INTRODUCTION

The word “audit” has Latin origins (audire, means listening). During this time, this word has known a lot
of definitions and classifications. In general, it is a synonym to control, check, inspect, and revise.Audit
by its word means to thoroughly check or enquire in order to ensure that things are in place and are in
order.While the accounting has suffered a little change in time, the audit has permanently evolved,
answering to the changes in the environment and modifying its objectives starting the middle age, passing
through the industrial revolution up to the 21st century. Companies prepare financial statements of their
activities, which represent their overall performance. These financial statements are examined and
evaluated by independent persons, who assess them according to the industry’s generally accepted
standards.

This examination and evaluation is an audit.

Thus, an audit is an examination and verification of a company’s financial and accounting records and
supporting documents by an independent professional against established criteria. The objective of an
audit of financial statements is to enable the auditor to express an opinion as to where the
financial statements are prepared, in all material respects, by an applicable financial reporting
framework.

The form the audit conclusion takes is that auditors state whether the financial statements give a true and
fair view. This is an expression of reasonable assurance.

A precise definition of the term ‘auditing’ is difficult to give. Some of the definitions given by different
authors are as follows:

According to the definition given by the International Federation of Accountants (IFAC), “An audit is
the independent examination of financial information of any entity, whether profit-oriented or not and
irrespective of its size, or legal form when such an examination is conducted to express an opinion
thereon.”

According to R.R. Comber, “Audit is an independent examination of the financial books and records of
some person or persons responsible or accountable to the third party with a view of verifying the
accountancy of statement prepared by or for the accounting party.”

Spicer and Pegler, have defined an audit as; “such an examination of the books, accounts, and vouchers
of a business, as will enable the auditor to satisfy himself that the Balance Sheet is properly drawn up, to
give a true and fair view of the state of the affairs of the business, and whether the Profit and Loss
Account gives a true and fair view of the profit or loss for the financial period, according to the best of
his information and the explanations given to him and as shown by the books; and if not, in what respect
he is not satisfied”.

According to Montgomery; “Auditing is a systematic examination of the books and records of a business
or the organization to ascertain or verify and to report upon the facts regarding the financial operation
and the result thereof”.

It is clear from the above definitions that;

  auditing is the systematic and scientific examination of the books of accounts and records of a
business,

 enables the auditor to judge that the Balance Sheet and the Profit and Loss Account are properly
drawn up, so it exhibits a true and fair view of the financial state of affairs of the business and
profit or loss for the financial period.

The auditor will have to go through various books and accounts and related evidence to satisfy himself
about the accuracy and authenticity to report the financial health of the business.

Audit is the examination or inspection of various books of accounts by an auditor followed by physical
checking of inventory/invoices/bills to make sure that all departments are following documented system
of recording transactions. It is done to ascertain the accuracy of financial statements provided by the
organization.
OBJECTS
Auditing is a systematic examination of the books and records of a business or other
organization, to ascertain or verify, and to report upon the facts regarding its financial
operations and the results thereof. Auditing is concerned with the verification of accounting
data by determining the accuracy and reliability of accounting statements and reports.
Broadly, Audits are classified into Statutory and Internal
Audit. The Objectives of an Auditare as follows:

Objectives of Audit

1. Proper Control

One of the main objectives of an internal audit is to keep stringent control over all the
activities of an organization. The management needs assurance of the authenticity of the
financial records and the efficiency of the operations of the firm. An audit helps establish
both.

2. Perfect Accounting System

An internal audit keeps a very close check on the accounting system of an organization. It
checks everything from the vouchers, to the authority of transactions to mathematical
accuracy. All entries are verified against documents and other proof. Chances of mistakes or
frauds are greatly reduced.

3. Review of Business
 The purpose of an audit is to keep a check on the financial and operational aspects of a
business. So as the current financial year is ongoing, internal audit can point out the mistakes,
weak points, and strengths of the business. This will allow an ongoing review, instead of
waiting till the year-end.

4. Asset Protection

In the process of audit, there is always a valuation and verification of an asset. There is also a
physical verification of the ownership and possession of the asset and in case of special
transactions like sale, purchase or revaluation of the asset, the authorization of this is also
audited in an internal audit. So the assets enjoy complete protection.

