The Company Audit: Notes(Part- 2) | Auditing and Ethics for CA Intermediate PDF Download

 Page 1


 
 
10.16 
 
AUDITING AND ASSURANCE 
 3 ROTATION OF AUDITOR 
3.1 Applicability of Section 139(2) Rotation of Auditor:  
As per rules prescribed in Companies (Audit 
and Auditors) Rules, 2014, for applicability of 
section 139(2) the class of companies shall 
mean the following classes of companies 
excluding one person companies and small 
companies-      Fig: Rotation of Auditors
*
 
  
Class of Companies for Rotation of Auditor 
? 
including Listed Companies 
+ 
excluding OPC (One Person Company) and Small Companies 
 
  
    
    
All companies having 
paid up share capital of 
below threshold limit 
mentioned,
but 
having public borrowings 
from financial 
institutions, banks or 
public deposits  
= ` 50 crore 
All unlisted public 
companies having paid 
up share capital 
=` 10 crore 
All private limited 
companies having paid up 
share capital 
 = ` 50 crore 
  
(i) all unlisted public companies having paid up share capital of rupees ten crore 
or more; 
(ii) all private limited companies having paid up share capital of rupees fifty crore 
or more; 
(iii) all companies having paid up share capital of below threshold limit 
mentioned above, but having public borrowings from financial institutions, 
banks or public deposits of rupees fifty crores or more. 
  
   
 3 
As per rules prescribed in Companies (Audit 
Rules, 2014, for applicability of 
Page 2


 
 
10.16 
 
AUDITING AND ASSURANCE 
 3 ROTATION OF AUDITOR 
3.1 Applicability of Section 139(2) Rotation of Auditor:  
As per rules prescribed in Companies (Audit 
and Auditors) Rules, 2014, for applicability of 
section 139(2) the class of companies shall 
mean the following classes of companies 
excluding one person companies and small 
companies-      Fig: Rotation of Auditors
*
 
  
Class of Companies for Rotation of Auditor 
? 
including Listed Companies 
+ 
excluding OPC (One Person Company) and Small Companies 
 
  
    
    
All companies having 
paid up share capital of 
below threshold limit 
mentioned,
but 
having public borrowings 
from financial 
institutions, banks or 
public deposits  
= ` 50 crore 
All unlisted public 
companies having paid 
up share capital 
=` 10 crore 
All private limited 
companies having paid up 
share capital 
 = ` 50 crore 
  
(i) all unlisted public companies having paid up share capital of rupees ten crore 
or more; 
(ii) all private limited companies having paid up share capital of rupees fifty crore 
or more; 
(iii) all companies having paid up share capital of below threshold limit 
mentioned above, but having public borrowings from financial institutions, 
banks or public deposits of rupees fifty crores or more. 
  
   
 3 
As per rules prescribed in Companies (Audit 
Rules, 2014, for applicability of 
 
 
10.17 
 
THE COMPANY AUDIT  
Example 
Rano Pvt. Ltd. is a private limited Company, having paid up share capital of ` 42 
crore but having public borrowing from nationalized banks and financial institutions 
of ` 72  crore, manner of rotation of auditor will be applicable. 
As per section 139(2), no listed company or a company belonging to such class or 
classes of companies as mentioned above, shall appoint or  re-appoint- 
(a) an individual as auditor for more than one term of five consecutive years;   
and 
(b) an audit firm as auditor for more than two terms of five consecutive years. 
Provided that    - 
(i) an individual auditor who has completed his term under clause (a) shall 
not be eligible for re-appointment as auditor in the same company for 
five years from the completion of his term; 
(ii) an audit firm which has completed its term under clause (b), shall not 
be eligible for re-appointment as auditor in the same company for five 
years from the completion of such term. 
 Therefore, provisions of Section 139(2) relating to rotation of auditors 
are applicable only to listed companies and class of companies satisfying 
conditions stated in para 3.1 above. 
Example 
Jolly Ltd., a listed company, appointed M/s Polly & Co., a  Chartered Accountant  
firm, as the statutory auditor in its AGM held at the end of September, 2016 for 11 
years. Here, the appointment of M/s Polly & Co. is not valid as the appointment can 
be made only for one term of five consecutive years and then another one more 
term of five consecutive years. It can’t be appointed for two terms in one AGM only. 
Further, a cooling period of five years from the completion of term is required i.e. 
the firm can’t be re-appointed for further 5 years after completion of two terms of 
five consecutive   years. 
The following points merit consideration in this regard- 
(1) As on the date of appointment, no audit firm having a common partner or 
partners to the other audit firm, whose tenure has expired in a company 
immediately preceding the financial year, shall be appointed as auditor of the 
same company for a period of five years. 
 
