(iii) Appointing Auditor other than the Retiring Auditor [Section 140(4)]
a. If the retiring auditor has not completed a consecutive tenure of 5 years or 10 years, as the case may be, as provided under sub-section (2) of section 139, special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re- appointed.
b. On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.
c.Where notice is given of such a resolution and the retiring auditor makes with respect thereto representation in writing to the company (not exceeding a reasonable length) and requests its notification to members of the company, the company shall, unless the representation is received by it too late for it to do so,—
(1) in any notice of the resolution given to members of the company, state the fact of the representation having been made; and
(2) send a copy of the representation to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representation by the company.
d. If a copy of the representation is not sent as aforesaid because it was received too late or because of the company’s default, the auditor may (without prejudice to his right to be heard orally) require that the representation shall be read out at the meeting.
e. However, if a copy of representation is not sent as aforesaid, a copy thereof shall be filed with the Registrar.
f. If the Tribunal is satisfied on an application either of the company or of any other aggrieved person that the rights conferred by this sub-section are being abused by the auditor, then the copy of the representation may not be sent and the representation need not be read out at the meeting.(iv) Auditor acts in a fraudulent manner or abetted or colluded in any fraud [Section 140(5)]
- On satisfaction of Tribunal that the auditor of a company has acted in a fraudulent manner etc.: Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either—
suo motu, or
on an application made to it by the Central Government, or
by any person concerned
if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors.
- Requirement for change of auditor: If the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within 15 days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place.
- Ineligibility of auditor to be appointed: An auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of 5 years from the date of passing of the order and the auditor shall also be liable for action under section 447 of the Companies Act 2013.
- Explanation I. — It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its director or officers.
- Explanation II.—For the purposes of this Chapter the word “auditor” includes a firm of auditors.
Example 10: FLP Ltd, engaged in the business of real estate and energy, defaulted on its borrowings which amounted to thousands of crores. During the year ended 31st March 2019, a fraud was uncovered in respect of various transactions of the company and it was observed by the Central Government that the auditors of the company were involved in such fraud. Please suggest what can be the course of action in this case.
Answer: The Central Government may apply to the Tribunal in respect of such matter highlighting that the auditors miserably failed to fulfill their duties as auditors of the company. If the Tribunal is satisfied that the auditors were involved in the fraud with the company, the Tribunal may direct the company to change its auditors and those auditors shall not be eligible to be appointed as auditor of any company for 5 years and also liable for action under section 447 of the Companies Act 2013.
4. ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITORS [SECTION 141]
Section 141 of the Companies Act, 2013 provides for eligibility, qualifications and disqualifications of auditors. This section deals with:
(i) Qualifications of an auditor [Section 141(1) & (2)]:
- A person shall be eligible to be appointed as an auditor of a company only if he is a Chartered Accountant within the meaning of the Chartered Accountants Act, 1949.
- A firm whereof majority of partners practicing in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company.
- 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 authorized to act and sign on behalf of the firm.
(ii) Disqualifications of auditors [Section 141(3)]:
(a) Section 141 (3) of the Act read with Rule 10 of Companies (Audit and Auditors) Rule 2014 prescribes following persons shall not be qualified for appointment as auditor of a company—
(1) A body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008;
(2) an officer or employee of the company;
(3) a person who is a partner, or who is in the employment, of an officer or employee of the company;
Example 11: Mr. Anil, a Chartered accountant, is a partner of a firm and has been appointed as an auditor of Laxman Ltd. in the Annual General Meeting of the company held in September 2018 in which he accepted the assignment. Subsequently, in January 2019, he offered Bharat, another Chartered Accountant, who is the Manager Finance of Laxman Ltd., to join the firm of Anil as a partner.
Answer: Provisions and Explanation: Section 141(3)(c) of the Companies Act, 2013 prescribes that any person who is a partner or in employment of an officer or employee of the company will be disqualified to act as an auditor of a company. Sub-section (4) of Section 141 provides that an auditor who becomes subject, after his appointment, to any of the disqualifications specified in sub-sections (3) of Section 141, shall be deemed to have vacated his office as an auditor.
Conclusion: In the present case, Anil is auditor of M/s Laxman Ltd. and any employee of Laxman Ltd. cannot become the Partner of the firm where Anil is a Partner. In case that happens, he/the firm shall be deemed to have vacated office of the auditor of M/s Laxman Ltd.
(4) a person who, or his relative or partner—
- is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company (i.e. fellow subsidiary):
Provided that the relative may hold security or interest in the company of face value not exceeding ?1,00,000 as prescribed under Rule 10 of the Company (Audit and Auditors) Rules, 2014.
