All about Company Audit

Chapter X (Sections 139–148) of the Companies Act, 2013 (CA 2013) deals with the provisions related to audit and auditors.

Few of the sections not been discussed in details because which are related to procedural matters and Govt Audits.

 Section 139: Appointment of auditors

• First appointment of auditors – to be done by BoD within 30 days – in such case rotation maybe after 1+5+5 years
• Appointment to be done once for 5 years – no requirement for ratification to be done every year
• Mandatory retirement after 5 / 10 years for individuals / firms
• No rotation for Small Companies and OPCs

Section 140: Removal of Auditors

 Removal of Auditor before the expiry of the term

• Special Resolution of the Company and
• Prior approval of Central government.

Resignation of Auditor

• Auditor to intimate to company and file in prescribed form with the Registrar within 30 days indicating reasons and facts.

Appointing as auditor a person other than a retiring auditor

• Special Notice is required for resolution
• To send a copy of special notice to Auditor.
• Retiring auditor’s right to make representation which should be sent along with notice to the members or read out in the meeting.

ICAI Implementation Guide on Auditor Resignation

Implementation Guide on resignation or withdrawal from an engagement to perform audit of FS – ICAI (Dec 2018)

• May depend on stage of completion of the audit
• If the audit is substantially completed, he may decide to disclaim an opinion and explain the scope of limitation
• The auditor should describe the circumstances while giving the reasons for resignation suitably, instead of mentioning ambiguous reasons such as other pre-occupation or personal reasons or administrative reasons or health reasons or mutual consent or unavoidable reasons.

As per IG of ICAI, some valid reasons could be:

• Non payment of fees
• inability to obtain sufficient appropriate audit evidence,;
• Possible effects on the FS of undetected misstatements, if any, could be both material and pervasive;
• f the matter is related to a material misstatement of the FS that relates to specific amounts in the FS (including quantitative disclosures), the auditor should include a description and quantification of the financial effects of the misstatement, unless impracticable
• Cannot legally continue as auditor

Section 141: Eligibility and Qualification of Auditors

• Chartered Accountant in Practice in India
• Firm / LLP where majority of partners are practicing in India are qualified as CAs
• Besides audit, only such services can be provided as approved by Board of Directors or Audit Committee.

 Section 141(3) – Disqualification of Auditors

The following persons shall not be eligible for appointment as an auditor of a company:

1. Body Corporate

2. Officer or Employee

3. Partner

4. Relative

5. Business Relationship

6. Director / KMP

7. CA in Full time Employment or Auditor who has crossed Audit Limit

8. Convicted by Court

Section 142: Remuneration of Auditors

• For 1st year to be decided by BoD
• Thereafter, it will be decided at AGM of Company.
• Any Expenses incurred and/or facility extended by auditor in conduct of audit to will also be included as Remuneration.
• Resolution for auditors’ remuneration should be very explicit and clear w.r.t. to various Payments to be made to Auditors such as an Auditor, Taxation matters, company law matters etc and should be disclosed while preparing FS separately.

Section 143: Powers and duties of auditors and auditing standards

Reporting under section 143(1) Rights and Powers to access and enquire by Company Auditors

The auditor have right to access the books of account and vouchers of a company and the records of all its subsidiaries, if any, in relation to the Consolidation of Financial Statements (CFS).

Note that auditor have power to access such records at all times even the same has been kept at the registered office or elsewhere. He shall also be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor.

He further has right and his duty to make inquiries and report on following matters-

(a) Secured Loans- 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) Book Entries- whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the co;

(c) Sale of Securities- where the company not being an investment / 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;

(d) Loans & Advances as Deposits- whether loans and advances made by the company have been shown as deposits;

(e) Personal Expenses- whether personal expenses have been charged to revenue account;

(f) Allotment of Shares for Cash – 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.

Reporting under section 143(2) Auditors Report to Members of a Company

The auditor shall make a report to the members of the company on the accounts examined by him and on every FS which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this 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 sub-section (11) of Section143 – (Caro Reporting) and to the best of his information and knowledge, the said accounts, 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 other matters as may be prescribed.

Reporting under section 143(3) Additional Matters to be stated in Auditors Report

The auditor’s report shall also state—

(a) Obtain Information- 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) Proper Books of Accounts- 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) Incorporate Branch Audit Report- whether the report on the accounts of any branch office of the company audited u/ss (8) by a person other than the company’s auditor has been sent to him and the manner in which he has dealt with it in preparing his report;

(d) FS in consistent with Books of Accounts- 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) Comply AS- whether, in his opinion, the FS comply with the accounting standards;

(f) Adverse effect of Auditors Comments- the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company; As per ICAI GN:

