IRRESPECTIVE OF SIZE – EVERY ENTERPRISE NEED AN AUDIT

AUDIT IS ABSOLUTELY RISK-FREE –PROVIDED WE FOLLOW SCIENCE & RULES OF IT

Introduction:

Science is ‘a systematic enterprise that builds and organizes knowledge in the form of testable explanation and predictions about the universe‘. Performing an audit and following the process results in testing and predictions whether the financial statements are free from material misstatement. Wikipedia defines Audit a follows:

An audit is an “independent examination of financial information of any entity, whether profit-oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.

Irrespective of Size – Every Enterprise Needs Audit

Proper and accurate compilation of financial information of a corporate and its disclosure, in a manner that is standardized and understood by stakeholders, is central to the credibility of the corporate and the soundness of investment decisions by the investors. To prescribe all the details guiding the process and principles of audit is a technical matter which needs to be gone into by experts keeping in view the requirements of proper disclosures of financial information in the interests of healthy corporate governance.

Types of Audit

Audits are generally classified into:

  • Statutory audits;
  • Internal audits; and
  • Other audits.

Statutory Audit

 The Statutory audits are conducted in order to report the state of a company’s finances and accounts to the departments of Indian Government like MCA, SEBI, CBDT etc and are performed by qualified auditors who are working as external and independent parties. The audit report of a statutory audit is made in the form prescribed by the government department. The two most common types of statutory audits in India are:

  • Tax audits; and
  • Company/ LLP audits.

Tax Audit: Tax audits are required under Section 44AB of India’s Income Tax Act 1961. This section mandates that every person whose business turnover exceeds Rs 1Crore in any previous year, and every person working in a profession with gross receipts exceeding Rs 50 Lakhs must have their accounts audited by an independent chartered accountant. However, in the case of business, if both the Payment and Receipt do not exceed 5% of the Total Receipts and Payments respectively, the turnover limit is raised to 5 crores for Assessment year 2021-22. The Finance Act, 2021 has further increased the threshold limit of turnover for tax audit u/s 44AB from Rs.5 crores to Rs.10 crores where cash transactions do not exceed 5% of total transactions.

Company audits: The provisions for a company audit are contained in the Companies Act, 2013. Every company, irrespective of its nature of business or turnover, must have its annual accounts audited each financial year.

LLP Audit: Under Section 34(4) of the Limited Liability Partnership Act, 2008 there is an LLP audit requirement for LLP whose turnover exceeds the prescribed limit of Rs. 40 lakhs or whose contribution exceeds Rs. 25 lakhs in any financial year.

Internal audits are conducted at the bequest of internal management in order to check the health of a company’s finances and analyze the operational efficiency of the organization. Internal audits may be performed by an independent party or by the company’s own internal staff. As per India’s Companies Act, 2013  the following companies must have an internal auditing system:

1. Every listed company.

2. Companies whose shares are not listed on the stock exchange and have:

  • Paid-up share capital of Rs 50 Crores or more during the preceding financial year;
  • Turnover of Rs 200 Crores or more during the preceding financial year;
  • Outstanding loans or borrowings from banks or public financial institutions exceeding Rs 100 Crores or more at any point in time during the preceding financial year; or
  • Outstanding deposits of Rs 25 crores or more at any point in time during the preceding financial year.

3. Every private company with:

  • Turnover of Rs 200 Crores or more during the preceding financial year; or
  • Outstanding loans or borrowings from banks or public financial institutions exceeding Rs 100 Crores or more at any point in time during the preceding financial year.

The statutory auditor of the company must report on the internal auditing system of the company in the audit report.

Other Audits

Besides the above there are certain other kinds of Audit like stock audit, cost audit , special audit, etc.

Stock audit

Stock audit or inventory audit is a term that refers to physical verification of a company or institution’s inventory assets. At times, it may also involve the valuation of the inventory but it would depend on the terms of reference or the engagement letter of the assignment. Every business institution at least needs to perform a stock audit once a year to update and ensure that the physical stock and the computed stock match. the stock audit process is concerned, the process mainly involves the counting of physical stock presenting the specified premises and verifying the same with computed stock maintained by the company. Stock Audit is done either on behest of management:

  • To find discrepancies between recorded stocks and physical stock,
  • to identify slow-moving, or obsolete stock, and scrap and
  • to reduce unnecessary investment on stocks and to ensure that you have a proper line balancing in the process.

