Company Audit-1

An auditor is a person who

is appointed to conduct an independent examination of books of accounts

and supporting vouchers to report on the reliability and fairness of profit

and loss statement and balance sheet. He is a professional person having
specialized knowledge and expertise in all branches of accounting.

In order to ensure that the person conducting the audit of accounts of

company has sufficient knowl-edge in accounting, the Companies Act
requires him to be a chartered accountant within the meaning of the
Chartered Accountants Act, 1949.

First Auditor

the Companies Act, 2013 provides for the appointment of first auditors by
the Board of Directors within 30 days of the date of registration of the
company. In the case of failure of the Board to appoint such auditor, it
shall inform the members of the company, who shall within 90 days at an
extraordinary general meeting appoint such an auditor and the auditor or
auditors so appointed shall hold office till the conclusion of the first annual
general meeting.

Rotation of Auditor

The mandatory rotation of the statutory auditors has been provided for
the Companies Act, 2013, which provides that no listed company or the
company belonging to such class or classes of companies as may be
prescribed shall appoint or reappoint:

(a) An individual as an auditor for more than one term of five consecutive
years.

(b) An audit firm as an auditor for more than two terms of five consecutive
years.

The Central Government, in its Companies (Audit and Auditors) Rules,

prescribed that these pro-visions shall be applicable to following class of
companies excluding one person companies and small companies:

(a) All unlisted public companies having paid-up capital of ` 10 crore or

more.

(b) All private limited companies having paid-up capital of ` 20 crore or

more.
(c) All companies having paid-up share capital of below threshold limit
mentioned in (a) and (b) above and having borrowing from financial
institutions, banks or public deposits of ` 50 crore or more.

ReAppoIntment

a retiring auditor may be reappointed at an annual general meeting, if—

(a) He is not disqualified for reappointment;

(b) He has not given the company a notice in writing of his unwillingness
to be reappointed;

(c) A special resolution has not been passed at that meeting appointing
some other auditor or providing expressly that he shall not be
reappointed.

According to Section 139(11), where a company is required to constitute

an Audit Committee , all appointments and reappointments, including the
filling of a casual vacancy of an auditor under this section, shall be made
after taking into account the recommendations of such committee.

Resignation of the Auditors

the Companies Act, 2013 prescribes that the auditor who has resigned
from the company shall file within a period of 30 days from the date of
resignation.

If the auditor does not comply with Subsection (2) of Section 140, he or it
shall be punishable with

fine which shall not be less than 50,000 rupees but which may extend to 5
lakh rupees.

Remuneration of the Auditors

the remuneration of the auditor of a company shall be fixed in its general

meeting or in such manner as may be determined therein, provided that
the Board may fix remuneration of the first auditor appointed by it.

the company and any facility extended to him but does not include any
remuneration paid to him for any

other service rendered by him at the request of the company.

removal of Auditors

An appointed auditor may be removed from his office either in accordance

with the provisions of the

Companies Act or as per restrictions imposed by the Chartered

Accountants Act.
Removal as per the companies act

The removal of the auditor in accordance with the provisions of the

Companies Act depends upon the

option of the concerned company. He may be removed before the expiry

of his term or after the expiry

of his term.

The Companies Act, 2013 lays down clear procedures about the removal
of auditors in Section 140.

1. Removal before the expiry of the term: Section 140(1) of the

Companies Act prescribes the removal

procedures of an auditor. According to this section, the auditor appointed

under Section 139 may be removed from his office before the expiry of his
term only by a special resolution of the company, after obtaining the
previous approval of the Central Government in that behalf in the
prescribed manner.

It is provided that before taking any action under this subsection, the
auditor concerned shall be given a reasonable opportunity of being heard.

2. Removal after the expiry of the term: According to Section 140(4),

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 reappointed, except
where the retiring auditor has completed a consecutive tenure of 5 years
or, as the case may be, 10 years, as provided under sub-section (2) of
Section 139.

Removal as per the chartered accountants act

An auditor may also be removed from his office due to his professional
misconduct. Following are some

1. If a chartered accountant accepts the position as an auditor previously

held by another chartered

accountant without first communicating him in writing.

