Audit and Auditor

Meaha K.V
17BLB1059
AUDIT & AUDITORS
Large business corporations are managed by the directors who represent the
members who are the real owners of the company. In the absence of any check
the directors may mismanage the finances of the organisation. Thus, members
appoint auditor to look into the true and fair view of the financial affairs of the
company. These auditors are independent from the management of the
company and hence can express an un- biased opinion.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. 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’) .
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)
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

2. APPOINTMENT OF AUDITORS [SECTION 139]
Section 139 of the Companies Act, 2013 provides for appointment of
auditors. According to this section :

(i) Appointment of auditor [Section 139(1)] :

(a) Every company shall, at the first annual general meeting, appoint
an individual or a firm as an auditor of the company.
(b) The auditor shall hold office from the conclusion of 1stannual
general meeting (AGM) till the conclusion of its 6th AGM and
thereafter till the conclusion of every sixth meeting and the
manner and procedure of selection of auditors by the members
ofthe company at AGM has been prescribed under the Companies
(Audit and Auditors) Rules, 2014. According to the Rules:

Manner and procedure of selection and appointment of auditors

 Categories of Companies
A company which is required to
constitute an Audit Committee under
section 1771
A Company which is not required to
constitute an Audit Committee under
section 177
Competent authority Responsibility of the competent authority
Audit Committee (i) The competent authority shall take into
consideration the qualifications and expe- rience
of the individual or the firm proposed to be
considered for appointment as auditor and
whether such qualifications and experience are
Board commensurate with the size and requirements of
the company.
(ii) It shall have regard to any order or pending
proceeding relating to professional matters of
conduct against the proposed auditor before the
Institute of Chartered Accountants of India or any
competent authority or any Court.
(iii) It may call for such other information from the
proposed auditor as it may deem fit.
(ii) Term of Auditor [Section 139(2)] :
(a) Section 139(2) provides that listed companies and other
prescribed class or classes of companies (except one person
companies and small companies) shall not appoint or re-
appoint—

CORPORATE AND OTHER LAWS

(1) an individual as auditor for more than one term of five consecutive
years;
(2) an audit firm as auditor for more than two terms of five years

(b) Rule 5 of the Companies (Audit and Auditors) Rules, 2014 has
prescribed the following classes of companies for the purposes of
section 139(2) :
(a) Cooling off Period :
(1) An individual auditor who has completed his term (i.e. one term of five
consecutive years) shall not be eligible for re-appointment as auditor in the
same company for five years from the completion of his term;
(2) An audit firm which has completed its term (i.e. two terms of five consecutive
years) shall not be eligible for re- appointment as auditor in the same
company for five years from the completion of such term.
Example : XYZ Ltd. which is a listed company appoints Mr. Raghav as an
auditor in its AGM dated 29th September, 2016. Mr. Raghav will hold office of
Auditor from the conclusion of this meeting upto conclusion of sixth AGM

i.e. AGM to be held in the year 2021. Now as per sub-section (2), Mr. Raghav

shall not be re-appointed as Auditor in XYZ Ltd. for further term of five years

i.e. he cannot be appointed as Auditor upto year 2026.

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
 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.
 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.
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).
● 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
wide range of services.
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:

(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,
(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.
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.

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

CONCLUSION AND IMPORTANCE OF AUDITOR

Auditing provides assurance to investors and creditors that

company funds are handled appropriately. Auditors protect the
public from investing in companies that use corrupt business
practices or that attempt to defraud investors with false
financial statements. By reviewing financial statements and
digging into accounting records, auditors can determine
whether the financial statements and records accurately depict
the company's true financial profile.