ICAI Notes: Audit and Auditors - CA Intermediate PDF Download

 Page 1


 
LEARNING OUTCOMES 
    
 
CHAPTER 
10 
  
 
AUDIT AND AUDITORS 
 
 
 
At the end of this chapter, you will be able to: 
?
Comprehend the procedure for appointment of auditors, 
their removal, resignation, eligibility, qualifications, 
disqualifications and remuneration. 
?
Identify the powers and duties of auditors. 
?
Explain about auditing services and certain services which an 
auditor cannot render. 
 
 
© The Institute of Chartered Accountants of India
Page 2


 
LEARNING OUTCOMES 
    
 
CHAPTER 
10 
  
 
AUDIT AND AUDITORS 
 
 
 
At the end of this chapter, you will be able to: 
?
Comprehend the procedure for appointment of auditors, 
their removal, resignation, eligibility, qualifications, 
disqualifications and remuneration. 
?
Identify the powers and duties of auditors. 
?
Explain about auditing services and certain services which an 
auditor cannot render. 
 
 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 10.2 
?  
 
This chapter explains the provisions of Chapter X of the Companies Act, 2013 
(hereinafter also referred to as “the Act” or “this Act”), consisting of Sections 139 to 
148 dealing with the Audit and Auditors. The provisions contained in chapter X of 
the Act are supplemented by the Companies (Audit and Auditors) Rules, 2014.  
The relevant aspects (and arrangement of sections) to be covered in this book 
chapter are presented below;   
 
 
* Appointment includes re-appointment  
Audit & Auditors 
Appointment* of Auditors (Section 139)
First Auditor
Subsequent Auditor
Removal, resignation of auditor and giving of special notice (Section 140)
Eligibility, Qualification & Disqualification (Section 141)
Remuneration of Auditor (Section 142) 
Powers & Duties of auditors and auditing standards (Section 143) 
Segment of Audit Reports
Prohibited Services (Section 144) 
Signing of Audit Reports (Section 145)
Auditor to attend AGM (Section 146)
Punishment Provisions (Section 147)
Cost Auditor (Section 148)
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
Page 3


 
LEARNING OUTCOMES 
    
 
CHAPTER 
10 
  
 
AUDIT AND AUDITORS 
 
 
 
At the end of this chapter, you will be able to: 
?
Comprehend the procedure for appointment of auditors, 
their removal, resignation, eligibility, qualifications, 
disqualifications and remuneration. 
?
Identify the powers and duties of auditors. 
?
Explain about auditing services and certain services which an 
auditor cannot render. 
 
 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 10.2 
?  
 
This chapter explains the provisions of Chapter X of the Companies Act, 2013 
(hereinafter also referred to as “the Act” or “this Act”), consisting of Sections 139 to 
148 dealing with the Audit and Auditors. The provisions contained in chapter X of 
the Act are supplemented by the Companies (Audit and Auditors) Rules, 2014.  
The relevant aspects (and arrangement of sections) to be covered in this book 
chapter are presented below;   
 
 
* Appointment includes re-appointment  
Audit & Auditors 
Appointment* of Auditors (Section 139)
First Auditor
Subsequent Auditor
Removal, resignation of auditor and giving of special notice (Section 140)
Eligibility, Qualification & Disqualification (Section 141)
Remuneration of Auditor (Section 142) 
Powers & Duties of auditors and auditing standards (Section 143) 
Segment of Audit Reports
Prohibited Services (Section 144) 
Signing of Audit Reports (Section 145)
Auditor to attend AGM (Section 146)
Punishment Provisions (Section 147)
Cost Auditor (Section 148)
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
AUDIT AND AUDITORS 
 
 
 
