an auditor purchases goods or services from a company audited by him on credit, he is definitely indebted to the company and if the amount outstanding exceeds ₹ 5 Lacs, he is disqualified for appointment as an auditor of the company.
• It will not make any difference if the company allows him the same period of credit as it allows to other customers on the normal terms and conditions of the business.

Conclusion: In instant case, auditor has become indebted to the company and consequently he has deemed to have vacated his office.

Question 25.
Ram and Hanuman Associates, Chartered Accountants in practice have been appointed as Statutory Auditor of Krishna Ltd. for the accounting year 2020-21. Mr. Hanuman holds 100 equity shares of Shiva Ltd., a subsidiary company of Krishna Ltd.
Answer:
Auditor holding securities of a company:

• As per Sec. 141 (3) (d) of the Companies Act, 2013, a person shall not be eligible for appointment as an auditor of a company, 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.
• In the present case, Mr. Hanuman, Chartered Accountant, a partner of M/s Ram and Hanuman Associates, holds 100 equity shares of Shiva Ltd. which is a subsidiary of Krishna Ltd.

Conclusion: The firm, M/s Ram and Hanuman Associates would be disqualified to be appointed as statutory auditor of Krishna Ltd., which is the holding company of Shiva Ltd., because one of the partner Mr. Hanuman is holding equity shares of its subsidiary.

Question 26.
Mr. Amar, a Chartered Accountant, bought a car financed at ₹ 7,00,000 by Chaudhary Finance Ltd., which is a holding company of Charan Ltd. and Das Ltd. He has been the statutory auditor of Das Ltd. and continues to be even after taking the loan.
Answer:
Disqualification as to indebtedness:

• As per Sec. 141(3}(d}(ii} of the Companies Act, 2013, a person is not eligible for appointment as auditor of any company, If he is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of rupees ₹ 5 Lacs.
• In the given case Mr. Amar is disqualified to act as an auditor u/s 141(3)d}(ii) as he is indebted to M/s Chaudhary Finance Ltd. for more than ₹ 5 Lacs.
• Further he cannot act as an auditor of any subsidiary of Chaudhary Finance Ltd. i.e. he is.also disqualified to work in Charan Ltd. & Das Ltd.
• Further Sec. 141 (4) provides that a person appointed as auditor incurs any of the disqualification mentioned u/s 141(3) after his appointment, he shall vacate the office immediately and it will be treated a casual vacancy.

Conclusion: Mr. Amar should vacate his office immediately and Das Ltd. must have to appoint any other CA as an auditor of the company.

Question 27.
Praveen, a member of the ICA1, does not hold a Certificate of practice. Is his appointment as an auditor valid? .
Answer:
Qualifications of an Auditor:

• As per Sec. 141(1} a person shall be qualified for appointment as an auditor of a company, only if he is a Chartered Accountant within the meaning of the Chartered Accountants Act, 1949.
• Under the Chartered Accountants Act, 1949, only a Chartered Accountant holding the certificate of practice can engage in public practice.

Conclusion: Mr. Praveen does not hold a certificate of practice and hence cannot be appointed as an auditor of a company.

Question 28.
‘B’ owes ₹ 5,01,000 to ‘C’ Ltd., of which he is an auditor. Is his appointment valid? Will it make any difference, if the advance is taken for meeting-out travelling expenses?
Answer:
Indebtedness to the Company:
As per Section 141(3) (d) (ii) of the Companies Act, 2013, a person who, or his relative or partner is indebted to the company, or its subsidiary, or its holding or associate company, or a subsidiary of its holding company, for an amount exceeding ₹ 5 Lacs, then he is not qualified for appointment as an auditor of a company.

Even if the advance was taken for meeting out travelling expenses particularly before commencement of audit work, his appointment is not valid because in such a case also the auditor shall be indebted to the company. The auditor is entitled to recover fees on a progressive basis only.

Conclusion: B’s appointment is not valid and he is disqualified as the amount of debt exceeds ₹ 5,00,000.

Question 29.
Mr. Aditya, a practising chartered accountant is appointed as a “Tax Consultant” of ABC Ltd., in which his father Mr. Singhvi is the Managing Director.
Answer:
Appointment of relative as tax consultant:

• Sec, 141(3)(f) of Companies Act, 2013 disqualifies a person to be appointed as auditor whose relative is a director or is in employment of the company as director or key managerial personnel.
• However, no such disqualification is prescribed under the law for appointing a person as a tax consultant, therefore sec. 141(3)(f) will not be attracted.

Conclusion: Mr. Aditya can be appointed as tax consultant irrespective that his father is the managing director of the company.

Question 30.
Mr. Ram, a relative of a Director was appointed as an auditor of the company. Comment. [Nov. 10 (6 Marks)]
Answer:
Appointment of director’s relative as auditor:
Section 141 (3)(f) explicitly disqualifies a person from being appointed as an auditor of a company whose relative is a director or is in the employment of the company as director or key managerial personnel.

This term relative has been defined u/s 2(77) of and explained under Rule 4 of the Companies (Specification of Definitions Details) Rules, 2014. As per Sec. 2(77) the term relative with reference to any person, means who anyone who is related to another, if they are members of HUF; they are husband and wife; or related to the other in prescribed manner. Rule 4 provides that a person shall be deemed to be relative of another, if he or she is related to another as father, mother, son, son’s wife, daughter, daughter’s husband, brother or sister.

Conclusion: Assuming that Mr. Ram falls within the above-mentioned relations, he should not accept the appointment as an auditor of that company.

Question 31.
Comment on the following: Sri & Company, a firm of Chartered Accountants was appointed as statutory auditors of Aaradhana Company Ltd. Aaradhana Company Ltd. holds 51 % shares in Sarang Company Ltd. Mr. Sri, one of the partners of Sri & Company, owed ₹ 1,500 as on the date of appointment to Sarang Company Ltd. for goods purchased in normal course of business.
Answer:
Disqualification as to indebtedness:
As per Section 141(3)(d)(ii) of the Companies Act, 2013, a person who, or his relative or partner is indebted to the company, or its subsidiary, or its holding or associate company, or a subsidiary of its holding company, for an amount exceeding ₹ 5,00,000 then he is not qualified for appointment as an auditor of a company.

Conclusion: Mr. Sri is not disqualified to be appointed as auditor of the company as he is indebted to the company for an amount not exceeding ₹ 5,00,000, consequently, Sri & Co., is not disqualified to be appointed as an auditor of Aaradhana Company Ltd.

Question 32.
Dabloo Ltd. offered appointment as its auditor to Mr. Bee, a practicing Chartered Accountant. Later on, Mr. Dee, the step-brother of Mr. Bee, purchased securities of the company having face value of ₹ 4,99,000. Comment, whether Mr. Bee may accept the offer of appointment as an auditor?
Answer:
Disqualification as to holding of security by relatives:
As per section 141(3)(d)(i) of the Companies Act, 2013 read with Rule 10 of the Companies (Audit and Auditors) Rule, 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.

However, the relative of the auditor may hold the securities or interest in the company of face value not exceeding of ₹ 1,00,000. The term “relative” as defined under the Companies Act, 2013 includes step-brother.

In the present situation, Mr. Dee, the step-brother of Mr. Bee, is holding the securities having face value of ₹ 4,99,000 in Dabloo Ltd. Thus, holding of securities in Dabloo Ltd. by Mr. Dee having face value exceeding ₹ 1,00,000, will disqualify Mr. Bee from being appointed as an auditor of Dabloo Ltd.

Conclusion: Mr. Bee may not accept the offer of appointment as an auditor of Dabloo Ltd.

Question 33.
M/s Duster & Co., Chartered Accountants, appointed as a statutory auditor of R Ltd. for the financial year 2020-21. The company is also in need of some actuarial services. Consequently, the Board of Directors of the company offered the same to M/s Srivastava & Co., an associate to M/s Duster & Co., which has been duly accepted by the firm. Comment.
Answer:
Services not to be rendered By Auditor:

• Section 141(3)(i) of the Companies Act, 2013 disqualify a person who directly or indirectly, renders any service referred to in sec. 144 to the company or its holding company or its subsidiary company.
• Section 141 [4) of the Act provides that where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sec. 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.
• As per Section 144 of Companies Act, 2 013 an auditor appointed under this Act shall not provide certain service, directly or indirectly to the company or its holding company or subsidiary company. List of such services include actuarial services.
• In the given case, M/s Duster & Co., Chartered Accountants, was appointed as an auditor of R Ltd. and, the company offered actuarial services to M/s Srivastava & Co., an associate to M/s Duster & Co., which has also been duly accepted by the firm.

Conclusion: M/s Duster & Co. is disqualified to hold office as an auditor of R Ltd. u/s 141(3)(i), as its associate is involved in providing such services, to R Ltd., as mentioned in Sec. 144. Subsequently, M/s Duster & Co. shall have to vacate the office of auditor of R Ltd.

Question 34.
X & Associates, a Chartered Accountant firm, has been appointed as Statutory Auditor of H Ltd. for the financial year 2020-2021. Mr. Y, the relative of Mr. X, a partner in X & Associates, is indebted for ₹ 5,50,000 to S Ltd., a subsidiary company of H Ltd. Comment.
Answer:
Disqualification as to indebtedness to the Subsidiary Company:
Section 141(3)(d)(ii) of the Companies Act, 2013 provides that a person shall not be eligible for appointment as an auditor of a company, 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.

Section 141(4) of the Companies Act, 2013 provides that where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in Section 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 present case, Mr. Y, the relative of Mr. X, a partner in X and Associates, has been indebted to S Ltd., a subsidiary company of H Ltd., for ₹ 5,50,000.

Conclusion: X & Associates would be disqualified to be appointed as statutory auditor of H Ltd. as per section 141(3)(d)(ii), which is the holding company of S Ltd., because Mr. Y, the relative of Mr. X, a partner in X and Associates, has been indebted to S Ltd. for an amount exceeding ₹ 5 Lacs.

Question 35.
R and M is an audit firm having partners CA R, CA M and CA G. Mr. S is the relative of CA R holding shares of STP Ltd. having a face value of ₹ 1,51,000 Whether CA R and CA M are qualified to be appointed as auditors of STP Ltd.? [May 15 (4 Marks)]
Answer:
Disqualifications as to security:

• As per section 141(3)(d)(i) 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
• However, the relative of the auditor may hold the securities or interest in the company of face value not exceeding of ₹ 1,00,000.
• In the instant case Mr. S relative of CA R, is holding the securities in STP Ltd. which is exceeding the limit mentioned in proviso to section 141(3)(d)(i). Therefore Audit firm is disqualified for appointment as an auditor of STP Ltd.