Page 3


 
 
10.16 
 
AUDITING AND ASSURANCE 
 3 ROTATION OF AUDITOR 
3.1 Applicability of Section 139(2) Rotation of Auditor:  
As per rules prescribed in Companies (Audit 
and Auditors) Rules, 2014, for applicability of 
section 139(2) the class of companies shall 
mean the following classes of companies 
excluding one person companies and small 
companies-      Fig: Rotation of Auditors
*
 
  
Class of Companies for Rotation of Auditor 
? 
including Listed Companies 
+ 
excluding OPC (One Person Company) and Small Companies 
 
  
    
    
All companies having 
paid up share capital of 
below threshold limit 
mentioned,
but 
having public borrowings 
from financial 
institutions, banks or 
public deposits  
= ` 50 crore 
All unlisted public 
companies having paid 
up share capital 
=` 10 crore 
All private limited 
companies having paid up 
share capital 
 = ` 50 crore 
  
(i) all unlisted public companies having paid up share capital of rupees ten crore 
or more; 
(ii) all private limited companies having paid up share capital of rupees fifty crore 
or more; 
(iii) all companies having paid up share capital of below threshold limit 
mentioned above, but having public borrowings from financial institutions, 
banks or public deposits of rupees fifty crores or more. 
  
   
 3 
As per rules prescribed in Companies (Audit 
Rules, 2014, for applicability of 
 
 
10.17 
 
THE COMPANY AUDIT  
Example 
Rano Pvt. Ltd. is a private limited Company, having paid up share capital of ` 42 
crore but having public borrowing from nationalized banks and financial institutions 
of ` 72  crore, manner of rotation of auditor will be applicable. 
As per section 139(2), no listed company or a company belonging to such class or 
classes of companies as mentioned above, shall appoint or  re-appoint- 
(a) an individual as auditor for more than one term of five consecutive years;   
and 
(b) an audit firm as auditor for more than two terms of five consecutive years. 
Provided that    - 
(i) an individual auditor who has completed his term under clause (a) shall 
not be eligible for re-appointment as auditor in the same company for 
five years from the completion of his term; 
(ii) an audit firm which has completed its term under clause (b), shall not 
be eligible for re-appointment as auditor in the same company for five 
years from the completion of such term. 
 Therefore, provisions of Section 139(2) relating to rotation of auditors 
are applicable only to listed companies and class of companies satisfying 
conditions stated in para 3.1 above. 
Example 
Jolly Ltd., a listed company, appointed M/s Polly & Co., a  Chartered Accountant  
firm, as the statutory auditor in its AGM held at the end of September, 2016 for 11 
years. Here, the appointment of M/s Polly & Co. is not valid as the appointment can 
be made only for one term of five consecutive years and then another one more 
term of five consecutive years. It can’t be appointed for two terms in one AGM only. 
Further, a cooling period of five years from the completion of term is required i.e. 
the firm can’t be re-appointed for further 5 years after completion of two terms of 
five consecutive   years. 
The following points merit consideration in this regard- 
(1) As on the date of appointment, no audit firm having a common partner or 
partners to the other audit firm, whose tenure has expired in a company 
immediately preceding the financial year, shall be appointed as auditor of the 
same company for a period of five years. 
 