5. Keeps a Check on Errors

In a financial audit, the auditor will be able to determine if any mistakes were made in the
financial records. But this only happens at the end of the financial year and the mistakes are
corrected thereafter. But in case of an internal audit, the mistakes are spotted as soon as they
are made, and corrected immediately.

6. Detection of Fraud

In case the company has an audit system in place, the detection of fraud becomes much
easier. This is because there is a year-round check on the employees. In fact, an employee is
less likely to attempt fraud in the presence of an internal auditor. He will not have any time
gap between the occurrence of fraud and its detection to cover it up. This will dissuade
employees from committing fraud.

7. Risk Management, Internal Process & Controls

Audit helps in assessing and ensuring that the internal controls, accounting processes and risk
management systems are in place or not.

8. Ensure proper maintenance and correctness of books of accounts and certification of the same
by an auditor

9. Reporting observations/discrepancies noted by tax auditor after a methodical examination of

the books of accounts.
To report prescribed information such as tax depreciation, compliance of various provisions of
income tax law etc.
CONTENT-STRUCTURED ANALYSIS OF THE TOPIC

STATUTORY AUDIT
Statutory audit is a mandatory annual audit that takes place to report the current state of a
company’s finances and account to the Indian government. These audits are mandated by the law
to ensure the fair practice of accounts management. Statutory audits are performed by
knowledgeable and qualified Chartered Accountants who work as external and independent
parties.
A statutory audit is a legally required check of the accuracy of the financial statements and
records of a company . A statutory audit is intended to determine if an organization delivers an
honest and accurate representation of its financial position by evaluating information, such as
bank balances, financial transactionsand accounting records.
Statutory Audit is further classified into the following:
Tax Audit under the Income Tax Act, 1961
According to Section 44AB of India’s Income Tax Act, 1961, Tax audits are mandatory. It
ensures that every individual who business turnover exceeds Rs 10 million in any preceding year
and every individual working in a profession with gross receipts of more than Rs. 5 million
should have their financial accounts audited by an independent chartered accountant.

The provision of tax audits is applicable to everyone, be it an individual, a business organization,

a partnership firm or any other entity. A non-compliance with the tax audit provisions could
attract a penalty of 0.5% of the turnover of Rs. 100,000, whichever is lower.

As of now, there are no specific guidelines regarding the appointment or removal of a tax
auditor.

Company Audit under the Companies Act, 2013

As per the Companies Act, 2013 it is essential to conduct to a company audit. All companies
regardless of its type of business or turnover should have their annual accounts audited each
financial year. This process can be successfully executed when the company directors appoint an
auditor for the audit. Furthermore, at every annual general meeting (AGM), an auditor is
appointed by the shareholders of the company who will maintain the position from one AGM to
the conclusion of the next AGM.
According to the Companies Act, 2017 it allows auditors to be appointed for a term period of 5
years. But in the case of individuals and partnership firms, auditors cannot be appointed for more
than one or two terms. It is compulsory for the auditor to be changed after the end of the term.

It is possible for an independent chartered accountant or firm to be appointed as the auditor of a

company.

INTERNAL AUDIT
The Internal Audit is usually conducted at the request of the internal management so that they
can get a proper idea of all the financial functioning and efficiency. These audits can be done by
an independent party or by the internal staff of the company. This is a sub-set of the Statutory
Audit in order o ensure that the internal financial controls, corporate governance and accounting
processes are in place.
In short, the role of internal audit is to provide independent assurance that an organization’s risk
management, governance and internal control processes are operating effectively.
Power and Duties of Auditor
Powers
1. Every auditor shall have access to the books of account and vouchers of the company at
all times from any place.
2. He/it shall be entitled to get information from the officers of the company if consider
necessary for doing his duty.
3. May make inquiry of:-

 Loans and advances made by the company and terms and conditions of such loans or
advances are prejudicial to the interest of the company or its members.

 Transactions of the company, which are entered in the books of account and the same
must be prejudicial to the interests of the company.

 Whether loans and advances of the company shown as deposits or not.