Conclusion: CA R and CA M are not qualified to be appointed as auditor of STP Ltd.

Question 36.
CA Mr. X was indebted to ABC Ltd. for a sum of ₹ 5,50,000 as on 01.04.2020. However, Mr. X having come to know that he might be appointed as auditor of the company, he squared up the amount on 10.7.2020. Later on, he was appointed as an auditor of the company at the Annual General Meeting held on 16.07.2020. Subsequently, one of the shareholders complains that the appointment of Mr. X as an auditor is invalid because he incurred disqualification under section 141 of the Companies Act, 2013. Comment. [Nov. 16 (4 Marks)]
Answer:
Auditor’s Disqualifications as to Indebtedness:

• Section 141(3)(d)(ii) of the Companies Act, 2013 provides that a person who is indebted to the company for an amount exceeding ₹ 5,00,000 shall be disqualified to act as an auditor of such company.
• However, where the person proposed to be appointed as auditor, liquidated the debt before the date of appointment, no disqualification arises as to appointment.
• In the given case, CA Mr. X was indebted to ABC Ltd. for a sum of ₹ 5,50,000 as on 01.04.2020. He repaid the loan amount fully to the company on 10.7.2020. He was appointed as an auditor of the company at the Annual General Meeting held on 16.07.2020. At the time of appointment, he was not indebted to the company hence, not disqualified.

Conclusion: The appointment of CA Mr. X as an auditor is valid and the shareholder’s complaint is not acceptable.

Question 37.
Comment on the validity of the appointments of Mr. A as an auditor of ABC Ltd. in the following situations:
(i) Mr. B, a partner of Mr. A held shares of face value of.Rs. 1,00,000 in DEF Ltd., the holding company of ABC Ltd. Mr. B has sold the securities after a period of 45 days from the date of appointment of Mr. A as an auditor of ABC Ltd.
(ii) Mrs. A, wife of Mr. A had given a financial guarantee for the principal amount of a debt owed by Mr. X to ABC Ltd. for Rs. 6 lakhs. Mr. X has repaid Rs. 5 lakhs to ABC Ltd. 2 days before the date of appointment of Mr. A as an auditor of the company. [Nov. 18-Old Syllabus (6 Marks)]
Answer:
Validity of Appointments:
(a) Auditor’s disqualifications as to security:
As per section 141 (3)(d) (i) 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.

However, the relative of the auditor may hold the securities or interest in the company of face value not exceeding of Rs. 1,00,000. It is also provided that in the event of acquiring and security or interest by a relative above the threshold limit, the corrective action to maintain the limits as specified above shall be taken by the auditor within 60 days of such acquisition or interest.

In the present case, Mr. B, a partner of Mr. A held shares of face value of Rs. 1,00,000 in DEF Ltd., the holding company of ABC Ltd. Mr. B has sold the securities after a period of 45 days from the date of appointment of Mr. A as an auditor of ABC Ltd.

Conclusion: Appointment of Mr. A as auditor in ABC Ltd. is not valid as he is disqualified by virtue of provisions as stated in Sec. 141(3)(d)(i). Subsequent sale of securities by the partner is of no relevance in this case.

(ii) Auditor’s disqualifications as to security:

• As per section 141 (3)(d) [iii) a person is disqualified to be appointed as an auditor if he, or his relative or partner has given a guarantee or provided any security in connection with, the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ₹ 1 Lac.
• These disqualifications need to be examined as at the time of appointment.
• In the present case, Mrs. A, wife of Mr. A had given a financial guarantee for the principal amount of a debt owed by Mr. X to ABC Ltd. for Rs. 6 lakhs. Mr. X has repaid Rs. 5 lakhs to ABC Ltd. 2 days before the date of appointment of Mr. A as an auditor of the company.

Conclusion: Appointment of Mr. A as auditor in ABC Ltd. is valid as the amount of guarantee given by the Mrs. A for indebtedness of Mr. X in the company does not exceed Rs. 1 lac as on date of appointment.

Question 38.
Mr. Y, a practicing Chartered Accountant, has been appointed as an auditor of M/s Z Ltd. on 12th June, 2020 for the year ended 31st March, 2021. Following persons have done following transactions in securities of M/s Z Ltd.:

• Daughter of Mr. Y: Purchase of Securities on 10th September, 2020 of face value of Rs. 45,000 (market value Rs. 90,000)
• Husband of daughter of Mr. Y: Purchase of Securities on 10th December, 2020 of face value of Rs. 90,000 (Market value Rs. 1,90,000).

All the above securities were sold on 10th March, 2021 for Rs. 3,00,000. Discuss the implications of the above on the appointment of Mr. Y. [May 19 – Old Syllabus (5 Marks)]
Answer:
Auditor’s disqualifications as to security:
As per section 141(3)(d)(0 of Companies Act, 2013, 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.

As per Rule 10 of Companies (Audit and Auditor’s) Rules, 2014, the relative of the auditor may hold the securities or interest in the company of face value not exceeding of Rs. 1,00,000. It is also provided that in the event of acquiring and security or interest by a relative above the threshold limit, the corrective action to maintain the limits as specified above shall be taken by the auditor within 60 days of such acquisition or interest.

The term relative as defined in Sec. 2(77) includes daughter and daughter’s husband.

In the present case, Mr. Y, has been appointed as an auditor of M/s Z Ltd. on 12th June, 2020 for the year ended 31st March, 2021. His daughter purchases securities of Z Ltd. on 10th Sep., 2020 of face value of Rs. 45,000, whereas husband of daughter of Mr. Y purchases securities of Z Ltd. on 10th Dec., 2020 of face value of Rs. 90,000.

Aggregate face value of securities held by relatives of Mr. Y amounts to Rs. 1,35,000. Mr. Y was required to take corrective action within 60 days of 10th Dec. 2020 to bring the value of securities held by relatives to Rs. 1,00,000. However, securities were sold on 10th March, 2021 after expiry of 60 days from 10th Dec. 2020.

Conclusion: Mr. Y becomes disqualified on expiry of 60 days from 10th Dec. 2020 as he fails to take corrective action so as to bring the shareholding of relatives within prescribed limit of ₹ 1 Lac (face Value).

Question 39.
PQ and Co. is an audit firm with P and Q as partners. For the financial year 2020-21, the firm has been appointed as statutory auditor of M/s Mango Orchards Hotel Ltd. The audit firm is a regular customer of the hotel and the partners usually stay in the same hotel at various locations in the course of travelling for their various professional assignments. Normally, payments for such stay are settled against quarterly bills raised by the company. Give your comment with respect to the Companies Act, 2013. [May 19 – New Syllabus (4 Marks)]
Answer:
Auditor’s disqualifications as to business relationship:
As per Sec. 141(3)(c/)(z7) of the Companies Act, 2013 read with Rule 10 of Companies (TVudit and Auditor’s) Rules, 2014, a person who is indebted to the company for an amount exceeding t 5 Lacs shall be disqualified to be appointed as auditor.

As per section 141(3)(e) of Companies Act, 2013, 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 of such nature as may be prescribed, is disqualified to be appointed as auditor of that company.

As per Rule 10 of Companies (Audit and Auditor’s) Rules, 2014, the term “business relationship” shall be construed as any transaction entered into for a commercial purpose, except:

Commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or the regulations made under those Acts;

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 auditor, 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 present case, audit firm is a regular customer of the client running a hotel and th e partners usually stay in the same hotel at various locations in the course of travelling for their various professional assignments. Normally, payments for such stay are settled against quarterly bills raised by the company.

Conclusion: No disqualification arises as the services availed are in ordinary course of business of client and cannot be considered as business relationship. (It is assumed that outstanding does not exceed ₹ 5 lakh)

Ceiling on Number of Audits |Sec. 141(3)(g)]

Question 40.
“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 Auditor in 4,6 and 10 Companies respectively.

1. Provide the maximum number of Audits remaining in the name of “ABC & Co.”
2. Provide the maximum number of Audits remaining in the name of individual partner i.e. Mr. A, Mr. B and Mr. C.
3.  Can ABC & Co. accept the appointment as an auditor in 60 private companies having paid- up share capital less than ₹ 100 Cr. which has not committed default in filing its financial statements u/s 137 or annual return u/s 92 of Companies Act with the Registrar, 2 small companies and 1 dormant company?
4. Would your answer be different, if out of those 60 private companies, 45 companies are having paid-up share capital of ₹ 110 crore each [MTP-Oct. 18, RTP-Nov. 19]

Answer:
Ceiling on Number of Audit:
As per section 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 twenty companies other than one person company, dormant companies, small companies and private companies having paid up share capital less than ₹ 100 Crores, which has not committed default in filing its financial statements u/s 137 or annual return u/s 92 of Companies Act with the Registrar.

As per section 141(3)(g), 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.

(iii) M/s ABC & Co. can hold appointment as an auditor in all the 60 private companies having paid up share capital less than ₹ 100 crores, 2 small companies and 1 dormant company as these are excluded from the ceiling limit of company audits given under section 141 (3) (g) of the Companies Act, 2013.

(iv) M/s ABC & Co. can also accept the appointment as an auditor for 2 small companies, 1 dormant company, 15 private companies having paid-up share capital less than ₹ 100 crores and 40 private companies having paid-up share capital of ₹ 110 crore each in addition to above 20 company audits already holding.

Question 41.
KBC & Co. a firm of Chartered Accountants has three partners, K, B & C; K is also in whole time employment elsewhere. The firm is offered the audit of ABC Ltd. and is already holding audit of 40 companies. Comment
Answer:
Ceiling on Number of Company Audits:
As per section 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 twenty companies.

In the firm of KBC & Co., K is in whole-time employment elsewhere, therefore, he will be excluded in determining the number of company audits that the firm can hold.

If B and C do not hold any audits in their personal capacity or as partners of other firms, the total number of company audits that can be accepted by KBC & Co., is forty, and in the given case company is already holding forty audits.

Conclusion: KBC & Co. can’t accept the offer for audit of ABC Ltd.