 
 
10.18 
 
AUDITING AND ASSURANCE 
 Example 
M/s XYZ & Co., is an audit firm having partner Mrs. X, Mr. Y and Mr. Z, whose 
tenure has expired in the company immediately preceding the financial year. 
M/s ABZ & Co., another audit firm in which Mr. Z is a common partner, will 
also be disqualified for the same company along with M/S XYZ & Co. for the 
period of five   years. 
(2) Every company, existing on or before the commencement of this Act which is 
required to comply with provisions of this sub-section, shall comply with the 
requirements of this sub- section 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 sub-section (1) of section 96, after three years from 
the date of commencement of this Act. 
 Examples 
Ex 1: Mr. Raj, a Chartered Accountant, is an individual auditor of Binaca Limited 
for last 5 years as on March, 2013 (i.e. existing on or before the date of 
Commencement of Companies Act, 2013). Keeping in view the transition period 
as stated in the Companies Act, 2013, Mr. Raj can continue the audit of Binaca 
Ltd. upto the first annual general meeting to be held after three years from the 
date of commencement of the Act. 
Ex 2: M/s Raj & Associates, a Chartered Accountants Audit Firm, is doing audit 
of Binaca Limited for last 11 years as on March, 2013 (i.e. existing on or before 
the date of Commencement of Companies Act, 2013). Keeping in view the 
transition period as stated   in the Companies Act, 2013, M/s Raj Associates can 
continue the audit of Binaca Ltd. upto the first annual general meeting to be 
held after three years from the date of commencement of the Act. 
 Students may interlink the above example with Illustrative table 
explaining rotation in case of individual auditor as well as audit firm 
which has been given after the 3.2 i.e. Manner of rotation of Auditors by 
the Companies on Expiry of their Term.* 
(3) It has also been provided that right of the company to remove an auditor or 
the right of the auditor to resign from such office of the company shall not 
be prejudiced. 
(4) Subject to the provisions of this Act, members of a company may resolve to 
provide that - 
Page 4


 
 
10.16 
 
AUDITING AND ASSURANCE 
 3 ROTATION OF AUDITOR 
3.1 Applicability of Section 139(2) Rotation of Auditor:  
As per rules prescribed in Companies (Audit 
and Auditors) Rules, 2014, for applicability of 
section 139(2) the class of companies shall 
mean the following classes of companies 
excluding one person companies and small 
companies-      Fig: Rotation of Auditors
*
 
  
Class of Companies for Rotation of Auditor 
? 
including Listed Companies 
+ 
excluding OPC (One Person Company) and Small Companies 
 
  
    
    
All companies having 
paid up share capital of 
below threshold limit 
mentioned,
but 
having public borrowings 
from financial 
institutions, banks or 
public deposits  
= ` 50 crore 
All unlisted public 
companies having paid 
up share capital 
=` 10 crore 
All private limited 
companies having paid up 
share capital 
 = ` 50 crore 
  
(i) all unlisted public companies having paid up share capital of rupees ten crore 
or more; 
(ii) all private limited companies having paid up share capital of rupees fifty crore 
or more; 
(iii) all companies having paid up share capital of below threshold limit 
mentioned above, but having public borrowings from financial institutions, 
banks or public deposits of rupees fifty crores or more. 
  