 Whether the personal expenses of the company have been charged to revenue account.
An Auditor also has the right to inquire excess of records of all his companies
subsidiaries.
Duties (Section 143 (2),(3),(4))
Shall make a report to the members about:-
1. Accounts examined by him.
 2. Every financial statement required to be laid down before the company’s general meeting
as per the Act.
While making the report he/she must take into account:-
1. Provisions of the act.
2. Accounting and auditing standards.
3. Matters which are necessary to be included in the audit report as per the provisions of the
act or rule made.
His report shall also state that:-
1. Whether information obtained by him and its explanation is complete for fulfilling the
purpose of his audit.
2. Whether as per law, proper books of accounts are maintained or not.
3. Whether report on the books of account of any branch office of the company audited by
any person other them him must be sent to the companies auditor and in what manner the
report has been made.
4. Whether the company’s balance sheet and profit loss account dealt in the report are in
consonance with books of accounts and return or not.
5. He must also express his opinion on the examination of a financial statement made by
him.
6. Whether his opinion on financial statements complies with accounting standards.
7. Is any director is disqualified from being appointed as a director as per section 164 of the
act?
8. Whether the internal financial system of the company is adequate and also operate the
effectiveness of such control system.
9. Any remarks in respect of maintenance of the account.
10. Any such matters as may be prescribed
STATUTORY PROVISIONS
The purpose of the statutory audit is to determine whether a company is providing an accurate
representation of its financial situation by examining the information, such as books of account,
bank balance, and financial statements.
All public and private limited companies have to undergo a statutory audit. Irrespective of the
nature of the business or turnover, these companies are mandated to get their annual accounts
audited each financial year.

Meanwhile, a limited liability partnership (LLP) has to undergo a statutory audit only if its
turnover in any financial year exceeds INR 4 million or its capital contribution exceeds INR 2.5
million.

Statutory audit is governed under the Companies Act, 2013, and Companies (Audit and
Auditors) Rules, 2014.

Chapter X –of the Companies Act, 2013 rules governs rules related to Audit and Auditors.

Statutory Audit

Section 139 of the Companies Act, 2013 read with The Companies (Audit and Auditors)
Rules, 2013 governs rules related to appointment of Statutory Auditors.

139 (1) Every company shall, at the first annual general meeting, 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 and the
manner and procedure of selection of auditors by the members of the company at such meeting
shall be such as may be prescribed .

(2) No listed company or a company belonging to such class or classes of companies shall
appointor re-appoint—
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years:
Provided that—
(i) an individual auditor who has completed his term under clause (a) shall not be eligible for re-
appointment as auditor in the same company for five years from the completion of his term;
(ii) an audit firm which has completed its term under clause (b), shall not be eligible for re-
appointment as auditor in the same company for five years from the completion of such
term:
Provided further that as on the date of appointment no audit firm having a common partner or
partners to the other audit firm, whose tenure has expired in a company immediately preceding
the financial year, shall be appointed as auditor of the same company for a period of five years:
Class of Companies.
For the purposes of sub-section (2) of section 139, the class of companies shall mean the
following classes of companies excluding one person companies and small companies:-
(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 1[fifty] crore or more;
(c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b)
above, but having public borrowings from financial institutions, banks or public deposits of
rupees fifty crores or more.
Internal Audit

Section 138 of the Companies Act, 2013 read with Rule 13 of the Companies (Accounts)
Rules, 2014 governs rules related to appointment of Internal Auditor.

According to Section 138 of the Companies Act 2013, the below-mentioned companies should
compulsorily have an internal auditor (which may be either an individual or a partnership firm or
a body corporate)

(a) every listed company;

(b) every unlisted public company having-

(i) paid up share capital of fifty crore rupees or more during the preceding financial year; or
(ii) turnover of two hundred crore rupees or more during the preceding financial year; or
(iii) outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year; or
(iv) outstanding deposits of twenty five crore rupees or more at any point of time during the
preceding financial year; and