Further, the above condition shall, wherever relevant, be also applicable in the case of a company not having share capital or other securities. If the relative acquires any security or interest above the prescribed threshold i.e. ?1,00,000 , the corrective action to maintain the limits as specified above shall be taken by the auditor within 60 days of such acquisition or interest.
Example 12: “Mr. Ashish”, a practicing Chartered Accountant, is holding securities of “XYZ Ltd.” having face value of ? 900/-. Whether Mr. Ashish is qualified for appointment as an Auditor of “XYZ Ltd.”?
Answer: As per section 141 (3)(d) (i) an auditor is disqualified to be appointed as an auditor if he, or his relative or partner holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company:
In the present case, Mr. Ashish is holding security of ? 900 in the XYZ Ltd, therefore he is not eligible for appointment as an Auditor of “XYZ Ltd”.
Example 13: “Mr. P” is a practicing Chartered Accountant and “Mr. Q”, the relative of “Mr. P”, is holding securities of “ABC Ltd.” Having face value of ? 90,000/-. Whether “Mr. P” is qualified for being appointed as an auditor of “ABC Ltd.”?
Answer: As per section 141 (3)(d)(i), an auditor is disqualified to be appointed as an auditor if he, or his relative or partner holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company. Further as per proviso to this Section, the relative of the auditor may hold the securities or interest in the company of face value not exceeding of ?1,00,000.
In the present case, Mr. Q. (relative of Mr. P, an auditor), is having securities of ?90,000 face value in ABC Ltd., which is as per requirement of proviso to section 141 (3)(d)(i). Therefore, Mr. P will not be disqualified to be appointed as an auditor of ABC Ltd.
Example 14: “BC & Co.” is an audit firm having partners “Mr. B” and “Mr. C” and “Mr. A”, relative of “Mr. C”, is holding securities of “MWF Ltd.” having face value of ?1,01,000. Whether “BC & Co.” is qualified for appointment as auditor of “MWF Ltd.”?
Answer: As per section 141(3)(d)(i) an auditor is disqualified to be appointed as an auditor if he, or his relative or partner holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company. Further as per proviso to this Section, the relative of the auditor may hold the securities or interest in the company of face value not exceeding of ?1,00,000.
In the instant case, BC & Co, will be disqualified for appointment as an auditor of MWF Ltd as the relative of Mr. C i.e. partner of BC & Co., is holding the securities in MWF Ltd which is exceeding the limit mentioned in proviso to section 141(3)(d)(i).
- is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ? 5 Lacs; or
- has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ? 1 Lac.
(5) a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company. According to the Companies (Audit and Auditors) Rules, 2014, the term “business relationship” shall be construed as any transaction entered into for a commercial purpose, except–
- commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or the regulations made under those Acts;
- commercial transactions which are in the ordinary course of business of the company at arm’s length price like sale of products or services to the auditor as customer by the companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses.
(6) a person whose relative is a director or is in the employment of the company as a director or key managerial personnel;
(7) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 companies other than one person companies, small companies and private companies having paid-up share capital less than 100 crores rupees.
Ceiling on numbers of audits: Before appointment is given to any auditor, the company must obtain a certificate from him to the effect that the appointment, if made, will not result in an excess holding of company audit by the auditor concerned over the limit laid down in section141(3)(g) of the Companies Act, 2013 which prescribes that a person who 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 other than one person companies, dormant companies, small companies and private companies having paid-up share capital less than ? 100 crore (MCA notification dated 5 June 2015).
Example 15: “ABC & Co.” is an audit firm having partners “Mr. A”, “Mr. B” and “Mr. C”, Chartered Accountants. “Mr. A”, “Mr. B” and “Mr. C” are holding appointment as auditors in 4, 6 and 10 companies respectively.
- Provide the maximum number of audits remaining in the name of “ABC & Co.”
- Provide the maximum number of audits remaining in the name of individual partner i.e. Mr. A, Mr. B and Mr. C.
Fact of the Case: In the instant case, Mr. A is holding appointment in 4 companies, Mr. B is having appointment in 6 companies and Mr. C is having appointment in 10 companies. In aggregate all three partners are having 20 audits.
Provisions and Explanations: As per section 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for appointment as an auditor if he is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such person or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies other than one person companies, dormant companies, small companies and private companies having paid-up share capital less than ` 100 crores.
