chapter 10 : treasury and cash...

Prof. Bhambwani’sRELIABLE CLASSES/C.A. INTERMEDIATE/AUDITING /CO.AUDIT

COMPANY AUDIT 1Q1. EXPLAIN ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF AN

AUDITOR The provisions relating to eligibility, qualifications and disqualifications of an auditor are governed by section 141 of the Companies Act, 2013 (hereinafter referred as the Act). The main provisions are stated below:

(1) A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant.

It may be noted that a firm whereof majority of partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company.

(2) Where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are authorised to act and sign on behalf of the firm.

(3) Under sub-section (3) of section 141 along with Rule 10 of the Companies (Audit and Auditors) Rules, 2014 (hereinafter referred as CAAR), the following persons shall not be eligible for appointment as an auditor of a company, namely-(a) a body corporate other than a limited liability partnership registered under the Limited

Liability Partnership Act, 2008;(b) an officer or employee of the company;(c) a person who is a partner, or who is in the employment, of an officer or

employee of the company;(d) a person who, or his relative or partner –(i) 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;It may be noted that the relative may hold security or interest in the company of face value not exceeding ` 1,00,000.It may also be noted that the condition of ` 1,00,000 shall, wherever relevant, be also applicable in the case of a company not having share capital or other securities.Students may also note that in the event of acquiring any security or interest by a relative, above the threshold prescribed, 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 following points merit consideration in this regard: The value of shares of ` 1,00,000 that can be hold by relative is the face value not the market

value. The limit of ` 1,00,000 would be applicable where the securities are held by the relative of an

auditor and not where the securities are held by an auditor himself or his partner. In case of an auditor or his partner, securities of even small value shall be a disqualification.

Grace period of 60 days for corrective action shall apply only in respect of securities held by

relatives. This would not apply to auditor or his partner.

(e) a person whose relative is a Director or is in the employment of the Company as a director or key

Managerial Personnel.(f) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its

1


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 companies, dormant companies, small companies and private companies having paid- up share capital less than ` 100 crore.

(g) a person who has been convicted by a Court of an offence involving fraud and a period of ten years has not

elapsed from the date of such conviction.(h) any person whose subsidiary or associate company or any other form of entity, is

engaged as on the date of appointment in consulting and specialized services as provided in section 144.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:

(i) accounting and book keeping services;(ii) internal audit;(iii) design and implementation of any financial information system;(iv) actuarial services;(v) investment advisory services;(vi) investment banking services;(vii) rendering of outsourced financial services;(viii) management services; and(ix) any other kind of services as may be prescribed.It may be noted that an auditor or audit firm who or which has been performing any non-audit services on or before the commencement of this Act shall comply with the provisions of this section before the closure of the first financial year after the date of such commencement. Further, in case of auditor being an individual, either himself or through his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual, shall be termed as rendering of services directly or indirectly by the auditor; and in case of auditor being a firm, either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners, shall be termed as rendering of services directly or indirectly by the auditor.

APPOINTMENT OF AUDITORSection 139 of the Companies Act, 2013 contains provisions regarding Appointment of Auditors. Discussion on appointment of auditors may be grouped under two broad headings-

I. Appointment of First Auditors.

2


II. Appointment of Subsequent Auditors.

2.1 Appointment of First Auditor2.1.1 Appointment of First Auditors in the case of a company, other than a Government Company

As per Section 139(6),the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within 30 days from the date of registration of the company.

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.Appointment of First Auditors in the case of Government CompanyA “Government company” is a company in which not less than 51% of the paid-up share capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government companySection 139(7) provides that in the case of a Government company or any other company owned or controlled, directly or indirectly, 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, the first auditor shall be appointed by the Comptroller and Auditor-General of India within 60 days from the date of registration of the company.

In case the Comptroller and Auditor-General of India does not appoint such auditor within the above said period, the Board of Directors of the company shall appoint such auditor within the next 30 days. Further, in the case of failure of the Board to appoint such auditor within next 30 days, it shall inform the members of the company who shall appoint such auditor within 60 days at an extraordinary general meeting. Auditors shall hold office till the conclusion of the first annual general meeting.

3


Appointment of Subsequent Auditor/Reappointment of Auditor2.2.1 Appointment of Subsequent Auditors in case of Non-Government

CompaniesSection 139(1) of the Companies Act, 2013 provides that every company shall, at the first annual general meeting appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting.

The following points need to be noted in this regard-(i) The company shall place the matter relating to such appointment of ratification by member at every Annual

General Meeting.(ii) Before such appointment is made, the written consent of the auditor to such appointment, and a certificate

from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor.

(iii) The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141.(iv) The company shall inform the auditor concerned of his or its appointment, and also file a notice of such

appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.

2.2.2 Appointment of Subsequent Auditors in case of Government CompaniesAs per Section 139(5) in the case of a Government company or any other company owned or controlled, directly or indirectly, 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, the Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of 180 days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting.

2.3 Filling of a Casual VacancyAs per Section 139(8), any casual vacancy in the o ce of an auditor shall-ffi

(i) In the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within 30 days.If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting.

(ii) In the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within 30 days.It may be noted that in case the Comptroller and Auditor-General of India does not fill the vacancy within the said period the Board of Directors shall fill the vacancy within next 30 days.

4


2.3.1 Casual Vacancy by Resignation

As per section 140(2) 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 (as per Rule 8 of CAAR) with the company and the Registrar, and in case of the companies referred to in section 139(5) i.e. Government company, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation. In case of failure the auditor shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees as per section 140(3).Other Important Provisions Regarding Appointment of Auditors(1) A retiring auditor may be re-appointed at an annual general meeting, if-(a) he is not disqualified for re-appointment;(b) he has not given the company a notice in writing of his unwillingness to be re-appointed; and(c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly

that he shall not be re-appointed.(2) Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.

Q4. EXPLAIN THE POWERS/RIGHTS OF AUDITORSThe auditor has the following powers/rights while conducting an audit:

(a) Right of access to books, etc.–Section 143(1) of the Act provides that the auditor of a company, at all times, shall have a right of access to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and he is entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor.It may be noted that according to section 2(59) of the Act, the term ‘officer’ includes any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act;The phrase ‘books, accounts and vouchers’ includes 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; memoranda books, e.g., inventory books, costing records and the like may also be inspected by the auditor. Similarly the term ‘voucher’ includes all or any of the correspondence which may in any way serve to vouch for the accuracy of the accounts. Thus, the right of access is not restricted to books of account alone and it is for the auditor to determine what record or document is necessary for the purpose of the audit.

The right of access is not limited to those books and records maintained at the registered or head office so that in the case of a company with branches, the right also extends to the branch records, if the auditor considers it necessary to have access thereto as per Section143(8).

(b) Right to obtain information and explanation from officers - This right of the auditor to obtain from the officers of the company such information and explanations as he may think necessary for the performance of his duties as auditor is a wide and important power. In the absence of such power, the auditor would not be able to obtain details of amount collected by the directors, etc. from any other company, firm or person as well as of any benefits in kind derived by the directors from the company, which may not be known from an examination of the books. It is for the auditor to decide the matters in respect of which information and explanations are required by him. When the auditor is not provided the information required by him or is denied access to books, etc., his only remedy would be to report to the members that he could not obtain all the information and explanations he had

5


required or considered necessary for the performance of his duties as auditors.(c) Right to receive notices and to attend general meeting – The auditors of a company are

entitled to attend any general meeting of the company (the right is not restricted to those at which the accounts audited by them are to be discussed); also to receive all the notices and other communications relating to the general meetings, which members are entitled to receive and to be heard at any general meeting in any part of the business of the meeting which concerns them as auditors.

Section 146 of the Companies Act, 2013 discusses right as well as duty of the auditor. According to the section 146:

“all notices of, and other communications relating to, any general meeting shall be forwarded to the auditor of the company, and the auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorised representative, who shall also be qualified to be an auditor, any general meeting and shall have right to be heard at such meeting on any part of the business which concerns him as the auditor.”Thus, it is right of the auditor to receive notices and other communications relating to any general meeting and to be heard at such meeting, relating to the matter of his concern, however, it is duty of the auditor to attend the same or through his authorised representative unless otherwise exempted.

(d) Right to report to the members of the company on the accounts examined by him – The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made there under or under any order made under this section and to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company’s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.

(e) Right to Lien – In terms of the general principles of law, any person having the lawful possession of somebody else’s property, on which he has worked, may retain the property for non-payment of his dues on account of the work done on the property. On this premise, auditor can exercise lien on books and documents placed at his possession by the client for non payment of fees, for work done on the books and documents. The Institute of Chartered Accountants in England and Wales has expressed a similar view on the following conditions:(i) Documents retained must belong to the client who owes the money.(ii) Documents must have come into possession of the auditor on the authority of the

client. They must not have been received through irregular or illegal means. In case of a company client, they must be received on the authority of the Board of Directors.

(iii) The auditor can retain the documents only if he has done work on the documents assigned to him.(iv) Such of the documents can be retained which are connected with the work on which

fees have not been paid.Under section 128 of the Act, books of account of a company must be kept at the registered office. These provisions ordinarily make it impracticable for the auditor to have possession of the books and documents. The company provides reasonable facility to auditor for inspection of the books of account by directors and others authorised to inspect under the Act. Taking an overall view of the matter, it seems that though legally, auditor may exercise right of lien in cases of companies, it is mostly impracticable for legal and practicable constraints. His working papers being his own property, the question of lien, on them does not arise.

6


DUTIES OF AUDITORSSections 143 of the Companies Act, 2013 specifies the duties of an auditor of a company in a quite comprehensive manner. It is noteworthy that scope of duties of an auditor has generally been extending over all these years.