Question 42.
What are the steps to be taken by a firm of Chartered Accountant to ensure that its appointment as Statutory Auditor of a Company is valid?
Answer:
Validity of appointment as a statutory auditor:
To ensure that the appointment is valid, the incoming auditor should take the following steps before accepting his appointment:

1. Ceiling limit: Ensure that a certificate has been issued u/s 139 of the Companies Act, 2013 so that the total number of company audits held by the firm (including the new appointment) will not exceed the specified number.
2. Resolution at AGM: Verify that, a proper resolution is passed at AGM of the Company. For this purpose, minutes book of general meeting may be inspected.
3. Compliance with law: Ensure compliance of provisions of sections 139 and 140 of the Companies Act 2013, relating to appointment of auditor and removal of existing auditor.
4. Code of conduct: Ensure compliance of Clause 8 of Part I of First Schedule of Chartered Accountants Act, 1949 requiring communication with the previous auditor, in writing, to ascertain whether there are any professional reasons for not accepting the appointment.

Question 43.
KSY & Co. Chartered Accountants is an audiGfirm having two partners CA K and CA Y. KSY & Co. is already holding appointment as auditors of 36 public companies.
KSY & Co. seeks your advice in the following situations:
(i) KSY & Co. has been offered the appointment as Auditors of 7 more Private Limited Companies. Of the seven, one is a company with a paid-up share capital of 150 crores, five are “small companies” as per the Act and one is a “Dormant Company”.
(ii) Would your answer be different, if out of those 7 Private Companies, 3 Companies have paid up capital of ₹ 90 crores each?

Note: None of the private companies has committed default in filing its financial statements under section 137 or annual return under section 92 of the Companies Act with the Registrar. [May 16 (4 Marks)]
Answer:
Ceiling on Number of Audits:
Section 141(3) (g) of Companies Act, 2013 provides that a person is not eligible to be appointed as auditor of a company if he at the date of such appointment or reappointment holding appointment as auditor of more than 20 Companies other than one-person company, dormant companies, small companies and private companies having paid up share capital less than 100 Crores which has not committed default in filing its financial statements u/s 137 or annual return u/s 92 of Companies Act with the Registrar.

In the case of firm of auditors, it has been further provided that specified number of companies shall be construed as the number of companies specified for every partner of the firm who is not in full time employment elsewhere.

In the present case, KSY & Co. has two partners and hence eligible for audit of 40 Companies. Firm is already holding audit of 36 Public companies. It can accept the audit of 4 more companies other than One-person company, dormant companies, small companies and private companies having paid up share capital less than 100 Crores.

Conclusion:

1. KSY & Co. can accept audit of all 7 Private companies, because 5 small companies and one dormant company will not be considered for the purpose of ceiling limit. Total number of audit after acceptance of all seven audits remains at 37.
2. Answer will remain same, as the private companies having paid up capital less than 100 Crores are not considered for the purpose of ceiling limit. Total number of audit after acceptance of all seven audits remains at 40 assuming that other four companies having paid up capital in excess of ₹ 100 Crores.

Question 44.
M/s ABC and Co., a firm of Chartered Accountants, comprising of three partners A, B, and C are Statutory Auditors of 50 Companies as per details given below:

1. Small Companies – 10
2. Private Companies having paid up share capital of less than ₹ 100 Crores – 20
3. Private Companies having paid up share capital of more than ₹ 100 Crores – 15
4. Public Companies – 5

Mr. A signs the Balance Sheet of 10 Small Companies and 10 Private Companies having paid up share capital of less than ₹ 100 Crores. Mr. B signs the Balance Sheet of 10 Private Companies having paid up share capital of less than Rs. 100 Crores and 5 private Companies having paid up share capital of more than ₹ 100 Crores. Mr. C signs the Balance Sheet of 10 Private Companies having paid up share capital of more than ₹ 100 crores and 5 Public Companies.

What is the maximum number of audits that the firm as a whole can accept and what is the maximum number of audits each individual partner can accept?

Note: None of the private companies has committed default in filing its financial statements under section 137 or annual return under section 92 of the Companies Act with the Registrar. [May 18 – Old Syllabus (6 Marks)]
Answer:
Ceiling on Number of Audit:
As per section 141(3)(g) ofthe 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 twenty companies other than one person company, dormant companies, small companies and private companies having paid up share capital less than ₹ 100 Crores, which has not committed default in filing its financial statements u/s 137 or annual return u/s 92 of Companies Act with the Registrar.

As per section 141(3)(g), 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.

Conclusion:
Firm can accept 40 more audits of Public companies and private companies having paid up capital of more than ₹? 100 Crores. Audit of Small companies and private companies having paid up share capital less than ₹ 100 cr. are not considered for the purpose of ceiling.

Partner A can accept 20 audits of Public companies and private companies having paid up capital of more than ₹ 100 Crores. Partner B can accept 15 audits of Public companies and private companies having paid up capital of more than ₹ 100 Crores. Partner C can accept 5 audits of Public companies and private companies having paid up capital of more than ₹ 100 Crores. Audit of Small companies and private companies having paid up share capital less than ₹ 100 cr. are not considered for the purpose of ceiling.

Powers and Duties of Auditor – Sec. 143, Sec. 144, Sec. 145, Sec. 146

Question 45.
CA. G, was appointed by DP Ltd., as Statutory Auditor. While doing the audit of DP Ltd., CA. G observed that certain loans and advances were made without proper securities; certain trade receivables and trade payables were adjusted inter se; and personal expenses were charged to revenue. As a company auditor comment on the reporting responsibilities of CA. G. [Nov. 19 – New Syllabus (5 Marks)]
Answer:
Inquiry into Propriety Matters u/s 143(1):
Section 143(1] of the Companies Act, 2013 requires the auditor to conduct inquiry into certain matters and if the auditor finds answer of any of these matters in adverse, auditor is required to report, otherwise no reporting is required. In relation to observations stated in the question, auditor should inquire as follows:

1. Clause (a) of Section 143(1) requires the auditor to inquire “Whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members”.
2. Clause (b] of section 143(1), requires the auditor to inquire “whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company”.
3. Clause (c) of section 143(1) requires the auditor to inquire “Whether personal expenses have been charged to revenue account”.

If the auditor finds that the loans and advances have not been properly secured, he may enter an adverse comment in the report without modifying opinion on financial statements if the loans and advances are properly described and presented in terms of Part I of Schedule III to the Companies Act.

If relation to his observation regarding inter se adjustment of trade receivables and trade payables, being a book entry, auditor should have inquired into the legitimate interests of the company. If appears prejudicial, he may enter adverse comment in the report.

Regarding charging of personal expenses to revenue account auditor should inquire whether such expenses are incurred on the basis of the company’s contractual obligations, or in accordance with accepted business practice. If personal expenses incurred by the company are not covered by contractual obligations or by accepted business practice and charged to revenue account, it would be the duty of the auditor to report thereon.

Conclusion: In the instant case, Mr. G, the statutory auditor of DP Ltd., needs to enquire in light of above provisions, as a result of the enquiries if he is satisfied then there is no further duty to report on these matters.

Question 46.
Asan auditor, how would you deal with the following: In the audit of ABC Private Limited, auditor came across cases of payments to Directors, whereby, expenses of a personal nature were re-imbursed.
Answer:
Personal Expenses of Directors:

• All payments to Directors as remuneration or perquisites whether in the case of a public or private company need to be authorised in accordance with the Companies Act as well as Articles of Association of the company.
• If the terms of appointment of a Director include payment of expenses of a personal nature, then such expenses can be incurred by the company; otherwise, no such expense can be incurred or reimbursed by the company.
• In the instant case the auditor has to ensure that the payment is authorized by the Articles of Association and the same has been covered by terms of appointment.
• Further as this payment is also covered u/s 143 (1), and hence auditor is also required to inquire into the matter and make a disclosure in his report accordingly.

Question 47.
Director of T Ltd. draws an advance of US$ 200 per day in connection with the foreign trip undertaken on behalf of the company. On his return he files a declaration stating that entire advance was expended without any supporting or evidence. T Ltd. books the entire expenses on the basis of such declaration. As the auditor of T Ltd. how do you deal with this? [May 11 (8 Marks)]
Answer:
Personal Expenses Charged to revenue Account:

• Section 143(1)(e) of the Companies Act, 2013 requires an auditor to inquire and report whether personal expenses have been charged to revenue account.
• SA500 “Audit Evidence” states that an auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base his option.
• All payments to Directors as remuneration or perquisites whether in the case of a public or private company need to be authorised in accordance with the Companies Act as well as Articles of Association of the company.
• In the present case, company has booked foreign trip expenses of director in its revenue account. In the context, auditor is required to inquire whether the payment made by the company for the foreign trip is personal expense or not and collect the necessary supporting evidences.
• If it appears to be personal expense, auditor is required to ascertain whether such expense is properly authorized or not. If not authorized, auditor should state the matter in his report.

Question 48.
What are the statements of facts that an auditor has to report u/s 143 of the Companies Act, 2013.
Answer:
Statement of Facts to be reported u/s 143:
Section 143 (3) of Companies Act, 2013 requires the auditor the comment on the following in addition to opinion on true and fair view of financial statements:
(a) 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;

(b) 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;

(c) Whether the report on the accounts of any branch office of the company audited u/s 143(8) 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;

(d) Whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;’

(e) Whether, in his opinion, the financial statements comply with the accounting standards;

(f) The observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;

(g) Whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;

(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;

(i) whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls;

(j) such other matters as may be prescribed.

Further, Rule 11 of the Companies (Audit and Auditors) Rules, 2014 prescribes the other matters to be included in auditor’s report. The auditor’s report shall also include their views and comments on the following matters, namely:
(a) whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement;

(b) 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;

(c) whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company.

Question 49.
While conducting the audit of a limited company for the year ended 31st March, 2021, the auditor wanted to refer to the Minute Books. The Board of Directors refused to show the Minute Books to the auditor
Answer:
Right of Access to Books of Account:

• Sec. 143(1) of the Companies Act, 2013 grants powers to the auditor that every auditor has a right of access, at all times, to the books of account and vouchers of the company.
• The term books of account include all books which have any bearing or are likely to have any bearing on the accounts, whether these be the usual financial books or the statutory or statistical books.
• In order to verify actions of the company and to vouch and verify some of the transactions of
  the company, it is necessary for the auditor to refer to the decisions of the shareholders and/ or the directors of the company.
• It is, therefore, essential for the auditor to refer to the Minute Books. In the absence of the Minute Books, the auditor may not be able to vouch/verify certain transactions of the company.

Conclusion: In case the directors have refused to produce the Minute Books, the auditor may consider extending the audit procedure as also consider qualifying his report in any appropriate manner.