Besides, stock audit is also done from the view point of the lender/ banks, annually, semi annually or quarterly, to monitor and ensure end-use of funds lent and check the economic viability of the borrower. The appointment of stock auditor is generally made by the Regional or Zonal Office in case of Nationalized banks and in case of co-op banks sometimes concurrent auditors only are asked to conduct stock audit of select borrowers of the branch who are enjoying certain working capital credit limits. The minimum limit for conducting stock audit varies from bank to bank according to their risk perception. Normally, CA or Cost Accountants are appointed by banks for conducting Cost Audit.

Audit of Receivables

The audit of existence in accounts receivables means verifying the actual existence, rights, and obligations, completeness, accuracy, classification, and presentation of receivables account balances as shown in books of accounts. The assertions in accounts may be materially misstated due to fraud or error. It is the responsibility of the auditor to perform unique audit procedures for every assertion and reveal any misstatement if present. One important and primary risk involved in the accounts receivables balances is that the organization has not expensed out the amounts of the bad debts in the receivables balances, which cannot be recovered anymore. Normally Banks/ lenders get this audit for ongoing working capital loan or cash credits secured by book debts.

Cost Audit

cost audit represents the verification of cost records and accounts and a check on the adherence to the prescribed cost accounting procedures and the continuing relevance of such procedures. Cost audit ascertains the accuracy of cost accounting records to ensure that they are in conformity with cost accounting principles, plans, procedures, and objectives. A cost audit comprises the following:

  • Verification of the cost accounting records such as the accuracy of the cost accounts, cost reports, cost statements, cost data, and costing technique
  • Examination of these records to ensure that they adhere to the cost accounting principles, plans, procedures, and objective
  • To report to the government on optimum utilization of national resources.

The cost audit may be done on behalf of management, customer, government agencies or it may be required by some statute. Section 148 of The Companies Act, 2013 read with The Companies (Cost Records and Audit) Rules, 2014 and Cost and Works Accountants Act, 1959 regulates statutory cost audit in India. Every company falling in regulated Sector like telecommunication, electricity, petroleum, pharma, fertilizer, etc, should get its cost records audited if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is Rs 50 crore or more and the aggregate turnover of the individual product or products or services for which cost records are required to be maintained is Rs 25 crore or more. Other companies belonging to non-regulated Sector as given under Annexure A should get their cost records audited if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is Rs 100 crore or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained is Rs 35 crore or more. Only a Cost Accountant can be appointed as Cost Auditor for conducting a cost audits. Cost Accountant and no person appointed statutory auditor of the company shall be appointed for conducting the audit of cost records.

Special Audit

A Special Audit can be defined as a tightly defined type of audit that is conducted in order to probe into a specific area of the organization’s activities. Normally, this type of audit is mainly initiated by a third party, like a government agency or the tax authority, when some abnormal behavior is suspected within the organization. They can also be conducted when there are other institutional violations that might include pertaining to duties, authorizations, internal control procedures, or responsibilities of the Senior Management. These special audits may be quite varied in their nature, purpose, and scope and may take different forms like:

  • Compliance Audit – This is mainly conducted when there is a need to examine the policies and procedures to check if they follow internal or regulatory standards.
  • Construction Audit – This analyzes the costs that occur for a given construction project. In the same manner, this also tracks down the actual amount that is paid to contractors, suppliers, and other reimbursements that takes place in this regard.
  • Information Systems Audit. Information System Audit is mainly conducted when there is a need to review the overall controls present in software development. Additionally, it also involves a review of controls regarding software development, data processing, and the overall access to computer systems.
  • Investigative Audit. Investigative Audits take place when there is a need to find details of a specific event or an incident within the company, that was suspicious.
  • Tax Audit. This Audit is mainly initiated to analyze the overall tax returns that are submitted by an individual or business entity. The main rationale is to see if the paid tax is actually valid.