10.3 
 1.  INTRODUCTION 
Chapter X Consists of sections 139 to 148 as well as the Companies 
(Audit and Auditors) Rules, 2014. 
Large business corporations are managed by the directors who represent the members 
who are the real owners of the company through board. In the absence of any check, 
the directors may mismanage the finances of the organisation. Thus, members appoint 
auditor/auditors to look into the true and fair view of the financial affairs of the 
company. Large business corporations are managed by the directors, who act as 
fiduciaries (a person who prudently takes care of finances or other assets for another 
person) to the members (the real owners). This is the reason that the board of directors 
is responsible for the preparation of the financial statement and laying it out at the 
general meeting of members. 
Despite assuming a fiduciary role, in the absence of proper checks and balances, the 
directors may indulge in mismanagement of the finances and other assets of the 
corporation. Hence, financial statements prepared and laid down by the board need 
to be audited by an independent auditor.  
Thus, members appoint auditors to have an independent professional opinion on the 
financial affairs of the company, who examine such financial statements to frame 
opinion to report; whether they reflect a true and fair view of financial position and 
performance or not. 
 2.  APPOINTMENT
1
 OF AUDITORS [SECTION 139] 
APPOINTMENT OF AUDITOR [SUB-SECTION 1 READ WITH RULE 3 
AND 4 OF THE COMPANIES (AUDIT AND AUDITORS) RULES, 2014]  
Who can be appointed as Auditor and when?  
Every company shall appoint an individual or a firm (“firm” shall 
include a limited liability partnership incorporated under the Limited 
Liability Partnership Act, 2008) as an auditor of the company at the first 
Annual General Meeting (AGM).  
 
1
 Appointment includes re-appointment 
© The Institute of Chartered Accountants of India
Page 4


 
LEARNING OUTCOMES 
    
 
CHAPTER 
10 
  
 
AUDIT AND AUDITORS 
 
 
 
At the end of this chapter, you will be able to: 
?
Comprehend the procedure for appointment of auditors, 
their removal, resignation, eligibility, qualifications, 
disqualifications and remuneration. 
?
Identify the powers and duties of auditors. 
?
Explain about auditing services and certain services which an 
auditor cannot render. 
 
 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 10.2 
?  
 
This chapter explains the provisions of Chapter X of the Companies Act, 2013 
(hereinafter also referred to as “the Act” or “this Act”), consisting of Sections 139 to 
148 dealing with the Audit and Auditors. The provisions contained in chapter X of 
the Act are supplemented by the Companies (Audit and Auditors) Rules, 2014.  
The relevant aspects (and arrangement of sections) to be covered in this book 
chapter are presented below;   
 
 
* Appointment includes re-appointment  
Audit & Auditors 
Appointment* of Auditors (Section 139)
First Auditor
Subsequent Auditor
Removal, resignation of auditor and giving of special notice (Section 140)
Eligibility, Qualification & Disqualification (Section 141)
Remuneration of Auditor (Section 142) 
Powers & Duties of auditors and auditing standards (Section 143) 
Segment of Audit Reports
Prohibited Services (Section 144) 
Signing of Audit Reports (Section 145)
Auditor to attend AGM (Section 146)
Punishment Provisions (Section 147)
Cost Auditor (Section 148)
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
AUDIT AND AUDITORS 
 
 
 
10.3 
 1.  INTRODUCTION 
Chapter X Consists of sections 139 to 148 as well as the Companies 
(Audit and Auditors) Rules, 2014. 
Large business corporations are managed by the directors who represent the members 
who are the real owners of the company through board. In the absence of any check, 
the directors may mismanage the finances of the organisation. Thus, members appoint 
auditor/auditors to look into the true and fair view of the financial affairs of the 
company. Large business corporations are managed by the directors, who act as 
fiduciaries (a person who prudently takes care of finances or other assets for another 
person) to the members (the real owners). This is the reason that the board of directors 
is responsible for the preparation of the financial statement and laying it out at the 
general meeting of members. 
Despite assuming a fiduciary role, in the absence of proper checks and balances, the 
directors may indulge in mismanagement of the finances and other assets of the 
corporation. Hence, financial statements prepared and laid down by the board need 
to be audited by an independent auditor.  
Thus, members appoint auditors to have an independent professional opinion on the 
financial affairs of the company, who examine such financial statements to frame 
opinion to report; whether they reflect a true and fair view of financial position and 
performance or not. 
 2.  APPOINTMENT
1
 OF AUDITORS [SECTION 139] 
APPOINTMENT OF AUDITOR [SUB-SECTION 1 READ WITH RULE 3 
AND 4 OF THE COMPANIES (AUDIT AND AUDITORS) RULES, 2014]  
Who can be appointed as Auditor and when?  
Every company shall appoint an individual or a firm (“firm” shall 
include a limited liability partnership incorporated under the Limited 
Liability Partnership Act, 2008) as an auditor of the company at the first 
Annual General Meeting (AGM).  
 
