This article is written by Pratibha Bansal, a student of Banasthali Vidhyapith, Rajasthan. She has discussed chapter 10 of the companies act, 2013 which elucidate who is an auditor, what are his duties and power, how is appointment being done and what are the required qualifications to become an auditor and procedure of his/its removal.

Who is an auditor?

If we speak in the context of taxation language, then, an auditor is a person who is authorised to check, review and verify accuracy of financial records. He also has to check that the company is complying with all the tax laws or not.

Auditors are like the security guards of the company’s capital as they have to keep a check on the company’s investment, expenses, their earning profit and loss and also have to analyse, annual accounts of the company and report as to whether they are calculated truly and fairly or not. Any fraud found by the Board or any other person after he had already audited those account will make him also liable for that fraudulent activity.

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In this article, we are discussing statutory auditor appointed under chapter X of the companies act, 2013, consisting of section 139 to 148.

So, we will be starting with who can be an auditor and what is the procedure for its appointment under section 139(1)

• An auditor can be an individual as well as a firm.
• An Auditor shall be appointed in the first annual general meeting by the shareholders.
• Whereas, before the first general meeting Board of directors have to appoint the first auditor within 30 days from the date of its incorporation and if the Board of Directors fails to appoint such auditor then it must notify the same to the members and then members shall within 90 days from the date of its incorporation in an extraordinary general meeting appoint the First auditor, office tenure will be till the conclusion of the first annual general meeting.

Government Companies Section- 139(5) 

In case of government companies or any other company owned or controlled, directly or indirectly by any government bodies an auditor is to be appointed within 180 days from the commencement of the financial year, who shall hold office till the end of the annual general meeting.

Appointment of the first auditor in government companies according to section 139(6) is to be done within 60 days after its incorporation by Comptroller and Auditor General. Whereas, in case of failure in making such appointment, within the next 30 days Board has to make such appoint and if Board also fails then, within 60 days from Comptroller and Auditor General failure in an extraordinary general meeting(EGM) appointment of the first auditor is made.

Term of Appointment 

Term of office of an auditor shall not exceed 5 years and are not eligible for reappointment in case of:-

1. Listed companies
2. Unlisted companies
3. A private company having paid-up share capital of Rs. 50 crore or more
4. All companies having paid up share capital with a threshold limit of Rs. 50 crore or more but having public borrowings from financial institutions, banks or public deposit of Rs. 50 crore or more.

In cases of all other companies, re-appointment can be done, but the term of 5 years is fXed for every appointment or re-appointment.

Section 139(2) states that appointment of an individual as auditor for one term of 5 consecutive years is only in case of the above listed four types of companies and shall not be eligible for re-appoint after completion of its term. Whereas, a firm as auditor shall be appointed or re-appointment for two or more term of 5 consecutive years.  

 If the person has worked as an auditor in any company for 5 years or more before the commencement of the Companies Act, 2013 then the person is allowed to work for another 3 years after the commencement of the act and if the tenure of 5 years is not completed, ie. the person has worked for only 1 year before the commencement of 2013 Act, then till the complication of 5 years of working person is allowed to work as an auditor.

Illustration 

Number of consecutive years for which individual had worked before the commencement of the provision of section 139(2)	Maximum number of years he can work as an auditor for the same company after the commencement of section 139(2)	Aggregate (the period for which an auditor worked totally before and after)
1. 5 years or more	3 years	8 years or more
2. 4 years	3 years	7 years
3. 2 years	3 years	5 years
4. 1 year	4 years	5 years

 

Whereas, in the case of a partnership firm according to the act of 2013, working tenure of a firm as an auditor of a company is 10 years, and if the firm is working as an auditor of a company before the commencement of 2013 Act, for 10 years or more then will be given extension to work as an auditor for another three year after the commencement of such Act and if the firm has worked for less than 10 years, they will work as an auditor of the company till the completion of a term of 10 years which can’t be less than 3 years.