Question 50.
The auditor of X Ltd. did not report on the matters, specified u/s 143 (1) of the Companies Act, 2013, on which he inquired into, because of the reason that he was satisfied. But the management of the company wanted the auditor to report on those matters so that the members can also be aware of the true position of the company. Comment as to whether the auditor is required to report the matters, specified under the Act, he inquired into and whether the contention of the management is sustainable.
Answer:
Reporting of Matters contained under Section 143(1) of the Companies Act, 2013:
Sec. 143(1) of the Act deals with the duties of an auditor requiring him to make an inquiry in respect of specified propriety matters.

The matters in respect of which the inquiry has to be made by the auditor are relating to loans and advances on the basis of security, transactions represented merely by book entries, investments sold at less than cost price, loans and advances shown as deposits, personal expenses charged to revenue account etc.

The law requires the auditor to make an inquiry, the Research Committee of the Institute opined that the auditor is not required to report on these matters unless he has any special comments to make on any of the items referred to therein. If the auditor is satisfied as a result of the inquiries, he has no further duty to report that he is so satisfied.

Therefore, it could be said that the auditor should make a report to the members in case he finds answer to any of these matters in adverse.

Conclusion: The auditor of X Ltd. is correct in non-reporting on the matters specified in Sec. 143(1) of the Act and hence, the contention of the management is not sustainable.

Question 51.
M/s XYZ & Co., auditors of Goodwill Education Foundation, a recognised non-profit organisation feels that the standards on auditing need not to be applied as Goodwill Education Foundation is a non-profit making concern.
Answer:
Compliance with Standards on Auditing:
As per Sec. 143(9) of the Companies Act, 2013, every auditor shall comply with the auditing standards. Further as per Sec. 143(10), the Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by the ICAI, in consultation with and after examination of the recommendations made by the NFRA.

However, until any auditing standards are notified, standards of auditing specified by the ICAI shall be deemed to be the auditing standards.

Further, the Preface to Standards on Auditing requires that while discharging their attest function; it is the duty of the Chartered Accountant to ensure that SAs are followed in the audit of financial information covered by their audit reports.

Conclusion: In the given case, even though the client is a non-profit oriented entity the SAs shall apply and the auditor is required to ensure their compliance. In case he fails to discharge his duty he shall be guilty of professional misconduct.

Question 52.
An auditor became aware of a matter regarding a company, only after he had issued his audit opinion. Had he become aware of the same prior to his issuing the audit report, he would have issued a different opinion.
Answer:
Auditor’s duties w.r.t. subsequent events:

• Sec. 146 of the Companies Act, 2013 requires the auditors of a company to attend the general meeting of the company unless otherwise exempted by the company.
• Auditor shall have the right to be heard at such meeting on any part of the business which concerns him as auditors.
• The discovery of a fact after issuance of the financial statements that existed at the date of the audit report which would have caused the revision of the audit report, requires the auditor to bring this to the notice of shareholders.
• Further SA 560 “Subsequent Event” also prescribes the procedures which the auditor is required to perform.

Conclusion: It will be advisable for the auditor to attend the meeting with a view to bringing to the notice of the shareholders the matter which came to his knowledge subsequent to his signing the report and perform procedures are per the requirement of SA 560.

Question 53.
Y, is the auditor of X Pvt. Ltd. In which there are four shareholders only, who are also the Directors of the company. On account of bad trade and for reducing the expenses in ail directions, the directors asked Y to accept a reduced fee and for that he has been offered not to carry out such full audit as he has done in the past. Y accepted the suggestions of the directors.
Answer:
Restricting Scope of Audit:

• Auditor’s duties are governed by the provisions of Sec. 143 of Companies Act, 2013, which cannot be restricted either by the director or even by the entire body of shareholders.
• Further, remuneration is a matter of arrangement between the auditor and the shareholders. Section 142 specifies the remuneration of an auditor, shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine.
• Duties of auditor may not necessarily commensurate with his remuneration.

Conclusion: Y, should not accept the suggestions of the directors regarding the scope of the work to be done. If he accepts the suggestions of the directors regarding the scope of work to be done, it would not reduce his responsibility as an auditor under the law and he will be violating the provisions of the Companies Act, 2013.

Question 54.
At the Annual General Meeting of the Company, a resolution was passed by the entire body of shareholders restricting some of the powers of the Statutory Auditors. Whether powers of the Statutory Auditors can be restricted?
Answer:
Restrictions on Powers of Statutory Auditors:
Section 143 of the Companies Act, 2013 provides that an auditor of a company shall have right of access at all times to the books and account and vouchers of the company whether kept at the Head Office or other places and shall be entitled to require from the offices of the company such information and explanations as the auditor may think necessary for the purpose of his audit.

These specific rights have been conferred by the statute on the auditor to enable him to carry out his duties and responsibilities prescribed under the Act, which cannot be restricted or abridged in any manner.

Further it was held in the case of Newton vs. Birmingham Small Arms Co. that any resolution even if passed by entire body of shareholders which preclude the auditors from availing themselves of all the information for which they are entitled to under the Company Law are inconsistent with the Act and therefore null and void.

Conclusion: Any resolution restricting the scope of statutory right of auditor even if passed by entire body of shareholders is ultra vires and therefore void.

Question 55.
Mr. Rajendra, a fellow member of the Institute of Chartered Accountants of India, working as Manager of Shrivastav and Co., a Chartered Accountant firm, signed the audit report of Om Ltd. on behalf of Shrivastav & Co.
Answer:
Signature on Audit Report:
Section 145 of the Companies Act, 2013 requires that 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. where a firm including a LLP is appointed as an auditor of a company, only the partners who are CAs shall be authorized to act and sign on behalf of the firm.

In the present case, Mr. Rajendra, a fellow member of the Institute and a manager of M/s Shrivastav & Co., Chartered Accountants, cannot sign on behalf of the firm in view of the specific requirements of the Companies Act, 2013.

If any auditor’s report or any document of the company is signed or authenticated otherwise than in conformity with the requirements of Section 145, the auditor concerned and the person, if any, other than the auditor who signs the report or signs or authenticates the document shall, if the default is wilful, be punishable with a fine.

Question 56.
The members of C. Ltd. preferred a complaint against the auditor stating that he has failed to send the auditor’s report to them.
Answer:
Dispatch of Auditor’s Report to Shareholders:
Section 143 of the Companies Act, 2013 lays down the powers and duties of auditor. As per provisions of the law, it is no part of the auditor’s duty to send a copy of his report to members of the company.

The auditor’s duty concludes once he forwards his report to the company. It is the responsibility of company to send the report to every member of the company.

In case of Allen Graig and Company (London] Ltd., it was held that duty of the auditor after having signed the report to be annexed to a balance sheet is confined only to forwarding that report to the secretary of the company. It will be for the secretary or the director to convene a general meeting and send the balance sheet and report to the members (or another person] entitled to receive it.

Conclusion: Auditor cannot be held liable for the failure to send the report to the shareholders.

Question 57.
What are the duties of an auditor regarding disqualifications of directors under section 164(2) of Companies Act, 2013. (May 09 (8 Marks)]
Answer:
Auditor’s duties w.r.t. Director’s disqualifications:

• Section 143(3](g] of the Companies Act, 2013 imposes a specific duty on the auditor to report whether any director is disqualified from being appointed as directors under section 164(2] of the Companies Act, 2013.
• As per Section 164(2] of Companies Act, 2013, no person who is or has been a director of a company which
  (a) has not filed financial statements or annual returns for any continuous period of three financial years; or
  (b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.
• Rule 14(1] of Companies (Appointment and Qualification of Directors) Rules, 2014 requires every director to inform to the company concerned about his disqualification under Sec. 164(2), if any, in Form DIR-8 before he is appointed or re-appointed.
• The auditor is required to ensure whether the director has submitted DIR-8 to the company at the time of appointment or reappointment.
• Auditor may also request for the inspection of DIR-8 available with the company and obtain a copy of the same for the purpose of his record.

Question 58.
One of the directors of Hitech Ltd. is attracted by the disqualification under Section 164(2) of the Companies Act, 2013.
Answer:
Disqualification of a Director under section 164(2) of the Companies Act, 2013:

• Section 143(3)(g) of the Companies Act, 2013 imposes a specific duty on the auditor to report whether any director is disqualified from being appointed as directors under section 164(2) of the Companies Act, 2013.
• The auditor has to ensure that written representation have been obtained by the Board from each director that one is not hit by Section 164(2).

Conclusion: In this case, one of the director is attracted by disqualification u/s 164(2) of the Act, the auditor shall state in his report as per Sec. 143 about the disqualification of the particular director.

Question 59.
The Board of Directors of a company have filed a complaint with the 1CAI against their statutory auditors for their failing to attend the AGM of the Shareholders in which audited accounts were considered.
Answer:
Auditor’s Attendance at Annual General Meeting:

• Section 146 of the Companies Act, 2013 requires the auditor of a company to attend either by himself or through his qualified authorised representative to attend the general meeting, unless exempted.
• The said section provides that all notices and other communications relating to any general meeting of a company shall also be forwarded to the auditor.
• Further, it has been provided that the auditor shall have right to be heard at such meeting on any part of the business which concerns him as an auditor.

Conclusion: Complaint filed by the Board of Directors is valid if the auditor was not being exempted by the company.

Question 60.
Mr. X, a Director of M/s KP Private Ltd., is also a Director of another company viz., M/s GP Private Ltd., which has not filed the financial statements and annual return for last three years 2017-18 to 2019-20. Mr. X is of the opinion that he is not disqualified u/s 164(2) of the Companies Act, 2013, and auditor should not mention disqualification remark in his audit report.
Answer:
Disqualification of a Director under section 164(2) of the Companies Act, 2013:
Section 143(3)(g) of the Companies Act, 2013 imposes a specific duty on the auditor to report whether any director is disqualified from being appointed as director u/s 164(2) of the Companies Act, 2013.

As per provisions of Section 164(2), if a director is already holding a directorship of a company which has not filed the financial statements or annual returns for any continuous period of 3 financial years shall not be eligible to be reappointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

Conclusion: In this case, Mr. X is a director of M/s KP Private Ltd. as well as of M/s GP Private Ltd., And, M/s GP Private Ltd., has not filed the financial statements and annual return for last three years. Hence the provisions of section 164(2) are applicable to him and as such he is disqualified from directorship of both the companies. Therefore, the auditor shall report about the disqualification u/s 143(3)(g) of the Companies Act, 2013.

