Role of Auditors

- Meaning of Audit and Auditors

Audit
❖ An audit can thus be called as the detection of fraud, technical errors and errors of principle.
Auditors
❖ An auditor is a person authorized to review and verify the accuracy of financial records and ensure that companies
comply with tax laws.
❖ They protect businesses from fraud, point out discrepancies in accounting methods and, on occasion, work on a consultancy
basis, helping organizations to spot ways to boost operational efficiency. .

“A person who oversees the financial part of company are auditors”

Types of auditors

► Internal Auditor
► External Auditor
 Who can be auditors?

❖ Any Individual or audit firm can become auditors

❖ As per The Companies Act, 2013 a person shall be eligible for appointment as an auditor of a company only if he is a
chartered accountant and a member of Institute of Chartered Accountants of India.
❖ Provided that a firm whereof majority of partners practicing in India are qualified for appointment as aforesaid may be
appointed by its firm name to be the auditor of a company.
 - Are auditors always to blame?

- If, after the auditor has completed the audit, a fraud is discovered pertaining to that period, it does not necessarily mean that
the auditor has been negligent or that they have not performed his duties competently.
- Merely because the audit report has been signed doesn’t signify that no fraud has been committed.
- The auditor to the best of their knowledge must perform the task at hand and take due diligence while conducting the
same.
- If they have conducted the audit by applying due care and skill in consonance with the professional standards
expected, the auditor would not be held responsible for not having discovered that fraud.
Chapter-X of The Companies Act, 2013 deals with Audit and
Auditors (139-148)
Section: 139 (Appointment of Auditors)
1. Every Company shall at the First AGM appoint an Individual/firm as an Auditor who shall hold office from the
conclusion of the 1st AGM until the 6th AGM.
Company shall place the matter relating to such appointment for ratification by members at the AGM. before such appointment
Company should obtain the written consent from the Auditor and certificate which shall indicate the criteria of
appointment as per Section 141Company shall file the said appointment with the ROC within 15 days from the date of
appointment.
2. No listed Company shall appoint or re-appoint or other classes of companies
► a. An Individual as an Auditor for more than 1 term of 5 consecutive years. and
► b. An Audit firm as auditor for more than 2 terms of 5 consecutive years
3. Company to ensure that -
a. 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.
b. The audit shall be conducted by more than one auditor.
5. the first auditors of the company of Government Company shall be appointed by the Comptroller and Auditor-General of
India within 60 days from the date of registration and such auditor shall hold office till the conclusion of the First AGM,
if not then BOD -30, then members - 60
6. In the case of company other than Government Company the first auditor of a company, shall be appointed by the Board
of Directors within 30 days from the date of registration of the company and in the case of failure of the Board to appoint
such auditor, it shall inform the members of the company, who shall within 90 days at an EGM appoint such auditor and
such auditor shall hold office till the conclusion of the first AGM.
C. CAN AUDITORS BE REMOVED OR CAN THEY RESIGN?

Any casual vacancy in the office of an auditor shall be

- Company where appointment is done by BoD - to be filled by the Board of Directors within
30 days and shall also be approved by the company at a EGM convened within 3 months of
the recommendation of the Board and
- Company where appointment is done by Comptroller and Auditor-General of India - be filled
by the Comptroller and Auditor-General of India within 30 days
Subject to the provisions of Sec. 139(1) and the rules made there under, a retiring auditor may be re-appointed at an annual general
meeting, if:
► He is not disqualified for re-appointment
► He has not given the company a notice in writing of his unwillingness to be re-appointed; and
► A special resolution has not been passed at the meeting appointing some other auditor or expressly mentioning that he
shall not be re-appointed.
10. Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the
Company.
11. Whereas a Company which is required to form an Audit committee as required under section 177, then all the
appointment including appointment of Auditor through Casual vacancy can be made, after taking into account the
recommendation of such committee.
ELIGIBILITY & QUALIFICATIONS OF AUDITOR
- Section 141 (1) & (2) of the Act prescribed the following eligibility and qualifications of auditor which are as under:-
i. Only a Chartered Accountant (individual) or a firm where majority of partners practicing in India are Chartered
Accountants can be appointed as auditor.
ii. Where a firm including a limited liability partnership (LLP) is appointed as an auditor of a company, only the
partners who are chartered accountants shall be authorized to act and sign on behalf of the firm.
DISQUALIFICATIONS OF AUDITOR
- Section 141 (3) of the Act prescribes the following persons shall not be eligible for appointment as an auditor of a company,
namely:
i. A body corporate, except LLP;
ii. An officer or employee of the company;
iii. Any partner/employee of company;
iv. A person who himself or his relative/partner is holding any security or interest in the company, or any company
which is its holding, subsidiary, associate
v. A person who 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
i. a person whose relative is in the employment of the company as a director or key
managerial personnel
ii. a person who is in full time employment elsewhere or a person or a partner of
a firm holding appointment as its auditor of more than 20 companies other than one
person companies, dormant companies, small companies and private companies having
paid-up share capital less than 100 crore rupees
iii. a person who has been convicted by a court of an offence involving fraud and
a period of 10 years has not elapsed from the date of such conviction
iv. A person directly or indirectly providing management services
REMUNERATION OF AUDITOR
- Section 142 of the Act prescribed that the remuneration of the auditor of a company shall be fixed in its general meeting
or in such manner as may be determined therein.
- Board may fix remuneration of the first auditor appointed by it.
- The remuneration will be in addition to the out of pocket expenses incurred by the auditor in connection with the audit of the
company and any remuneration paid to him for any other service rendered by him at the request of the company.