2. If a chartered accountant is grossly negligent in the conduct of his

professional duties.

3. If a chartered accountant is engaged in any business or occupation

other than the profession of

accountancy unless permitted by the council of the Institute.

4. If a chartered accountant contravenes any of the provisions of the Act
and regulation made there

under, etc.

Eligibility And Qualification of An Auditor

It is provided in Section 141(1) of the Companies Act, 2013, that ‘a person

shall be eligible for appoint-ment as an auditor of a company only if he is
a chartered accountant’ within the meaning of the Chartùered
Accountants Act, 1949.

It is also provided that a firm whereof majority of the partners practicing in

India are qualified for appointment as aforesaid may be appointed by its
firm name to be the auditor of the company shall be authorized to act and
sign on behalf of the firm. In this connection, it may be noted that under
the Chartered Accountants Act, 1949, only a chartered accountant having
a certificate of practice can be engaged in the public practice of the
profession of accountancy. Therefore, only a practicing chartered
accountant can be appointed as an auditor of a company.

Disqualification of An Auditor

Section 141(3) provides the disqualification of auditors. According to it,

none of the following shall be

qualified for appointment as an auditor of a company—

(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 partner or an employee of an officer or employee of the company.

(d) A person who, or his relative or partner—

•RIGHTS OF A COMPANY AUDITOR

•Purpose: Report on truth and fairness of financial statements.

•In case of Sole Proprietor/Partnership Firm Rights and duties are

determined by agreement.
•In case of Joint Stock Company Rights and duties are laid down by
Companies Act, 201.

•Absolute Rights Cannot be curtailed by resolution or Article provision.

•Null and Void: Any provision limiting auditor's rights is invalid.

Case Law: Newton vs Birmingham Small Arms Co. Ltd. (1906) supports
auditor's absolute rights.

Auditor's Rights

1. Access to financial information

2. Right to attend general meetings

3. Right to receive notices and communications

4. Right to seek information from employees and officers

Auditor's Duties

1. Report on financial statements

2. Conduct audit in accordance with auditing standards

3. Detect and report material misstatements

4. Comply with Companies Act, 2013, and auditing standards.

Auditor's Responsibilities:

1. Report on Truth and Fairness: Auditors must report on whether the

financial statements present a true and fair view of the company's
financial position and performance.

2. Determine True and Fair View: Auditors must determine whether the
balance sheet and profit and loss account show a true and fair view of the
company's financial position and performance.

Auditor's Obligations

1. Report Discrepancies: Auditors must report discrepancies that affect the

true and fair view of the financial statements.

2. Include Paragraph in Audit Report: Auditors must include a paragraph in

the audit report stating the discrepancies and their effect.
3. Qualify or Adverse Audit Report: Auditors may need to qualify or issue
an adverse audit report if the discrepancies are material.

The Companies Act provides the following rights to the auditor

1. Right of access to books and vouchers: Access to company records

whether et in headquarters for the purpose of making his report.

2. Right to obtain information and explanations: Require information and

explanations from company officers necessary for the performance of his
duties.

3. Right to visit branch offices and access branch accounts: Visit branch
offices and access branch accounts and vouchers.

4. Right to receive branch audit reports: Receive audit reports from branch
auditors.

5. Right to receive notices and attend general meetings: Attend general

meetings and receive notices and communications.

6. Right to make representation: Make written representation to the

company and have it circulated or read out at a general meeting.

7. Right to sign audit report: Only the appointed auditor or a partner in the
firm can sign the audit report.

8. Right to seek legal and technical advice: Take legal and technical advice
as required for audit or discharge of duties.

9. Right to be indemnified: Be indemnified out of company assets against

liability incurred in defending against civil or criminal proceedings.

10. Right to receive remuneration: Receive remuneration for services

rendered, which cannot be limited by a company resolution.

Liabilities on the basis of legal implications

On the basis of legal implication, liabilities may be divided into three

categories, namely:

1. Liabilities under the Companies Act: Under the Companies Act, the
liability of an auditor may

arise in the following cases:

(a) Misappropriation and retention of client’s money: If an auditor has

misapplied or retained or
become liable or accountable for any money or property of the company,
or has been guilty of any

misfeasance or breach of trust in relation to the company, the court may

compel him to repay or to

restore the money or property of or any part thereof with interest at

certain rate or to contribute such

sum to the assets of the company by way of compensation (Section 340).

