Provisions Related to Audit and Auditors Under Companies Act, 2013

CA Pallavi Agrawal

AUDIT & AUDITORS

The Ministry has taken a big step by notifying 183 major sections of Companies Act, 2013 w.e.f. 01.04.2014 out of which the provisions relating to Audit & Auditors is of utmost importance for all the Chartered professionals out there. This article contains the key amendments bought into effect in relation to audit and auditors and the way forward.

Chapter X –Audit & auditors ranging from Sections 139 to 148 of the Companies Act, 2013 (the ‘Act’) alongwith Companies (Audit and Auditors) Rules, 2014 (the ‘Rules’) have been notified & they shall come into force on the 1st day of April, 2014.

Below is the summary of all the sections within the ambit of this Chapter alongwith the corresponding section form Companies Act, 1956:

Companies Act, 2013(New Act)	Companies Act, 1956(Old Act)	Section Title
139	224, 224A, 619	Appointment of Auditors
140	225	Removal, Resignation of auditor and giving of special notice.
141	226	Eligibility, qualifications and disqualifications of auditors.
142	224(8)	Remuneration of auditors.
143	227, 228, 263A	Powers and duties of auditors and auditing standards.
144	Nil	Auditor not to render certain services.
145	229, 230	Auditors to sign audit reports, etc. (similar)
146	231	Auditors to attend general meeting.(similar)
147	232, 233, 233A	Punishment for contravention.
148	233B	Central Government to specify audit of items of cost in respect of certain companies. (Cost Audit)

Note: Sub-section 5 & proviso to sub-section 4 of Section 140 of Companies Act, 2013 has not been yet notified & Proviso to sub-section (3) of Section 225 of Companies Act, 1956 still remains in effect.

KEY CHANGES :

1)      The term of auditor holding the office in a company is increased to 5 years subject to ratification at every AGM as compared to one year in the previous act.

2)      Mandatory rotation of auditors in case of listed companies, certain unlisted companies & certain private companies after 5 years.

3)      No. of audits per individual/partner reduced to twenty including private limited companies.

4)      LLP is eligible to be appointed as an auditor

5)      A firm/LLP can partner with non-CA’s and still be appointed as auditor.

6)      Automatic re-appointment of retiring auditor in case of other companies where no resolution is passed in AGM

7)      Certain services named in Section 144 which an auditor cannot provide to its auditee

8)       Compliances in relation to appointment, resignation of auditor have increased and changed significantly.

9)      Acts of Relative is included within the ambit of disqualification of an auditor

10)  Limits for disqualification in case of holding of security, indebtness to a company or providing guarantee to a company have increased.

11)  Business relationship with a company is bought within the ambit of disqualification of an auditor

12)  As per Section 143 (2), an auditor is required to make a report to the members on the accounts examined by him and on every financial statement which are required by or under this Act to be laid in GM 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

a. Balance Sheet

b. Profit & Loss Account

c.       Cash Flow Statement

d. A statement of changes in equity if applicable

e. Other Statements as prescribed

Note : CFS is not mandatory in case of One Person Company, Small Company & Dormant Company.

Small Company means a company other than public company of which Paid up share capital does not exceed Rs. 50 lakh or such prescribed amount & T/o of which as per its last P & L A/c does not exceed 2 crores or such amount as prescribed. These do not include holding or subsidiary company.

13)  As per 143(9) of the company’s act 2013, every auditor shall comply with the auditing standards.

14)  Fraud Reporting to CG has been introduced and provisions regarding this are required to be followed by auditor immediately within the specified time.

SECTION 139 – Appointment of auditors:

1)      Appointment of Auditors other than First:

A company shall, at the 1st AGM, appoint an individual or an audit firm (always includes LLP) as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its 6^th AGM and thereafter till the conclusion of every 6^th AGM.

Appointment of First Auditors:

However, the first Auditors of a company are to be appointed always by the BOD within 30 days of registration of company and in case of failure to do so, the members shall be informed who shall within 90 days at an EGM appoint such auditor and such auditor shall hold office till conclusion of 1^st AGM.

2)      Ratification at every AGM :

Company shall place the matter relating to such appointment for ratification by members at every AGM.

Note : If the appointment is not ratified, the rules prescribe that the Board of Directors shall appoint another individual or firm as its auditor or auditors after following the procedure laid down in this behalf under the Act.

3)      Compliance before appointment by company/auditor:

Before the appointment, a company shall obtain from the auditor–

a. Written consent of the auditor to such appointment

b. Certificate that

(a)   auditor is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made there under;

(b)    the proposed appointment is as per the term provided under the Act;

(c)    the proposed appointment is within the limits laid down by or under the authority of the Act;

(d)   the list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.