1
 Appointment includes re-appointment 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 10.4 
Tenor of appointment as Auditor 
The auditor shall hold office from the 
conclusion of 1
st
AGM (or the AGM in which 
he is appointed) till the conclusion of its 6
th
 
AGM (and thereafter till the conclusion of 
every sixth AGM).  
Example 1: Rashail Tech Labs Private Limited was incorporated during the financial 
year 2019-20. First AGM of the company held on 30.09.2020. The company 
appointed M/s. Rams & Associates, Chartered Accountant firm for the period of 5 
Years as a subsequent statutory auditor. 
Manner and procedure of selection and appointment of auditors [Rule 3 of 
the Companies (Audit and Auditors) Rules, 2014] 
The manner and procedure of selection of auditors by the members of the company 
at AGM has been prescribed under the Rule 3 of the Companies (Audit and Auditors) 
Rules, 2014; tabled and stated below. 
Categories of 
Companies  
Competent 
authority 
Responsibility of the competent authority 
A company 
which is 
required to 
constitute an 
Audit 
Committee 
under section 
177 
Audit 
Committee* 
The competent authority shall take into 
consideration the qualifications and 
experience of the individual or the firm 
proposed to be considered for appointment as 
auditor and such qualifications and experience 
are commensurate with the size and requirements 
of the company. 
It shall have regard to any order or pending 
proceeding relating to professional matters of 
conduct against the proposed auditor before the 
Institute of Chartered Accountants of India (ICAI) 
or any competent authority or any Court. 
It may call for such other information from the 
proposed auditor as it may deem fit. 
A Company 
which is not 
required to 
constitute an 
Audit 
Committee 
under section 
177 
Board of 
Directors 
 
conclusion 
of 1
st
AGM 
till
conclusion 
of its 6
th
AGM 
© The Institute of Chartered Accountants of India
Page 5


 
LEARNING OUTCOMES 
    
 
CHAPTER 
10 
  
 
AUDIT AND AUDITORS 
 
 
 
At the end of this chapter, you will be able to: 
?
Comprehend the procedure for appointment of auditors, 
their removal, resignation, eligibility, qualifications, 
disqualifications and remuneration. 
?
Identify the powers and duties of auditors. 
?
Explain about auditing services and certain services which an 
auditor cannot render. 
 
 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 10.2 
?  
 
This chapter explains the provisions of Chapter X of the Companies Act, 2013 
(hereinafter also referred to as “the Act” or “this Act”), consisting of Sections 139 to 
148 dealing with the Audit and Auditors. The provisions contained in chapter X of 
the Act are supplemented by the Companies (Audit and Auditors) Rules, 2014.  
The relevant aspects (and arrangement of sections) to be covered in this book 
chapter are presented below;   
 
 
* Appointment includes re-appointment  
Audit & Auditors 
Appointment* of Auditors (Section 139)
First Auditor
Subsequent Auditor
Removal, resignation of auditor and giving of special notice (Section 140)
Eligibility, Qualification & Disqualification (Section 141)
Remuneration of Auditor (Section 142) 
Powers & Duties of auditors and auditing standards (Section 143) 
Segment of Audit Reports
Prohibited Services (Section 144) 
Signing of Audit Reports (Section 145)
Auditor to attend AGM (Section 146)
Punishment Provisions (Section 147)
Cost Auditor (Section 148)
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
AUDIT AND AUDITORS 
 
 
 
10.3 
 1.  INTRODUCTION 
Chapter X Consists of sections 139 to 148 as well as the Companies 
(Audit and Auditors) Rules, 2014. 
Large business corporations are managed by the directors who represent the members 
who are the real owners of the company through board. In the absence of any check, 
the directors may mismanage the finances of the organisation. Thus, members appoint 
auditor/auditors to look into the true and fair view of the financial affairs of the 
company. Large business corporations are managed by the directors, who act as 
fiduciaries (a person who prudently takes care of finances or other assets for another 
person) to the members (the real owners). This is the reason that the board of directors 
is responsible for the preparation of the financial statement and laying it out at the 
general meeting of members. 
Despite assuming a fiduciary role, in the absence of proper checks and balances, the 
directors may indulge in mismanagement of the finances and other assets of the 
corporation. Hence, financial statements prepared and laid down by the board need 
to be audited by an independent auditor.  
Thus, members appoint auditors to have an independent professional opinion on the 
financial affairs of the company, who examine such financial statements to frame 
opinion to report; whether they reflect a true and fair view of financial position and 
performance or not. 
 2.  APPOINTMENT
1
 OF AUDITORS [SECTION 139] 
APPOINTMENT OF AUDITOR [SUB-SECTION 1 READ WITH RULE 3 
AND 4 OF THE COMPANIES (AUDIT AND AUDITORS) RULES, 2014]  
Who can be appointed as Auditor and when?  
Every company shall appoint an individual or a firm (“firm” shall 
include a limited liability partnership incorporated under the Limited 
Liability Partnership Act, 2008) as an auditor of the company at the first 
Annual General Meeting (AGM).  
 