   
 3 
As per rules prescribed in Companies (Audit 
Rules, 2014, for applicability of 
 
 
10.17 
 
THE COMPANY AUDIT  
Example 
Rano Pvt. Ltd. is a private limited Company, having paid up share capital of ` 42 
crore but having public borrowing from nationalized banks and financial institutions 
of ` 72  crore, manner of rotation of auditor will be applicable. 
As per section 139(2), no listed company or a company belonging to such class or 
classes of companies as mentioned above, shall appoint or  re-appoint- 
(a) an individual as auditor for more than one term of five consecutive years;   
and 
(b) an audit firm as auditor for more than two terms of five consecutive years. 
Provided that    - 
(i) an individual auditor who has completed his term under clause (a) shall 
not be eligible for re-appointment as auditor in the same company for 
five years from the completion of his term; 
(ii) an audit firm which has completed its term under clause (b), shall not 
be eligible for re-appointment as auditor in the same company for five 
years from the completion of such term. 
 Therefore, provisions of Section 139(2) relating to rotation of auditors 
are applicable only to listed companies and class of companies satisfying 
conditions stated in para 3.1 above. 
Example 
Jolly Ltd., a listed company, appointed M/s Polly & Co., a  Chartered Accountant  
firm, as the statutory auditor in its AGM held at the end of September, 2016 for 11 
years. Here, the appointment of M/s Polly & Co. is not valid as the appointment can 
be made only for one term of five consecutive years and then another one more 
term of five consecutive years. It can’t be appointed for two terms in one AGM only. 
Further, a cooling period of five years from the completion of term is required i.e. 
the firm can’t be re-appointed for further 5 years after completion of two terms of 
five consecutive   years. 
The following points merit consideration in this regard- 
(1) As on the date of appointment, no audit firm having a common partner or 
partners to the other audit firm, whose tenure has expired in a company 
immediately preceding the financial year, shall be appointed as auditor of the 
same company for a period of five years. 
 
 
 
10.18 
 
AUDITING AND ASSURANCE 
 Example 
M/s XYZ & Co., is an audit firm having partner Mrs. X, Mr. Y and Mr. Z, whose 
tenure has expired in the company immediately preceding the financial year. 
M/s ABZ & Co., another audit firm in which Mr. Z is a common partner, will 
also be disqualified for the same company along with M/S XYZ & Co. for the 
period of five   years. 
(2) Every company, existing on or before the commencement of this Act which is 
required to comply with provisions of this sub-section, shall comply with the 
requirements of this sub- section 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 sub-section (1) of section 96, after three years from 
the date of commencement of this Act. 
 Examples 
Ex 1: Mr. Raj, a Chartered Accountant, is an individual auditor of Binaca Limited 
for last 5 years as on March, 2013 (i.e. existing on or before the date of 
Commencement of Companies Act, 2013). Keeping in view the transition period 
as stated in the Companies Act, 2013, Mr. Raj can continue the audit of Binaca 
Ltd. upto the first annual general meeting to be held after three years from the 
date of commencement of the Act. 
Ex 2: M/s Raj & Associates, a Chartered Accountants Audit Firm, is doing audit 
of Binaca Limited for last 11 years as on March, 2013 (i.e. existing on or before 
the date of Commencement of Companies Act, 2013). Keeping in view the 
transition period as stated   in the Companies Act, 2013, M/s Raj Associates can 
continue the audit of Binaca Ltd. upto the first annual general meeting to be 
held after three years from the date of commencement of the Act. 
 Students may interlink the above example with Illustrative table 
explaining rotation in case of individual auditor as well as audit firm 
which has been given after the 3.2 i.e. Manner of rotation of Auditors by 
the Companies on Expiry of their Term.* 
(3) It has also been provided that right of the company to remove an auditor or 
the right of the auditor to resign from such office of the company shall not 
be prejudiced. 
(4) Subject to the provisions of this Act, members of a company may resolve to 
provide that - 
 