Question 61.
Comment: Contravene Ltd. appointed CA Innocent as an auditor for the company for the current financial year. Further the company offered him the services of actuarial, investment advisory and investment banking which was also approved by the Board of Directors. [MTP-Oct. 19]
Answer:
Services not to be rendered by the Auditor:
Section 144 of the Companies Act, 2013 prescribes certain services not to be rendered by the auditor. 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 which shall not include any of the following services (whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company), namely:

1. accounting and book keeping services;
2. internal audit;
3. design and implementation of any financial information system;
4. actuarial services;
5. investment advisory services;
6. investment banking services;
7. rendering of outsourced financial services;
8. management services; and
9. any other kind of services as may be prescribed.

Further section 141(3)(i) of the Companies Act, 2013 also disqualify a person for appointment as an auditor of a company who, directly or indirectly, renders any service referred to in Sec. 144 to the company or its holding company or its subsidiary company.

In the given case, CA Innocent was appointed as an auditor of Contravene Ltd. He was offered additional services of actuarial, investment advisory and investment banking which was also approved by the Board of Directors.

Conclusion: The auditor is advised not to accept the services as these services are specifically notified in the services not to be rendered by him as an auditor as per section 144 of the Act.

Question 62.
When can a company be said to have ‘Not maintained’ proper books of account? What is the role of the statutory auditor for the same?
or
The auditor report of company states that proper books of account as required by law have been maintained by the company. What is the role of statutory auditor of the company, when a company be said to have not maintained proper books of account? [May 15 (4 Marks}}
Or
Write short note on: Proper Books of Account as per Companies Act, 2013. [May 17 (4 Marks)]
Answer:
Auditor’s duties in case of non-maintenance of proper books of account:
Section 143(3) (b) of Companies Act, 2 013 requires that the auditor’s report shall state 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.

As per Section 128 of the Companies Act, 2013, every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which give a true and faif view of the state of the affairs of the company, including that of its branch office or offices, if any.

Such books shall be kept on accrual basis and according to the double entry system of accounting.

Conclusion: The Auditor is required to check that the company has complied with all the provisions related to maintenance of books of account prescribed under section 128. If the statutory auditor finds that the books are not maintained properly, he will have to modify his report and shall state the reasons for the same.

“ICAI Examiner Comments”
Many Candidates failed to explain the provisions of section 143(3)(b). Few candidates laid ^ stress on various books of account, records and document as per section 2(13).

Question 63.
Write short note on: Obligation of the statutory auditor to report frauds to the Central Government during the audit carried out under the Companies Act, 2013. [Nov. 15 (4 Marks)]
Or
An auditor observed a fraud committed by an employee of the company. State the manner and timing of reporting of the fraud by the auditor. [Nov. 16 (4 Marks)]
Or
You have been appointed statutory auditor of a company for the financial year ended 31st March, 2021 in place of the retiring auditor. During the course of audit, you observe that a fraud had been committed by a general manager who retired in March 2021. While going into further details, it was found that the fraud was going on since last 2-3 years and the total amount misappropriated was likely to exceed ₹ 100 lakhs. As statutory auditor, what would be your reporting responsibilities to the government? [Nov. 17 [5 Marks)]
Answer:
Auditor’s duties to report fraud to the Central Government:
Section 143 (12) of Companies Act, 2013 requires that if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed. For this purpose. Rule 13 prescribes the amount of ₹ 1 Cr. or more.

However, in case of a fraud involving lesser than the specified amount, i.e. below ₹ 1 Cr., the auditor shall report the matter to the audit committee constituted u/s 177 or to the Board in other cases within such time and in such manner as may be prescribed.

The companies, whose auditors have reported frauds to the audit committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the Board’s report in such manner as may be prescribed.

Rule 13 of Companies (Audit and Auditors) Rules, 2014 prescribes the manner of Reporting of Frauds in various cases. Accordingly:
(1) If an auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of ₹ 1 Cr. or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the CG.

(2) The auditor shall report the matter to the CG as under:
(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than 2 days of his knowledge of the fraud, seeking their reply or observations within 45 days;

(b) on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the CG within 15 days from the date of receipt of such reply or observations;

(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of 45 days, he shall forward his report to the CG along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations;

(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same;

(e) the report shall be on the letter-head of the auditor containing postal address, e-mail address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; and

(f) the report shall be in the form of a statement as specified in Form ADT-4.

(3) In case of a fraud involving amount less than ₹ 1 Cr., the auditor shall report the matter to Audit Committee constituted u/s 177 or to the Board immediately but not later than 2 days of his knowledge of the fraud and he shall report the matter specifying the following:
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.

(4) The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during the year shall be disclosed in the Board’s Report-
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.

“ICAI Examiner Comments”
The procedures to be followed as per Companies (Audit and Auditors) Rules, 2014 to report frauds have not been properly explained by examinees.

Question 64.
RX Ltd. is a sugar manufacturing company. The company appointed Mr. Suresh, a practicing cost accountant, to conduct cost audit of its cost records under section 148 of the Companies Act, 2013. While conducting audit, Mr. Suresh found some misstatement resulting into fraud committed by the officers of the company amounting ₹ 1.5 crore. However, he did not report the matter to the Central Government believing that liability for such reporting lies only with statutory auditor of the company Advise.
Answer:
Reporting of Fraud u/s 142(12) by a Cost Accountant:
Sec. 143(12) of the Companies Act, 2013 along with Rule 13 of the Companies (Audit and Auditors) Rules, 2014 provides that if auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of ₹ 1 crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government as per the prescribed procedure.

Sec. 143(14) of Companies Act, 2013 provides that the provisions related to reporting of fraud shall also apply, mutatis mutandis, to a cost accountant conducting cost audit u/s 148 of the Companies Act, 2013.

In the present case, Mr. Suresh, being the cost auditor of RX Ltd., found misstatement resulting into fraud amounting ₹ 1.5 crore committed by the officers of the company. He was required to report the fraud to the Central Government.

Conclusion: Mr. Suresh failed to perform his duties to report the fraud to C.G.

Question 65.
Write short note on: Auditor’s right to Lien as per Companies Act, 2013. [May 17 (4 Marks)]
Answer:
Auditor’s Right of Lien:

• Lien refers to the right of a person for lawful possession of somebody’s else property on which he has worked. Right of lien is exercised for non-payment of his dues for the work done.
• The auditors can exercise right of lien on the client’s books and documents in his possession for non-payment of fees by the client, for the work done on the books and documents.
• In respect of auditor exercising the lien, The Institute of Chartered Accountants of England and Wales has expressed a similar view subject to the following conditions:
  1. Documents must belong to the client who owes the money,
  2. These documents must come to the possession of the auditor on the client’s authority.
  3. The auditor can retain such documents, only if he has done work on such documents, on which fees have not been paid.

Note: As per Ethical Standard Board of ICAI, a chartered accountant cannot exercise lien over the client documents/records for non-payment of his fees.

“ICAI Examiner Comments”
Many candidates explained Right of Lien of Auditors in a general manner but most of the candidates failed to explain the Auditor’s Right to Lien in the context of Companies Act, 2013. Few candidates wrongly mentioned Rights of an auditor which was not required.

Cost Audit and Companies (Cost Records and Audit) Rules, 2014

Question 66.
Sugar Ltd. isa top sugar manufacturer and exporter in India operating from Noida Specific Economic ! Zone, Uttar Pradesh. Its revenue from sale/export for the immediate preceding year is given below:
Sale within India ₹ 1157 lakhs
Sale outside India (Export) ₹ 1353 lakhs
Total Revenue ₹ 2510 lakhs
Mr. X, the statutory auditor of Sugar Ltd., is of the view that the company is mandatorily required to include cost records in their books of account and consequently conduct cost audit. He also suggested the name of his friend, who is a Cost Accountant in Practice, for the purpose of such cost audit.

However, the management is of the view thatthe company neither required including cost records in their books of account nor conduct cost audit.

Being an expert in cost records and audit rules, you are required to guide the management in this regard.
Answer:
Applicability of provisions related to Cost Records and Audit:
The provisions relating to cost records and audit are governed by section 148 of the Companies Act, 2013 read with the Companies (Cost Records and Audit) Rules, 2014. The audit conducted under this section shall be in addition to the audit conducted under section 143.

Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 provides the classes of companies (including Foreign Companies) required to include cost records in their books of account if they are having turnover ₹ 35 Cr. or more during immediately preceding financial year. The said rule has also divided the list of companies into regulated sectors and non-regulated sectors. Company belonging to sugar industry is one of the types of companies prescribed under the regulated sectors.

Rule 4 of Companies (Cost Records and Audit) Rules, 2014 requires audit of cost records in case of regulated sector industries if annual turnover from all products and services in immediately preceding financial year is ₹ 50 Cr. or more and the turnover of individual product or service is ₹ 25 Cr. or more.

Rule 4 further provides that requirement of cost audit shall not apply to a company whose revenue from exports in foreign exchange exceeds 75% of total revenue or which is operating from a SEZ.

In the given case, Sugar Ltd., a sugar manufacturer and exporter in India, is operating from Noida Specific Economic Zone, Uttar Pradesh and its turnover for the immediate preceding year is just ₹ 25.10 Cr.

Conclusion: Sugar Ltd. is not required to include cost records in their books of account in accordance with Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 and no Cost audit is required.

Question 67.
XYZ Ltd., having place of business in Delhi, is engaged in the production, trading, import and export of orthopedic implants and pacemaker. The company’s revenue from export is usually in foreign currency. Its total revenue classification for the immediate preceding financial year is as below:
Intra-State Sale : ₹ 1400 lakhs
Inter-State Sale : ₹ 1550 lakhs
Export to US : ₹ 4900 lakhs
Export to UK : ₹ 6900 lakhs
Total Revenue : ₹ 14750 lakhs
The management of the company is of the opinion that the company is not required to maintain cost records in their books of account. Consequently, there is no need to appoint cost auditor and conduct cost audit. Comment.
Answer:
Applicability of provisions related to Cost Records and Audit:
The provisions relating to cost records and audit are governed by section 148 of the Companies Act, 2013 read with Companies (Cost Records and Audit) Rules, 2014. The audit conducted under this section shall be in addition to the audit conducted under section 143.

Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 provides the classes of companies (including Foreign Companies) required to include cost records in their books of account if they are having turnover ₹ 35 Cr. or more during immediately preceding financial year.

Rule 4 of Companies (Cost Records and Audit) Rules, 2014 requires audit of cost records in case of non-regulated sector industries if annual turnover from all products and services in immediately preceding financial year is ₹ 100 Cr. or more and the turnover of individual product or service is ₹ 35 Cr. or more.