(1) Duty of Auditor to Inquire on Certain Matters: It is the duty of auditor to inquire into the following matters-

(a) 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;

(b) whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;(c) where the company not being an investment company or a banking company,

whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;

(d) whether loans and advances made by the company have been shown as deposits;

(e) whether personal expenses have been charged to revenue account;(f) where it is stated in the books and documents of the company that any shares have

been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading.

The opinion of the Research Committee of the Institute of Chartered Accountants of India on section 143(1) is reproduced below:“The auditor is not required to report on the matters specified in sub-section

(1) unless he has any special comments to make on any of the items referred to therein. If he is satisfied as a result of the inquiries, he has no further duty to report that he is so satisfied. In such a case, the content of the Auditor’s Report will remain exactly the same as the auditor has to inquire and apply his mind to the information elicited by the enquiry, in deciding whether or not any reference needs to be made in his report. In our opinion, it is in this light that the auditor has to consider his duties under section 143(1).”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.

(2) Duty to Sign the Audit Report: As per section 145 of the Companies Act, 2013, 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 section 141(2).Section 141(2) of the Companies Act, 2013 states that where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.The qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditor’s report shall be read before the company in general meeting.

(3) Duty to comply with Auditing Standards: As per section 143(9) of the Companies Act, 2013, every auditor shall comply with the auditing standards. Further, as per section 143(10) of the Act, the Central Government may prescribe the standards of auditing as recommended by the Institute of Chartered Accountants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.

(4) Duty to report: As per section 143(3), the auditor’s report shall also state –(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 7


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 under sub-section (8) by a person other than the company’s auditors 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 the 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 system in place and the

operating effectiveness of such controls;(j) such other matters as may be prescribed. 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:-

(i) whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement;

(ii) 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;

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

[Notes: (1) Students may note that the auditor is also required to report on certain additional matters specified under CARO, 2016 which is discussed later under Para 10 Reporting under Companies (Auditor’s Report) Order, 2016.(2) Students are also required to refer Guidance note on Reporting under section 143(3)(f) and (h) of the Companies Act, 2013.]

(5) Duty to report on frauds:Reporting to the Central Government-As per section 143(12) of the Companies Act, 2013 read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014, 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, which involves or is expected to involve individually an amount of ` 1 crore or above, 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 prescribed.

A. Reporting to the Audit Committee or Board-In case of a fraud involving lesser than the specified amount [i.e. less than ` 1 crore], the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as prescribed.

B. Disclosure in the Board’s Report: The companies, whose auditors have reported frauds under this sub-section (12) 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 prescribed.

Sub-section (13) of section 143 of the Companies Act, 2013 safeguards the act of fraud reporting by the auditor if it is done in good faith. It states that no duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter above if it is done in good faith.It is very important to note that the provisions regarding fraud reporting shall also apply, mutatis mutandis, to a cost auditor and a secretarial auditor during the performance of his duties under section 148 and section 204 respectively. If any auditor, cost accountant or company secretary in practice do not comply with the provisions of sub-section (12) of section 143, he shall be punishable with fine which shall not be less than `1 lakh but which may extend to `25 lakh.The auditor is also required to report under clause (x) of paragraph 3 of Companies (Auditor’s Report) Order, 2016 [CARO, 2016], whether any fraud by the company or any fraud on the Company by its officers or employees has been noticed or reported during the year. If yes, the nature and

8


the amount involved is to be indicated.(6) Duty to report on any other matter specified by Central Government: The Central Government

may, in consultation with the National Financial Reporting Authority (NFRA), by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor’s report shall also include a statement on such matters as may be specified therein. However, as per the notification dated 29.03.2016, till the time NFRA is constituted, the Central Government may hold consultation required under this sub-section with the Committee chaired by an officer of the rank of Joint Secretary or equivalent in the MCA and the Committee shall have the representatives from the ICAI and Industry Chambers and also special invitees from the National Advisory Committee on Accounting Standards (NACAS) and the office of the C&AG.

(7) Duties and powers of the company’s auditor with reference to the audit of the branch and the branch auditor are discussed separately in the chapter under heading 13 branch audit.

C. Duty to state the reason for qualification or negative report: As per section 143(4), where any of the matters required to be included in the audit report is answered in the negative or with a qualification, the report shall state the reasons there for.

COMPANY AUDITRotation of auditors [Section 139 (2) and 139 (4) of the Companies Act, 2013]

Q5. Explain the concept of rotation of auditors as introduced by the Companies Act, 2013.Ans. The provisions relating to rotation of auditors are explained as follows:1. Applicability of concept of rotation of auditors [Section 139 (2) read with Rule 5]

(a) Applicability of concept of rotation of auditors [Section 139 (2) read with Rule 5](i) listed companies;(ii) all unlisted public companies having paid up share capital of Rs.10 crore or more;(iii) all private limited companies having paid up share capital of Rs.50 crore or more;

and(iv) all companies having public borrowings from financial institutions, banks or public

deposits of Rs.50 crore or above.(b) The concept of rotation of auditors shall not apply to One Person Companies or Small

Companies.2. Manner of rotation of auditors

(a) In case, the auditor is an individual.(i) No individual shall be appointed or reappointed as auditor for more than 1 term of

5 consecutive years.

(ii) An individual auditor who has completed his term of 5 consecutive years, shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of his term.

(b) In case, the auditor is a firm.(i) No audit firm shall be appointed or reappointed as auditor for more than 2 terms

of 5 consecutive years.

(ii) An audit firm which has completed its 2 terms of 5 consecutive years, shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of such terms.

The period of 5 years for which the individual or the audit firm cannot be appointed as auditor is generally referred to as ‘cooling period’.

3. Restriction on other audit firm(s) having common partner(s)An audit firm having one or more common partner to the other audit firm, whose tenure has expired, shall not be appointed as the auditor of the same company for a period of 5 years.

Simply speaking, if two or more audit firms have common partner(s), and one of these firms has completed its 2 terms of 5 consecutive years, none of such audit firms shall be eligible for reappointment as auditor in the same company for 5 years.

4. Time period for compliance for existing companiesEvery company, existing on the commencement of this Act, which is required to comply with the provisions relating to rotation of auditors, shall comply with these requirements within a period which shall not be later than the date of the first Annual General Meeting of the company held, within the period specified under section 96, after 3 years from the date of commencement of this Act.

9


Simply speaking, the existing companies are required to comply with the provisions relating to rotation of auditors in the Annual General Meeting to be held for the Financial Year 2016-17, and such Annual General Meeting must be held within the time limit specified under section 96, viz. on or before 30-09-2017.

5. Right of removal or resignation not affected(a) The right of the company to remove an auditor before expiry of one/two term(s) of 5

consecutive years shall not be affected due to any provision contained in Section 139 (2).

(b) The right of the auditor to resign from the office of auditor before expiry of one/two terms(s) of 5 consecutive years shall not be affected due to any provision contained in Section 139 (2).

6. Strict provisions w.r.t. rotation may be imposed by membersMembers of a company may resolve to provide that –(a) In the audit firm appointed by it, the auditing partner and his team shall be rotated at

such intervals as may be resolved by members; or

(b) the audit shall be conducted by more than one auditor.

7. Rules for rotation of auditorsThe Central Government may, by rules, prescribe the manner of rotation of auditors.

Manner of rotation of auditors by the companies on expiry of their term (Rule 6)1. In case the company is required to constitute an Audit committee, the procedure shall be as

follows:(a) The Audit Committee shall recommend to the Board, the name of an individual auditor or

of an audit firm who may replace the incumbent auditor on expiry of the term of such incumbent.

(b) The Board shall consider the recommendation of the Audit Committee

(c) The Board shall make its own recommendation for appointment of the next auditor by the members in the AGM.

2. In case the company is not required to constitute an Audit Committee, the procedure shall be as follows:(a) The Board shall itself consider the matter of rotation of auditors.(b) The Board shall make its own recommendation for appointment of the next auditor by the

members in the AGM.

3. In case of an auditor (whether an individual or audit firm), the period for which the individual or the firm has held office as auditor prior to the commencement of the Act shall be taken into account for calculating the period of 5 consecutive years or 10 consecutive years, as the case may be.

4. The incoming auditor or audit firm shall not be eligible if such auditor or audit is associated with the outgoing auditor or audit firm under the same network of audit firms.

‘Same network’ includes the firms operating or functioning, under the same brand name, trade name or common control.

5. A break in the term for a continuous period of 5 years shall be considered as fulfilling the requirement of rotation.

6. 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 5 years.

Illustration explaining rotation in case of individual auditorColumn I Column II Column III

Number of consecutive years for which an individual auditor has been functioning as auditor in the same company [in the first AGM held after the commencement of provisions of section 139 (2)]

Maximum number of consecutive years for which he may be appointed in the same company (including transitional period)

Aggregate period which the auditor would complete in the same company in view of column I and II

10


5 years (or more than 5 years) 3 years 8 years or more4 years 3 years 7 years3 years 3 years 6 years2 years 3 years 5 years1 year 4 years 5 years

Note 1 :Individual auditor shall include other individual or firms whose name or trade mark or brand is used by such individual if any.

Note 2 :Consecutive years shall mean all the preceding financial years for which the individual auditor has been the auditor until there has been a break by 5 years or more.