Opportunity for Chartered Accountants in India in Audit

Auditing is the core and original function of any Chartered Accountant. With intense training, a qualified Chartered Accountant acquires professional skepticism to identify potential risks and propose preventative measures.  Their role as consultants, either internally or externally, is focused on providing objective assessments or informed opinions about how existing practices and procedures might be improved. Overall goals of an audit include increased operational efficiency, risk management and regulatory compliance. A variety of industries employ auditors to provide policy and procedural oversight and ensure accurate financial reporting. Some of the key opportunities open to CAs on audit are:

  • statutory audit under the Companies Act, 2013
  • statutory audit under the Limited Liability Partnership Act, 2008
  • Tax Audit under the Income Ta Act, 1961
  • Internal Audit
  • Stock and receivables audit for banks
  • Information Technology Auditor
  • Audit Manager in Company
  • Member of Audit Committee
  • Forensic audit
  • Cost Audit
  • Investigative Audit
  • Supply Chain Audit
  • Environmental Audit
  • Compliance Audit
  • Revenue Management Audit
  • Statutory Bank Audit
  • Concurrent Audit in Banks
  • Audit of NGOs
  • Conducting Special Audits

History of Auditing

The word “AUDIT” has Latin origins, In general, it is a synonym to control, check, inspect, and revise. From the time of ancient Egyptians, Greeks, and Romans, the practice of auditing the accounts of public institutions existed. At that time audit was ordered by the Kings, emperors. and Churches and were conducted by the people of the state or scribes.

Later in the 18th century, checking clerks began to be appointed by States or Courts, to check the public accounts. To locate frauds as well as to find out whether the receipts and payments are properly recorded by the person responsible was the main objective of auditing of those days. In the second half of the 18th century, with the industrial revolution taking place, the sizes and complexities of enterprises increased much fold and thus necessitated a joint-stock form of organizations and audit began its evolution into a field of fraud detection and financial accountability by professionally trained people.

Regulatory Requirement of Audit in India

Statutory Audit under the Companies Act, 2013 

It is pertinent to note that from the year 1857 till date, all these Companies Act enactments have recognized the mandatory requirement relating to Accounts and Audit of accounts of the companies in India. The Companies Act 2013 states that auditing standards issued by the Institute of Chartered Accountants of India (ICAI), and subsequently approved by the Ministry of Corporate Affairs, are mandatory for the audit of financial statements of companies in India.

Chapter X Audit and Auditors (Section 139 to Section 148) of Companies Act, 2013 contains provisions related to the audit of financial statements of companies. This chapter includes provisions, inter alia, regarding appointment, resignation, removal, rights, and duties of the auditor.

Section 139 of the Act that deals with the Appointment of the Auditor prescribe that every Company shall appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. The manner and procedure for selection of auditors by the members shall be as prescribed and the matter relating to such appointment for ratification by members at every annual general meeting.

Section 143(2) casts a  duty on the auditor to make a report to the members of the company on the accounts examined by him and on every financial statement which are required by or under the Act to be laid before the company in general meeting and requires that the report shall after taking into account the provisions of the Act, the accounting and auditing standards and matters which are required to be included in the audit report to the best of his information and knowledge, state that the said accounts and, 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.

Section 143(3) casts some additional reporting requirements on the auditor including the requirement that the auditor report shall state as to whether the company has adequate internal controls over financial reporting (ICFR) with reference to financial statements in place and the operating effectiveness of such controls.

Section 143(11) empowers the Central Government in consultation with NFRA, to specify certain matters to be included in the Auditor’s Report.   Accordingly, the Companies(Auditor’s Report) Order (CARO) has been issued from time to time.

Statutory Audit under LLP Act, 2008

Tax Audit under Income Tax Act, 1961

Tax audits are required under Section 44AB of India’s Income Tax Act 1961. The provision of tax audits is applicable to everyone, be it an individual, a partnership firm, a company or any other entity. The tax audit report is to be obtained by September 30 after the end of the previous fiscal year.

As per section 44AB, the following persons are compulsorily required to get their accounts audited :

  • A person carrying on business, if his total sales, turnover, or gross receipts (as the case may be) in business for the year exceed or exceeds Rs. 1 crore. This provision is​ not applicable to the person, who opts for a presumptive taxation scheme under section 44AD​ and his total sales or turnover doesn’t exceed Rs. 2 crores. The Finance Act, 2021 has increased the threshold limit of turnover for tax audit u/s 44AB from Rs. 5 crores to 10 crores where cash transactions do not exceed 5% of total transactions. Non-compliance with the tax audit provisions may attract a penalty of 0.5 percent of turnover or Rs 150,000, whichever is lower.
  • A person carrying on profession, if his gross receipts in profession for the year exceed Rs. 50 lakhs.
  • An assessee who declares profit for any previous year in accordance with section 44AD​ (presumptive taxation) and the decreases profit for any of one 5 assessment year relevant to the previous year succeeding such previous year lower than the profit computed as per section 44AD​ ​ and his income exceeds the amount which is not chargeable to tax.