Rule 4 further provides that requirement of cost audit shall not apply to a company whose revenue from exports in foreign exchange exceeds 75% of total revenue or which is operating from a SEZ.

In the given case, XYZ Ltd. is a foreign company and its total revenue for the immediate preceding financial year is ₹ 14750 lakhs, out of which, export, in foreign currency, comprises ₹ 11800 lakhs (₹ 4900 lakhs + ₹ 6900 lakhs). The proportion of the company’s export to its total revenue is 80% [(₹ 11800 lakhs/₹ 14750 lakhs)*100].

Conclusion: XYZ Ltd. is required to include cost records in their books of account in accordance with Rule 3 of the Companies (Cost Records and Audit) Rules, 2014.

However, the company is not required to conduct cost audit as its revenue from exports, in foreign exchange, exceeds 75 percent of its total revenue.

Question 68.
Electro Ltd. is engaged in generation of electricity for captive consumption through Captive Generating Plant The Company also maintain cost records in their books of account as required under Cost Records and Audit Rules. Mr. X, friend of Managing Director of the company, suggested name of his brother, who is a Cost Accountant in Practice, for the purpose of cost audit. However, the statutory auditor of the company, is of the view that the company is not legally required to conduct cost audit. Now, the Managing Director is in dilemma about the requirement of cost audit.
Being an expert in cost records and audit rules, you are required to guide in this regard. [RTP – Nov. 20]
Answer:
Applicability of provisions related to Cost Records and Audit:

Provisions relating to cost records and audit are governed by section 148 of the Companies Act, 2013 read with the Companies (Cost Records and Audit) Rules, 2014.

Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 provides the classes of companies, engaged in the production of goods or providing services, required to include cost records in their books of account. However, the requirement for cost audit under these rules shall not be applicable to a company which is covered under Rule 3, and,

1. whose revenue from exports, in foreign exchange, exceeds 75 per cent of its total revenue; or
2. which is operating from a special economic zone.
3. which is engaged in generation of electricity for captive consumption through Captive Generating Plant.

In the given case, Electro Ltd. is engaged in generation of electricity for captive consumption through Captive Generating Plant. Electro Ltd. is not required to conduct cost audit as it is falling under the exemption criteria.

Conclusion: The opinion of statutory auditor of the company regarding non-applicability of cost audit is correct and the management should follow the same.

Question 69.
X Ltd. is engaged in the production of Iron and Steel. A CA Firm ‘M/s M & Co.’ was appointed as the statutory auditor of X Ltd. for the current financial year. During the year, the management of the company realized that the company is required to maintain cost records in their books of account and get it audited. Therefore, in a general meeting, the members of the company appointed M/s M & Co. as the cost auditor of the company. You are required to examine the validity of appointment of M/s M & Co. as the cost auditor.
Answer:
Appointment of Statutory Auditor as Cost Auditor:
As per Section 148(3) of the Companies Act,-2013 read with Rule 6 of Companies (Cost Records and Audit) Rules, 2014 –

1. in the case of companies which are required to constitute an audit committee, the Board shall appoint an individual, who is a cost accountant in practice, or a firm of cost accountants in practice, as cost auditor on the recommendations of the Audit committee;
2. in the case of other companies which are not required to constitute an audit committee, the Board shall appoint an individual who is a cost accountant in practice or a firm of cost accountants in practice as cost auditor.

Sec. 148(3) also provides that no person appointed under section 139 as an auditor of the company shall be appointed for conducting the audit of cost records.

In the given case, the members of X Ltd. in general meeting appointed M/s M & Co., the statutory auditor of the company, as the cost auditor.
Therefore, the appointment of the CA firm as cost auditor made by the company is not valid.

Conclusion: Appointment is not valid as a CA firm cannot be appointed as cost auditor. The Board shall appoint a cost accountant in practice or a firm of cost accountants in practice to conduct such cost audit.

Question 70.
On 30.08.2020, the Board of SRE Ltd. proposed to appoint Mr. Elex, a Cost Accountant in practice, for conducting cost audit for the financial year 2020-21. The management came to know about the certificate which needs to be obtained from the auditor before such appointment is made. However, the management is unaware about what certification is required from the auditor. Please guide.
Answer:
Certificate to be obtained from Cost Auditor:
As per Rule 6 of Companies (Cost Records and Audit) Rules, 2014, Companies required to get the cost records audited, shall within 180 Days of the commencement of every financial year, appoint a cost auditor. Before such appointment is made, the written consent of cost auditor to such appointment and a certificate from him or it shall be obtained.

The Cost Auditor appointed shall submit 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 Cost and Works Accountants Act, 1959 and the Rules or regulations made thereunder.

(b) the individual or the firm, as the case may be, satisfies the criteria provided in Sec. 141, so far as may be applicable.

(c) the proposed appointment is within the limits laid down by or under the authority of the Act.

(d) the list of proceedings against the cost 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.

Question 71.
Elucidate the provisions relating to submission of Cost Audit Report to the Board and the Central Government as per the Companies Act, 2013.
Answer:
Submission of Cost Audit Report:
Sec. 148(5) of Companies Act, 2013 requires the cost auditor to submit the report on the audit of cost records to the Board of Directors of the company. Sec. 148(6) provides that the company shall within 30 days from the date of receipt of a copy of the cost audit report furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein.

Sec. 148(7) of Companies Act, 2013 provides that if, after considering the cost audit report and the information and explanation furnished by the company, the Central Government is of the opinion that any further information or explanation is necessary, it may call for such further information and explanation and the company shall: arnish the same within such time as may be specified by that Government. , –

Rule 6 of Companies (Cost Records and Audit) Rules, 2014 provides the following in this regard:
a. Every cost auditor, who conducts an audit of the cost records of a company, shall submit the cost audit report along with his or its reservations or qualifications or observations or suggestions, if any, in Form CRA-3.

b. Every cost auditor shall forward his report to the Board of Directors of the company within a period of 180 days from the closure of the financial year to which the report relates and the Board of Directors shall consider and examine such report particularly any reservation or qualification contained therein.

c. Every company covered under these rules shall, within a period of thirty days from the date of receipt of a copy of the cost audit report, furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein, in Form CRA-4 along with specified fees.

Question 72.
Pearl Ltd. is an exporter of precious and semi-precious stones. The turnover of the company is Rs. 150 crores, out of which Rs. 105 crores are from export business and remaining Rs. 45 crores from domestic sales. Amount received from export business is all in foreign currency. Directors of Pearl Ltd. is of the opinion that cost audit is not applicable to their company as maximum revenue has been generated from export business. Give your opinion. [May 19 – New Syllabus (4 Marks)]
Answer:
Applicability of Cost Audit:

• Provisions relating to cost audit are governed by section 148 of the Companies Act, 2013 read with the Companies (Cost Records and Audit) Rules, 2014.
• Rule 4 of Companies (Cost Records and Audit) Rules, 2014 requires audit of cost records in case of non-regulated sector industries if annual turnover from all products and services in immediately preceding financial year is Rs. 100 Cr. or more and the turnover of individual product or service is Rs. 35 Cr. or more.
• Rule 4 further provides that requirement of cost audit shall not apply to a company whose revenue from exports, in foreign exchange, exceeds 75 per cent of its total revenue.
• In the present case, the turnover of the company is Rs. 15 0 crores, out of which Rs. 105 crores are from export business and remaining Rs. 45 crores from domestic sales. Amount received from export business is all in foreign currency. Revenue from exports in foreign exchange amounts to 70% of total revenue.

Conclusion: Opinion of the Directors that cost audit is not applicable to their company as maximum revenue has been generated from export business is not valid as total revenue from exports in foreign exchange is less than 50% of total revenue. Hence company is required to get its cost records audited.

It is assumed that figures of revenue are given for immediately preceding financial year.

Note: Suggested Answer oflCAI refer Rule 3 instead of Rule 4. Rule 3 is related to applicability of cost records. Provisions related with Cost Audit are covered in Rule 4.

Branch Audit

Question 73.
As a Statutory Auditor, how would you deal with the following: P Ltd. of whom you are the Statutory Auditor appoints M/s XYZ as Branch Auditors for one of its branches. M/s XYZ conducted the audit of the branch without visiting the branch and instead getting the books at the H.O. M/s XYZ has submitted their Branch Audit Report to you.
Answer:
Duties of Company Auditor w.r.t. Branches not audited by him:
As per Sec. 143(8) of the Companies Act, 2013, the accounts of a branch office of a company may be audited either by the company’s auditor or by any other person qualified for appointment as auditor of the company.

The branch auditor shall prepare a report on the accounts of the branch examined by him and send it to the auditor of the company who shall deal with it in his report in the manner as he considers necessary.

It is however not necessary for branch auditor to visit the branch and conduct the audit only at branch’s premises. It is a matter of professional judgment for the branch auditor to decide as to whether he needs to visit the branch.

As per SA 600 “Using the work of another auditor”, the principal auditor is not required to evaluate professional competence because branch auditor happens to be member of 1CAI. The statutory auditor is also required to deal with the Branch Auditor’s report in the manner, he considers necessary.

Under the present circumstances the statutory auditor is entitled to rely on the work of branch auditor unless there are special circumstances to make it essential for him to visit the branch and examine the books of account and voucher records.

Conclusion: The statutory auditor is required to deal with branch auditor’s report in the manner it considers fit under the circumstances.

Question 74.
X Ltd. has a branch office in Malaysia. The company has appointed Mr. X, who is qualified to audit accounts as per Malaysian laws. Mr. Z, the statutory auditor objects to the same, contending that he alone can audit the branch office accounts. Discuss.
Answer:
Eligibility criteria for appointment as Branch Auditor
As per Sec. 143(8] of the Companies Act, 2013, where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company’s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country.

Hence, a company can appoint as auditor of a foreign branch an accountant duly qualified to act as an auditor in accordance with the laws of the foreign country.

Conclusion: Mr. Z contention that he alone can audit the branch office accounts is not valid.

Question 75.
Bhishm Limited decided to appoint Mr. Rajvir, chartered accountant, as the branch auditor for the audit of its Lucknow branch accounts for the year 2020-21. The decision to appoint branch auditor was taken by way of Boa rd Resolution in the meeting of Board of Directors of the company, held in April 2020, subject to shareholders’ approval in AGM of the company scheduled to be held in June 2020. Meanwhile, the Principal Auditor of the company raised an objection that the branch auditor cannot be appointed without his consent. Advise, whether the objection raised by company auditor is valid. , [RTP-Nov.19]
Answer:
Appointment of Branch Auditor:
As per Sec. 143(8] of the Companies Act, 2013, where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company’s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country.