Illustration explaining rotation in case of audit firm

Column I Column II Column IIINumber of consecutive years for which an audit firm has been functioning as auditor in the same company [in the first AGM held after the commencement of provisions of section 139 (2)]

Maximum number of consecutive years for which the firm may be appointed in the same company (including transitional period)

Aggregate period which the firm would complete in the same company in view of column I and II

10 years (or more than 10 years) 3 years 13 years or more9 years 3 years 12 years8 years 3 years 11 years7 years 3 years 10 years6 years 4 years 10 years5 years 5 years 10 years4 years 6 years 10 years3 years 7 years 10 years2 years 8 years 10 years1 years 9 years 10 years

Note 1 : Audit firm shall include other firms whose name or trade mark or brand is used by the firm or any of its partners.

Note 2: Consecutive years shall mean all the preceding financial years for which the firm has been the auditor until there has been a break by 5 years or more.

Filling of casual vacancy in the office of auditors [Section 139 (8) of the Companies Act, 2013]

Certificate and consent by auditor, and notice of appointment by company (Section 139 of the Companies Act, 2013)

Q.6 No person can be appointed as an auditor unless he consents to such appointment. Comment.

Ans. The provisions of section 139 (8) are explained as follows:1. Certificate and Consent to be given by the Auditor

Before any appointment of auditor is made, the auditor shall furnish to the company –(a) his written consent for such appointment; and(b) a certificate that –

(i) the appointment, if made, shall be in accordance with the conditions as may be prescribed; and

(ii) the auditor satisfies the criteria provided in section 141.

Conditions prescribed for appointment and notice to Registrar (Rule 4)The auditor proposed to be appointed shall submit a certificate that –

(a) the individual or the firm is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder;

(b) the proposed appointment is as per the term provided under the Act;

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

11


(d) the list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.

2. Notice of Appointment to be given by the companyThe company shall -(a) inform the auditor concerned of his or its appointment; and

(b) file a notice of such appointment with the Registrar in Form No. ADT-1 within 15 days of the meeting in which the auditor is appointed.

Miscellaneous provisions w.r.t. appointment of auditors (Section 139 of the Companies Act, 2013)

Q7. Can a Limited Liability Partnership be appointed as an auditor? Are the provisions relating to appointment of auditor also applicable to reappointment?

Ans. The provisions of section 139 (8) are explained as follows:

1. ‘Firm’ to include ‘Limited Liability Partnership’ [Explanation to Section 139 (4)For the purpose of this Chapter (viz. ‘Audit and Auditors’, consisting of Sections 139 to 148), the word ‘firm’ shall include a Limited Liability Partnership (LLP) incorporated under the Limited Liability Partnership Act, 2008.

2. Meaning of ‘appointment’ [Explanation to Section 139 (1)]For the purposes of this Chapter (viz ‘Audit and Auditors’, consisting of Sections 139 to 148), ‘appointment’ includes reappointment.

3. Recommendation of the Audit Committee to be considered [Section 139 (1)]Where a company is required to constitute an Audit Committee under section 177, all appointments, including the filling of a casual vacancy of an auditor under section 139 shall be made after taking into account the recommendations of the Audit Committee.

Removal, resignation of auditor and giving of special notice (Section 140 of the Companies Act, 2013)

Q8. What is the remedy available to the company where the auditor refuses to carry out the audit?

OR

State the procedure for the following, explaining the relevant provisions of the Companies Act:Removal of statutory auditor before the expiry of his term [CA (Final) Nov. 2004]

OR

Prakash Carriers Limited appointed Mr. Raman as its auditor in the Annual General Meeting held on 30th September, 2014. Initially, he accepted the appointment. But he resigned from his office on 31st October, 2014 for personal reasons. The Board of Directors seeks your advice for filling up the vacancy by appointment of Mr. Albert as auditor. Advise. Also suggest the procedure to be adopted in case Mr. Albert is proposed to be removed from his office before the expiry of his term. [CA (Final) Nov. 2009]

Ans. The provisions relating to removal, resignation and giving of special notice are explained as follows:

1. Removal of auditor before expiry of his term [Section 140 (1)](a) Board Resolution. Board resolution is required for removal of an auditor before the expiry

of his term.

(b) Special resolution. Removal of auditor before the expiry of his term also requires a special resolution.

(c) Approval. Previous approval of the Central Government must be obtained in the manner prescribed.

Procedure for obtaining approval of the Central Government and passing Special Resolution (Rule 7)

12


(i) An application shall be made to the Central Government in Form ADT-2. The application shall be accompanied with the prescribed fees.

(ii) The application shall be made to the Central Government within 30 days of passing the Board resolution.

(iii) The company shall hold the general meeting within 60 days of receipt of approval of the Central Government of passing the special resolution.

(d) Opportunity of being heard. Before taking any action for removal, the auditor shall be given a reasonable opportunity of being heard.

2. Resignation by Auditors [Section 140 (2) and 140 (3)](a) Duty of auditor, When an auditor resigns, he is required to file a Statement in the

prescribed form.

(b) Contents of Statement. The Statement shall indicate the reasons and other facts as may be relevant with regard to his resignation.

(c) Filing with whom? The Statement shall be filed with -- the company- the Registrar- CAG (in the case of a Government company)

(d) Time limit for filing. The Statement shall be filed within 30 days from the date of resignation.

(e) Fine for non-filingMinimum : Rs.50,000Maximum : Rs.5 lakh

3. Special Notice for not reappointing the retiring auditor [Section 140 (4)(a) Requirement of special notice, at an AGM, special notice shall be required for –

(i) appointing as auditor a person other than the retiring auditor; or(ii) providing expressly that the retiring auditor shall not be re-appointed.

(b) Copy to be sent to the retiring auditor. On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.

(c) Right of auditor to make a representation and to get it circulated.(i) The retiring auditor is entitled to make a representation against his removal. The

representation (not exceeding a reasonable length) shall be in writing and shall be sent to the company.

(ii) He may request the company to circulate the representation to the members of the company.

(d) Duties of the company w.r.t. representation.(i) The company shall state fact that the retiring auditor has made a representation

against his removal, in any notice of the resolution that is given to the members of the company.

(ii) The company shall sent a copy of the representation to every member of the company to whom notice of the meeting is sent (unless the representation is received by the company too late).

(iii) If a copy of the representation is not sent because it was received too late or because of the company’s default, then -

- the auditor may require that the representation shall be read out at the meeting;- a copy of the representation shall be filed with the Registrar.

(e) Intervention by the Tribunal

(i) The copies of the representation need not be sent to the members and the representation made by the auditor need not be read out at the meeting, if the Tribunal is satisfied that the right of making representation is being abused by the auditor.

(ii) The application to the Tribunal may be made either by the company or by any other person who claims to be aggrieved.

13


The provisions of section 140 (4) viz. the provisions relating to special notice) shall not apply where the retiring auditor has completed his tenure of 5 consecutive years / 10 consecutive years, as provide under section 139 (2).

4. Power of the Tribunal to order change of auditor [Section 140 (5)](a) Application to the Tribunal, and reason for Tribunal’s order.

(i) The application to the Tribunal may be made by the Central Government or by any other person concerned. The Tribunal may also act suo motu.

(ii) If the Tribunal is satisfied that the auditor 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.

The Power of the Tribunal under section 140 (5) shall be in addition to any action that may be taken under the provisions of this Act or any other law for the time being in force.

(b) Appointment of auditor by the Central Government on an order made by the TribunalIf 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 such auditor shall not function as an auditor and the Central Government may appoint another auditor in his place.

(c) Auditor to be disqualified for 5 years.An auditor against whom an order has been passed by the Tribunal under section 140 (5). –(i) shall not be eligible to be appointed as an auditor of any company for a period of 5

years from the date of passing of such order;

(ii) shall be liable for action under section 447.

The disqualification, as stated above, and the liability under section 447 shall apply irrespective of the fact as to whether the auditor is an individual or a firm. In the case of a firm, the liability shall be of the firm and of every partner or partners who acted in a fraudulent manner of abetted or colluded in any fraud by, or in relation to, the company or its directors of officers.

(d) ‘Auditor’ to include ‘firm’.For the purposes of Chapter X of the Companies Act, 2013 (viz. Section 139 to 148), the word ‘auditor’ includes a firm of auditors.

Remuneration of auditors (Section 142 of the Companies Act, 2013)

Q9. State the legal provisions with respect to remuneration of auditors.Ans. The provisions relating to remuneration of auditors are explained as follows:

1. Remuneration to be fixed in general meeting.The remuneration of the auditor of a company shall be fixed-(a) in the general meeting; or(b) in such manner as may be decided in the general meeting.

2. Remuneration to be fixed by the BoardIn case, the first auditor is appointed by the Board, the remuneration of the first auditor shall be fixed by the Board.

3. Certain sums to be included in remunerationThe remuneration shall, in addition to the fee payable to an auditor, include –

(a) the expenses, if any, incurred by the auditor in connection with the audit of the company; and

(b) any facility extended to the auditor.

However, the remuneration shall not include any remuneration paid to the auditor for any other service rendered by him at the request of the company.

14


Q10. Explain the rights of the Comptroller and auditor General of India with respect to conduct of audit of government companies.

Ans. Section 143 of the Companies Act, 2013 confers upon CAG certain rights with respect to conduct of audit of government companies, as explained below:

1. Directions by CAG to the auditor [Section 143 (5)]- The provisions of section 143 (5) are applicable to –(i) a Government company; and(ii) any other company owned or controlled, directly or indirectly, 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.

- Section 143 (5) makes the following provisions:(a) CAG shall direct the auditor the manner in which the accounts of the Government

Company are required to be audited.

(b) The auditor shall submit a copy of his audit report to CAG.

(c) The auditor report shall, among other things, include the directions, if any, issued by CAG, the action taken thereon and its impact on the accounts and financial statement of the company.