As per section 141 (3)(g), this limit of 20 company audits is per person. In the case of an audit firm having 3 partners, the overall ceiling will be 3 × 20 = 60 companies audit. Sometimes, a Chartered Accountant may be a partner in a number of auditing firms. In such a case, all the firms in which he is partner or proprietor will be together entitled to 20 company audits only on his account.
- Therefore, ABC & Co. can hold appointment as an auditor of 40 more companies:
Total Number of audits for which the firm would be eligible = 20*3 = 60
Number of audits already taken by all the partners
In their individual capacity = 4+6+10 = 20
Remaining number of audits available to the firm = 40
- With reference to above provisions, an auditor can hold more appointment as auditor = ceiling limit as per section 141(3)(g)- already holding appointments as an auditor.
(1) Mr. A can hold: 20 – 4 = 16 more audits.
(2) Mr. B can hold 20 - 6 = 14 more audits and
(3) Mr. C can hold 20-10 = 10 more audits.
It has been assumed that the companies given in the question are not one person companies, dormant companies, small companies and private companies having paid-up share capital less than 100 crore.
(8) a person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction;
(9) a person who, directly or indirectly, renders any service referred to in section 144 to the company or its holding company or its subsidiary company.
Explanation— For the purposes of this clause, the term "directly or indirectly" shall have the meaning assigned to it in the Explanation to section 144 (section 144 deals with certain services not to be tendered by auditor).
(iii) Vacation of office by an auditor [Section 141(4)]:
If a person appointed as an auditor of a company incurs any of the disqualifications specified in Section 141(3), he shall be deemed to have vacated his office. Such vacation shall be deemed to be a casual vacancy in the office of the auditor.
5. REMUNERATION OF AUDITORS [SECTION 142]
Section 142 of the Companies Act, 2013 provides for remuneration of auditors. According to this section:
- The remuneration of the auditors of a company shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine.
- In the case of first auditor, remuneration may be fixed by the Board.
- The remuneration mentioned aforesaid shall, in addition to the fee payable to an auditor, include the expenses, if any, incurred by the auditor in connection with the audit of the company and any facility extended to him. But the remuneration does not include any remuneration paid to him for any other service rendered by him at the request of the company.
Example 16: SHRD Private Ltd is engaged in the business of software and consultancy. The company has an annual turnover of INR 2,000 crores but its profit margins are not very good as compared to the industry standards. For the financial year ended 31st March 2019, the company proposed appointment of its statutory auditors at its Board meeting, however, the remuneration was not finalized. The statutory auditors completed the engagement formalities including the engagement letter between the company and the auditors and it was decided that the engagement letter be signed without fee i.e. with the clause that the fee to be mutually decided. In this situation, engagement letter with such arrangement is valid.
6. POWERS AND DUTIES OF AUDITORS AND AUDITING STANDARDS [SECTION 143]
(i) Powers of Auditors [Section 143(1)]:
- Access to books of account and vouchers: Every auditor of a company shall have a right of access at all times to the books of accounts and vouchers of the company, whether kept at the registered office of the company or at any other place.
- Entitled to have necessary information and explanation: He shall be entitled to require from the officers of the company such information and explanations as the auditor may consider necessary for the performance of his duties as auditor.
- Access to record of all its subsidiaries: The auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries and associate companies in so far as it relates to the consolidation of its financial statements with that of its subsidiaries and associate companies.
(ii) Duties of Auditors
(a) Matters of inquiry: The auditor shall inquire into the following matters, namely—
- 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;
- Whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;
- 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;
- Whether loans and advances made by the company have been shown as deposits;
- Whether personal expenses have been charged to revenue account;
- 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.
(b) The auditor shall make a report to the members of the company on the following:
- 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
(c) The auditor while making the report shall take into account the provisions of the Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Actor any rules made thereunder or under any order made under section 143(11).
(d) The auditor shall express his opinion on the accounts and financial statements examined by him. He shall express an opinion, according to him and to the best of his information and knowledge, whether 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) The auditors’ report shall also state—
- whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements;
- whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;
- whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;
- whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;
- whether, in his opinion, the financial statements comply with the accounting standards;
- the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;
- whether any director is disqualified from being appointed as a director under sub section (2) of section 164;
- any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;
- whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls;
As per the Rule 10A inserted by the Companies(Audit and Auditors) Amendments Rules, 2014 vide Notification dated 14th October, 2014,for the purposes of clause (i) of sub-section (3) of section
143 (i.e. point 9 mentioned above), for the financial years commencing on or after 1st April 2015, the report of the auditor shall state about existence of internal financial controls with reference to financial statements and its operating effectiveness.