In the instant case, Bhishm Limited decided to appoint Mr. Rajvir, chartered accountant, as the branch auditor for the audit of its Lucknow branch accounts and the decision to appoint branch auditor was taken by way of Board Resolution in the meeting of Board of Directors of the company subject to shareholders’ approval in AGM of the company.

Conclusion: Objection raised by company auditor is not valid as per section 143(8) of the companies Act, 2013 and the Board has authority to appoint branch auditor but should be approved by shareholders in General Meeting.

Question 76.
M/s. Seeman & Co. had been the company auditor for Amudhan Company Limited for the year 2020-21 The company had three branches located at Chennai, Delhi and Mumbai. The audits of branches-Chennai, Delhi were looked after by the company auditors themselves. The audit of Mumbai branch had been done by another auditor M/s Vasan & Co., a local auditor situated at Mumbai.

The branch auditor had completed the audit and had given his report too. After this, but before finalization, the company auditor wanted to visit the Mumbai branch and have access to the inventory records maintained at the branch. The management objects to this on the grounds of the company auditor is transgressing the scope of audit areas agreed. Comment.
Answer:
Right of Access of Company Auditor for Branch Records:
As per Sec. 143(8] of the Companies Act, 2013 the audit of the branches can be done by the company auditor himself or by another auditor. Even where, the branch accounts are audited, the company auditor has right to visit the branch if he deems it necessary to do so for the performance of his duties as auditor.

Company Auditor has also right of access at all times to the books and account and vouchers of the company maintained at the branch office. He can appropriately deal with the report of the branch auditor in framing his main report. He will disclose how he had dealt with the branch audit report.

In this case, the audits of two branches were done by the company auditor and one branch was done by a separate branch auditor.

Conclusion : Management’s objection that the company auditor is transgressing the scope of audit areas agreed, is absolutely, wrong. The right of company auditor in visiting and accessing the records of branch cannot be forfeited. Even where the branch accounts are audited by another local auditor, the company auditor has right to visit the branch and can have access to the books and vouchers of the company maintained at the branch office.

Question 77.
A company has a branch office which recorded a turnover of ₹ 1,90,000 in the financial year 202021. No audit of the branch has been carried out. The statutory auditor of the company has made no reference of the above branch in his report. The total turnover of the company is ₹ 10 crores for the year 2020-21. Comment.
Or
A Ltd. is a Chennai based company. The total turnover of the company is ₹ 10 crores for the year 2020-2li The company has a branch office at an area which was recently affected by flood. The transportation services are not available due to destruction caused by flood. The branch office recorded turnover of ₹ 1,50,000 in the Financial Year 2020-21. No audit of branch has been carried out. The statutory auditor of the company has made no reference of the above branch in his report. Comment. [May 14 (4 Marks)]
Answer:
Requirement of Branch Audit:
As per section 143(8) of the Companies Act, 2013 if a company has a branch office, the accounts of that office shall be audited either by the auditor appointed for the company or by any other person qualified for appointment as an auditor of the company, or where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company’s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country.

Therefore, if any office is described by the company as branch office, the company has to get its branch audited by a person specified u/s 143(8).

In case accounts of the branch has not been audited, company’s auditor is required to mention this fact in the audit report and deal appropriately.

Conclusion: Company’s auditor is required to state the fact of non-audit of branch office in his report and deal appropriately.

Question 78.
Lakshya Ltd. has a branch office located outside India. Company is in the process of appointment of non-Chartered Accountant as an auditor but otherwise qualified person from country where the branch office is situated. Statutory auditor is of the opinion that non-Chartered Accountant cannot be appointed as branch auditor. Comment.

You are also required to discuss the applicability of SA 600 using the work of another auditor by the head office auditor in regard to branch located outside India, if non-Chartered Accountant is appointed.
Answer:
Eligibility criteria for appointment as Branch Auditor
As per Sec. 143(8) of the Companies Act, 2013, where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company’s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country.

Hence, a company can appoint as auditor of a foreign branch an accountant duly qualified to act as an auditor in accordance with the laws of the foreign country.

Conclusion: Contention of statutory auditor that non-Chartered Accountant cannot be appointed as auditor is not valid.

Applicability of SA 600:
SA 600 “Using the work of another Auditor” deals with the principal auditor’s responsibility in relation to his use of the work of the other auditor. SA 600 provides the following:

When planning to use the work of another auditor, the principal auditor should consider the professional competence of the other auditor in the context of specific assignment if the other auditor is not a member of the ICAI.

The principal auditor should perform procedures to obtain sufficient appropriate audit evidence, that the work of the other auditor is adequate for the principal auditor’s purposes, in the context of the specific assignment.

The principal auditor should consider the significant findings of the other auditor.

When the principal auditor has to base his opinion on the financial information of the entity as a whole relying upon the statements and reports of the other auditors, his report should state clearly the division of responsibility for the financial information of the entity by indicating the extent to which the financial information of components audited by the other auditors have been included in the financial information of the entity, e.g., the number of divisions/branches/ subsidiaries or other components audited by other auditors.

Salient Features of Audit of Limited Liability Partnerships (LLP Audit)

Question 79.
Write a short note on: Books of Account to be maintained by a Limited Liability Partnership.
Answer:
Books of Account to be maintained by a LLP:
As per Sec. 34 of LLP Act, 2008, LLP shall maintain such proper books of account as may be prescribed relating to its affairs for each year of its existence. Books may be maintained on cash basis or accrual basis and according to double entry system of accounting. Books shall be maintained at registered office for such period as may be prescribed.

As per Rule 24 of LLP Rules, 2009, the books of account shall contain:
(a) particulars of all sums of money received and expended by the LLP and the matters in respect of which the receipt and expenditure takes place;
(b) a record of the assets and liabilities of the LLP;
(c) statements of cost of goods purchased, inventories, W1P, finished goods and cost of goods sold; and
[d) any other particulars which the partners may decide.

The books of account which a LLP is required to keep shall be preserved for eight years from the date on which they are made.

Question 80.
Write a short note on: Statutory provisions as to Audit of Limited Liability partnerships.
Answer:
Statutory Provisions as to Audit of LLP:
As per Sec. 34 of LLP Act, 2008, accounts of LLP shall be audited in accordance with such rules as may be prescribed.

Rule 24 of LLP Rules, 2009 provides the following in relation to audit:

• Requirement of Audit: A LLP whose turnover does not exceed, in any financial year, ₹ 40 Lacs, or whose contribution does not exceed ₹ 25 Lacs shall not be required to get its accounts audited. If partners of such LLP decide to get the accounts of such LLP audited, the accounts shall be audited in accordance with these rules.
• Eligibility for auditor: A person shall not be qualified for appointment as an auditor of a LLP unless he is a Chartered Accountant in practice.
• Period of Appointment: Auditor of a LLP shall be appointed for each financial year of the LLP for auditing its accounts.
• Appointment of auditor by designated partner: The designated partners may appoint an auditor:
  (a) at any time for the first financial year but before the end of the first financial year,
  (b) at least 30 days prior to the end of each financial year (other than the first financial year),
  (c) to fill a casual vacancy in the office of auditor, including in the case when the turnover or contribution of a LLP exceeds the limits, or
  (d) to fill up the vacancy caused by removal of an auditor.
• Appointment of auditor by partner: Partners may appoint an auditor where the designated partners have power to appoint and have failed to appoint.
• Tenure of Auditor: Auditor shall hold office in accordance with the terms of his or their appointment and shall continue to hold such office till the period the new auditors are appointed, or they are re-appointed.

Question 81.
List the benefits that arise to LLP from getting the accounts audited.
Answer:
Benefits that arise to LLP from getting the accounts audited:
(a) Detection of errors & frauds
(b) Verification of financial statements
(c) Resolving disputed among the partners in relation to accounting matters.
(d) Arranging finance from banks & financial institutions.
(e) Improved management of the LLP
(f) Settlement of accounts between partners at the time of admission, death, retirement, insolvency, insanity, etc

Question 82.
Briefly describe the auditor’s duty regarding audit of LLP
Answer:
Auditor’s duty regarding audit of LLP:
(a) Auditor should obtain instructions in writing as to the work to be performed by him.
(b) Auditor should read the LLP agreement & note the following provisions

• Nature of the business of LLP
• Capital contributed by each partner
• Interest in respect of capital contributions
• Duration of partnership
• Drawings allowed to the partners
• Salaries, commission etc. payable to partners
• Rights & duties of partners
• Method of settlement of accounts between partners at the time of admission, retirement, admission etc.
• Any loans advanced by the partners
• Profit sharing ratio

(c) Auditor should report (a) Whether the records reflects true and fair view (b) Whether he obtains all information & explanation (c) whether any restriction/limitation imposed upon him.

(d) If minute book is being maintained, auditor shall refer it for any resolution passed regarding the accounts.

Question 83.
MKc LLP is a newly set up LLP (Limited Liability Partnership). The operations of the LLP have been picking up and management is currently in the process of setting up processes and procedures in place. As per the understanding of the management of the LLP, its accounts would not be required to be audited mandatory because of its operations but still the management has decided that they would get the accounts audited voluntarily. In this regard/ the management would like to understand some of the aspects which they should consider not only limited to audit but also about the maintenance of books of account as per the relevant laws. Please advise. [RTP-May 19]

Guidance Note on Internal Financial Control over Financial Reporting

Question 84.
Explain the terms:
(i) ‘Internal Financial Control’ and
(ii) ‘Internal Financial Control’ over ‘Financial Reporting’. [Nov. 18-Old Syllabus (6 Marks)]
Answer:
Internal Financial Control and Internal Financial Control over Financial Reporting:
(i) Internal Financial Control:
Explanation to Sec. 134(5) of Companies Act, 2013 defines the term Internal Financial Controls as the policies and procedures adopted by the company for ensuring:

• Orderly and efficient conduct of its business, including adherence to Company’s policies,
• Safeguarding of its assets,
• Prevention and detection of frauds and errors,
• Accuracy and completeness of the accounting records, and
• Timely preparation of reliable financial information.