AUDITOR’S RIGHT TO ATTEND GENERAL MEETING - Section 146

All notices of any general meeting shall be forwarded to the auditor of the company and he must attend any general meeting
either by himself or through his authorized representative (qualified to be an auditor) and shall have right to be heard at such
meeting on any part of the business which concerns him as the auditor.
AUDIT REPORT
- Section 143 (2) - auditor shall make a report to the members of the company on the accounts and on every financial
statement which is required to be laid in the AGM.
- The Audit report should take into consideration the provisions of this Act, the Accounting and Auditing standards and matters
which are required under this Act or rules made thereunder
- The Audit report should state that to the best of his information and knowledge, the said accounts and financial
statements give a true and fair view of the state of the company’s affair as at the end of the financial year and the
profit or loss and the cash flow for the year and such other matters as may be prescribed.
- Section 143 (3) laid down that auditor’s report shall also state other details which are as under: (Duties of the Auditor)
(a) whether he has sought and obtained all the information and explanations which were necessary and if not, the details
thereof and the effect of such information on the financial statements;
(b) whether, in his opinion, proper books of account as required by law have been kept by the company and proper
returns adequate for the purposes of his audit have been received from branches not visited by him;
(c) whether the branch audit report prepared by a person other than the company’s auditor has been sent to him;
(d) whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the
books of account and returns;
(e) whether, in his opinion, the financial statements comply with the accounting standards;
(f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the
functioning of the company;
(g) whether any director is disqualified from being appointed as a director under section 164 (2);
(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected
therewith;
(i) whether the company has adequate internal financial controls system in place and the operating
effectiveness of such controls;
(j) Auditor’s Report shall also include their views and comments on the following matters, namely:-
(i) whether the company has disclosed the impact, if any of pending litigations on its financial
position in its financial statement;
(ii) whether the company has made provision, as required under any law or accounting standards, for
material foreseeable losses, if any, on long term contracts including derivative contracts;
(iii) whether there has been any delay in transferring amounts, required to be transferred, to the
Investor Education and Protection Fund by the company. The auditor is required to provide the
reasons, where any of the matters required to be included in the Audit Report under this Clause is
answered in negative or with a qualification. {Section 143 (4)}
SIGNING OF AUDIT REPORTS - Section 145
- Auditor shall sign the auditor’s report of the company.
- Any qualifications, observations or comments on financial transactions matters, which have any adverse effect on the
functioning of the company mentioned in the auditor’s report shall be read before the company in general meeting and shall
be open to inspection by any member of the company
PUNISHMENT FOR CONTRAVENTION – Section 147
For the Company
1. If any of the provisions of sections 139 to 146 (both inclusive) is contravened,
- the company shall be punishable with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5,00,000 and
- every officer 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 Rs. 10,000 but which may extend to Rs. 1,00,000 or with both.
For the Auditor
2. If an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or section 145,
- the auditor shall be punishable with fine which shall not be less than Rs. 25,000 but which may extent to Rs. 5,00,000 or four times the
remuneration of the auditor, whichever is less
- if an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company/
shareholders/creditors/authorities, he shall be punishable with imprisonment for a term which may extend to 1 year and with fine which
shall not be less than Rs. 1,00,000 which may extend to Rs. 25,00,000 or eight times the remuneration of the auditor, whichever is less.
3. Where an auditor has been convicted, he shall be liable to refund the remuneration received by him to the company; and pay
for damages to the company/ statutory bodies/authorities/creditors or to any other persons for loss arising out of incorrect or
misleading statements of particulars made in his audit report.
4. The Central Government shall specify any statutory body/ authority/an officer for ensuring prompt payment of damages to the
company/ statutory bodies/authorities/any other persons by issuing notification and such body shall after payment of damages to
such company/persons file a report with the Central Government in respect of making such damages in such manner as may be
specified in the notification.
5. Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner(s) of audit firm have acted
in a fraudulent manner/abetted/ colluded in any fraud by, or in relation to or by, the company/its directors/ officers, the
civil/criminal liability as provided in this Act or in any other law for the time being in force, for such act shall be of the
partner or partners concerned of the audit firm and of the firm jointly and severally
Companies (Auditor’s Report) Order, 2020
- The Ministry of Corporate Affairs (MCA) has announced a new format of statutory audits of companies.
- The MCA has notified Companies (Auditor’s Report) Order, 2020 on 25 February 2020 (CARO 2020).
- The order (CARO 2020) replaces the earlier order under Companies (Auditor’s Report) Order, 2016