National Financial Reporting Authority (“NFRA”)

National Financial Reporting Authority (“NFRA” ), was constituted as an independent regulator for accounting and auditing in India in October 2018. As per NFRA’s Charter, an important function of NFRA under 132(2)(a) of the Companies Act 2013 is to make recommendations to Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors. 

Standards on Auditing in India

Brief History

  • ICAI constituted the Auditing Practices Committee (APC) on 17th September 1982, to review the existing auditing practices in India and to develop Statements on Standard Auditing Practices
  • At its 226th meeting held in July 2002, approved the renaming of the Auditing Practices Committee as the Auditing and Assurance Standards Board (AASB) as well as the renaming of the Statements on Standard Auditing Practices as Auditing and Assurance Standards (AASs).
  • The ICAI is one of the founder members of the International Federation of Accountants (IFAC)

Accordingly, while formulating Engagement and Quality Control Standards, the AASB takes into consideration the corresponding Standards, if any, issued by the IAASB

Section 143(9) of the Companies Act, 2013, requires that every auditor shall comply with auditing standards. Section 143(10) of Companies Act, 2013, states that 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, provided that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India (ICAI) shall be deemed to be the auditing standards. As of date, there is a single set of auditing standards issued by ICAI which is applicable for all types and sizes of companies and are to be applied whenever an independent examination of financial information is carried on for ANY entity whether the business motive is t make the profit or not, whether the size of the entity is big or small or even if the entity has does not have any legal form (unless any lays specifies something else).

Auditing Standards in India are in line with the International Standards issued by the International Auditing and Assurance Board (IAASB) and even their numbering is akin to International Standards. In all there are 45 standards.

  • Standards of Quality Control (SQCs): This is a single standard SQC 1 which is for all the services under Engagement Standards. These standards are applicable to all auditing firms which perform audits and reviews of historical financial information including assurances and related service engagements.
  • Standards on Auditing (SAs): There are 37 SAs for auditing historical financial information. These apply whenever any independent Audit is carried out.
  • Standard on Review Engagements (SRE): There are 2 SREs for review of historical financial statements.
  • Standard on Assurance Engagements (SAE): There are 3 SAEs for assurance engagements other than audit and review.
  • Standard on Related Services (SRS): There are 2 SRSs applicable to agreed-upon procedures regarding financial information.
Standards on Quality Control (SQCs)
SQC 1 Quality Control for Firms that Perform Audit and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements
Standards on Auditing (SAs)
SA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing
SA 210 Agreeing on the Terms of Audit Engagements
SA 220 Quality Control for an Audit of Financial Statements
SA 230 Audit Documentation
SA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
SA 250 Consideration of Laws and Regulations in an Audit of Financial Statements
SA 260 Communication with Those Charged with Governance
Rev SA 260 Communication with Those Charged with Governance
SA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance and Management
SA 299 Responsibility of Joint Auditors
Rev SA 299 Joint Audit of Financial Statements
SA 300 Planning an Audit of Financial Statements
SA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment
SA 320 Materiality in Planning and Performing an Audit
SA 330 The Auditor’s Responses to Assessed Risks
SA 402 Audit Considerations Relating to an Entity Using a Service Organisation
SA 450 Evaluation of Misstatements Identified During the Audit
SA 500 Audit Evidence
SA 501 Audit Evidence-Specific Considerations for Selected Items
SA 505 External Confirmations
SA 510 Initial Audit Engagements – Opening Balances
SA 520 Analytical Procedures
SA 530 Audit Sampling
SA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures
SA 550 Related Parties
SA 560 Subsequent Events
SA 570 Going Concern
Rev SA 570 Going Concern
SA 580 Written Representations
SA 600 Using the Work of Another Auditor
SA 610 Using the Work of Internal Auditors
Rev SA 610 Using the Work of Internal Auditors
SA 620 Using the Work of an Auditor’s Expert
SA 700 Forming an Opinion and Reporting on Financial Statements
Rev SA 700 Forming an Opinion and Reporting on Financial Statements
SA 701 Communicating Key Audit Matters in the Independent Auditor’s Report
SA 705 Modifications to the Opinion in the Independent Auditor’s Report
Rev SA 705 Modifications to the Opinion in the Independent Auditor’s Report
SA 706 The emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
Rev SA 706 The emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
SA 710 Comparative Information—Corresponding Figures and Comparative Financial Statements
SA 720 The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements
Rev SA 720 The Auditor’s Responsibilities Relating to Other Information
SA 800 Special Considerations-Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
SA 805 Special Considerations-Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement
SA 810 Engagements to Report on Summary Financial Statements
Standards on Review Engagements (SREs)
SRE 2400 Engagements to Review Financial Statements
SRE 2400 Rev Engagements to Review Historical Financial Statements
SRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity
Standards on Assurance Engagements (SAEs)
SAE 3400 The Examination of Prospective Financial Information
SAE 3402 Assurance Reports on Controls At a Service Organisation
SAE 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus
Standards on Related Services (SRSs)
SRS 4400 Engagements to Perform Agreed-upon Procedures Regarding Financial Information
SRS 4410 Engagements to Compile Financial Information
SRS 4410 (Revised) Compilation Engagements