2. Right of CAG to conduct supplementary Audit or supplement the audit report [Section 143 (6)]CAG shall, within 60 days from the date of receipt of the audit report, have the following rights:(a) Supplementary audit

- CAG may order conduct of a supplementary audit of the financial statement of the company.

- Supplementary audit shall be conducted by such person(s) as CAG may authorise in this behalf.

- CAG may authorise such person(s) to obtain such information as may be required for conduct of supplementary audit.

(b) Supplement / comment- CAG may comment upon the audit report.- CAG may supplement the audit report.- Any such comments or supplement shall be sent by the company to every person

entitled to copies of audited financial statements.- Any such comments or supplement shall also be placed before the members in the

AGM at the same time and in the same manner as the audit report.

3. Test Audit [Section 143 (7)]CAG may, by an order, cause test audit to be conducted of the accounts of a Government company.

Branch audit [Section 143 8) of the Companies Act. 2013]

Q11. State the provisions of the Companies Act with respect to audit of accounts of a branch office of a company.

Ans. The provisions relating to audit of branch office of a company are explained as follows:1. Branch in India – Appointment of auditor

The accounts of any branch office in India, shall be audited by –(a) the company’s auditor; or(b) any other person qualified for appointment as an auditor of the company.

2. Branch outside India – Appointment of auditorThe accounts of any branch office outside India, shall be audited by –(a) the company’s auditor; or(b) 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.

3. Duties and powers of the company’s auditorThe duties and powers of the company’s auditor with reference to the audit of the branch and the branch auditor, shall be such as may be prescribed.

Duties and powers of the company’s auditor prescribed under the Rules (Rule 12).

15


(a) The duties and powers of the company’s auditor with reference to the audit of the branch and the branch auditor, if any, shall be as contained in sub-sections (1) to (4) of section 143.

(b) The provisions regarding reporting of fraud by the auditor shall also extend to such branch auditor to the extent it relates to the concerned branch.

4. Report of Branch Auditor- The branch auditor shall prepare a report on the accounts of the branch examined by

him.- The branch auditor shall send his report to the auditor of the company.- The auditor of the company shall deal with the report of the branch auditor, in his report

in such manner as he considers necessary.

Definition of ‘branch office’ [Section 2 (14) of the Companies Act, 2013]‘Branch office’, in relation to a company, means any establishment described as such by the company. As per this definition, whether an office of a company is a branch or not, is left to the discretion of the company.

Auditor to comply with auditing standards [Section 143 (9) and (10) of the Companies Act, 2013]

Q12. State the duties of the auditor regarding compliance of auditing standards.Ans. The duties of the auditor regarding auditing standards and the power of the Central Government

to prescribe auditing standards is explained below:

1. Duty w.r.t. auditing standards 143 (9)Every auditor shall comply with the auditing standards.

2. The Central Government to prescribe auditing standards 143 (10)Stages in prescribing the auditing standards are as follows:(i) At the first stage, ICAI recommends the Standards of Auditing.(ii) At the second stage, these Standards of Auditing shall be examined by the National

Financial Reporting Authority (NFRA).NFRA may also make its own recommendations.

(iii) At the third stage, the Central Government examines the recommendations made by NFRA. Then, the Central Government may prescribe, after consultation with NFRA, the Auditing Standards.

3. Position, until Auditing Standards are notifiedUntil any auditing standards are notified, any standard or standards of auditing specified by ICAI shall be deemed to be the auditing standards.

Reporting of fraud by an auditor [Section 143 (12) to (15) of the Companies Act, 2013]

Q13. State the provisions relating of fraud by an auditor as contained in the Companies Act, 2013.

Ans. The provisions relating to reporting of frauds by an auditor are contained in section 143 (2) to (15) of the Companies Act, 2013 read with Rule 13 of the Companies (Audit and Auditors) Rules, 2013, as explained below:

1. Reporting of frauds involving Rs.1 crore or above [Section 143 (12)](a) If an auditor of a company has reason to believe that a fraud involving such amount 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

As per Rule 13, any fraud which involves or is expected to involve individually an amount of Rs.1 crore or above is required to be reported to the Central Government.

(b) The auditor shall report such fraud within such time and in such manner as may be prescribed.

16


As per Rule 13, the manner of reporting of such fraud shall be as follows:1. The auditor shall report such fraud to the Audit Committee or to the Board,

immediately but not later than 2 days of his knowledge of the fraud. The auditor shall seek the reply or observations of the Audit Committee or the Board, within 45 days.

2. If the auditor receives the reply or observations of the Audit Committee or the Board, the auditor shall, within 15 days of receipt of such reply or observations, forward to the Central Government -(a) his report;(b) the reply or observations of the Audit Committee or the Board; and(c) his comments on the reply or observations of the Audit Committee or the Board.

3. If the auditor fails to receive the reply or observations of the Audit Committee or the Board within 45 days, he shall forward to the Central Government -(a) His report; and(b) 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.

4. The report shall be sent -- to the Secretary, Ministry of Corporate Affairs- in a sealed cover- by Registration Post with Acknowledgement Due or by Speed post.

5. After the report is sent, an e-mail shall also be sent to the Secretary, Ministry of Corporate Affairs in confirmation of the report sent.

6. The report shall be on the letter-head of the auditor containing postal address, e-mail address and contract telephone number or mobile number.

7. The report shall be signed by the auditor with his seal and shall Indicate his Membership Number.

8. The report shall be in the form of a statement as specified in Form ADT-4.

9. These provisions shall also apply, mutatis mutandis, to -(a) a cost auditor during the performance of his duties under section 148; and(b) a secretarial auditor during the performance of his duties under section 204.

2. Reporting of frauds involving less than Rs.1 crore [Section 143 (12)](a) In case of a fraud involving lesser than Rs.1 crore, the auditor shall report the matter to –(i) the audit committee constituted under section 177; or(ii) the Board, in case the company is not reuired to constitute the audit committee.

(b) The auditor shall report such fraud within such time and in such manner as may be prescribed.

As per Rule 13, the auditor shall report such fraud to the Audit Committee or to the Board, immediately but not later than 2 days of his knowledge of the fraud. The auditor shall specify the following points in his report:(a) Nature of fraud with description;(b) Approximate amount involved; and(c) Parties involved.

(c) The company shall disclose the details about such frauds in the Board’s report in such manner as may be prescribed.

17


As per Rule 13, the following details of each such fraud shall be disclosed in the Board’s Report:(a) Nature of fraud with description;(b) Approximate amount involved;(c) Parties involved, if remedial action is not taken; and (d) Remedial actions taken.

3. No liability of auditor [Section 143 (13)]An auditor shall not be deemed to be guilty for breach of any of his duties by reason of his reporting any matter to the Central Government if such reporting is done in good faith.

4. Provisions applicable to other auditors [Section 143 (14)]The provisions w.r.t. reporting of fraud shall mutatis mutandis apply to –

(a) the cost accountant in practice conducting cost audit under section 148; or(b) the company secretary in practice conducting secretarial audit under section 2014.

5. Punishment for non-compliance [Section 143 (15)](a) Minimum Fine : Rs. 1 lakh(b) Maximum Fine : Rs. 25 lakh

Scope of ‘reporting of frauds by the auditor’As per section 143 (12), only such frauds are required to be reported by the auditor as have been committed or are being committed by any officer or employee of the company against the company’. What amounts to ‘a fraud by any officer or employee of the company against the company’ is a subject matter of interpretation by the Courts.

Auditor not to render certain services (Section 14 of the Companies Act, 2013)

Auditor to sign audit reports, etc. (Section 145 of the Companies Act, 2013)Q14. Who is authorised to sign the audit report?Ans. The provisions relating to signing of audit report are explained below:1. Signing and certification- The auditor’s report shall be signed only by the person appointed as an auditor of the company.

- Any other document of the company required to be signed or certified by the auditor, shall be signed or certified only by the person appointed as an auditor of the company.

2. Qualifications to be read in general meeting and inspection thereofThe qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditor’s report shall be (a) read before the company in general meeting; and(b) open to inspection by any member of the company.Auditors to attend general meeting (Section 146 of the Companies Act, 2013)

Q15. Is an auditor entitled to attend the general meetings? Is an auditor entitled to any other right, when he is present in a general meeting?

Ans. The rights and duties of an auditor with respect to attending general meetings of the company are explained as follows:

1. Right of the auditor to receive notices of general meetingAll notices of, and other communications relating to, any general meeting shall be forwarded to the auditor of the company.

2. Duty of the auditor to attend general meetingThe auditor shall attend the general meetings.The auditor may attend the general meeting –(a) himself; or(b) through his authorised representative, who shall also be qualified to be an auditor.The company may exempt an auditor from attending the general meeting.

3. Right of the auditor to be heard at general meetingsThe auditor shall have a right to be heard at a general meeting on any part of the business which concerns him as the auditor.

Punishment for contravention (Section 147 of the Companies Act, 2013)

18


Q16. Explain the liabilities of an auditor if he contravenes the various provisions of the Companies Act.

Ans. The liabilities of an auditor for various contraventions under the Act are explained below;1. Punishment for contravention of Section 139 to 146

(a) Punishment for the company.(i) Minimum Fine : Rs.25,000(ii) Maximum Fine: Rs.5 lakh

(b) Punishment for Officer in default.(i) Maximum Imprisonment: 1 year(ii) Minimum Fine : Rs.10,000(iii) Maximum Fine: Rs.1 lakh

2. Punishment for the Auditor for contravention of Section 139, 143, 144 or 145(a) Minimum Fine : Rs.25,000(b) Maximum Fine : Rs. 5 lakh(c) If a contravention is committed knowingly or willfully with the intention to deceive the

company or its shareholders or creditors or tax authorities, then punishment shall be –(i) Maximum Imprisonment : 1 year(ii) Minimum Fine Rs. 1 lakh(iii) Maximum Fine: Rs.25 lakh

3. Consequences of conviction of auditor for contravention of Section 139, 143, 144 or 145(a) Refund of remunearation. The auditor shall be liable to refund to the company

the remuneration received by him.