Illustration 

Number of consecutive years for which an audit firm had worked as an auditor before the commencement of the provision of section 139(2)	Maximum number of years it can work as an auditor for the same company after the commencement of section 139(2)	Aggregate (the period for which an auditor worked before and after.
10 years or more	3 years	13 years or more
9 years	3 years	12 years
7 years	3 years	10 years
6 years	4 years	10 years
5 years	5 years	10 years
3 years	7 years	10 years
2 years	8 years	10 years
1 year	9 years	10 years

 

Procedure for Appointment 

1. The audit committee will recommend the name of auditor to be appointed to the Board.
2. In case such a name is agreed by the Board then the same name will be recommended to members for consideration in the annual general meeting.
3. In case of disagreement by the recommendation of the audit committee, the same will be referred back to the audit committee for reconsideration and also stating their reason for disagreement.
4. Audit committee decided not to reconsider the original recommendation made by it and the Board of directors also continues to disagree then the Board has to record the reason for their disagreement and decision will be left on the shareholders.
5. And in case, the Board of directors agree even if the audit committee refuse to reconsider then the recommended name will get forward to members for consideration in the annual general meeting.
6. Once the person is decided by the member, an appointment letter i.e. an offer is made to the person considered as an auditor by the shareholders.
7. After the acceptance of an offer made to him, written consent for such an acceptance is to be given along with a certificate for prescribed limit and a certificating declaring whether auditor satisfies the conditions of section 141 or not.
8. After Completion of all the formalities, we will give confirmation, and once the confirmation is done, it becomes the duty of the company to inform auditor about its appointment.

Now there arises one question that when the person is giving his consent for the acceptance of the offer made to him then why there is a need to inform him about his appointment. So, offer is not made to only one person may be there can be two or more and among that one either an individual or an audit firm is appointed as auditor of a company, therefore, information of appointment is to be given to the person or firm appointed for the same.

The auditor is appointed in the first annual general meeting for a term of 5 years, i.e. till 6th annual general meeting as discussed above. After the appointment is done, then every year, such an appointment is reviewed by the members of the company. 

If no ratification is done, auditor continues till the end of its tenure. Whereas, in case of ratification of auditor, he or it must vacate the office, and there will be a casual vacancy then, according to section 139(8) that should be filled by the Board of directors within 30 days from the date of vacancy and such appointment is subject to resignation, also must be approved by the company in a general meeting that should be held within 3 months of the recommendation. Term of office of such appointed auditor will last on the conclusion of the next annual general meeting.

In case a casual vacancy occurs other than ratification or resignation then, an appointment made within 30 days is confirmed then there will be no need for further approval of members in general meeting.

In case of government companies if there arises any casual vacancy either by resignation or by any other reason, Comptroller and Auditor General of India has to make fresh appointment within 30 days from the date of such vacancy and if he does not fill the vacancy within said period, the Board of Directors shall be making the appointment for the vacancy within the next 30 days.

Re-appointment of Retiring Auditor – section 139(9)(10)(11)

An auditor may be re-appointed on his retirement if:-

1. Not disqualified from re-appointment as per section 141 of the Companies Act,2013.
2. Not given any notice in writing of his unwillingness regarding reappointment.
3. No special resolution has been passed at the meeting expressly making a pronouncement that he shall not be re-appointed.

Wherein, at any annual general meeting no auditor is appointed or re-appointed, the existing auditor continues to be the auditor of the company.

Removal of auditor before the expiry of Term 

 If it is found by the company that the auditor is indulged in any wrongful activity or has committed some fraud then it can seek from his removal. The procedure followed is:-

1. Board must pass a resolution regarding the same.
2. Once the resolution is passed by the Board of directors with 30 days from the passing of the resolution approval must be taken from Central Government in the form of ADT-2 regarding such removal.
3. After receipt of approval within 60 days, a special resolution needs to be passed in general meeting.

Once all the approvals and resolution are being made, the removal of the auditor can be possible before the expiry of his term.

Case- Basant ram & sons v Union of India (2002)

Held- Delhi High Court held that for making a removal effective, an auditor who is being removed from his post must be given a reasonable opportunity to be heard according to the principle of Rule of Law which states that “no one should be condemned unheard”. Such an opportunity is given to the auditor as to make his area also clean and provide the honourable court with his clearing statements and assist the court in providing equal justice to all. It was also held that after approval of the Central Government, general body approval is necessary to make the removal effective.

Removal and Resignation of Auditor

1. If retiring auditor has not completed consecutive tenure of 5 years or, as the case may be, 10 years, according to the provisions of the Act, special notice shall be required for resolution at the annual general meeting appointing as auditor, person other than retiring officer or expressly making statement that retiring auditor must not be re-appointed.
2. Upon receipt of such notice company shall forward a copy of same to the retiring officer.
3. After receiving the notice retiring officer makes his representation in writing to the company(must not exceed reasonable length) and request the company to notify the same to the members of the company.
4. Company will unless the representation is received :

• In the notice given to the members of the resolution states the fact of representation being made, and 
• deliver a copy of representation made by the retiring auditor to every member of the company.