Provided that auditor of a company may voluntarily include the statement referred to in this rule for the financial year commencing on or after 1st April 2014 and ending on or before 31st March 2015.
Exemption to Private Company: ‘In case of Private Company - Clause (i) of Sub-Section (3) of Section 143 shall not apply to a private company:-
(i) which is a one person company or a small company; or
(ii) which has turnover less than rupees fifty crore as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than rupees 25 crore. - Notification Dated 13th June, 2017.
The aforesaid exceptions, modifications and adaptations shall be applicable to a Private company which has not committed a default in filing of its financial statements under section 137 or annual return under section 92 of the said Act with the Registrar.’
[Notification No. G.S.R. 583(E) dated 13th June, 2017 stated that requirements of reporting under section 143(3)(i) read with Rule 10A of the Companies (Audit and Auditors) Rules, 2014 of the Companies Act 2013 shall not apply to certain private companies. Through issue of this circular, it was clarified that the exemption shall be applicable for those audit reports in respect of financial statements pertaining to financial year, commencing on or after 1st April 2016, which are made on or after the date of the said notification. (Clarification regarding applicability of exemption given to certain private companies under section 143(3)(i) vide circular no. 08/2017 dated 25th July 2017)]
- such other matters as may be prescribed.
(f) Rule 11 of the Companies (Audit and Auditors) Rules, 2014 provides that the auditor’s report shall also include their views and comments on the following matters, namely:
- whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement;
- whether the company has made provision, as required under any law or accounting standards, for material foreseeable losses, if any, on long term contracts including derivative contracts;
- whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company.
- whether the company had provided requisite disclosures in its financial statements as to holdings as well as dealings in Specified Bank Notes during the period from 8November2016 to 30 December 2016 and if so, whether these are in accordance with the books of accounts maintained by the company” (this provision is not relevant now, however, till the time this requirement is not removed from the law, it will continue to be reported as not applicable for any financial year post 31 March 2017).
(g) Where any of the matters is answered in the negative or with a qualification, the auditor’s report shall state the reason for the same.
Example 17: MNO Ltd. is a listed company engaged in the business of trading of various products. The company also plans to start manufacturing of certain products which are currently traded.
During the course of its audit, the auditors completed all the procedures related to audit of financial statements. However, the auditor got stuck on one procedure because of which audit has not got concluded.
Auditors are waiting for certain additional information – Directors report and Management Discussion and Analysis (MD&A) for their review. However, the management is not ready with this information and wants the auditors to complete their work without review of this information. Please advise as per the legal requirements.
Answer: In the given case, the requirement of the auditors regarding additional information i.e. Directors report and MD&A without which they have not been able to conclude the audit doesn’t look valid. The auditor is required to audit the financial statements and express an opinion on the same. The auditor does not audit these additional information.
Hence the auditor should conclude the work without delaying because of this additional information.
(h) Compliance with auditing standards [Section 143(9) and 143(10)]:
- Every auditor shall comply with the auditing standards.
- The Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by the ICAI, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority (NFRA).
- It is further provided that until any auditing standards are notified, any standard or standards of auditing specified by the ICAI shall be deemed to be the auditing standards.
Additional matters to be reported in case of specified companies [Section 143(11)]: In respect of such class or description of companies, as may be specified in the general or special order by the Central Government, may in consultation with the NFRA direct, the auditor’s report shall also include a statement on such matters as may be specified therein.
CARO 2020 issued by MCA should be complied by the statutory auditor of every company on which it applies.
(iii) Reporting of frauds by auditors [Section 143(12)]:
Not withstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.
(1) The Companies (Audit and Auditors) Amendment Rules, 2015, issued by the MCA, on 14December 2015, amended Rule 13 of the Companies (Audit and Auditors) Rules, 2014. The amended Rule 13 has introduced the thresholds for the purpose of reporting on frauds and a differential reporting responsibilities of the statutory auditor with respect to the fraud(s) above or below the notified threshold.
As per the amended Rule 13, 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 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 in following manner:
- the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than 2 days of his knowledge of the fraud, seeking their reply or observations within 45 days;
- on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within 15 days from the date of receipt of such reply or observations;
- in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of 45 days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations;
- the report shall be sent to the Secretary, Ministry of Corporate Affairs (MCA) in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same;
- the report shall be on the letter-head of the auditor containing postal address, e-mail address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; and
- The report shall be in the form of a statement as specified in Form ADT-4.
(2) In case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board immediately but not later than two days of his knowledge of fraud and he shall report the matter specifying the following:
- Nature of fraud with description;
- Approximate amount involved; and
- Parties involved.
