This article is written by Mrinal Mukul, a student at O.P Jindal Global University, Haryana. This article seeks to elucidate the rights of an auditor and other factors. The later part will focus on the benefits and duties of an auditor.
It has been published by Rachit Garg.
Over the past years, we have realised a need to strengthen corporate governance globally. The audit function remains one of the pillars of corporate governance in companies, and the auditor remains one of the keystones in implementing and enforcing the standards of governance.
The purpose of an audit is to furnish company stakeholders with a specialist, independent, valid, and fair perspective on the monetary undertakings of a company. Autonomy of an auditor is, hence, the focal component to play out their job “uninhibitedly, courageously, and objectively” to safeguard the bigger interests of all stakeholders. In this article, relevant provisions of the Companies Act, 2013 will be discussed in relation to the rights and other roles of an auditor.
Who is an auditor
An auditor is a person appointed to validate the correctness of the accounting records of the company. Under the Companies Act, 2013, a person practising Chartered Accountant (hereinafter, “CA”) is qualified to be appointed as the statutory auditor in a company. A person would not be qualified as a company’s statutory auditor unless there is appropriation on the part of the person to perform in the capacity of an auditor. Furthermore, as per the Companies Act, 2013, only a practising Chartered Accountant is qualified to be appointed as a statutory auditor in a company. Such appointments are possible if a majority of the partners are executing Chartered Accountants.
Moreover, the partners can also be appointed in their individual capacities. A Limited Liability Partnership (hereinafter as “LLP”) can also be appointed as an auditor of a firm in its own name. Although to qualify for such a post, all LLP partners must be engaged in full-time practice as Chartered Account.
In essence, what has been stated so far is that an auditor is an economic specialist or a person who has the power to verify and review the accuracy of financial records and fortifies that the company obeys tax laws.
Importance of Auditors/Auditing
Auditing is important because it increases the credibility of a set of financial statements and convinces shareholders that the financial statements are accurate and fair. It also helps to improve a company’s internal controls and systems. Auditing helps in improving a company’s profitability and plays an essential role in the public interest and the company’s trust factor.
Furthermore, auditors are important because they can provide an objective and independent opinion on an organisation’s financial statements. It benefits companies in several ways, such as finding errors in processing, maintaining consistency, or detecting some kind of fraud. Furthermore, it objectively advises on the matter related to the company, which involves the board of directors, shareholders, or interest groups. An auditor’s ability to prepare fair financial statements for a particular company also helps in reducing investor risk while ensuring effectiveness. This, in turn, boosts the confidence of the investors. Furthermore, an audit report provides an overview of a company’s financial statements, indicating good corporate governance, if passed.
Auditing plays an extremely important role in India as in many family businesses, it is very likely that a powerful group of promoters may put their own interests ahead of those of the remaining shareholders. An audit of a company’s financial statements by an external auditor is crucial to ensure that data and accounts have not been tampered with.
Types of Auditors
It is important to understand that auditors can be of two types, i.e., internal auditors and external auditors.
According to Section 138 (1) of the Companies Act, 2013, read with Rule 13 of Companies (Accounts) Rules, 2014, the following class of companies need to appoint Internal Auditors:
- every listed company;
- an unlisted public company having:
- paid-up share capital of fifty crore rupees or more during a financial year;
- outstanding loans or borrowings from a bank or public financial institutions exceeding one hundred crore rupees and more during a financial year;
- outstanding deposits of twenty-five crore rupees or more during the financial year.
- A private company having a turnover of two hundred crore rupees or outstanding loans or borrowing from a bank exceeding one hundred crore rupees or more at any point during the financial year.
Internal auditors work as employees of the company and, as part of their duties, are required to review certain procedures within the company, such as its record keeping. Internal auditors are the ones employed by the organisations they audit. These auditors can review employee performance, compliance with company standards, and financial and accounting systems. Internal auditors can keep company executives informed about what is happening in the company and address issues or concerns ahead of time. An internal auditor then writes a report highlighting the problem and recommending remedial action. Therefore, these are employees of the company’s management and are not considered independent auditors, unlike external auditors.