And in case the copy of representation is not received due to any default on the part of the company or the person sending such representation, without any prejudice to his right, the person(retiring auditor) must be heard orally.

There are conditions in which the representation made by the auditor will not be valid and will not be read in the meeting.

1. In case of wrongful use of right by the auditor given to him under sub-section 4 of section 140- an application is made to the tribunal either by the company or by the person aggrieved by this wrongful act, and if the tribunal is satisfied upon receipt of the application  then, his representation must not be considered.
2. If the tribunal is satisfied that the auditor of the company is, whether directly or indirectly indulge in any fraudulent activity then, tribunal either suo moto or on an application made to it by the Central Government or by any concerned person, may by order direct the company to change its auditor.
3. On application by the Central Government and after satisfying with the application, the tribunal shall within 15 days on receipt of such application make an order, that the person or firm shall not work as an auditor and Central Government will appoint another auditor in his place.
4. Once a final order is passed against an auditor by the tribunal under section 140, he/it must not be eligible to be appointed as an auditor of any other company for five years, and the auditor shall be liable for action under section 447.

Eligibility, qualification and disqualification of an auditor under section 141

Qualification of an auditor –

1. In the case of an individual– He must be a chartered accountant(practising).
2. In case of a firm– a partnership firm can also become an auditor but condition requisite for it is that the majority of its partners must be practising in India and are qualified for appointment as auditor, can also be appointed as auditor by its firm name.
3. In the case of the firm, including limited liability partnership as an auditor, only the chartered accountant partners of India are allowed to sign and act on behalf of the firm.

Clause 141(3) of the act provides a list of person or firms disqualified from being appointed as an auditor.

1. Body corporate is other than limited liability partnership firms.
2. Company’s own officer (section 2(59)) or employee
3. Company’s partner or any person who is employed by the officer or employee of the company.

Illustration- Katrina is an officer at a company named Hollywood genus ltd and has a partnership with Salman named Hollywood & Bollywood partners then Salman can’t be an auditor of Hollywood genus ltd.

• Any person who himself or his relative or partner is holding any securities in the company itself or in the company’s subsidiary or its holding(including a subsidiary of such holding) or associate company. 
• Indebtedness of a company or its subsidiary, or its holding or associate or subsidiary of such holding, in excess of Rs. 5 Lacs. 
• Has given guarantee or given any security in connection with such indebtedness of any third person of any company or its subsidiary, or its holding or associate or subsidiary of such holding above Rs. 1Lac. 

There is an exception to this point that in such case person and his partners can’t hold any securities whereas, his relatives are exempted from such an exception and can hold securities or interest amount up to Rs. 1 lakh in the company.

And if the person’s partner holds share, then the person will also become disqualified. Once any securities or interest have been bought by the relative above the prescribed amount of Rs. 1 lakh, then 60 days time period is given to them for making the reverse of such securities and to maintain limits as specified.

1. Any person or firm wish to be an auditor of the company having a business relationship(as per Companies (Audit & Auditors) rules, 2014) either directly or indirectly with the company or with its subsidiary, or its holding or associate or subsidiary of such holding or associate company.

But the person can purchase the products of the company at arm’s length price then that will not be covered under business relation.

1. If the person’s relative is a director or is in employment as a director or key managerial personnel of a company, then, the person is disqualified.
2. Any person who is in full-time employment at any other place or person or partner of a firm holding appointment as an auditor and on such date of holding appointment is appointed as an auditor of more than 20 companies other than:-

• Small companies
• One person companies
• Private companies having paid-up share capital less than 100 crores.

1. Any person convicted for any offence involving fraud and such conviction has been done a recently, i.e. period of 10 years has not yet elapsed from such conviction.
2. Person’s subsidiary or associate company or any is engaged in consulting and specialized services as under section 144. 

If a person already got appointed as an auditor of the company and possess any of the listed disqualifications, then, he is deemed to vacate his office. And such vacancy shall be considered to be a casual vacancy.

Remuneration of Auditor 

1. FXed in its general meeting.
2. First auditor remuneration must be fixed by the Board of Directors.
3. Subsequent auditors are appointed as well as their remuneration is fixed by the shareholders.
4. Remuneration includes – basic remuneration along with expenses incurred in connection to audit and any other facility extended to the auditor.