 
10.19 
 
THE COMPANY AUDIT  
(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. 
(5) The Central Government may, by rules, prescribe the manner in which the 
companies shall rotate their auditors. 
3.2 Manner of Rotation of Auditors by the Companies on 
Expiry of their Term:  
Rule 6 of the Companies (Audit and Auditors) Rules, 2014 prescribes the manner of 
rotation of auditors on expiry of their term which is given   below- 
(1) 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. 
(2) Where a company is required to constitute an Audit Committee, the Board 
shall consider the recommendation of such committee, and in other cases, 
the Board shall itself consider the matter of rotation of auditors and make its 
recommendation for appointment of the next auditor by the members in 
annual general meeting. 
(3) For the purpose of the rotation of auditors- 
(i) 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 five consecutive years or ten consecutive years, 
as the case may be; 
(ii) the incoming auditor or audit firm shall not be eligible if such auditor 
or audit firm is associated with the outgoing auditor or audit firm under 
the same network of audit firms. 
 Explanation I - For the purposes of these rules the term “same 
network” includes the firms operating or functioning, hitherto or in 
future, under the same brand name, trade name or common control. 
 Explanation II - For the purpose of rotation of auditors, 
(a) a break in the term for a continuous period of five years shall be 
considered as fulfilling the requirement of rotation; 
Page 5


 
 
10.16 
 
AUDITING AND ASSURANCE 
 3 ROTATION OF AUDITOR 
3.1 Applicability of Section 139(2) Rotation of Auditor:  
As per rules prescribed in Companies (Audit 
and Auditors) Rules, 2014, for applicability of 
section 139(2) the class of companies shall 
mean the following classes of companies 
excluding one person companies and small 
companies-      Fig: Rotation of Auditors
*
 
  
Class of Companies for Rotation of Auditor 
? 
including Listed Companies 
+ 
excluding OPC (One Person Company) and Small Companies 
 
  
    
    
All companies having 
paid up share capital of 
below threshold limit 
mentioned,
but 
having public borrowings 
from financial 
institutions, banks or 
public deposits  
= ` 50 crore 
All unlisted public 
companies having paid 
up share capital 
=` 10 crore 
All private limited 
companies having paid up 
share capital 
 = ` 50 crore 
  
(i) all unlisted public companies having paid up share capital of rupees ten crore 
or more; 
(ii) all private limited companies having paid up share capital of rupees fifty crore 
or more; 
(iii) all companies having paid up share capital of below threshold limit 
mentioned above, but having public borrowings from financial institutions, 
banks or public deposits of rupees fifty crores or more. 
  
   
 3 
As per rules prescribed in Companies (Audit 
Rules, 2014, for applicability of 
 
 
10.17 
 
THE COMPANY AUDIT  
Example 
Rano Pvt. Ltd. is a private limited Company, having paid up share capital of ` 42 
crore but having public borrowing from nationalized banks and financial institutions 
of ` 72  crore, manner of rotation of auditor will be applicable. 
As per section 139(2), no listed company or a company belonging to such class or 
classes of companies as mentioned above, shall appoint or  re-appoint- 
(a) an individual as auditor for more than one term of five consecutive years;   
and 
(b) an audit firm as auditor for more than two terms of five consecutive years. 
Provided that    - 
(i) an individual auditor who has completed his term under clause (a) shall 
not be eligible for re-appointment as auditor in the same company for 
five years from the completion of his term; 
(ii) an audit firm which has completed its term under clause (b), shall not 
be eligible for re-appointment as auditor in the same company for five 
years from the completion of such term. 
 Therefore, provisions of Section 139(2) relating to rotation of auditors 
are applicable only to listed companies and class of companies satisfying 
conditions stated in para 3.1 above. 
Example 
Jolly Ltd., a listed company, appointed M/s Polly & Co., a  Chartered Accountant  
firm, as the statutory auditor in its AGM held at the end of September, 2016 for 11 
years. Here, the appointment of M/s Polly & Co. is not valid as the appointment can 
be made only for one term of five consecutive years and then another one more 
term of five consecutive years. It can’t be appointed for two terms in one AGM only. 
Further, a cooling period of five years from the completion of term is required i.e. 
the firm can’t be re-appointed for further 5 years after completion of two terms of 
five consecutive   years. 
The following points merit consideration in this regard- 
(1) As on the date of appointment, no audit firm having a common partner or 
partners to the other audit firm, whose tenure has expired in a company 
immediately preceding the financial year, shall be appointed as auditor of the 
same company for a period of five years. 
 