4)      Compliance after Appointment by Company:

A Company shall inform the auditor of his appointment & is to file a notice of appointment with ROC within 15 days of the meeting in which auditor is appointed. (Form No. ADT – 1)

Note : Earlier auditor used to file Form 23B and inform ROC, now the company is to inform ROC, so in a way they shifted the burden to inform on Company.

5)      Mandatory Rotation of Auditors in case of Listed Companies & Certain classes of Companies :

All Listed companies and Companies prescribed by CG shall not appoint or re-appoint–

• an individual  –  for more than one term of 5 consecutive years
• an audit firm  –  for more than two terms of 5 consecutive years

Classes of Company prescribed by CG under the Rules :

(a) all unlisted public companies having paid up share capital of rupees ten crore or more;

(b) all private limited companies having paid up share capital of rupees twenty crore or more;

(c) all companies having paid up share capital of below threshold limit mentioned in (a) & (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more.

Cooling Period:

An individual or audit firm as the case may be who/which has completed the abovementioned terms shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of such term

Common Partners Restriction:

As on the date of appointment, no audit firm having a common partner/s to the other audit firm, whose tenure has expired in a company immediately preceding the F.Y., shall be appointed as auditor of the same company for a period of 5 years.

Transition Period :

Every company required to comply as above, existing on or before the commencement of this Act, shall comply with the above requirements within 3 years from 01.04.2014.

Rights of shareholders/ auditor unharmed :

Nothing contained above with respect to rotation shall prejudice the right of the company to remove an auditor or the right of the auditor to resign from such office of the company.

Provisions in Rules regarding rotation :

– The period for which the individual/firm has held office as auditor prior to the commencement of the Act shall be taken into account for calculating the period of 5 or 10 years, as the case may be.

– The incoming auditor/audit firm shall not be eligible if such auditor/audit firm is associated with the outgoing auditor/audit firm under the same network of audit firms.

Here, “same network” includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control.

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;

(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 audit firm :

Number of consecutive years for which an audit firm 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 the firm may be appointed in the same company (including transitional period)	Aggregate period which the firm would complete in the same company in view of column I and II
I	II	III
10 years (or more than 10 years)	3 years	13 years or more
9 years	3 years	12 years
8 years	3 years	11 years
7 years	3 years	10 years
6 years	4 years	10 years
And so on

 6)      Reappointment in case of other than listed companies possible:

A retiring auditor is eligible for reappointment at an AGM, if

a)      He is not disqualified for re-appointment

b)      He has not given notice in writing of unwillingness to be re-appointed

c)      SR passed at a meeting that some other auditor is to be appointed or expressly providing  that he shall not be re-appointed (Read special notice requirement in Section 140)

Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.

7)       Additional rights provided to Shareholders :

Subject to the provisions of this Act, members of a company may resolve to provide that –

• 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
• The audit shall be conducted by more than one auditor.

8)      Casual Vacancy (CV):

• CV caused because of resignation : By BOD within 30 days but the same should be approved by the company within 3 months of recommendation and shall hold office till conclusion of next AGM
• CV caused because of other reasons (disqualifications as per 141) : By BOD within 30 days, No approval

9)       Where a company is required to constitute an Audit Committee u/s 177, all appointments, including the filling of a CV of an auditor shall be made after taking into account the recommendations of such committee.

Section 140 : Removal, Resignation of auditor and giving of special notice

• The auditor appointed u/s 139 may be removed from his office before the expiry of his term only by way previous approval of CG and a special resolution of the company to be passed in a general meeting within 60 days of receipt of approval of CG. However, before such step, the auditor shall be given a reasonable opportunity of being heard.  The application to CG has to be made within 30 days of passing the board resolution. (Form No. ADT- 2 along with fees).

Here, a long-term relationship is built for 5 years, since removal before 5 years would be considered as removal before the expiry of his term. And for removal before the expiry of an auditor’s term requires strict formalities to be followed.

• Compliance by auditor after resignation : The auditor who has resigned from the company shall file within a period of 30 days from the date of resignation, a statement in the prescribed form with the company and the ROC, indicating the reasons and other facts as may be relevant. (Form No. ADT-3)

Punishment if auditor doesn’t comply : Fine of Rs. 50,000 to Rs. 5,00,000

• Special Notice : 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, except in case of mandatory rotation in case of listed companies. Other provisions w.r.t special notice are similar to the old Act.
  

Section 141 : Eligibility, Qualifications & Disqualifications

Eligibility:

a)      Individual : Only if is a CA holding certificate of Practice as per Section 2(17) of the Companies Act,2013.

b)     Audit Firm/LLP : Majority of partners who are CA are practicing in India, apptd in Firm name. Only the partner’s who are CA’s are authorised to act as auditors and sign.