On the other hand, an external auditor is defined as an auditor who audits an organisation from an independent perspective. They will look at several areas of the organisation, such as risk management or financial processes and reporting, to check whether they are working properly and being properly documented. For example, after an audit is completed, an external auditor can provide their objective audit to shareholders or stakeholders. A classic statutory audit, also known as an audit or statutory audit, is performed by an external auditor.
The external auditor’s role is to determine whether the accounts are adequately kept and whether the financial statements truthfully and fairly reflect the company’s financial position. The external auditor’s report is critical because it contains the auditor’s assessment of the company’s integrity. Financial statements and audit reports are available to stakeholders, including the public. The judgment of the external auditor is impartial and pure with the members of the companies.
Appointment of an Auditor under the Companies Act
According to Section 139(6) of the Companies Act, 2013, the first auditor of a non-governmental company must be appointed by the board of directors within 30 days of its establishment. If the board does not pass, an extraordinary general meeting of shareholders will be held within 90 days to appoint the first auditor. The law does not specify when the 90 days period is calculated. So the benefit of this is to take a stricter view and explain that the 90-day period starts from the day the company is formed, rather than at the end of the 30 days period.
Auditors are appointed in a way that they can exercise their powers until the conclusion of the First General Meeting of Shareholders. The company must file an ADT-1 form (hereinafter, Form for Appointment of First Auditor) with the Registrar of Companies along with the prescribed fee. For government companies, the first auditor will be appointed by the Auditor General of India within 60 days from the date of incorporation of the company; if the Auditor General of India fails to appoint the auditor within the said period, the board of directors of the company will appoint the latter within the next thirty days. If not appointed by the board within the next thirty days, members must approve an auditor within sixty days in the Extraordinary General Meeting (hereinafter, EGM). The term of office for the first auditor will be until the conclusion of the first annual general meeting.
Furthermore, the subsequent appointment of an auditor will be made by the members, and he/she will hold office until the conclusion of the sixth annual general meeting. However, it is important to note down that the company members will permit an auditor’s appointment in every annual general meeting.
Pursuant to Rule 3(6) of the Companies (Auditors and Auditors) Rules 2014, if the board decides not to reconsider the recommendation given by the Audit Committee related to the appointment of a firm or an individual as an auditor, the board must record the reasons for its disagreement with the committee, and submit its own proposals for consideration of the members at the Annual General Meeting (AGM).
Section 139 also provides that prior to any such appointment, the written approval of the auditor for such appointment must be obtained, and the appointment of the individual auditor or firm, if appointed, will comply with the prescribed terms.
Rule 4 of the Companies (Audit and Auditors) Rules, 2014, obligate the auditor to submit a certificate that contains:-
- He or the company (as the case may be) shall be entitled to an appointment and not be disqualified under the Act, the Chartered Accountants Act 1949, and any rules or regulations made therein;
- The term of office to be appointed shall be the term prescribed by law;
- The proposed appointment is within the scope of the law or is authorised by the law;
- The list of pending professional proceedings against the statutory auditor, the audit firm, or a partner of the audit firm disclosed in the auditor’s report is true and accurate.
The auditor’s certificate must also indicate whether the auditor also meets the criteria of Section 141 of the Act (listed in the following paragraphs).
The firm must notify the applicable auditor of its appointment within fifteen days of the meeting to appoint/re-appoint the auditor and file a notification of such appointment with the Registrar on Form ADT-1.
Purpose of appointing an auditor
The role of corporate auditors is to protect the interests of shareholders. Auditors are required by law to examine the books kept by directors and inform them about the company’s true financial position. An auditor gives an independent opinion to the company’s owners or shareholders to protect the company and keep the company in a safe financial position.
Other reasons are that an auditor should have reasonable skills, caution, and care depending on each case’s circumstances. There are several other purposes for appointing an auditor, such as examining the company’s accounts; he or she should not be biased and give an independent opinion to the company’s owners to keep the company’s financial condition safe and protected from the threat. An auditor is not obligated to be a detective and approach his work with suspicion or any preconceived conclusion. If there is anything that might give rise to suspicion, he should investigate, but if such issues are not there, then he has the only duty to take reasonable care and caution.