1
 Appointment includes re-appointment 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 10.4 
Tenor of appointment as Auditor 
The auditor shall hold office from the 
conclusion of 1
st
AGM (or the AGM in which 
he is appointed) till the conclusion of its 6
th
 
AGM (and thereafter till the conclusion of 
every sixth AGM).  
Example 1: Rashail Tech Labs Private Limited was incorporated during the financial 
year 2019-20. First AGM of the company held on 30.09.2020. The company 
appointed M/s. Rams & Associates, Chartered Accountant firm for the period of 5 
Years as a subsequent statutory auditor. 
Manner and procedure of selection and appointment of auditors [Rule 3 of 
the Companies (Audit and Auditors) Rules, 2014] 
The manner and procedure of selection of auditors by the members of the company 
at AGM has been prescribed under the Rule 3 of the Companies (Audit and Auditors) 
Rules, 2014; tabled and stated below. 
Categories of 
Companies  
Competent 
authority 
Responsibility of the competent authority 
A company 
which is 
required to 
constitute an 
Audit 
Committee 
under section 
177 
Audit 
Committee* 
The competent authority shall take into 
consideration the qualifications and 
experience of the individual or the firm 
proposed to be considered for appointment as 
auditor and such qualifications and experience 
are commensurate with the size and requirements 
of the company. 
It shall have regard to any order or pending 
proceeding relating to professional matters of 
conduct against the proposed auditor before the 
Institute of Chartered Accountants of India (ICAI) 
or any competent authority or any Court. 
It may call for such other information from the 
proposed auditor as it may deem fit. 
A Company 
which is not 
required to 
constitute an 
Audit 
Committee 
under section 
177 
Board of 
Directors 
 
conclusion 
of 1
st
AGM 
till
conclusion 
of its 6
th
AGM 
© The Institute of Chartered Accountants of India
 
 
AUDIT AND AUDITORS 
 
 
 
10.5 
* Where competent authority is audit committee, the committee shall 
recommend the name of an individual or a firm as auditor to the Board for 
consideration; the Board shall consider and recommend an individual or a firm as 
auditor to the members in the AGM for appointment.  
If the Board agrees with the recommendation of the Audit Committee - It shall 
further recommend the appointment of an individual or a firm as auditor to the 
members in the annual general meeting. 
If the Board disagrees with the recommendation of the Audit Committee - It shall 
refer back the recommendation to the committee for reconsideration citing reasons 
for such disagreement. 
Example 2: Audit Committee recommended KPM & Associates, Chartered 
Accountants firm for appointment as statutory auditor to the board of Surya Solar 
Limited. However, board of the company disagreed with the recommendation of 
the audit committee. In such condition, board shall refer back the recommendation 
to the committee for reconsideration citing reasons for such disagreement.    
If the Audit Committee, after considering the reasons given by the Board, decides 
not to reconsider its original recommendation, the Board shall record reasons for 
its disagreement with the committee and send its own recommendation for 
consideration of the members in the AGM; and if the Board agrees with the 
recommendations of the Audit Committee, it shall place the matter for 
consideration by members in the AGM. 
Note: 
Companies that require to constitute an audit committee 
Section 177
2
 of the Act, read with Companies (Meetings of Board and its Powers) 
Rules, 2014 provides Audit Committee shall be constituted by Board of directors in 
case of; 
i.  Every listed public companies and  
ii.  Those public companies which having:  
a.  Paid up capital of ten crore rupees or more; or 
b.  Turnover of one hundred crore rupees or more; or 
 
2
 Not a part of syllabus at Intermediate level, but necessary to build understanding of the students. 
© The Institute of Chartered Accountants of India