(b) Payment of damages by the auditor. The auditor shall be liable to pay damages to the company/ Statutory bodies or authorities / any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.

4. Measures to ensure prompt payment of damages(a) For ensuring prompt payment of damages by the auditor, the Central Government

shall, by notification, specify any statutory body/ authority / an officer.

(b) Such statutory body / authority / an officer shall pay the damages to the persons entitled to damages.

(c) Such statutory body / authority / an officer shall file a report with the Central Government containing particulars of damages.

5. Jointly and several liability of partnersIn case of auditor being an audit firm, the liability (whether civil or criminal) shall be of the partner(s) concerned and of the firm jointly and severally.

Power of the Central Government to order maintenance of cost records and conduct of cost audit (Section 148 of the Companies Act, 2013)

Q17.Discuss the provisions of the Companies Act relating to maintenance of cost records and appointment of cost auditor? [CA (Final) May 1990]

ORWhen is a company required to appoint cost auditor? What are his duties and powers? [CA (Final) May 1994]

(a). Order by the Central Government for maintenance of cost records(a) Whether mandatory? Maintenance of cost records is mandatory only if such an order is

made by the Central Government

(b) Order for which companies?(i) Such class of companies as are engaged in the production of such goods as may

be prescribed.

(ii) Such class of companies providing such services as may be prescribed.

(c) Nature of cost records to be maintained. Prescribed particulars relating to-(i) the utilization of material;(ii) labour; and(iii) other items of cost.

19


(d) Consultation before making order. Before issuing any such order in respect of any class of companies regulated under a special Act, the Central Government shall consult the regulatory body constituted or established under such special Act.

(b). Order by the Central Government for conduct of cost audit(i) for which the Central Government has made an order for maintenance of cost records;

and (ii) which have –

- net worth of such amount as may be prescribed; or- turnover of such amount as may be prescribed.

(c) Manner, Cost audit shall be conducted in the manner specified in the order made by the Central Government.

3. Appointment of Cost Auditor by Board [Section 148 (3)]- Cost audit shall be conducted by a Cost Accountant in practice.- Only a Cost Accountant in practice or a firm of Cost Accountants in practice can be

appointed as a cost auditor.- The Cost Auditor shall be appointed by the Board.- The cost audit shall be in addition, the audit conducted under section 143.- The auditor appointed under section 139 shall not be appointed as the Cost Auditor.- The remuneration of the Cost Auditor shall be determined by the members in such

manner as may be prescribed- The company shall give all assistance and facilities to the cost auditor.

Procedure for appointment and fixation of remuneration of the Cost Auditor (Rule 14).(a) Case I : The company is required to constitute an audit committee

- The Board shall appoint the cost auditor on the recommendations of the Audit Committee.

- The Audit Committee shall recommend the remuneration of the cost auditor.

- The remuneration of the cost auditor shall be considered and approved by the Board and approved subsequently by the members.

(b) Case II : The company is not required to constitute an audit committeeThe Board shall appoint the cost auditor.The remuneration of the cost auditor shall be fixed by the Board and ratified subsequently by the members.Compliance with Cost Auditing Standards

- The Cost Auditor shall comply with the cost auditing standards.- ‘Cost auditing standards’ mean such standards as are issued by the Institute of Cost and

Works Accountants of India, with the approval of the Central Government.5. Disqualifications, rights and duties of cost auditor

The qualifications, disqualifications, rights, duties and obligations applicable to auditors under sections 141 and 143 shall, so far as may be applicable, apply to the cost auditor.

6. Cost Audit Report- The cost auditor shall submit his report to the Board of directors.- Within 30 days of receipt of cost audit report, the company shall furnish to the Central

Government –(a) a copy of the cost audit report; andAs per Rule 4 of the Companies (Filing of Documents and Forms in Extensible Business Reporting Language). Rules 2015, a company required to furnish cost audit report and other documents to the Central Government shall file such report and other documents using the XBRL Taxonomy given in Annexure-III for the financial years commencing on or after 1st April, 2014 in e-Form CRA-4 specified under the Companies (Cost Records and Audit) Rules, 2014.

(b) along with full information and explanation on every reservation or qualification contained in the cost audit report.- The Central Government may call for such further information and explanation as it may

deem fit.

- The Company shall furnish such further information and explanation within such time as may be specified by the Central Government.

20


Practical Problems from CA ExaminationsAppointment of auditor made for 10 years - Whether valid?

P.3A On recommendation of the Board of Directors of DJA company Limited, Mr. X is appointed at the company’s Annual general Meeting held on 1st October, 2014 as auditor for period of 10 years. A resoltuion to this effect was passed unanimously with no vote against the resolution. Explaining the provisions of the Companies Act, 2013 relating to the appointment and re-appointment of auditors.

(i) Examine the validity of the above resolution.(ii) What shall be your answer in case an audit firm Messrs X & Associates is appointed as

the company’s auditor? [CA (Final) Nov. 2014]Ans. The present problem relates to section 139 (1) and 139 (2) of the Companies Act, 2013.1. As per section 139 (1),when any appointment of auditor is made at any AGM, the auditor so

appointed shall hold office till the conclusion of 6th AGM, with the AGM wherein such appointment has been made being counted as the first AGM. At every AGM (viz. 2nd, 3rd, 4th and 5th AGM), the matter relating to appointment of auditor shall be placed before the members for ratification.

2. In case the company is covered under sub-section (2) of section 139 (i.e. the concept of rotation of auditors is applicable to the company), then -

(a) No individual shall be appointed or reappointed as auditor for more than 1 term of 5 consecutive years.

(b) In case, the auditor is a firm, no audit firm shall be appointed or reappointed as auditor for more than 2 terms of 5 consecutive years.

The given case is answered as under:(i) The resolution passed in the AGM appointing Mr. X as an auditor for a period of 10 years is not

valid, since such appointment is in contravention of section 139 (1) as well as 139 (2). It is immaterial that in the AGM, no vote has been cost against the resolution.

(ii) The answer remains some even where the M/S X & Associates, an audit firm was appointed as auditor, since section 139 (1) as well as 139 (2) do not permit appointment for 10 years. Even in case of an audit firm, the term shall be 5 years. However, an completion of one term of 5 years, the audit firm may be reappointed for another term of 5 years.

Appointment of first auditor by the Board of directors of a government company – Whether valid?

P 4A. Gov. Ltd is a government company incorporated on 15.05.2015. On 01.06.2015, the Board of directors of Gov. Ltd. appointed Mr. Pratham s the first auditor.

Ans. As per section 139 (6) of the Companies Act, 2013, the first auditor of a company shall be appointed by the Board of directors within 30 days from the date of registration of the company. However, in the case of a government company, the first auditor shall be appointed in accordance with the provisions of section 139 (7) of the Companies Act 2013, and not as per section 139 (6). As per Section 139 (7), the first auditor of a government company shall be appointed by the Comptroller and Auditor General of India within 60 days of registration of the company. In case the Comptroller and Auditor General of India does not appoint the first auditor within the said period of 60 days, the appointment of first auditor shall be made by the Board of directors within next 30 days.

Gov. Ltd. is a government company. Therefore, the appointment of first auditor shall be made by the Comptroller and Auditor General of India within 60 days of registration of the company. However, if the comptroller and Auditor General of India does not make the appointment of first auditor till 14.07.2015, the appointment of first auditor shall be made by the Board of directors till 13.08.2015. The appointment of first auditor made by the Board of Directors on 01.06.2015 is not in accordance with the provisions of section 139 (7) since the time period allowed to the Comptroller and Auditor General of India has not expired as on 01.06.2015. Therefore, the appointment of the first auditor is null and void.

Manner of appointment of auditors where a nationalized bank, an insurance company and a Public Financial Institution are the shareholders of the company.

P4B . Explain, how the auditor will be appointed in the case of a company whose shareholders include the following.(a) Bank of Baroda (A Nationalised Bank) holding 12% of the subscribed capital in

the company.(b) National Insurance company Limited (carrying on General Insurance Business)

holding 10% of the subscribed capital in the company .(c) Maharashtra State Financial corporation (A Public Financial Institution) holding

8% of the subscribed capital in the company21


Ans. The provisions relation to appointment of auditors are contained in section 139 of the Companies Act, 2013.

- In the given case, only 30% of subscribed share capital of the company is held by a nationalized bank, a company carrying on general insurance business and a Public Financial Institution, and so the company is neither a government company nor a company owned or controlled, directly or indirectly, by the Central Government or one or more State Governments or partly by the Central Government and partly by one or more State Governments.

- Thus, the first auditors of the company shall be appointed as per the provisions contained in sub-section (6) of section 139, and the subsequent auditors of the company shall be appointed as per sub-section (1) of section 139.

- As per sub-section (6) of section 139, the first auditor of the company shall be appointed by the Board within 30 days of registration of the company, and in case of failure of the Board to appoint the first auditor within the said period of 30 days, the Board shall inform the members and the members shall, within 90 days, at an extraordinary general meeting appoint the first auditor.

- As per sub-section (6) of section 139, the first auditor of the company shall be appointed by the Board within 30 days of registration of the company, and in case of failure of the Board to appoint the first auditor within the said period of 30 days, the Board shall inform the members and the members shall, within 90 days, at an extraordinary general meeting appoint the first auditor.