 
 
10.18 
 
AUDITING AND ASSURANCE 
 Example 
M/s XYZ & Co., is an audit firm having partner Mrs. X, Mr. Y and Mr. Z, whose 
tenure has expired in the company immediately preceding the financial year. 
M/s ABZ & Co., another audit firm in which Mr. Z is a common partner, will 
also be disqualified for the same company along with M/S XYZ & Co. for the 
period of five   years. 
(2) Every company, existing on or before the commencement of this Act which is 
required to comply with provisions of this sub-section, shall comply with the 
requirements of this sub- section 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 sub-section (1) of section 96, after three years from 
the date of commencement of this Act. 
 Examples 
Ex 1: Mr. Raj, a Chartered Accountant, is an individual auditor of Binaca Limited 
for last 5 years as on March, 2013 (i.e. existing on or before the date of 
Commencement of Companies Act, 2013). Keeping in view the transition period 
as stated in the Companies Act, 2013, Mr. Raj can continue the audit of Binaca 
Ltd. upto the first annual general meeting to be held after three years from the 
date of commencement of the Act. 
Ex 2: M/s Raj & Associates, a Chartered Accountants Audit Firm, is doing audit 
of Binaca Limited for last 11 years as on March, 2013 (i.e. existing on or before 
the date of Commencement of Companies Act, 2013). Keeping in view the 
transition period as stated   in the Companies Act, 2013, M/s Raj Associates can 
continue the audit of Binaca Ltd. upto the first annual general meeting to be 
held after three years from the date of commencement of the Act. 
 Students may interlink the above example with Illustrative table 
explaining rotation in case of individual auditor as well as audit firm 
which has been given after the 3.2 i.e. Manner of rotation of Auditors by 
the Companies on Expiry of their Term.* 
(3) It has also been provided that right of the company to remove an auditor or 
the right of the auditor to resign from such office of the company shall not 
be prejudiced. 
(4) Subject to the provisions of this Act, members of a company may resolve to 
provide that - 
 
 
10.19 
 
THE COMPANY AUDIT  
(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. 
(5) The Central Government may, by rules, prescribe the manner in which the 
companies shall rotate their auditors. 
3.2 Manner of Rotation of Auditors by the Companies on 
Expiry of their Term:  
Rule 6 of the Companies (Audit and Auditors) Rules, 2014 prescribes the manner of 
rotation of auditors on expiry of their term which is given   below- 
(1) 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. 
(2) Where a company is required to constitute an Audit Committee, the Board 
shall consider the recommendation of such committee, and in other cases, 
the Board shall itself consider the matter of rotation of auditors and make its 
recommendation for appointment of the next auditor by the members in 
annual general meeting. 
(3) For the purpose of the rotation of auditors- 
(i) 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 five consecutive years or ten consecutive years, 
as the case may be; 
(ii) the incoming auditor or audit firm shall not be eligible if such auditor 
or audit firm is associated with the outgoing auditor or audit firm under 
the same network of audit firms. 
 Explanation I - For the purposes of these rules the term “same 
network” includes the firms operating or functioning, hitherto or in 
future, under the same brand name, trade name or common control. 
 Explanation II - For the purpose of rotation of auditors, 
(a) a break in the term for a continuous period of five years shall be 
considered as fulfilling the requirement of rotation; 
 
 
10.20 
 
AUDITING AND ASSURANCE 
(b) 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 five years. 
*Illustration explaining rotation in case of individual auditor 
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 
I II III 
5 Years (or more than 5  
years) 
3 years 8 years or more 
4 years 3 years 7 years 
3 years 3 years 6 years 
2 years 3 years 5 years 
1 year 4 years 5 years 
Note: 
(1) Individual auditor shall include other individuals or firms whose name 
or trade mark  or brand is used by such individual, if  any. 
(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 five years or more.