Note : Thus, it seems Firm/LLP can contain partner’s who are Non-CA’s. The introduction of LLP as an auditor and ability of a firm/LLP to operate with partners who are not Chartered Accountants is a welcome change and in line with international practices. This will also result in  multi-disciplinary  firms providing vide range of services.

Disqualifications : The following persons shall not be eligible for appointment as auditors of a company or shall vacate the office after appointment :—

 Disqualifications similar to old act :

(a) a body corporate other than a LLP

(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;

Disqualifications amended and its limits :

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

(i) 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 1000 rupees or such sum as may be prescribed; (Prescribed sum is Rs. 1 lakh)

(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of such amount as may be prescribed; (Prescribed sum is Rs. 5 lakh)

(iii) 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, for such amount as may be prescribed;(Prescribed sum is Rs. 1 lakh)

NEWLY ADDED disqualifications provided in the ACT:

(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 of such nature as may be prescribed;

The rules define the “business relationship” as any transaction entered into for a commercial purpose, except –

(i)                 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;

(ii)               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;

(h) a person who has been convicted by a court of an offence involving fraud and a period of ten 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 specialised servicesas providedin section 144.

Note :

BUSINESS RELATIONSHIP IS AN INCLUSIVE TERM WHICH IS OPEN TO VIDE INTERPRETRATIONS THOUGH THE EXCEPTIONS ARE PROVIDED BUT THE EXCEPTIONS ARE LIMTED TO CERTAIN COMMERICAL TRANSACTION OF CERTAIN INDUSTRIES

LIMITS FOR AN INDIVIDUAL/PARTNER REDUCED TO TWENTY :

The 1956 Act and the Institute of Chartered Accountants of India (‘ICAI’) restrict the number of companies in which a person/ firm can be appointed as auditor. An individual cannot be appointed as auditor for more than 30 companies. Further, an individual cannot be appointed as auditor for more than 20 public companies and of which not more than 10 companies should have a paid up share capital of more than Rs 25 lakh. In case of a firm, such ceiling is determined for every partner of the firm. This limits specifically excluded private companies. However, the ICAI had notified that an auditor could accept 30 audits including private companies.

But the Companies Act, 2013 simply restricts the number of audits to 20 companies for an individual/ partner. It does not provide any restrictions based on nature/ size of the companies. Thus, this limit is further reduced.

Note : For the audits taken up by auditor for F.Y. 2013-14, the limits won’t be applicable since the appointment for the same was made before 01.04.2014.

Section 144 – New Insertion : AUDITOR NOT TO RENDER CERTAIN SERVICES :

In Old Act, there was no provision as to rendering of non-audit services to an audit client. It was determined by applying the Code of Ethics and the Guidance Note on Independence of Auditors issued by the ICAI. But the New Act contains specific provisions that prohibit auditors of a company to render non-audit services to an audit client directly or indirectly or its holding company or subsidiary company.

Prohibited services include:

• Accounting and book keeping services;

• Internal audit;

• Design and implementation of any financial information system;

• Actuarial services;

• Investment advisory services;

• Investment banking services;

• rendering of outsourced financial services; and

• Management services.

Here, the Act has provided a transition period 1 year meaning an auditor who has already been performing any non-audit services shall comply with this section till 31.03.2015.

Directly or Indirectly Defined :

Auditor – Individual : His Relative, Any other person connected/associated with such individual, entity in which such individual has significant influence or control or whose name/trademark/brand is used by such individual.

Auditor – Audit Firm : All partners, parent/subsidiary/Associate Entity or entity in which firm/partner has significant influence or whose name/trademark/brand is used by such firm/partners.

Comments :

This section will significantly damage the ability of an audit-firm/individual to provide most non-audit services. The requirements appear to be quite onerous and indeed would appear to prohibit an audit firm from providing a wide range of services, even when those are non-material.

Section 142 : Remuneration of auditors

First Auditor : Board

Other : GM

As per the old Act, any sums paid by the company in respect of the auditors’ expenses shall be deemed to be included in the expression “remuneration”. But as per the new act, the remuneration 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 does not include any remuneration paid to him for any other service rendered by him at the request of the company. 

This means, the board is free to decide the remuneration for other services provided by auditor provided they don’t come within Section 144.

Section 147 : Penalty

Penalty w.r.t to contravention of Section 139 to 146 :

Company : Rs. 25,000 to Rs. 5,00,000

Officer in Default : Rs. 10,000 to Rs. 1,00,000 or imprisonment upto 1 year or both

Auditor (Sec 139, 143, 144, 145) : Rs.25000 to Rs. 5,00,000

(Author may be contacted at [email protected])