- As per sub-section (1) of section 139, the subsequent auditor of the company shall be appointed in the first AGM of the company to hold office till the conclusion of 6 th AGM, and thereafter till the conclusion of every 6th AGM of the company. Such appointment shall require an ordinary resolution.Appointment of subsequent auditor in case of a government company [Section 139 (5) of the Companies Act, 2013].Resignation by auditor of a government company, and the vacancy filled up by the Board – Validity of appointment made by the Board

P6A. NTPC Limited is a government company, of which Mr. Aged is the auditor, Mr. Aged resigned from the office of auditor on 01.01.2015. The vacancy was not filled by CAG till 31.01.2015. On 17.02.2015 the Board of directors of NTPC Limited appointed Mr. Young as the auditor to fill the vacancy created as a result of resignation of Mr. Aged. The appointment of Mr. Young was not put before the members for approval. Is the appointment of Mr. Young valid?

Ans.- Section 139 (B) of the Companies Act, 2013 lays down the provisions regarding filing up of

casual vacancy in the office of an auditor. As per section 139 (8) (b) and its proviso, in the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor – General of India, the casual vacancy shall be filled by the comptroller and Auditor – General of India within 30 days. However, if the Comptroller and Auditor-General of India does not fill the vacancy within the said period of 30 days, the Board of Directors shall fill the vacancy within next 30 days.

- In the present case, resignation by Mr. Aged on 01.01.2015 results in a casual vacancy. The Comptroller and Auditor – General of India was empowered to fill this casual vacancy till 31.01.2015. However, the Comptroller and Auditor-General of India did not fill the casual vacancy till 31.01.2015, and so the Board of directors of NTPC Limited was empowered to fill the casual vacancy in the next 30 days, i.e. till 02.03.2015. On 17.02.2015, the Board of directors appointed Mr. Young as auditor to fill the casual vacancy. Such appointment is valid as it in accordance with the provisions of section 139 (B) (b) and its proviso.

- It should be noted that the appointment of Mr. Young does not require any approval of the members in the general meeting since there is no such requirement for filling a casual vacancy in case of a company whose accounts are audited by the Comptroller and Auditor-General of India.Dissolution of Audit firm – Consequences

P6B. AM & Co. is a firm of chartered accountants having two partners, viz. Anil and Mukesh. In the first AGM of Dhirubhai Ltd. held on 30.09.2014, AM & Co. was appointed as the statutory auditor. However, due to disagreements between Anil and Mukesh, the firm AM & Co. was dissolved. The Board of directors of Dhirubhai Ltd. desires in appoint Mr. Mukesh as the statutory auditory for one year.

Ans.As per section 139 (B) (i) of the Companies Act, 2013, the Board of Directors is authorised to fill any casual vacancy in the office of an auditor. However, where the casual vacancy is caused by the resignation of an auditor, the vacancy shall be filled by the Board of directors and such appointment shall also be approved by the company in the general meeting.

- The ‘casual vacancy’ may arise due to a variety of reasons which may include death, resignation, disqualification, etc. Dissolution of the firm also results in a casual vacancy.

22


- An auditor appointed to fill a casual vacancy shall hold office till the conclusion of the next AGM.

- In the present case, the casual vacancy has not arisen by reason of resignation of auditor, and so the approval in the general meeting is not required. Accordingly, the action of the Board of directors in appointing Mr. Mukesh to fill up the casual vacancy due dissolution of M/s AM & Co. is in accordancy with law. However, Mr. Mukesh shall hold office till the conclusion of next AGM only, and not for one year.

Whether purchase of goods on credit by the auditor from the company results in vacation of office?

P10A Mr. Harman is the auditor of Heermaan Diamonds Ltd. Mr. Harman purchased a necklace worth Rs.9,00,000 on a credit of 2 months from Heermaan Diamonds Ltd. Heermaan Diamonds Ltd. ordinarily provides a credit of 2 monhts to all its customers.

Ans. As per section 141 (3) of the Companies Act, 2013, a person shall be disqualified to act as an auditor if he is indebted to the company for an amount exceeding Rs. 5 lakh.

As per section 141 (4), if, after appointment as auditor, the auditor becomes disqualified as per section 141 (3), he shall have to vacate his office.

Where an auditor purchases goods an credit from a company being audited by him, he is indebted to the company. It is immaterial that the company allows him the same credit period as it allows to other customers.

In the present case, Mr. Harman has became indebted to Heermaan Diamonds Ltd. for Rs.9 lakh, viz. more than Rs.5 lakh, thus attracting the disqualification given u/s 141 (3). Therefore, Mr. Haman shall have to vacate the office of auditor in Heermaan Diamonds Ltd.

Disqualification for appointment as auditor by reason of limit on number of audits and a partner being an employee of the company.

P.10B KNR & Co. is a firm of Chartered Accountants having 3 partners, viz. Keshav, Nitin and Rohit. Rohit is in whole time employment in Rohan Garments Ltd. The firm KNR & Co. is holding audit of 38 companies. It is proposed to appoint the firm KNR & Co. as auditors by 2 companies, viz. Rohan Garments Ltd. and Pragati Ltd. Answer the following:

(a) Can the firm KNR & Co. accept the audit of Rohan Garments Ltd. and Pragati Ltd.?(b) Can the firm KNR & Co. accept the audit of Pragati Ltd. if it were holding audit of 40

companies instead of 38 companies?(c) What would be your answer if the firm KNR & Co. was holding audit of 40 companies

instead of 38 companies, and Mr. Rohit is not in employment in Rohan Garments Ltd.?Ans.

As per section 141 (3) of the Companies Act, 2013, a person shall not be eligible for appointment as an auditor if he is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such person or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 companies.

In the case of a partnership firm, the maximum limit of 20 companies shall be reckoned with respect to every partner of the firm, i.e. maximum 20 companies per partner.

For the purpose of computing the maximum number of audits a firm can hold, any partner of the firm who is in whole-time employment will be excluded.

(a) In the present case, Mr. Rohit is in whole-time employment in Rohan Garments Ltd. Accordingly, Mr. Rohit or any firm in which Mr. Rohit is a partner is disqualified for appointment as auditor in Rohan Garments Ltd. Thus, the firm KNR & Co. is disqualified for appointment as auditors in Rohan Garments Ltd., but KNR & Co. is not disqualified for appointment as auditors in Pragati Ltd.

(b) Since Mr. Rohit is in whole- time employment in Rohan Garments Ltd., he will be excluded while determining the maximum number of audits the firm KNR & Co. may accept. Accordingly, the firm KNR & Co. may accept a maximum of 40 audits. Since the firm KNR & Co. already holds 40 audits, if cannot accept the audit of Pragati Ltd.

(c) If Mr. Rohit is not in employment in Rohan Garments Ltd., then the firm KNR & Co. is not disqualified for appointment as auditors in Rohan Garments Ltd. In such a case, no partner of KNR & Co. will be excluded while determining the maximum number of auditors the firm KNR & Co. may accept. Accordingly, the firm KNR & Co. may accept the audits of Rohan Garments Ltd. as well Pragati Ltd.Consequences of auditor entering into partnership with an employee, of the company.

23


P10C. Mr. Alone a chartered accountant, was appointed as auditor of Single Ltd. in the first AGM of the company held on 30.09.2014. In January, 2015, Mr. Alone enters into partnership with Mrs. Alone Mrs Alone Mrs. Alone is a chartered accountant, and holds the position of Finance Manager in Single Ltd.

Ans.As Per Section 141 (3) (c) of the Companies Act, 2013, any person who is a partner or in employment of an officer or employee of the, company shall be disqualified to act as an auditor of a company.

In the case of a partnership firm, the maximum limit of 20 companies shall be reckoned with respect to every partner of the firm, i.e. maximum 20 companies per partner.

For the purpose of computing the maximum number of audits a firm can hold, any partner of the firm who is in whole-time employment will be excluded.

(a) In the present case, Mr. Rohit is in whole-time employment in Rohan Garments Ltd. Accordingly, Mr. Rohit or any firm in which Mr. Rohit is a partner is disqualified for appointment as auditor in Rohan Garments Ltd. Thus, the firm KNR & Co. is disqualified for appointment as auditors in Rohan Garments Ltd., but KNR & Co. is not disqualified for appointment as auditors in Pragati Ltd.

(b) Since Mr. Rohit is in whole-time employment in Rohan Garments Ltd., he will be excluded while determining the maximum number audits the firm KNR & Co. may accept. Accordingly, the firm KNR & Co. may accept a maximum of 40 audits. Since the firm KNR & Co. already holds 40 audits, it cannot accept the audit of Pragati Ltd.

(c) If Mr. Rohit is not in employment in Rohan Garments Ltd., then the firm KNR & Co. is not disqualified for appointment as auditors in Rohan Garments Ltd. In such a case, no partner of KNR & Co. will be excluded while determining the maximum number of auditors the firm KNR & Co. may accept. Accordingly, the firm KNR & Co. may accept the audits of Rohan Garments Ltd. as well Pragati Ltd.

Consequences of auditor entering into partnership with an employee, of the companyP10.C Mr. Alone, a chartered accountant, was appointed as auditor of Single Ltd. in the first

AGM of the company held on 30.09.2014. In January, 2015, Mr. Alone enters into partnership with Mrs. Alone. Mrs Alone is a chartered accountant, and holds the position of Finance Manager in Single Ltd.

Ans. As per Section 141 (3) (c) of the Companies Act, 2013, any person who is a partner or in employment of an officer or employee of the, company shall be disqualified to act as an auditor of a company.

- As per Section 141 (4), if after his appointment, an auditor incurs any of the disqualifications specified under section 141 (3), He shall vacate his office.