Benefits of Auditing

Auditing should not be viewed barely as a statutory compliance exercise as audit and assurance services provide numerous benefits to management. They can:

  • Determine whether internal controls in an enterprise is adequate, effective and suggest corrective measures if required;
  • Promote and prescribe best practices for controls
  • Ensure complete and timely compliance with policies and regulations to ensure smooth functioning by avoiding penalties and prosecutions
  • Identify operational inefficiencies and waste and to enable maximization of profit
  • Review IT projects, systems, and technology to determine deficiencies therein
  • Provide objective insight on overall working of an enterprise
  • Assess efficient and responsible use of resources
  • Identify potential cost savings
  • Assist management in addressing complex, cross-functional issues

Quality of a Good Auditor 

An auditor’s job is to obtain complete and accurate information about the activities of the enterprise. It is a very responsible job requiring specialized skills. Some of the essential qualities an auditor must possess are:

  • Knowledgeable: Appropriate range and depth of knowledge of best quality practices, regulations, compliance requirements, standards, and relevant technology. The CA course ensures indebt study of all the regulations and standards applicable to different kinds of entities operating and thus making auditors competent to do the job diligently.
  • Experienced: The auditor will need an appropriate range and depth of experience which he gains during the course of professional pursuit including the article ship period.
  • Observer: An auditor must possess good powers of quick observation as he has to quickly have a grasp of entities operations, processes, finance, management, internal control etc so that he can plan his work likewise and conduct audits diligently.
  • Inquisitiveness and Scepticism: An Audit must have an enquiring attitude which is essential to know the in and outs of the enterprise under audit. He must have a questioning mind being alert to anything that may indicate misstatement due to error or fraud while critically assessing audit evidence.
  • Articulate: An Auditor must have good communication skills as the job involves interactions with all levels of people in an organization. He should be proficient in both oral and written communication as a lot of interactions are done on electronic media.
  • Independence: Auditors must function independently and should have courage and conviction to maintain independence as it fundamental principle of any audit assignment.
  • Level headed: Every entity an auditor deals with in course of his professional career is different with a different set of people involved. The varied environment in which the auditor works exposes him to experiences some of which may not be very pleasant. As an Auditor one must be able to stay cool and maintain composure and be persistent, yet patient and diplomatic, in pursuit of the objectives of the audit.
  • Sound Decision Maker: An auditor must be capable of making sound and quick judgments on the matters observed.
  • Good Listener: An auditor must be a good listener so as to properly appreciate what is being communicated to him.

5 Phases in Auditing Process

Though the extent, nature, and requirement vary for different kinds of entities under audit, the essential process involved is similar in each audit assignment. The whole process of auditing can be understood in 5 different phases viz.

i. Pre-Commencement: Before starting the process, an auditor has to get an engagement letter and a general analysis is performed on the organization be audited to have a better understanding of how processes work and what the entity’s objectives are. To have such understanding the audit team must comprehend the organizational structure of the entity under audit. The audit team must acquire a though understanding of the legal framework in which the entity under audit operates and also the internal regulation imposed by its memorandum/ articles, board decisions, etc. Doing so will give the team an overall picture of Organizational objectives, Activities performed, Company’s structure, Resources available, Industry context, and the Budget.

ii. Audit Planning: It is a very important aspect of any audit as the work well planned is half done. In this phase of the audit, the data collected in the previous stage are used to create an audit plan. The audit plan must contain the following information:

  • Objectives, scope and criteria of the audit.
  • Units and areas to be audited within the company.
  • Staff members in charge of the quality of the processes.
  • Priority aspects.
  • Time and duration of inspections: dates and locations.
  • Meeting schedule.
  • Confidential requirements.
  • Structure and delivery of the final report.