• • Such observations / comments would ordinarily lead to Modification or an EoM (Emphasis of Matter) in the AR on FS;
  • The phrase ‘observations / comments’ should be construed to have same meaning as referring to modification or EoM in the AR,
  • The ‘observations / comments’ in AR cannot have any adverse effect on the functioning of the company, but it might contain matters which might have an adverse effect
  • Act does not specify meaning of the phrase “adverse effect on functioning of the company’ – hence cannot be interpreted to cover all events (like revocation of license), but only events that may impact the FS under audit
  • Because of inclusion of (f), there is no change in scope of audit and auditor’s role as contemplated under SAs and other ICAI pronouncements;
  • However auditor has to now evaluate if subject matters leading to modification or EoM in AR may have an adverse effect on functioning of the company;
  • In case of matters that are pervasive in nature, can significantly impact the operations of the company e.g. EoM on ‘Going Concern” assumption. In such cases, the Auditor should report under 143(3)(f)

(g) Disqualified Directors- whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;

(h) Reporting in relation to Maintenance of Accounts- any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith; As per ICAI GN:

• • Matters that cause modification in AR can have consequential effects (or possible effects) on books maintained and other matters connected therewith;
  • Sec 128 requires every company to prepare and keep its books of account and FS that give a ‘true and fair’ view;
  • Sec 129(1) requires that FS should comply with notified AS;
  • Sec 2(13) defines ‘books of account’;
  • 143(3)(b) also requires reporting on ‘books of account’
  • Auditor needs to report under this clause any matter of modification in AR, if it can have effect on ‘books of account’ maintained by company;

(i) Internal Control System- whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls; [IFC defined in 134(5)]

As per sec 134(5)(e), “internal financial controls” means the policies and procedures adopted by the company for:

– ensuring the orderly and efficient conduct of its business, including

– adherence to company’s policies,

– the safeguarding of its assets,

– the prevention and detection of frauds and errors,

– the accuracy and completeness of accounting records, and

– the timely preparation of reliable financial information.

Companies Amendment Act 2017 has amended sec 143(3) to now require auditors to state “whether the company has adequate internal financial controls in place with reference to financial statements and the operating effectiveness of such controls”

‘IFC’ means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.

Internal Control over Financial Reporting (ICFR) + Operational Controls + Fraud Prevention = Internal Financial Control

Exception/ Modification/ Adaptation: Clause (i) of sub-section (3) of section 143 shall not apply to a private company:- (i.r. Above Clause)

(i) which is a one person company or a small company; or

(ii) which has turnover less than rupees fifty crores as per latest audited financial statement or which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than rupees twenty five crore.”.

(j) Other Matters- such other matters as may be prescribed (as under)

Other matters to be included in Audit Report u/s 143(3): Rule 11

• Whether company has disclosed impact, if any, of pending litigations on its financial position in its FS.
• Whether company has provided for material foreseeable losses, if any, on long term contracts including derivative contracts.
• Whether there has been any delay in in transferring amounts to IEPF.

143(4) Negative or Qualified Report by Auditor- Where any of the matters required to be included in the audit report under this section is answered in the negative or with a qualification, the report shall state the reasons therefor.

Sec 143(5) to 143(7): Reporting to C&AG by auditors of PSUs

These sections specifically deals with Government Owned Companies hence not discussed in details.

Sec 143(8): Reporting by Branch Auditors to main auditor

The accounts of branch office of a company shall be audited by:

A. For Branch Office in India

1. The company’s auditor; or

2. Any other qualified person appointed u/s 139 as auditor

B. For Branch Office outside India

1. The company’s auditor; or

2. An accountant; or

3. Any other qualified person to act as an auditor in accordance with laws of that country.

The duties and powers of the company’s auditor shall be prescribed with reference to the branch audit the branch auditor. The branch auditor shall send report to the auditor of the company who shall deal with it in his report in such manner as he considers necessary.

Section 143(9) – Mandatory to comply with SAs- In accordance with the provisions of section 143(9) of the companies Act, 2013, the auditing standards must be complied with by every auditor. The term “Auditing Standards” has been defined in clause (7) of section 2 of Company Act, 2013 which means the standards of auditing or any addendum thereto for companies or class of companies referred to in sub-section (10) of section 143.

Section 143(10) – Auditing Standards prescribed by CG or specified by ICAI- The Central Government prescribes Standards of Auditing (SA) as recommended by the Institute of Chartered Accountants of India (ICAI) in consultation with and after examination of the recommendations made by the National Financial Reporting Authority (NFRA). Note that until any SAs are notified by CG, any SA specified by CA Institute shall be deemed to be the auditing standards.

Section 143(11) – Statement on specified matters (CARO – 2020) in Auditors Report- The Central Government may direct by issuing an order in consultation with the NFRA that the auditor’s report of certain class or description of companies shall also include a statement on specified matters. Accordingly, such reporting requirements has now been prescribed by the Ministry of Corporate Affairs (MCA) under the Companies (Auditor’s Report) Order, 2020.