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.

Case- Deputy secretary to TheGovernment of India v SN Gupta (AIR 1956 Cal 414)

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.

Case– Institute Of Chartered  accountant vs P. K. Mukherji And Anr (AIR 1104, 1968 SCR (3) 330)

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. 

Section 143(10) states some of the additional matters that need to be stated in the case of specified companies.

1. As per section 145 of the companies act,2013, an auditor being an individual or firm must sign the audit report.
2. Section 146 companies act,2013, states that auditor, unless exempted, has to attend the general meeting, and the company must forward the notice of the general meeting and any other communication to the auditor also.
3. He possesses the right to be heard in the meeting in regards to any part of the business which concern him as the auditor
4. Duty of an auditor of a subsidiary company to its holding company was explained in case- Barling plc v Cooper & Lybrand (1997)

Held– Court makes a declaration that nowhere in any provision it is stated that a holding company can’t recover for the damages of loss in value of its subsidiary, and the loss which has occurred is the result of a breach of duty owed to the company itself. Auditors of the subsidiary company must be aware of the fact that their report is the only basis on which true and fair picture of all the companies in the group will be ensured. Therefore it became their duty to check that true and fair aspect of the subsidiary company’s accounts. Thus, the holding company had director right of action against the subsidiary’s auditor

Fraud by Auditors 

While performing his duty as an auditor if he has reason to believe that offence of fraud in respect of the prescribed amount is being committed then he/it must report the same to the Board within 2 days and within 45 days Board must give a reply on the same and if the response is not given by the Board then within 15 days report the offence of fraud to Central Government if the amount of fraud is more than 1 crore(Companies audit and auditors rules 2015). And if it is less than 1 crore, then he must report the same to the Board within 2 days, and Board’s reply on the same must be viewed on the Board’s report.

Case– Sasea Finance Ltd. v KPMG (2000)

Held– Court held that where the auditor had discovered fraud being done by such an officer who is at the post where he can continue doing the same. Then, it becomes the duty of the auditor to report the condition to the company’s management and not to wait till submission of their report.

Cases in which fraud be reported to the Central Government or not are:-

Fraud in the subsidiary company

While auditing the holding company auditor found fraud in the accounts of the subsidiary company, then the same will not be reported to the Central Government.

Exception- if such an offence of fraud by the officer or employee of the subsidiary company is affecting the holding company, then the same will be reported to the Central Government.

Amount of individual fraud

Amount of individual fraud must be Rs. 1 crore or more and not the collective amount of different of fraud will be reported to the Central Government.

Fraud of less than 1 crore

If fraud of 70 lakh has been found and it is believed that another 40 lakh will also be found soon, then it must be reported to the Central Government.

Conspiracy of fraud

If the auditor overheard any conspiracy regarding fraud(not yet committed) can’t be reported to Central Government. 

Previous year fraud 

If the auditor is appointed from the year 2015-16 and while making audit of the same year he found fraud in the previous year in which some other person/firm was auditor then he/it must not report the same to the Central Government and in case statutory auditor didn’t find any fraud but tax auditor find the fraud of more than Rs.1 crore then he must not report the same to the Central Government but can state the same in his report.

In the case of Government Companies Audit

An Auditor is appointed by the Comptroller and Auditor General, and he must submit his audit report which includes directions, action taken etc. to the comptroller and auditor general.

Comptroller and Auditor General will check the report and direct for supplementary audit and will comment on the supplementary audit report.

Then comment of Comptroller and Auditor General on supplementary audit report along the supplement audit will be sent by the company to the members and also place both the documents in annual general meeting.

Services not to be Rendered by an Auditor 

There are some services provided under the act that should not be rendered by the auditor himself, by is relative or any other person associated with him. 

Section 144 of the Companies Act, 2013

1. He/it must render only those services which are approved by the Board of directors or by the audit committee. But if the auditor is asked to provide any of the services mentioned in section 144(1)(a-i) by the Board or audit committee then, must not render such services on their demands also.
2. In case of individual as an auditor he himself, his relatives or any other person connected or associated with such individual or any other entity in which individual has significant influence or whose name or trademark or brand is used by an individual must not render such services.