The lead auditor must define the staff members who will be responsible for performing each of the audit activities. To ensure the independence of audit function team members involved in audit assignment must be free from conflict of interest and must not be involved in the activities they are auditing.

  • Conducting the audit: Once the audit plan is drawn, a meeting of the audit team should take place, where the team members introduced themselves and the plan is reviewed. The methodologies and procedures to be used in the audit are discussed and the role of each member of the team is defined. The necessary resources are also defined and the security and emergency procedures are reviewed. The audit team must work diligently and intelligently to work as per the plan. However, the plan must not be too rigid and should provide scope for adjustment like increasing the extent of the audit in case some major discrepancies are observed during the course of the audit. The information collected by the audit team is gathered and analyzed, and it is assessed whether the criteria of the audit plan are being fully complied with. The auditors then meet with management and those responsible for the audited functions and the results of the audit are discussed, disagreements are resolved, and conclusions are drawn.
  • Reporting: The Auditor of the company after verifying the accounts, financial and operational performance of the company would release an audit report with audit opinion. This audit opinion could be unqualified, qualified, adverse or disclaimer of opinion. An unqualified audit report means that the Auditor has verified and accepts the financial statement prepared by the Company whereas a qualified opinion means that the Auditor after verifying the accounts does not agree on some information presented in the financial statements prepared by the Company. Such qualification is given where the auditor concludes that misstatements are material but the impact is not so high that it would render the whole financial statements unacceptable or where the auditor is unable to obtain sufficient or appropriate audit evidence but concludes that there are indications of misstatements in the financial statements but the degree is not high. An Adverse opinion shall be issued by the auditor where he concludes that on the basis of evidence obtained and procedures performed, there are material misstatements in the financial statements and the impact of the same is high. A Disclaimer of Opinion is to be issued by an auditor in cases where the auditor concludes that he/she is not able to obtain sufficient and appropriate evidence.
  • Follow up: There may be occasions when corrective actions to resolve an audit issue are not accomplished until after the audit report has been finalized.  In these cases, follow-up should be performed on the previously reported recommendations to determine whether corrective action plans have been effectively implemented and that expected results are being achieved.  Depending on the severity of the audit issue, follow-up activities could include interviewing staff, reviewing updated procedures or documentation, or re-auditing the processes that originally led to the audit issue.

Action against Auditors

Under Income Tax Act, 1951: As per Section 271J of the Income Tax Act, 1961 the Assessing Officer can levy a penalty of Rs. 10,000 on a Chartered Accountant if he believes that the CA has furnished incorrect information in any report

Under Chartered Accountants Act, 1949: Section 22 of the Chartered Accountants  Act 1949, provides an inclusive definition of the term Professional or Other Misconduct as acts and omissions provided in any of the Schedules annexed to the Act.  There are 2 Schedules that lay down the various types of offenses by a CA.

If a CA is found guilty of professional misconduct under the First Schedule action can be taken by the Board of Discipline constituted under Section 21A of the Act and also by the Disciplinary Committee constituted under section 21B of the Act. Board of discipline adopts summary disposal procedure and may take any one or more of the following actions if a CA is found guilty under Misconduct specified in First Schedule, namely

  • reprimand the member;
  • remove the name of the member from the Register up to a period of 3 months;
  • impose such fine as it may think fit which may extend to Rs. 1 lakh.