- In the present case, Mr. Alone has incurred the disqualification specified under section 141 (3) (c) since has become a partner of an employee of the company (viz. Mrs. Alone), of which he is the auditor. Thus, the office of auditor held by Mr. Alone in Single Ltd. shall become vacant.

Various cases in which a partner of the firm or his relative holds security of the company – Whether firm is disqualified?

P10D. Mr. Jai and Mr. Veeru are the two partners in the firm JV & Co. Can JV & Co. is proposed to be appointed to be appointed as the statutory auditors of Sholay Ltd. in the following cases?(a) Mr. Jai holds 100 equity shares of Rs.10 each in Sholay Ltd.(b) Mr. Jai holds 100 equity shares of Rs.10 each in Gabbar Ltd., Subsidiary

company of Sholay Ltd.(c) Mrs. Basanti, wife of Mr. Veeru holds 100 equity shares of Rs.10 each in Sholay

Ltd.(d) Mrs. Basant, wife of Mr. Veeru, holds 100 equity shares of Rs.10 each in Gabbar

Ltd, a subsidiary company of Sholay Ltd.Ans.- As per section 141 (3) (d) (i) 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 the company or its subsidiary, or of its holding or associate company.

- As per Proviso to section 141 (3) (d) (i), the relative may hold security of the company of face value not exceeding Rs.1,000 or such sum as may be prescribed.

- As per Rule 10 of the Companies (Audit and Auditors) Rules, 2014, the relative may hold security of the company of face value not exceeding Rs. 1 lakh.

24


- As per Section 141 (4) of the Companies Act, 2013, where a person appointed as an auditor of a company incurs any of the disqualifications 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.

The give case is answered as under:(a) In the present case, Mr. Jai holds security in Sholay Ltd. Accordinlgy, Mr. Jai or any firm in which

Mr. Jai is a partner is disqualified for appointment as auditor in Sholay Ltd. The value of the security held by Mr. Jai in Sholay Ltd, is immaterial. Thus, the firm JV & Co. is disqualified for appointment as auditors in Sholay Ltd.

(b) In this case, Mr. Jai holds security in Gabbar Ltd. Accordingly, Mr. Jai or any firm in which Mr. Jai is a partner is disqualified for appointment as auditor in Gabbar Ltd. or in any company which is subsidiary company of Gabbar Ltd. or holding company of Gabbar Ltd. or associate company of Gabbar Ltd. or subsidiary company of holding company of Gabbar Ltd. Since, Sholay Ltd. is a holding company of Gabbar Ltd., the firm JV & Co. is disqualified for appointment as auditors in Sholay Ltd. The value of the security held by Mr. Jai in Gabbar Ltd. is immaterial.

(c) In this case, relative or Mr. Veeru holds security of the face value of Rs.1,000 only in gabber Ltd. As per section 141 (3) (d) (i), the Mr. Veeru and JV & Co. (viz, the firm in which Mr. Veeru is a partner) are disqualified for appointment as auditors in Gabbar Ltd. or in any company which is subsidiary company of Gabbar Ltd. or holding company of gabber Ltd. or associate company of Gabbar Ltd. or subsidiary company of holding company of Gabbar Ltd.

As per Proviso the section 141 (3) (d) (i) read with Rule 10 of the Companies (Audit and Auditors) Rules, 2014, neither Mr. Veeru nor JV & Co. is disqualified for appointment as auditor sin Gabbar Ltd. if the face value of security held by relative of Mr. Veeru does not exceed Rs.1 lakh. It is very much clear from the language used in Proviso to Section 141 (3) (d) (i) as well as Rule 10 of the companies (Audit and Auditors) Rules, 2014 that the benefit of this proviso and Rule 10 is available only if the relative holds security upto Rs.1 lakh in the same company in which appointment is to be made. However, in the given case, the security is held by the relative in Gabbar Ltd. while appointment is proposed to be made in Sholay Ltd. (a holding company of Gabbar Ltd.). Therefore, the benefit of provision and Rule 10 is not available. Accordingly. JV & Co. cannot be appointed as auditors in Sholay Ltd.

Case Studies on disqualifications of auditors (Section 141)1. Mr. Abhinav, Chartered Accountant is a director in Huge Ltd. State whether he is

disqualified to be the auditor of Small Ld., its subsidiary company, Ans. As per section 226 of the Companies Act, 1956, if a person was disqualified to be appointed as

an auditor of a company, he was also disqualified to be appointed as an auditor of its holding company, its subsidiary company, and any other subsidiary of its holding company. However, no such provision has been made been made under the Companies Act, 2013. Therefore, as per section 141 (3) of the Companies Act, 2013, Mr. Abhinav is not disqualified to be an auditor of Small Ltd.

The Committee on Ethical Standards (CES) constituted by ICAI, has examined an issue as to whether the auditor of a subsidiary company can be appointed as a director in its holding company. The Committee noted that in terms of Clause (11) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant in practice can not engage (unless permitted by the Council so to engage) in any business of occupation other than the profession of Chartered Accountant but he can be a director of a Company (not being a managing director or whole time director or whole time director) wherein he or any of his partner is not interested in such Company as an auditor. The Committee further noted that public conscience is expected to be ahead of the law. Members, therefore, are expected to interpret the requirement as regards independence much more strictly than what the law requires and should not place themselves in positions which would either compromise or jeopardize their independence, In view of the above, the Committee has decided that

the auditor of a Subsidiary Company can’t be a Director of its Holding Company, as it will affect the independence of an auditor.

The above opinion has been included in this book so as to guide the students that they should also refer to the provisions of the Chartered Accountants Act, 1949 and the opinions of ICAI given under that Act for all practical purposes and also for answering questions asked in Paper 4: Corporate and Allied Laws, the provisions contained in the Chartered Accountants Act, 1949 and opinions of ICAI given under

25


that Act are not required to be mentioned Accordingly, no other answer in this book incorporates such provisions.

2. Abbas a chartered accountant, is a director in X Limited. Abbas is also a partner in a partnership firm AM and Co. having two partners, viz. Abbas and Mustan. Whether Abbas or Mustan or the firm AM and Co. can be appointed as auditor of X Limited?

Ans. As per section 141 (3), a person who is an officer or employee of the company is disqualified to be an auditor of such company. Also, a person who is a partner or an employee of an officer or employee of the company is disqualified to be an auditor of such company.Abbas is an officer of X Limited, and so, he is disqualified to be an auditor of X Limited.Mustan is also disqualified to be an auditor of X Limited since he is partner of an officer of X Limited (viz. Abbas)If a partner of a firm is disqualified, such firm is also disqualified. Therefore, the firm AM and Co. is disqualified to be an auditor of X Limited, since the partners of the firm, viz. Abbas and Mustan are disqualified.

3. Ms. Ekta is a Chartered Accountant. She is a part-time employee of Partition Ltd. State whether she is disqualified to be the auditor of Partition Ltd.

Ans. As per section 141 (3), an employee (whether full time or part time) is disqualified to be an auditor. Accordingly, Ms. Ekta is disqualified to be an auditor of Partition Ltd.

4. Mr. Shekhar, a chartered accountant in practice, is holding debentures in Deeraghaayu Ltd. State whether he can be appointed as an auditor of Deerghaayu Ltd.

Ans. As per Section 141 (3), Mr. Shekhar is disqualified to be an auditor of Deerghaayu Ltd. since he holds debentures (viz. a security) in the company.

5. Mr. Little is a charted Account in practice. His father is holding shares in Prakash Ltd. The face value of shares is Rs.15,000. However, the market value of same is Rs.1,25,000 . State whether Mr. Little is disqualified to be appointed as auditor in Prakash Ltd.

Ans. As per Section 141 (3), Mr. Little as not disqualified since holding of securities upto face value of Rs.1,00,000 does not result in disqualification (market value of the security is immaterial).

6. Mr. Amit is a chartered accountant in practice. His sister’s husband holds equity shares having face value of Rs.50 lakhs in Amita Ltd. State whether Mr. Amit is disqualified to be an auditor of Amita Ltd.

Ans. As per Section 141 (3). Mr, Amit is not disqualified since sister’s husband is not covered under ‘Relative’ under section 2 (77) of the Companies Act, 2013.

7. Akash is a Chartered Accountant in practice. His sister is CEO in Huge Ltd. State whether Mr. Akash is disqualified to be the auditor of Small Ltd. a subsidiary company of Huge Ltd.

Ans. As per Section 141(3), Mr. Akash is not disqualified.8. Mr. Mahesh is a chartered Account in Practice providing management services to

sangharsh Ltd. State whether he is disqualified to be appointed as the auditor of Sangharsh Ltd.

Ans. Mr. Mahesh is disqualified under section 141 (3).

9. Mr Dravid is a Chartered Accountant in practice. He holds a derivative contract of Drona Ltd. in his own name. State whether he is disqualified to be appointed as the auditor of Drona Ltd.

Ans. Mr. Dravid is disqualified to be appointed as an auditor of Drona Ltd. [As per Section 2 (81) of the Companies Act, 2013, The term ‘securities’ means the ‘securities’ as defined under the Securities Contracts (Regulation) Act, 1956. As per the Securities Contracts (Regulation) Act, 1956, ‘securities’ includes ‘derivative’].

Whether auditors are liable if they rely on incorrect certificate relating to value of stock?