For example– If Virat Kohli is an auditor of company AZB ltd. So viral Kohli’s relatives, his teammates, or brand like puma coz Virat Kohli is their ambassador, or his fans must not render those which are exempted under section 144(1).

1. In case of a firm as an auditor, then the firm itself or by any of its partners or through its, parent(holding), subsidiary or associated entity, or through any other entity in which firm or its partners have significant influence or control, or whose  name or trademark or brand is used by the firm or any of its partners must not render such services.
2. Before the commencement of 2013, companies act if an individual or firm is an internal auditor and statutory auditor of the company then after the commencement of the act he/it has to choose any one position among the two and will work only on those services which are specified for that position under the act.
3. Lastly in case of the auditor has rendered any other service as specified may lead to his disqualification.

Punishments for non-obedience of the provision of chapter X of The Act

 Section 147 of Companies Act, 2013

• Section 139 to 146 is contravened

Company will be punishable with a minimum fine of Rs. 25 thousand which may extend to Rs. 5 lakh and officer in default will be punishable with imprisonment of 1 year and fine, minimum for Rs. 10 thousand which may extend up to 1 lakh or both

• Fault by auditor

If an auditor has acted in contravention to the provision of section 139,143,144 or 145 then fine of the minimum amount 25 thousand which may extend up to 5 lakh must be imposed.

In case any infringement is done with full knowledge and intention to defraud the company or shareholders or creditors or tax authorities then the auditor will be punished with imprisonment up to 1 year and a fine of amount 1 lakh which may extend up to 25 lakh or both.

If an auditor is convicted he has to do follows.

1. Make refund of remuneration amount.
2. Make a payment of damages.

Items of cost audit to be specified by Central Government 

Section- 148 of Companies Act, 2013

Audit of companies engaged in production relating to utilisation of material and labour is demanded by Central Government, and cost audit of such companies are performed by cost and work accountancy which is practising as per the standards of cost auditing.

Such cost auditor will be appointed by the Board of directors. 

These Board of directors must submit their report to the Central Government within 30 days.

Applicability of cost audit

Cost audit will be important in regulated companies whose individual product turnover is equal to or more than Rs.25 cr and its overall turnover must be equal to or more than Rs.50 Cr.

For example- there is pharma company Cipla whose produces approx 50 products and among those medicines and products 1 product for say inheller are on very high demand so, that inhaler turnover must be more than or equal to Rs.25 Cr. and a total turnover of Cipla company must be equal to or more than Rs.50 Cr.

Cost audit of non- regulated companies mentioned in below table must have an overall turnover of either equal to or more than 100 cr, and individual product turnover must be equal to or more than 35 cr for which coast audit must become important.

Exception

1. Special Economic Zone Organisation– foreign companies coming in India who make more and more export from India and generating foreign currency in India. 
2. 75% Export– Indian companies whose 75% of business is running on the cost of exports like- Infosys. 

Submission of Cost Audit Report

1. An auditor must submit the report within 180 days from the date of closure of the financial year to the Board of Directors.
2. Board of directors after examination of the report along with their explanation on the qualification of the content of the report, within 20 days from the date of receipt of cost audit report must forward it to the Central Government.

Default in compliance of section 148

1. Company and the officer at fault will be punished according to the provisions of section 147 clause 1.
2. Faulty cost auditor will be punished in the manner provided under clause 2,3 and 4 of section 147.

Conclusion

After going through the whole content or the article explaining chapter X of the companies act, 2013. It will become more accessible for all of us, to now compare and find that what all amendments were made in the act of 1956 in regards to an audit and auditor.

So, firstly the list of disqualification for appointment as an auditor under section 141 is elaborated as in the earlier section 226(3) contain a lesser amount of disqualifications.

Secondly, in the earlier Act, there was no specific provision stating as 5 years working tenure for an individual as auditor and 10 years for a firm as an auditor. Whereas, in the present act, section 139(2) clearly talks about the tenure of an auditor.

Thirdly concerning the disqualification of an auditor, there was no provision for disqualification of an auditor in the earlier act whereas, in 2013 act under section 141 there is a list given for disqualification of an auditor.

There are many other minor amendments which are being made by the legislature to make the concept of audit and auditor more clear and scrub off the loopholes present in the act.

References

1. Company law, Avtar Singh, 6th edition
2. 2002 110 CompCas 38 Delhi
3. AIR 1956 Cal 414
4. AIR 1104, 1968 SCR (3) 330
5. 1997 BCLC 427