If a CA is found guilty of professional misconduct under the Second Schedule action can be taken against a CA, by the Disciplinary Committee constituted under section 21B of the Act which has the same powers as are vested in a civil court, in matters summoning and enforcing the attendance of any person and examining him on oath; the discovery and production of any document; and receiving evidence on affidavit. It can take the following action against a CA:

  • Reprimand a Member
  • Remove name from Register Permanently or for any period of time
  • Impose fine for an amount which may go up to Rs. 5 Lakh

Some of the clauses of Part 1 of the Second Schedule which directly deal with audit functions and which would be regarded as professional misconduct ere

  • certifies or submits in his name, or in the name of his firm, a report of an examination of financial statements unless the examination of such statements and the related records has been made by him or by a partner or an employee in his firm or by another chartered accountant in practice
  • expresses his opinion on financial statements of any business or enterprise in which he, his firm, or a partner in his firm has a substantial interest
  • fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity
  • fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity;
  • does not exercise due diligence, or is grossly negligent in the conduct of his professional duties
  • fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion
  • fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances

Under the Companies Act, 2013

Section 140 (5):

Deals with removal, the resignation of Auditor and giving of special notice and prescribes punishment for auditor of a company who has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by or in relation to the company or its directors or officers. Apart from debarring the auditor from appointment as auditor of any company for a period of five years of the passing of the order by the NCLT, the auditor shall also be liable under Section 447.

Section 147

Section 139 to 145 of the Companies Act, 2013 deals with the audit and account of the Companies. Section 147 prescribes penalties for any contraventions under the Companies Act in respect to these sections. The company in default is punishable with a fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 Lakh and every officer of the company who is in default shall be punishable with a fine which shall not be less than Rs.10,000 but which may extend to 1 lakh rupees. If an auditor of a company contravenes any of the provisions unknowingly or unwillingly,

  • the auditor shall be punishable with a fine which shall not be less than Rs. 25,000 but which may extend toRs. 5 Lakh or 4 times the remuneration whichever is less.
  • However, if the auditor has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to 1 year and with a fine of Rs. 50,000 which may extend to Rs. 25 Lakh or 8 times the remuneration of the auditor, whichever is less.
  • Besides, the auditor if guilty, must also refund the fees to the Company and also pay damages if any to the company, statutory bodies or authorities or to members or creditors of the company for loss arising out of incorrect or misleading statements of particulars made in his audit report.
  • In case an audit firm is found guilty, the partners will be jointly and severally liable except in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable

Section 245 and 246

The Companies Act,2013 provides for class‐action lawsuits, which can allow a large number of people with a common interest in a matter to sue or be sued as a group. Sections 245 and 246 of the Act contain these provisions. Under these, class‐action suits may be filed by investors if they are of the opinion that the affairs of the company are being conducted in a manner prejudicial to the interest of the company, its shareholders, or depositors. The group of prescribed shareholders or depositors may file an application with the National Company Law Tribunal (NCLT).  Such class action may include other suits against the audit firm as well as the partners responsible for any misleading or improper statements in the auditors’ report or any misconduct or fraud by act or omission.

Section 132

National Financial Reporting Authority (NFRA) is an independent authority created under section 132 of the Companies Act, 2013 for the establishment and enforcement of accounting and auditing standards and oversight of the work of auditors of certain entities like listed entities, banking, insurance, and electricity companies and other large unlisted companies having

  • paid-up capital of Rs. 500 crores or more
  • annual turnover of Rs. 1000 crores or more
  • having, in aggregate, outstanding loans, debentures, and deposits of Rs. 500 crores

Where professional or other misconduct is proved on an auditor, NFRA shall have the power to impose the penalty which may be as follows:

  • For individuals a fine between Rs. 1,00,000 to 5 times the fees received
  • For firms a fine Between Rs. 5,00,000 to 10 times the fees received

Where professional or other misconduct is proved, NFRA shall have the power to debar the member/firm from being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or performing any valuation services for a period which may be from 6 months to 10 years.

Section 447

Section 447 of the Companies Act, 2013 exclusively deals with punishment for Fraud. As per the section, any person who is found to be guilty of fraud involving an amount of at least Rs 10 Lakh or 1% of the turnover of the company, whichever is lower shall be punishable with imprisonment for a term which shall not be less than 6 months but which may extend to 10  years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to 3 times the amount involved in the fraud: Moreover, where the fraud in question involves public interest, the term of imprisonment shall not be less than 3 years.

However, where the amount of fraud is lesser and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to 5 years or with a fine which may extend to R. 50 lakh or with both.

Conclusion

The penalties and responsibilities of an auditor may seem onerous however it would be incorrect to hold an audit as risky. With essential features of auditor like independence, professional skepticism, documentation skills, and continuous knowledge up-gradation any Chartered Accountant can make a name for himself in the field of the Audit profession.

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