Sections 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 whetheror 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 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 matterswhich 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 with reference to
financial statements in place and the operating effectiveness of such controls;
However, it may be noted that the reporting requirement on adequacy of internal
financial controls (IFCs) with reference to financial statements shall not be
applicable to a private company which is a–
(I) One person company; or
(II) Small company; or
(III) Company having turnover less than Rs. 50 crore as per latest audited
financial statement and having aggregate borrowings from banks or
financial institutions or any body corporate at any point of time during the
financial year less than Rs. 25 crore(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:
A. 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.
B. 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.
C. 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 the amount involved is to be indicated.
[Notes: For detailed provisions of CARO, 2016, students may refer Para 10 Reporting
under Companies (Auditor’s Report) Order, 2016]Example: The head accountant of a company entered fake invoices of credit purchases
in the books of account aggregate of ` 50 lakh and cleared all the payments to such bogus
creditor. Here, the auditor of the company is required to report the fraudulent ac tivity to
the Board or Audit Committee (as the case may be) within 2 days of his knowledge of
fraud. Further, the company is also required to disclose the same in Board’s Report.
It may be noted that the auditor need not to report the central government as the amount
of fraud involved is less than ` 1 crore, however, reporting under CARO, 2016 is required.
(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.
[Note: Students may note that Companies (Auditor’s Report) Order, 2016 has been
notified in this perspective which is discussed later under Para 10 Reporting under
Companies (Auditor’s Report) Order, 2016]
(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.
(8) 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.