This article is written by Megha Bhatia.
Sections 138 to 148 of the Companies Act deal with accounts, audit and auditors. These provisions will have far reaching implications for the audit profession. In this article some important provisions contained in the companies act, 2013 are discussed.
Understanding the definition of auditor
An auditor is an independent professional person qualified to perform an audit. In accounting, an auditor is someone who is responsible for evaluating the validity and reliability of a company or organization’s financial statements. The term is sometimes synonymous with “comptroller”.
- Appointment of auditor
As per section 139, it is a prime requirement that every company shall at the first annual general meeting appoint an auditor who can either be an individual or a firm. Appointment includes reappointment.
The manner and procedure of selection of auditors by the members of the company will be such as may be prescribed. It is a mandatory condition that before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him stating that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor.
Company can appoint an individual as an auditor for more than one term of five consecutive years and an audit firm as an auditor for more than two terms of five consecutive years.
In a Government company, the Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of one hundred and eighty days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting.
- Eligibility, Qualifications and Disqualifications of auditors
A person will b qualified to be appointed as an auditor of a company only if he is a chartered accountant. Where a firm 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. A person will be disqualified if he is falling under the following:
i. an officer or employee of the company;
ii. a person whose relative is a director or is in the employment of the company’s a director or key managerial personnel;
iii. 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;
(Refer to section 141 for detailed list)
- Removal and Change of Auditor
i. Special resolution
The auditor appointed may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf in the prescribed manner.
The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of Government company with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation. In case of non compliance he shall be punishable with fine ranging between INR 50,000 to 5 lakh.
The Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner in relation to the company or its directors or officers, it may, by order, direct the company to change its auditors.
In the case of such an application by the Central Government for change of Auditors, the Tribunal can, within 15 days, pass an order that the auditor shall not function as such and the Central Government will be able to appoint another auditor.
- The auditor who is removed by the Tribunal cannot be appointed as an auditor of that company for 5 years.
- Punishment with imprisonment for a minimum term of six months which may extent to 10 years and shall also be liable to pay a minimum fine of an amount involved in the fraud which may extend to 3 times the said amount.
- If the fraud involves public interest the minimum period of imprisonment will be 3 years.
- Powers and duties of auditors and auditing standards
- Right to access :
Every auditor of a company shall have right to access at all time to book of accounts and vouchers of the company. The Auditor shall be entitled to require from officers of the company such information and explanation as he may consider necessary for performance of his duties.
There is an inclusive list of matter for which auditor shall seek information and explanation. This list helps auditor to take special care on serious issues. The list includes issues related to:
(a) Proper security for Loan and advances,
(b) Transaction by book entries
(c) Sale of assets in securities in loss
(d) Loan and advances made shown as deposits,
(e) Personal expenses charged to revenue account
(f) Case received for share allotted for cash
The auditor of holding company also has same rights.
- Auditor to sign audit reports :
The auditor of the company shall sign the auditor’s report or sign or certify any other document of the company and financial transactions or 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.
- Auditor in general meeting:
It is a prime requirement under section 146, that the company must send all notices and communication to the auditor, relating to any general meeting, and he shall attend the meeting either through himself or through his representative, who shall also be an auditor. Such auditor must be given reasonable opportunity to speak at the meeting on any part of the business which concerns him as the auditor.
As per section 101, notice of general meeting must be given before 21 days either in writing or through electronic mode to the auditor in such manner as may be prescribed. Every notice of a meeting shall specify the place, date, day and the hour of the meeting and shall contain a statement of the business to be transacted at such meeting.
- Right to remuneration
The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein. It must 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.
- Consent of auditor
As per section 26, the company must mention in their prospectus the name, address and consent of the auditors of the company.
- Make report
The auditor shall make a report to the members of the company on accounts examined by him on every financial statements.
The auditor report shall also state:
(a) Whether he has sought and obtained all the necessary information and explanations,
(b) Whether proper books of account have been kept,
(c) Whether company’s balance sheet and profit and loss account are in agreement with books of accounts and returns,
(Refer to section 143 for detailed list)
- Audit report of Government Company :
The auditor of the government company will be appointed by the Comptroller and Auditor-General of India and such auditor shall act according to the directions given by them. He must submit a report to them which should include the action taken by him and impact on accounts and financial statement of the company.
The Comptroller and Audit – General of India shall within sixty days of receipt of the report have right to (a) conduct a supplementary audit and (b) comment upon or supplement such audit report.
The Comptroller and Audit – General of India may cause test audit to be conducted of the accounts of such company.
- Liable to pay damages
As per section 245, the depository and members of the company have right to file an application before the tribunal if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company
They also have right to claim damages or compensation from the auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct.
- Branch Audit :
Where a company has a branch office, the accounts of that office shall be audited either by the auditor appointed for the company, or by any other person qualified for appointment as an auditor of the company. The branch auditor shall prepare a report on the accounts of the branch examined by him and send it to the auditor of the company who shall deal with it in his report in such manner as he considers necessary.
- Auditing Standards :
Every auditor shall comply with the auditing standards. The Central Government shall notify these standards in consultation with National Financial reporting Authority. The government may also notify that auditors’ report shall include a statement on such matters as notified.
- Fraud Reporting :
If an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.
- Winding up
As per section 305, at the time of voluntary winding up of a company it is a mandatory requirement that auditor should attach the copy of the audits of the company prepared by him.
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