(ii) Internal Financial Control over Financial reporting:
Guidance Note on Internal Financial Control over Financial Reporting provides the guidance as to the concept of Internal financial control over financial reporting. Accordingly, –

Internal Financial Control over Financial Reporting is a Process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A Company’s internal financial control over financial reporting includes those policies and procedures which pertain to the maintenance of the records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company.

It provides reasonable assurance that transactions are recorded as necessary to permit preparation of financial statement in accordance with generally accepted accounting principles, and those receipts and expenditures of the company are being made only in accordance with authorizations of management and director of the company.

It provides reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effects of the financial statement.

Miscellaneous

Question 85.
X Ltd. issued 10,000 shares of face value of ₹ 10 each at a premium of ₹ 450 each in May, 2020. The company received the stated minimum amount in the prospectus and transferred a sum equal to the aggregate amount of the premium received on shares (i.e. ₹ 45 lakhs) to the ‘Securities Premium Account*. Unfortunately, in the month of July, the godown of the company caught fire and stock worth ₹ 40 lakhs burnt to ashes. Now, the management desires to adjust the loss due to fire against the said premium account. Comment.
Or ”
X Ltd. is a sick company and has accumulated losses of ₹ 10 crores. The company has ₹ 12 crores in its Securities Premium Account. The Management desires to adjust the accumulated losses against the Securities premium balance. Advise the company giving your reasons. [RTP – Nov. 18]
Answer:
Application of Securities Premium Account:

• As per Section 52 of the Companies Act, 2013, where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to an account called “Securities Premium Account”.
• The securities premium account may be applied by the company
  1. towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;
  2. in writing off the preliminary expenses of the company;
  3. in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;’
  4. in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or
  5. for the purchase of its own shares or other securities under section 68.
• In view of these provisions of the Companies Act, 2013, it is not permitted to adjust its losses against the securities premium account.

Conclusion: X Ltd. is not permitted to adjust its loss against the securities premium account by virtue of provisions of Section 52 of Companies Act, 2013.

Question 86.
Mr. X is a whole-time director of Manthan Ltd. who has a very good relation with the Director (Operations) of the company. Consequently, he entered into a purchase contract for supply of goods of ₹ 5,00,000 with the company without obtaining prior consent of the Board. What is the responsibility of the auditor in relation to the Companies Act, 2013?
Answer:
Auditor’s Responsibility in relation to Director’s contract with companies:
As per Section 188 of the Companies Act, 2013, no company shall enter into any contract or arrangement with a related party with respect to sale, purchase or supply of any goods or materials, except with the consent of the Board of Directors given by a resolution at a Board Meeting.

First proviso to Sec. 188 provides that in the case of a company having specified paid-up share capital, or transactions exceeding prescribed sum, no contract or arrangement shall be entered into except with the prior approval of the company by a resolution.

Third proviso to Sec. 188 provides that Sec. 188 is not applicable to any transactions entered into by the company in ordinary course of business other than transactions which are not on an arm’s length price.

Sec. 189 of Companies Act, 2013 requires that particulars of such contracts or arrangements shall be maintained in one or more registers.

Section 184 of the Companies Act, 2013 requires every director who is in any way whether directly or indirectly interested in a contract or proposed contract shall disclose the nature of his interest at the meeting of the Board in which such contract is discussed and shall not participate in such meeting.

In the present case one of the director of the company has entered into a contract for supply of goods worth ₹ 5,00,000 without obtaining consent of the Board. Auditor is required to determine whether the transactions is in ordinary course of business or entered on arm’s length price.

Conclusion: Auditor is required to ensure compliance of Sections 184,188 & 189 of Companies Act, 2013. In case of any violation, auditor is required to state the fact in his audit report accordingly.

Question 87.
Mr. X, Director of ABC Ltd. made a purchase contract for ? 10,00,000 with the company. Comment. [Nov. 10 (5 Marks)]
Answer:
Auditor’s duties in case of director’s contract with the company:
Section 184 of the Companies Act, 2013 requires every director who is in any way whether directly or indirectly interested in a contract or proposed contract shall disclose the nature of his interest at the meeting of the Board in which such contract is discussed and shall not participate in such meeting.

As per Section 188 of the Companies Act, 2013, no company shall enter into any contract or arrangement with a related party with respect to sale, purchase or supply of any goods or materials, except with the consent of the Board of Directors given by a resolution at a Board Meeting.

First proviso to Sec. 188 provides that in the case of a company having specified paid-up share capital, or transactions exceeding prescribed sum, no contract or arrangement shall be entered into except with the prior approval of the company by a resolution.

Third proviso to Sec. 188 provides that Sec. 188 is not applicable to any transactions entered into by the company in ordinary course of business other than transactions which are not on an arm’s length price.

Sec. 189 of Companies Act, 2013 requires that particulars of such contracts or arrangements shall be maintained in one or more registers.

In the present case one of the director of the company has entered into a purchase contract worth ? 10,00,000 with the company. Auditor is required to determine whether the transactions is in ordinary course of business or entered on arm’s length price.

Conclusion: Auditor is required to ensure compliance of Sections 184,188 & 189 of Companies Act, 2013. In case of any violation, auditor is required to state the fact in his audit report accordingly.

Question 88.
M/s IT Limited has prepared the financial statements for the year 2019-20 and mentioned in the significant accounting policies that depreciation on tangible fixed assets is provided on the straightline method over the useful lives of the assets as estimated by the management. The company has ignored the useful lives of assets mentioned in Schedule 11 of the Companies Act, 2013. As statutory auditor of the company how would you deal with this? [Nov. 15 (4 Marks)]
Answer:
Consideration of useful lives estimated by management:
Schedule II to the Companies Act, 2013 defines the useful life of an asset is the period over which an asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by the entity.

The useful life of an asset shall not be longer that the useful life specified in the Part C of Schedule II. If, however where a company uses a different useful life justification for the difference shall be disclosed in the financial statement with justification supported by technical device.

In the present case, auditor is required to examine the appropriateness of disclosures made in the financial statements with respect to difference in estimated useful life. If appropriate not given in the financial statements, auditor need to qualify his report stating the appropriate facts.

Conclusion: Company may use different useful lives, but disclosure is required in financial statements with justification supported by technical advice.

“ICAI Examiner Comments”
Many examinees have not referred to Section 129 of the Companies Act, 2013. They also failed to mention that if the justification has not been disclosed by the management for consideration of different useful life, then the auditor should qualify his report accordingly. Some ^ examinees were not aware about Schedule II of the Companies Act, 2013.

Question 89.
Asan auditor of DEF Ltd., you notice certain and the ‘Offer document’ for the proposed issue of securitIes. The company explains that the same is due to certain adjustments as per the SEBI (Disclosure and Investor Protection) Guidelines. What are such disclosures and adjustments to be incorporated in the financial statements included In the ‘Offer document’? [Nov. 17 (6 Marks)]
Answer:
Disclosures and Adjustments to be incorporated in the financial statements included in the Offer Document:
(A) Disclosures:

1. Principal terms of loan and assets charged as security: Brief terms and conditions of the term loans including re-schedulement, prepayment, penalty, default, etc.
2. Age-wise analysis of sundry debtors.
3. Aggregate book value of quoted investments as well as aggregate market value of quoted investments.
4. All significant accounting policies and standards followed in the preparation of the financial statements
5. Auditors’ qualifications.

(B) Adjustments:
Statements of Assets and Liabilities and Profit and Loss or any other financial information shall be incorporated after making the following adjustments, wherever quantification is possible:
1. Adjustments/rectification for all incorrect accounting practices or failures to make provisions or other adjustments which resulted in audit qualifications.

2. Material amounts relating to adjustments for previous years shall be identified and adjusted in arriving at the profits of the years to which they relate irrespective of the year in which the event triggering the profit or loss occurred.

3. Where there has been a change in accounting policy, the profits or losses of the earlier years (required to be shown in the offer document] and of the year in which the change in the accounting policy has taken place shall be recomputed to reflect what the profits or losses of those years would have been of a uniform accounting policy was followed in each of these years.

4. If an incorrect accounting policy is followed, the re-computation of the financial statements shall be in accordance with correct accounting policies.

5. Statement of profit or loss shall disclose the profit or the loss arrived at before considering extraordinary items and after considering the profit or loss from extraordinary items.

6. The statement of assets and liabilities shall be prepared after deducting the balance outstanding on revaluation reserve account from both fixed assets and reserves and the net worth arrived at after such deductions.

Note: SEBI(DIP) Guidelines replaces by SEBI (ICDR) Regulations in the year 2009. Answer is given on the basis of SEBI (ICDR) Regulations, 2009

“ICAI Examiner Comments”
Majority of the examinees have not attempted this question and those who attempted were not aware of the topic. Examinees were not aware of the adjustments to be incorporated in the Financial Statements included in the Offer Document as per SEBI Guidelines. Few examinees have misunderstood the question and answered in the context of SAE 3420.

Question 90.
Beneath Minerals Limited is a Public-Sector company engaged in extraction of minerals from land. It has to pump out water in the first layer of the soil if the minerals are to be excavated. The company pumps out water and diverts the water through a water course constructed by it to nearby villages and the water is allowed to be used by villagers for drinking purposes. The cost of construction of water course amounted to ₹ 5.2 5 crores and the company had disclosed this amount as CSR expenses in the statement of profit and loss. Comment. [May 18 – New Syllabus (5 Marks)]
Answer:
Treatment of expenses in normal course of business as CSR Expense:
As per Section 135 of Companies Act, 2013, the Board of directors of every company referred to inSec.l35(l) sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent of the average ngt profits of the company made during the three immediately preceding financial years, in pursuance-of its Corporate Social Responsibility Policy.

For this purpose, Schedule VII of Companies Act, 2013 prescribes the activities which may be included in CSR Activities. Ministry of Corporate Affairs also time to time, through various notifications provide clarification as to what kind of expenses will be covered in CSR activities.

However, any expense which is incurred by a company in the normal course of its business activities cannot be considered as CSR Expense.

In the present case, company pump out the water from the soil and construct a water course so as to divert the water to nearby villages and water is being used by villagers for drinking purposes. This kind of expenditure cannot be treated as expenditure incurred for CSR as the expense is being incurred as incidental to its business activities.

Conclusion: Though expenditure incurred in arranging drinking facilities qualifies as CSR expense, but any expenditure incurred in the normal course of business activity is not classified as CSR Expense. In the present case, pumping out the water is an essential part of business activity and for its disposal, a water course is being constructed. So, expenditure cannot be classified as CSR Expense and hence auditor should state the fact in the report and qualify the report.

Note: Alternative answer is possible with different assumptions.