Appointing an auditor is one of the key tasks a company has to face. As an auditor, they have many responsibilities that serve the company’s interests, in addition to reviewing consistent financial statement records and maintaining their occasional maintenance. Auditors are appointed after a thorough examination and consideration of the quality of the personnel. All these things make an auditor’s role very important in a company’s development, and their paramount purpose in a company cannot be ignored.
Duties of an auditor
Section 143 sets out the powers and duties of the auditor. Every auditor of the company shall have the right to inspect the books and records of the company at any time, whether kept at the company’s registered office or elsewhere, and shall have the right to request such information as he deems necessary for the performance of his acts. Statements necessary for the duties of auditors and inquiries about the following, such as:
- Whether loans and advances made by the company by way of security are properly secured and whether the terms of the loans and advances are prejudicial to the interests of the company or its members;
- Whether the company’s transaction represented solely by the booking is detrimental to the company’s interests;
- If the company is not an investment company or bank; whether most of the company’s assets (including stocks, bonds, and other securities) are being sold at a lower price than when the company purchased it;
- Whether the loans and advances made by the entity have been recorded as deposits;
- Whether personal expenses are included in the revenue account;
- If the company’s books and documents indicate that shares were distributed as cash, whether the distribution received cash, and if no cash was received, whether the item is correct, regular, and not misleading as indicated on the books and balance sheet.
The auditor of a company also has the power to examine the records of all its subsidiaries in order to consolidate its accounts.
The auditor will report to the shareholders on its audited books and financial statements to be submitted under this Act or to the company’s general meeting of shareholders and prepare reports in accordance with the provisions of this Act, the accounting and auditing standards, and the law or in accordance therewith. The regulations enacted require matters to be included in the audit report and, to the best of our knowledge and belief, declare that the above-mentioned financial statements are a true and fair view of the company’s year-end profit and loss and cash flow and other prescribed matters.
Work of an auditor
The work of an auditor has been laid down under the Companies Act, 2013, given in Section 143. The Act further explains the duties of an auditor, while the list provided is not exhaustive.
Prepare an audit report
An audit report is an appraisal of a business’s financial position. An auditor is responsible for making an audit report of a company based on its financial statements. The books of accounts maintained by him must comply with the relevant laws. Furthermore, as an auditor, it’s his responsibility that the financial statements should comply with provisions of the Companies Act, 2013. In addition, the entire financial statement must be true and fair with regard to the company’s financial position.
Compliance with audit standards is necessary
Such standards are issued by the Central Government in deliberation with the National Financial Reporting Authority. These standards help the auditor follow his duties with relevant ease and accuracy. As an auditor, they have to comply with standards as this may increase their efficacy comparatively.
Actions against fraud
In some instances, while performing his duties, an auditor may feel certain suspicion regarding fraud in the company, situations where financial statements and figures don’t quite add up to each other. As an auditor, when he finds himself in such situations, he must report such matters to the Central Government or matter prescribed in Rule 13 of Companies (Audit and Auditors) Rules, 2014.
Assistance in the case of a branch audit
When an auditor is a branch auditor of a company, he/she will assist in fulfilling the branch audit. He/she should prepare a report depending on the branch accounts examined by him/her and then send it to the company’s auditor. Then that company auditor will look into the main audit report of the company. Additionally, he/she may assist an expert with their working papers to the company auditor to aid in the given audit.
The Central Government shall issue auditing standards in collaboration with the National Financial Reporting Authority. These standards help the auditor to perform his/her auditing tasks in the given subject manner. However, there lies a responsibility on the auditor to comply with the standards while performing his/her tasks because this will boost their efficiency.
Rights of an auditor
The Companies Act gives extensive rights to an auditor. Specific provisions are specified in the Act, which states that an auditor cannot be prevented by anyone from enjoying his/her rights. Some of the rights are as follows: –
Right to access accounts
According to Section 143(1) of the Companies Act, every auditor has full rights to access books related to accounts, vouchers, and other relevant company documents at all times during his/her term of office. He also has full rights to go for surprise visits to check the entries in the books of accounts. Overall, he/she can check all the documents which are related to the company’s concern.
Right to make suggestions
The auditor has a right to suggest suitable modifications in methods of accounting, and if such suggestions are made, then the director should comply with them. If such compliance is not done, the auditor has full authority to report the same to the members. However, the auditor has no authority to alter the company’s accounts in his own accords.