- CARO 2020 is a new format for issue of audit reports in case of statutory audits of companies under Companies Act, 2013.
- CARO 2020 has included additional reporting requirements after consultations with the National Financial Reporting
Authority (NFRA).
- NFRA is an independent regulatory body for regulating the audit and accounting profession in India.
- The aim of CARO 2020 is to enhance the overall quality of reporting by the company auditors.
Applicability of CARO 2020
- CARO 2020 is applicable for all statutory audits commencing on or after 1 April 2021 corresponding to the financial
year 2020-21. The order is applicable to all companies which were covered by CARO 2016.
- Accordingly, the order applies to all the companies except the following companies specifically excluded from its purview:
► One person company.
► Small companies (Companies with paid up capital less than/equal to Rs 50 lakh and with a last reported turnover which is
less than/equal to Rs 2 crore).
► Banking companies.
► Companies registered for charitable purposes.
► Insurance companies.
► The following private companies are also exempt from the requirements of CARO, 2020: –
► Whose gross receipts or revenue (including revenue from discontinuing operations) is less than or equal to Rs 10 crore in the financial
year.
► Whose paid up share capital plus reserves is less than or equal to Rs 1 crore as on the balance sheet date (i.e. usually at the end of the
FY).
► Not a holding or subsidiary of a Public company.
► Whose borrowings is less than or equal to Rs 1 crore at any time during the FY.
Reporting Requirements Under CARO 2020
The auditor’s report (CARO 2020) shall include a statement on the following matters, namely:
► Details of tangible and intangible assets.
► Details of inventory and working capital.
► Details of investments, any guarantee or security or advances or loans given.
► Compliance in respect of a loan to directors.
► Compliance in respect of deposits accepted.
► Maintenance of costing records.
► Deposit of statutory liabilities.
► Unrecorded income.
► Default in repayment of borrowings.
► Funds raised and utilisation.
► Fraud and whistle-blower complaints.
► Compliance by a Nidhi.
► Compliance on transactions with related parties.
► Internal audit system.
► Non-cash dealings with directors.
► Registration under section 45-IA of RBI Act, 1934.
► Cash losses.
► Resignation of statutory auditors.
► Material uncertainty on meeting liabilities.
► Transfer to fund specified under Schedule VII of Companies Act, 2013.
► Qualifications or adverse auditor remarks in other group companies.
► In a case where the auditor’s answer to any of the requirements mentioned above is unfavourable or negative, then the
auditor’s report shall also state the basis for such unfavourable or qualified answer.
► in a case where the auditor is unable to express any opinion on any specific matter, the report shall indicate such fact along
with the reasons as to why it is not possible for the auditor to give an opinion on the same.
National Financial Reporting Authority ( NFRA )
► The National Financial Reporting Authority (NFRA) is a body constituted under the provisions of Section 132 of the
Companies Act, 2013. The constitution of this authority is effective from 1st October 2018.
The aim of the Central Government in this regard appears to be:
► Setting up of a separate and independent regulatory body to assist in the framing and enforcement of legislation relating to
accounting & auditing and
► Improving investor and public confidence in the financial reporting of an entity.
► The Companies Act requires the NFRA to have a chairperson who will be appointed by the Central Government and a
maximum of 15 members
The NFRA has the following responsibilities:
► Make recommendations on the foundation and laying down of accounting and auditing policies and standards;
► Monitor and enforce the compliance of the accounting standards and auditing standards:
► Oversee the quality of service of the professionals (such as auditors, CFOs, etc) and suggest measures required for
improvement in the quality of service;
► Perform such other functions related to the above.
► Prior to the constitution of this authority, the Central Government would prescribe accounting standards on the
recommendation of ICAI. The ICAI would prescribe the same only after consulting with the National Advisory Committee
on Accounting Standards who will provide their recommendations.
► The ICAI will now have to consult with the NFRA and examine its recommendations in this regard. Thus the National
Advisory Committee on Accounting Standards is effectively replaced by the NFRA.
The NFRA shall have the following powers:
► To investigate the matters of professional or other misconduct committed by a prescribed class of CA firms or CAs.
► No other authority can initiate or continue proceedings where the NFRA has initiated an investigation.
► Such an investigation can be initiated either suo moto (by itself) or on a reference made by the Central Government.
► The same powers as a Civil Court under the Code of Criminal Procedure, 1908, in respect of a suit involving the following
matters.
► Discovery and production of books of account and other documents, at such place and time as may be specified by the NFRA
► Summoning and enforcing the attendance of persons and examining them under oath
► Inspection of any books, registers, and other documents of any person at any place
► Issuing commissions for the examination of witnesses or documents
► Where professional or other misconduct is proved, it shall have the power to impose the following punishment:
► Penalty:
► 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;

► Debarring the member/firm from practice as a member of ICAI between 6 months to 10 years as may be decided