(b) Misstatements in the prospectus: He shall be liable with regard to

misstatements in the pro-

spectus of the company under Section 35. The auditor is liable to pay
compensation to every person

who subscribes for any shares or debentures on the faith of the

prospectus issued by the company for

any loss or damage he may have sustained.

(c) False statement in returns, reports, etc.: He shall be liable if he makes

a false statement with

material particulars in returns, reports or other statements knowing it to

be false or omits any material

fact knowing it to be material (Section 448).

(d) Intentional false evidence: He shall be liable if he gives false evidence

intentionally upon any

examination upon oath or solemn affirmations, authorized under this Act

or in any affidavit, deposi-

tion or solemn affirmations, in or about the winding-up of any company

under this Act (Section 449).

(e) Liability for delinquency: The liquidators may prosecute an auditor as

an officer of the com-

pany during the course of winding-up of the company for delinquency.

. Liabilities under the Chartered Accountants Act: Liability of

Chartered Accountant, acting as an

auditor, may be in the form of disciplinary proceedings under the

Chartered Accountants Act, 1949. It

may arise on account of professional misconduct on the part of the

auditor.
There are separate provisions for professional misconduct in relation to (a)
chartered accountants in

practice (b) members of the Institute in service and (c) members of the
Institute in general.

Liabilities on the basis of nature of liability

On the basis of nature of liability, it can be divided into two groups—

1. Civil liability: The civil liability of an auditor can be for (a) negligence or
(b) misfeasance. In these

cases, he may be called upon to pay damages as decided by the court.

(a) Liability for negligence: An auditor is appointed to perform certain

duties. To the extent of his

duties as an auditor, he acts as an agent of his client. In this capacity, he

must exercise reasonable care

and skill to perform his duties for which he is employed. If he acts

negligently on account of which

the client has to suffer loss, the auditor may be held liable and may be
called upon to make good the

damages, which the client suffered due to his negligence.

b) Liability for misfeasance: The term ‘misfeasance’ implies breach of trust

or breach of duty. An

auditor has to perform certain duties, which may arise out of a contract
with the client as in the case

of sole proprietor or partnership or it may be statutory as laid down under

various statutes. The duties

of a company auditor have been statutorily laid down in the Companies

Act, 2013. If the auditor does

not perform his duties properly and as a result his client suffers, he may
be held liable for misfeasance.

Criminal liability: An auditor of a company can be held guilty of criminal

offences, if he wilfully

makes a false statement in any report, return, certificate or balance sheet.

Under Section 448 of the Companies Act, 2013, ‘if an auditor in any
report, certificate, balance sheet,
prospectus, statement or other document required by or for the purpose
of any of this Act, makes a

statement (a) which is false in any material particular, knowing it to be

false or (b) omits any material

fact, knowing it to be material, he will be held liable on criminal ofrelat.

AudIt commIttee

Section 177 of the Companies Act, 2013 requires the setting up of an

audit committee by every public

company having a paid-up capital of ` 5 crores or more. An audit

committee is a committee of the Board

of Directors of a company entrusted with the task of overseeing the

financial reporting process of the

company. This committee will consider various issues relating to the audit
function and review the com-

pany’s financial and risk management policies.

Requirements under the companies act

According to Section 177 of the Companies Act, 2013, following are the
requirements of the audit

committee:

1. The Board of Directors of every listed company and such other class or
classes of companies, as

may be prescribed, shall constitute an Audit Committee.

The Audit Committee shall consist of a minimum of three directors with

independent directors

forming a majority.

It is provided that majority of members of Audit Committee including its

Chairperson shall be

persons with ability to read and understand the financial statement.

