Auditors Appointment - 2 | Company Law - B Com PDF Download

Special Notice for removing Auditor before the expiry of his term [Section 140 (4)]

(a) If the retiring auditor has not completed a consecutive tenure of 5 years or, as the case may be, 10 years, 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. 

Eligibility, qualifications and disqualifications of auditors (Section 141)

Qualifications of an auditor [Section 141 (1) & (2)]

1. A person shall be eligible to be appointed as auditor of a company only if he is a Chartered Accountant within the meaning of the Chartered Accountants Act, 1949.
2. 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.
3. 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.

Disqualifications of auditors [Section 141 (3)]

The following persons shall not be qualified for appointment as 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 person who is a partner, or who is in the employment, of an officer or employee of the company.

(d) a person who, or his relative or partner

1. 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: Provided that the relative may hold security or interest in the company of face value not exceeding 1,00,000 rupees as prescribed under the Company (Audit and Auditors) Rules, 2014. The Company (Audit and Auditors) Rules, 2014 provides that a relative of an auditor may hold securities in the company of face value not exceeding ` 1 Lac. 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 Lac, the corrective action to maintain the limits as specified above shall be taken by the auditor within sixty days of such acquisition or interest.
2. 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
3. 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.

(e) 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: 

1. 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.
2. 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, in the ordinary course of business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses.

(f) A person whose relative is a director or is in the employment of the company as a director or key managerial personnel.

(g) 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, dormant companies and private companies having paid-up share capital less than one hundred crore rupees. [MCA vide Notification No. 464(E) dated 05/06/2015]. It may be clarified that now the Limit of 20 Companies includes only: a) Public Companies and b) Private Companies having paid up capital of Rs100 crore or more.

(h) 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. 

(i) any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialized services as provided in Section 144 (This Section deals with certain services not to be tendered by auditor).

Vacation of office by an auditor [Section 141 (4)]

If a person appointed as an auditor of a company incurs any of the disqualification 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.

Remuneration of auditors (Section 142)

1. 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.
2. In the case of first auditor, remuneration may be fixed by the Board.
3. 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.

Powers and duties of auditors and auditing standards (Section 143) 

Powers of Auditors [Section 143 (1)]

(a) 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 account and vouchers of the company, whether kept at the registered office of the company or at any other place.

(b) 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.

(c) Matters of inquiry: The auditor may also inquire into the following matters, namely:

1. 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.
2. Whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company.
3. 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.
4. Whether loans and advances made by the company have been shown as deposits.
5. Whether personal expenses have been charged to revenue account.
6. 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.

(d) 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 in so far as it relates to the consolidation of its financial statements with that of its subsidiaries. 

Duties of auditors [Sections 143 (2), (3) and (4)]

(a) The auditor shall make a report to the members of the company on the following:

1. On the accounts examined by him, and
2. On every financial statements which are required by or under this Act to be laid before the company in general meeting. And

(b) 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 Act or any rules made thereunder or under any order made under Section 143 (11). 

(c) The auditor shall express his opinion of the accounts and financial statements examined by him. He shall express the opinion which according to him and to the best of his information and knowledge, 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.

(d) The auditors’ report shall also state:

1. 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.
2. 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.
3. Whether the report on the accounts of any branch office of the company audited under SubSection (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.
4. 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.
5. Whether, in his opinion, the financial statements comply with the accounting standards.
6. The observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company.
7. Whether any director is disqualified from being appointed as a director under Sub-Section (2) of Section 164.
8. Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith.
9. Whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.
10. Such other matters as prescribed under Rule 11 of the Companies (Audit and Auditors) Rules, 2014 which provides that the auditor‘s report shall also include their views and comments on the following matters, namely:

1. whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement.

2. 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.

3. whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company. 

(e) Where any of the matters is answered in the negative or with a qualification, the auditor‘s report shall state the reason for the answer.

(f) Compliance with auditing standards:

1. Every auditor shall comply with the auditing standards [Section 143(9)].
2. The Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under Section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.
3. It is further provided that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards.

(g) Additional matters to be reported in case of specified companies: 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 National Financial Reporting direct, the auditor’s report shall also include a statement on such matters as may be specified therein. 

(h) Reporting of frauds by auditors [Section 143 (12)]

(1) Notwithstanding anything contained in this Section, if an auditor of a company in the course of performance of his duties as auditor, has reason to believe that a offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government immediately but not later than 60 days of his knowledge and after following the procedure as prescribed in Rule 13 of the Companies (Audit and Auditors) Rules, 2014:

• Auditor shall forward his report to the Board or the Audit Committee, as the case may be, immediately after he comes to 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 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 failed to receive any reply or observations within the stipulated time.
• The report shall be sent to the Secretary, Ministry of Corporate Affairs 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 number and be signed by the auditor with his seal and shall indicate his Membership Number.
• The report shall be in the form of a statement as specified in Form ADT-4.

(2) 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 [Section 143(13)].

(3) The provision of this section shall mutatis mutandis apply to the cost accountant in practice conducting cost audit under section 148 and also to the company secretary in practice conducting secretarial audit under section 204 [Section 143(14)].

(4) Penalty for non compliance of Section 143 (12): If any auditor, the cost accountant or the company secretary in practice do not comply with the provisions of Section 143 (12) (reporting about the offence to the Central Government), he shall be punishable with fine which shall not be less than ` 1 Lacs but which may extend to ` 25 Lacs [Section 143(15)]. 

Audit of Government Companies [Sections 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 Comptroller and Auditor General of India 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 Comptroller and Auditor General of India.

(b) The audit report among other things, include the following:

1. The directions, if any, issued by the Comptroller and Auditor General of India,
2. The action taken thereon and
3. Its impact on the accounts and financial statement of the company.

(c) The Comptroller and Auditor General of India shall within 60 days from the date of receipt of the audit report have a right to: 

1. Conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorise in this behalf and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor General of India may direct, and
2. Comment upon or supplement such audit report.

(d) Any comments given by the Comptroller and Auditor General of India 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 annual general meeting 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 Comptroller and Auditor General of India 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.