CARO 2020 is applicable for all statutory audits commencing on starting from financial year 2021-22. The order is applicable to all companies which were covered by CARO 2016. Accordingly, the order applies to all the companies except the following companies specifically excluded from its purview:

• One person company
• Small companies (Companies with paid up capital less than/equal to Rs 2 Crores and with a last reported turnover which is less than/equal to Rs 20 crore)
• Banking companies
• Companies registered for charitable purposes
• Insurance companies
• The following private companies are also exempt from the requirements of CARO, 2020-
• Whose gross receipts or revenue (including revenue from discontinuing operations) is less than or equal to Rs 10 crore in the financial year
• Whose paid up share capital plus reserves is less than or equal to Rs 1 crore as on the balance sheet date (i.e. usually at the end of the FY)
• Not a holding or subsidiary of a Public company
• Whose borrowings is less than or equal to Rs 1 crore at any time during the FY

Reporting Requirements Under CARO 2020

The auditor’s report (CARO 2020) shall include a statement on the following matters, namely:

1. Details of tangible and intangible assets.

2. Details of inventory and working capital.

3. Details of investments, any guarantee or security or advances or loans given.

4. Compliance in respect of a loan to directors.

5. Compliance in respect of deposits accepted.

6. Maintenance of costing records.

7. Deposit of statutory liabilities.

8. Unrecorded income.

9. Default in repayment of borrowings.

10. Funds raised and utilisation.

11. Fraud and whistle-blower complaints.

12. Compliance by a Nidhi.

13. Compliance on transactions with related parties.

14. Internal audit system.

15. Non-cash dealings with directors.

16. Registration under section 45-IA of RBI Act, 1934.

17. Cash losses.

18. Resignation of statutory auditors.

19. Material uncertainty on meeting liabilities.

20. Transfer to fund specified under Schedule VII of Companies Act, 2013.

21. Qualifications or adverse auditor remarks in other group companies.

In a case where the auditor’s answer to any of the requirements mentioned above is unfavorable or negative, then the auditor’s report shall also state the basis for such unfavorable or qualified answer. Also, in a case where the auditor is unable to express any opinion on any specific matter, the report shall indicate such fact along with the reasons as to why it is not possible for the auditor to give an opinion on the same.

Section 143(12) – Reporting of Fraud committed against Company

Section 143(13) – Duties of Auditor done in Good Faith

Section 143(14) – The provisions also apply to CS and CMA in Practice.

Section 143(15) – Punishment for Contravention in Fraud Reporting- If any auditor, CS or CMA in practice do not comply with the provisions of sub-section (12) of section 143, he shall be punishable with fine of ₹ 1,00,000 in case of Non Listed Company whereas ₹ 5,00,000 in case of Listed Companies.

It is important to note that section 143(15) only provides penalty for contravention of section 143(12) other non compliances are covered under section 147.

 Section 144: Auditor Not To render Certain Services

The following services are specifically not permitted

• Accounting and book keeping services;
• Internal audit;
• Design / implementation of any financial information system;
• Actuarial services,
• Investment advisory / banking services;
• Outsourced financial services and
• Management services, (NFRA has recently interpreted this)
• Other kind of services to be prescribed

Restrictions apply to Audit firm, its partners, its parent, subsidiary or associate company or any other entity in which the firm or any of its partner has significant influence / control or whose name / trade name / brand is used by the firm or any of its partners.

Section 145 Signing Audit Reports and Certifying Other Documents of a Company

Section 146 Compulsory for Auditors to attend General Meeting of Company

Section 147: Punishment for contravention

Punishment for not complying with provisions of Section 143

Section 147(1) Penalty on Company

• Minimum Fine: ₹25,000;
• Maximum Fine: ₹5,00,000.

Section 147(1) Penalty on Officer

• Minimum Fine: ₹10,000;
• Maximum Fine: ₹1,00,000.

 Section 147(2) Penalty on Auditor-

According to section 147(2) of the CA 2013, if an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or section 145, the auditor shall be punishable with:

1. Minimum Fine: ₹25,000;

2. Maximum Fine: ₹5,00,000 or four times of Remuneration whichever is lower.

If an auditor has contravened such provisions (Sections 139, 143, 144 or 145) knowingly or willfully with the intention to deceive: – the company; or its shareholders or creditors or tax authorities, he shall be punishable with:

1. Imprisonment: Up to one year; and

2. Fine: Minimum ₹50,000; Maximum ₹25,00,000 or eight times of Remuneration whichever is lower..

 Section 147(3) Refund of Remuneration by Auditors- Where an auditor has been convicted u/s 147(2) of the CA 2013, the convicted auditor shall be liable to the following in addition to the penalty under sub-section (2) of section 147 of CA 2013: (i) refund the remuneration received by him to the company; and (ii) pay for damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.

Section 147(5) Liability of Audit Firm of a Company- If audit of a company is conducted by an audit firm and it is proved that the partner or partners of the audit firm has or have: – acted in a fraudulent manner; or – abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in CA 2013 or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally and shall also liable under section 447 (Fraud).

Section 148 (Central Government to specify audit of items of cost in respect of certain companies) of Companies Act 2013