The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) of amended Rule 13 during the year shall be disclosed in the Board’s Report:
- Nature of fraud with description;
- Approximate amount involved;
- Parties involved, if remedial action not taken; and
- Remedial actions taken.
(3) The provision of this section shall mutatis mutandis apply to a Cost Auditor and a Secretarial Auditor during the performance of his duties under section 148 and section 204 respectively.
(4) 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 referred above if it is done in good faith.
(5) Penalty for non-compliance of section 143(12): If any auditor, cost auditor or the Secretarial auditor, as mentioned above, do not comply with the provisions of this section (i.e. section 143(12)), he shall be punishable with fine which shall not be less than `1 lac but which may extend to `25 lacs.
(6) Good Faith [Section 143 (13)]: 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 referred to in sub- section (12) if it is done in good faith.
Example 18: NSH Ltd is engaged in the business of retail and is listed on National stock exchange. The company recently acquired a business undertaking to expand its business. During the year, certain transactions amounting to thousands of rupees were carried out by the employees/ directors of the company which the management found suspicious and appointed a forensic consultant to carry out their review. Pursuant to this review process, certain suspect transactions were identified by the management and the management reported these transactions to the appropriate authorities. During the course of statutory audit, such transactions were also made known to the statutory auditors. How should the auditor dealt with such matter?
Answer: The auditors need to report about this matter appropriately in their CARO report.
As per Section 143(12) of the Companies Act, 2013, the auditor is required to report to the Audit Committee or to the Board of Directors and, where applicable, to the Central Government an offence of fraud in the company by its officers or employees only if he is the first person to identify/note such instance in the course of performance of his duties as an auditor. In this case, the suspicious transactions have been identified by the management first and information about the same has been given by the management to the auditor. Accordingly, the auditor should report about this matter to the Audit Committee/ Board of Directors but the auditor would not be required to report the same to Central Government.
(iv) Audit of Government Companies [Section 143(5), (6) & (7)]:
(a) 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 CAG shall appoint the auditor under section 139(5) or 139(7) and direct such auditor the manner in which the accounts of the Government company are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the CAG.
(b) The audit report among other things, include the following:
- the directions, if any, issued by the CAG;
- the action taken thereon; and
- its impact on the accounts and financial statement of the company.
(c) The CAG shall within 60 days from the date of receipt of the audit report have a right to—
- conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorize in this behalf; and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorized, on such matters, by such person or persons, and in such form, as the CAG may direct; and
- comment upon or supplement such audit report.
(d) Any comments given by the CAG upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements under section 136(1) and also be placed before the AGM of the company at the same time and in the same manner as the audit report.
(e) Test Audit: For Government Company or Company controlled by State Government or Central Government, the CAG may, if he considers necessary, by an order, cause test audit to be conducted of the accounts of such company, without prejudice to the provisions related to Audit and Auditors. The provisions of section 19A of the Comptroller and Auditor-General’s (Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of such test audit.
(v) Audit of accounts of branch office of company [Section 143(8)]:
(a) Branch office in India:
Where a company has a branch office, the accounts of that office shall be audited either by:
- the company’s auditor appointed under section 139, or
- by any other person qualified for appointment as an auditor of the company under section 139.
(b) Branch office outside India:
If the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by:
- the company’s auditor or
- by an accountant or
- by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country.
(c) 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.
(d) The branch auditor shall prepare a report on the accounts of the branch examined by him and send it to the auditor of the company who shall deal with it in his report in such manner as he considers necessary.
(e) 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.
(vi) Application of provisions of section 143 to Cost Accountants and Company Secretary [Section 143(14)]: The provisions of this section shall mutatis mutandis apply to:
- the cost accountant conducting cost audit under section 148; or
- the company secretary in practice conducting secretarial audit under section 204.
7. AUDITOR NOT TO RENDER CERTAIN SERVICES [SECTION 144]
Section 144 of the Companies Act, 2013 provides for Auditor not to render certain services. According to this section:
(i) An auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be. But such services shall not include any of the following services (whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company), namely—
- accounting and book keeping services;
- internal audit;
- design and implementation of any financial information system;
- actuarial services;
- investment advisory services;
- investment banking services;
- rendering of outsourced financial services;
- management services; and
- any other kind of services as may be prescribed. [However no other kind of services has been prescribed till date]
(ii) Explanation: The term “directly or indirectly” shall include rendering of services by the auditor,—
- 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 trademark or brand is used by such individual;
- 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 trademark or brand is used by the firm or any of its partners.