Right to report
The auditor has a right as well as a duty to make a report to the members on the account examined by him/her to state whether it is in his opinion and to the best of his knowledge and explanation stated by him. Auditors must explain whether the financial statement given is true and fair to the company’s business.
Right to sign the audit report
As per Section 145 of the Companies Act, 2013, The person appointed as the company’s auditor shall sign or certify the company’s audit report or any other document presented in the audit report in accordance with Section 141(2) and the qualifications, opinions or comments relating to financial transactions which have any adverse effect on the functioning of the company must be read before the general meeting of the company and available for inspection by every member of the company.
As per Section 143(8) of the Companies Act, an auditor has full authority to visit the branches to check all the works related to the company’s matter. However, the auditor has no authority to visit foreign branches.
Right to receive a notice and attend meetings
As per Section 146 of the Companies Act, an auditor has full rights to receive the notice and communications related to all the meetings during his/her term. The company should send notice to the auditor even when his audited accounts are not discussed in the meeting. As an auditor, he/she has full authority to attend the company’s meeting. He/she can also speak at the meeting if any clarification is needed for any matter related to the company’s concern.
Right to be indemnified
Under certain conditions, a company can take civil or criminal actions against the auditor. If any legal action is taken against him, he generally defends himself against the proceedings. However, if the judgment goes in his favour means in favour of the auditor, then the company has to pay compensations for all the losses incurred by him during the proceeding. These types of rights are general rights given in most cases.
Right to make representation
The retiring auditor has the authority to receive a copy of the special notice regarding the removal or appointment of any other person as an auditor. He/she should have all the knowledge beforehand. The retiring auditor has an absolute right to make his representation through writing and request the same to be circulated among all the members. If the same thing has not been circulated, then the representation will be read at the company’s general meeting.
Right to receive remuneration
The company determines the auditor’s remuneration in the general meeting. However, when the Board of Directors appoints the company’s first auditor, they can fix his remuneration. The remuneration is in addition to the fees paid to him. It includes all expenses incurred by the auditor as a result of the audit and all facilities granted to him. However, this remuneration does not include amounts paid to him for services other than auditing.
Right to seek legal and technical advice
Auditors are entitled to obtain expert advice on legal or technical issues at the Company’s expense. But in his report, he should express his own opinion, not that of the concerned experts.
The Companies Act, 2013 comprehensively clarifies the law relating to statutory audits and auditors in Sections 139 to 148. From this article, it became clear that choosing the right auditor is extremely important for the growth of the company. Several duties stated above prove that the auditor’s role in a company is extremely important. Typically, an auditor reviews a company’s accounting practices and determines whether they meet minimum requirements. Furthermore, statutory auditors review a company’s accounting practices on an annual basis. The review includes key accounting activities, internal controls, and reporting procedures.
An auditor works closely with senior management to gather the information needed to do the required work. Since statutory auditors must always be considered independent, any auditor should exercise caution in the relationship he or she develops with the management. Some audit committees and boards limit any additional work the statutory auditor can do for the company to ensure the auditor’s independence.
In essence, it is important for a company to have an auditor so that he/she can look at all the important work required for the company’s growth.
Frequently Asked Questions (FAQs)
What every auditor should know?
Ans: An auditor must know the company where they work. They should observe people and the business culture. Learn to jargon things and put the best possible outcome for the company’s benefit.
What are the qualities of a good auditor?
Ans: They should have analytical skills and advice and influence behaviour to the highest level. However, these may lead to disagreement at times, so when such a situation arises, the auditor should show integrity and resilience to come to a constructive resolution. As an auditor, effective communication is very much important to dealing with day-to-day work.
What are the primary functions of an auditor?
- Make recommendations to improve poor internal controls.
- Investigate suspected fraud (even those deemed inconsequential).
- Perform financial and operational data reconciliation.
- Ensure compliance with industry rules and standards.
What is the difference between an auditor and an accountant?
Ans: Auditors are considered as accountants. Auditors typically major in accounting and identify the type of accountants they wish to be: public company auditors, internal auditors, tax advisors, corporate accountants, etc. Public company auditors are an alternative route.
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