3. Every Audit Committee of a company existing immediately before the

commencement of this

Act shall, within one year of such commencement, be reconstituted in

accordance with Sub-

section (2).
 4. Every Audit Committee shall act in accordance with the terms of
reference specified in writing by

the Board which shall, inter alia, include,—

(i) the recommendation for appointment, remuneration and terms of

appointment of auditors

of the company;

(ii) review and monitor the auditor’s independence and performance and
effectiveness of

audit process;

(iii) examination of the financial statement and the auditors’ report

thereon;

(iv) approval or any subsequent modification of transactions of the

company with related

parties;

(v) scrutiny of inter-corporate loans and investments;

(vi) valuation of undertakings or assets of the company, wherever it is

necessary;

(vii) evaluation of internal financial controls and risk management

systems;

(viii) monitoring the end use of funds raised through public offers and
related matters.

corporate governance through AudIt committees

The efficiency of a Board depends on the overall performance of its

functions, composition and struc-

ture of the Board and the procedures followed by it. Ideally, in mid-size to
large-size Boards, the Board

of Directors constitute subcommittees as part of the Board only to discuss

certain issues at Board level

in a much detailed and focused manner.

Clause 49 prescribes only two committees as mandatory ones. These are

as follows:

(i) Audit Committee

(ii) Shareholder’s Grievance Committee.

AREAS OF AUDIT COMMITTTEE

Audit Committee is empowered to investigate any activ-

ity within terms of reference, seek information from any employee, obtain
outside advice and secure

attendance of outsiders, if necessary. Its role shall include recommending

appointment and removal of

an external auditor, fixation of audit fees, approval of payment for other

services, review with the man-

agement of the annual financial statements before submission to the

Board, reviewing the adequacy of

internal control system, oversight of the financial reporting process of the

company and disclosure of

its financial information to ensure that financial statements are correct,

sufficient and credible, review-

ing the adequacy of internal audit function, reviewing the financial and
risk management policies of the

company, reviewing the functioning of the whistle-blowing policy and

looking into reasons for sub-

stantial defaults, etc.

Qualified and independent audit committee: A qualified and independent

audit committee

shall be set up by all eligible companies giving the terms of reference,

subject to the following

stipulations—

(i) The Audit Committee shall have minimum three directors as members.
Two-third of the members

of the Audit Committee shall be independent directors.

(ii) All members of the Audit Committee shall be financially literate and at
least one member shall

have accounting or related financial management expertise.

(iii) The chairperson of the Audit Committee shall be an independent

director.

(iv) The chairperson of the Audit Committee shall be present at Annual

General Meeting to answer the
shareholder’s queries.

(b) Meeting of the audit committee: The Audit Committee should meet at
least four times in a year

and not more than four months shall elapse between two meetings. The
quorum shall be either two

members or one-third of the members of the Audit Committee, whichever

is greater, but there should be

a minimum of two independent members present. There is no bar on the

maximum number of sittings

an Audit Committee can have.

(c) Powers of the audit committee: The Audit Committee shall have
powers, which should include

the following—

(i) To investigate any activity within its terms of reference.

(ii) To seek information from any employee.

(iii) To obtain outside legal or other professional advice.

(iv) To secure attendance of outsiders with relevant expertise, if it is

considered necessary.

(d) Role of the audit committee: According to Clause 49, the role of the
Audit Committee shall include

the following—

• Oversight of the financial reporting process of the company and the

disclosure of its financial infor-

mation to ensure that the financial statement is correct, sufficient and

credible.

• Recommending the appointment and removal of external auditor,

fixation of audit fee and also

approval for payment for any other service.

• Reviewing with the management the annual financial statements

before submission to the Board.

• Reviewing with the management, external and internal auditors and

the adequacy of the internal

control system.
(d) A person who, or his relative or partner—n 142(1), the remuneration of
the auditor of a company shall be fixed in its general

meeting or in such manner as may be determined therein, provided that

the Board may fix remuneration

of the first auditor appointed by it.

According to Section 142(2), the remuneration under Subsection (1) shall,

in addition to the fee pay-

able 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 does not include any
remuneration paid to him for any

other service rendered by him at the request of the company.e0(6) of the

Companies Act, 2013 provides for the appointment of first auditors by the
Board

of Directors within 30 days of the date of registration of the company. In

the case of failure of the Board

to appoint such auditor, it shall inform the members of the company, who
shall within 90 days at an

extraordinary general meeting appoint such an auditor and the auditor or

auditors so appointed shall

hold office till the conclusion of the first annual general meeting.