(c) every private company having-

(i) turnover of two hundred crore rupees or more during the preceding financial year; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding
onehundred crore rupees or more at any point of time during the preceding financial year:
Provided that an existing company covered under any of the above criteria shall comply with the
requirements of section 138 and this rule within six months of commencement of such section.
Penalty for non compliance of Section 138 and 139
Section 138
The Company and every officer of the company who is in default or such other person shall be
punishable with fine which may extend to ten thousand rupees and where the contravention is
continuing one with a further fine which may extend to one thousand rupees for every day after
the first during which the contravention continues.
Section 139
The Company shall be punishable with fine which shall not be less than twenty-five thousand
rupees but which may extend to five lakh rupees and every officer who is in default shall be
punishable with imprisonment for a term which may extend to 1 year or with fine which shall not
be less than ten thousand rupees but which may extend to one lakh rupees or with both.

CASELAW WITH CITATION

DEPUTY SECRETARY TO THE GOVERNMENT OF INDIA V SN GUPTA (AIR 1956
CAL 414)

Court: Culcutta High Court

Coram:- Phani Bhushan Chakravartti CJ, Surajit Chandra Lahiri HHJ

Held- Auditor’s duty is not only till restricting himself to the task of verifying arithmetical
accuracy of the balance sheet but to inquire into its substantial accuracy. Thus, where the auditor
failed to verify the cash balance claimed by the management and the actual cash in hand turned
out to be much less than was shown in the books, he was held to be guilty according to section
147, of the act for not performing his duty, as provided under section 143.

INSTITUTE OF CHARTERED ACCOUNTANT VS P. K. MUKHERJI AND ANR (AIR

1104, 1968 SCR (3) 330)

Court: Supreme Court Of India

Corom: Ramaswami, V.

Held– By referring the landmark judgment of Kingston Cotton Mills Co.(No. 2), re (1896)

Supreme Court held that in the matters of technical nature, like- the valuation of stock-in-trade,
the auditor may rely upon a skilled person and was not held liable for any wrong or fault in the
work of that qualified person, unless there was suspicion of something wrong. But this can’t be
used as a defence by auditor and part of his duty can’t become the work of any skilled person.
Like in the present case, respondent 1 has not made a disclosure to the beneficiaries of provident
fund in the statement of account about that significant part of the cash in hand represented as
uncashed cheques.

Therefore, the court held that there was a breach of duty on the part of respondent 1 and charged
with professional misconduct for the same.

CONCULSION
With the change in the context of the changing economic and business environment and to make
Indian corporate environment more transparent, simple and globally acceptable., there was a
need felt to be governed under the better legislation and to repeal the old law which governed the
Indian companies prior to 2013. Therefore, Companies Act 2013 was enacted. The Act promises
to substantively ‘raise the bar on governance’ and in a comprehensive form purports to deal with
relevant themes such as investor protection and fraud mitigation, inclusive agenda, auditor
accountability, reporting framework, director responsibility and efficient restructuring. One of
the big and new provision of the Companies Act 2013 is auditor rotation. We cannot say that our
Government hasn’t done anything for the rotation of auditors but it does need a little change in
order to fill the loophole. It adversely affects the health of the company as this will again lead to
biased and unfair audit reports. The Indian Legislature in the Companies Act 2013 and
Companies Act Rules (Accounts and Audits) 2014 have mentioned the essence of mandatory
auditor rotation and procedure of doing it. But the legislature is not oblivious of the fact that the
auditors and the management in collusion for their mutual benefit will avoid the cooling of
period and destroy the real meaning of mandatory rotation. With great power comes great
responsibility. India has unprecedented power by virtue of a large corporate but along with it has
come the great responsibility of protecting the interests of its investors and others of the same
market. It is not easy but it isn’t impossible either. The increase in transparency and availability
information on public platform will increase the global confidence too
BIBLOGRAPHY

 A RAMAIYA GUIDE TO THE COMPANIES ACT, 2014 - LexisNexis - New Delhi

18th Ed.
 COMPANY LAW READY RECKONER 2015 - Taxmann India – Mumbai 3rd
Edition 2015
 Company Law 2007 - Eastern Book Compnay – 15th Ed. Lucknow Author A. Singh

 www.indiankanoon.org
  www.legalserviceindia.com

 www.caclubindia.com

 www.lawyersclubindia.com