P16A. The auditors of PQR Ltd. accepted the Certificate of the Manager, a person of acknowledged competence and high reputation, as to the value of the stock in trade. The Stock was grossly overstated for several years in the balance sheets of the company. As a result of this over valuation dividends were paid out of capital. The Auditors did not examine the books of account very minutely. If they had done so and compared the amount of stock at the beginning of the year with the purchases and sales during the year, they would have noticed the over valuation. The company subsequently went into liquidation and the auditors wee sued to make good the loss caused by the wrongful payment of dividends relying on the balance sheets figures. Based

26


on the above facts, you are required to decide with reference to the provisions of the companies Act, 1956 and the decided case laws, the following issues:

(i) whether auditors of the company will be liable for the loss caused to the company by the wrongful payment of dividends based on the Balance sheets duly audited by the Auditors.

(ii) What are the statutory duties of the Auditors in this regard? (CA (Final) Nov. 2007OR

The auditor of Organic Foods Ltd., accepted the Certificate from Mr. Rohan who is the manager, a person of knowledge, competence and high reputation, as to the value of the stock in trade. The valuation of stock referred to above was found to be grossly overstated for several years in the balance sheets of the company. As a result of the over valuation, dividends were paid out of capital. The auditor did not examine the books of account very minutely. If they had done so and compared the amount of stock at the beginning of the year, with the purchases and sales during the year, they would have noticed the over valuation. The company subsequently went into liquidation and the auditors were sued to make good the loss caused by the wrongful payment of dividends based on the balance sheets figures. Based on the above facts, you are required to decide, with reference to the provisions of the Companies Act, 2013 and the decided case laws, the following issues:

(i) Whether the Auditors of the Company will be liable for the loss caused to the company by the wrongful payment of dividends based on the Balance sheets duly audited by the Auditors.

(ii) What are the statutory duties of the Auditors in this regard? [CA (Final) Nov 2015]

Ans. As per SA 200 (Basic Principles Governing an Audit), an auditor should exercise due skill and care in conduct of audit. Moreover, in case of any suspicious circumstances, the auditor should seek additional evidences. Stock in trade is a material item appearing in the financial statements. Applying the provisions of SA 200 with respect to valuation of stock, an auditor is duty bound to ensure that the company has an efficient system for recording the purchase, sale, storage, consumption and disposal of stock and raw materials.As per SA 500 (Audit Evidence), it is the duty of the auditor to obtain sufficient appropriate audit evidence before forming any conclusions.As per SA 580 (Written Representations), the auditor should obtain representations from management, where considered appropriate. However, representations by management cannot be a substitute for other audit evidence that the auditor could reasonably expect to be available. If a representation by management is contradicted by other evidence, the auditor should examine the circumstances and, when necessary, reconsider the reliability of other representations made by management.Failure to verify the books of account by the auditor amounts to negligence since it amounts to failure to exercise reasonable care and skill in the performance of duties of an auditor.An auditor has no right to rely upon others where physical verification is possible. The auditor should not blindly rely on the certificate or representation of management as regards the matters which are capable of direct verification by him from books and accounts and vouchers. Valuation of stock is a material item, for which corroborative evidences must be obtained. In the given case, the auditor has not scrutinized the books of account, and so he has been grossly negligent. Thus, an auditor who approves of whatever is stated to him by the management of the company, does not discharge his duty of exercising reasonable skill and care [Controller of Insurance v H C Das. AIR 1957 Cal 387]. An auditor is duty bound to verify the assets of the company himself, and he cannot rely on the verification done by persons appointed by the company. The auditor is not entitled to assume that the directors, officers or employees of the company would have done their work correctly, and so dispense with verifying them [Fox & Sons v Morrish Grant & Co. (1918) 35 TLR 126].The auditor shall be liable to punishment as provided under section 147, viz a minimum fine of Rs. 25,000 and a maximum fine of Rs. 25,000 and a maximum fine of Rs. 5 lakh However, if the contravention is committed knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, then punishment shall be maximum Imprisonment of 1 year, and a minimum fine of Rs.1 lakh and a maximum fine of Rs.25 lakh.The statutory duties of auditors are as follows:(a) To ensure that the company has an efficient system for recording the purchase, sale,

storage, consumption and disposal of stock and raw materials.(b) To verify the books of account.(c) To reconsider the reliability of certificate of valuation of stock in trade submitted by the

manager of the company.Validity of decision of the company that the auditor shall not carry out a comprehensive audit

P.16B Small Pvt. Ltd. is a small company having only 2 members who are also the directors. As the company is incurring losses since past 3 years, it is received by the Board of directors as well as

27


by the members to reduce the audit fees, and that the auditor need not carry out a comprehensive audit. State the duties of auditor in this regard.

Ans.The scope of Audit is as governed by the provisions of the Companies Act, 2013 and Standards on auditing. Neither the Board of directors nor the members can restrict the scope of audit.The duties of the auditor as laid down under section 143 of the Companies Act 2013 cannot be restricted by an agreement between the company and auditor, or by the company (whether acting through it s Board of directors or members or both). Under section 143 of the Companies Act, 2013, there is no concept of full or part audit.It is the duty of auditor to carry out auditing with due skill and care and in accordance with the law and Standards on Auditing.As per section 142, 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. Remuneration has nothing to do with the scope of audit or work involved in audit. The remuneration of auditor may not be commensurate with his scope of work and duties as an auditor.The directors or even the entire body shareholders can not restrict his scope of work.In the present case, the directors have asked the auditor to accept reduced fee on the ground that the auditor need not carry out such comprehensive audit as he bas done in the past.The auditor may agree to reduction in audit fees, if he so chooses but cannot accept the suggestions of the directors or members regarding reduction in the scope of the work to be done.His responsibility as auditor shall still be governed by the provisions of the Companies Act, 2013 and the Standards an Auditing.Whether the auditor is entitled to inspect the minutes book?

P16C. Mr. Hard worker is the auditor of Refusal Ltd. The Board of directors of Refusal Ltd. refused inspection of minutes book when demanded by Mr. Hard Worker. Comment.

Ans.As per section 143 of the Companies Act, 2013, the auditor has a right of access, at all times, to the books of accounts and vouchers of the company, including all the statutory records such as minutes books etc.,

- The auditor may need to refer to the decisions of the member or the directors of the company in order to vouch and verify some the transactions of the company.

- It is therefore, necessary for the auditor to refer to the Minutes Books.- In the absence of the Minutes Books, the auditor may not be able to vouch / verify certain

transactions of the company and ascent whether these are intra vires or not.- In the present case, the Board of Directors refused to show the Minute Books to the auditor.- Therefore, the decision of the Board of director sin refusing inspection of Minutes Books is not

valid.Validity of resolution passed by members restricting the Powers of auditor

P.16D All Checks Ltd. is company of which Mr. Liberal is the auditor. In the AGM of all Checks Ltd., a resolution was passed restricting the powers of Liberal. Comment.

Ans.- Section 143 of the Companies Act, 2013 deals with the rights of the auditor.- An auditor has the right of access at all times to the books and accounts and vouchers of the

company and is entitled to require from the officers of the company such information and explanations as he may think necessary for the purpose of his audit.

- The rights as provided under section 143 of the Companies Act, 2013 are necessary to enable him to carry out his duties and responsibilities prescribed under the Companies Act, 2013 and Standards on Auditing.

- Any resolution of directors or shareholders cannot restrict the rights which have been granted to the auditor under the Companies Act, 2013.

- Accordingly, the resolution passed by the members restricting the poser of the auditor is ultra vires and is thus void.No comments made by the auditor in his audit report w.r.t. matters contained in section 143 (1) Consequences

P16E. Mr. Reserve is the auditor of Truth Ltd. The audit report prepared by Mr. Reserve does not contain any mention of any of the matters contained in section 143 (1) of the companies Act, 2013, as he was satisfied that no comment is required

Ans. Section 143 (1) of the Act lays down the duties of the auditor to make an enquiry in respect of specified matters.

- As per section 143 (1), the auditor shall enquire regarding loans and advances, transactions represented merely by book entries investments sold at less than the cost price, loans and advances shown as deposits, personal expenses charged to revenue etc.

28


It should be noted that the auditor is not required to report on the matters specified in section 143(1) unless he has any special comments to make on any of the items referred to therein.In the present case, the auditor of Truth Ltd, did not report on the matters specified in section 143 (1), as he was satisfied that no comment was required. Therefore, the auditor’s view is correct.Audit report not sent by the Auditor to members – Whether it amounts to contravention?

P16F Mr. Trouble, a member of Honest Ltd., has made a complaint against the auditor has failed to send the audit report to him.

Ans.- The powers and duties of auditor are contained in section 143 of the Companies Act, 2013.- The auditor is duty bound to forward his report to the company.- It is not a duty of the auditor to send a copy of his report to every member of the company.- It is the responsibility of the company to send the audit report to every member of the company.- In the given case, a member of Honest Ltd. has made a complaint against the auditor stating

that the auditor has failed to send the audit report to him.- Since it is not a duty of the auditor to send the audit report to any member, the auditor has not

failed in performing any of his duties, and accordingly, he is not liable.

Whether signing of audit report by the Manager, of the audit firm is valid?P18A Virat and Mahender are the two partners of the firm VM & Co., Chartered

Accountants. Anushka is a Chartered Accountant employed by VM and Co. as the Manager of the Firm. VM & Co. is the statutory auditor of Celebrities Ltd. The audit report of Celebrities Ltd. is signed by Anushka Comment.

Ans.As per section 145 of the Companies Act, 2013, the person appointed as an auditor of the company shall sign the audit report or sign or certify any other document of the company in accordance with the provisions of section 141 (2).As per section 141 (2), in case a firm is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.In the present case, Anushka has signed the audit report on behalf of the firm. Anushka is a chartered accountant, but not a partner in the firm. It is immaterial that Anushka is the manager in the firm. As per section 141 (2), the only person authorised to sign the audit report are Virat and Mahender.Therefore, the provisions of section 145 read with section 141 (2) have been contravened.

********

29