This article is written by Sai Shriya Potla. This article elaborates on Section 143 of the Companies Act, 2013, which deals with the powers and duties of auditors, auditing standards, and auditing processes in government companies.

It has been published by Rachit Garg.

Introduction 

Financial statements are an essential element in the business activities of a company. The financial statement is a written record of the financial activities and performance of the company, which includes income statements, balance statements, and statements of cash flows. It enables the company to analyse the performance of the previous financial year and aids in the formulation of new plans and decisions for the company’s growth. For this reason, the role of an auditor becomes essential for the accounting needs of a company. The auditor conducts an in-depth investigation into the books of accounts and other documents of the company, verifies them with the members of the company, and prepares financial statements and reports for the company. Apart from this, auditors also provide suggestions for better management of the company. Section 143 of the Companies Act, 2013 outlines the powers and duties of an auditor in carrying out his obligations. The Section also mentions the provisions for auditing government companies and auditing standards. 

Who is the auditor

The auditor is an authorised person appointed by a company to perform the audit. The audit includes a thorough examination or inspection of the books of accounts and other documents to ensure the accuracy of the financial transactions of the company. For a person to be eligible to be an auditor for a company, he must be a qualified chartered accountant. 

Every company, at its first annual general meeting, has to appoint an individual or a firm as an auditor. Such a person or firm can hold the office as an auditor until the conclusion of the sixth annual general meeting. The company will prescribe the manner and procedure for the appointment of auditors. Such an appointment must be ratified by all members of the company at the annual general meeting.

Types of auditors

Auditors are broadly classified into two categories. They are:

1. Internal Auditors
2. External Auditors

Internal auditors

An internal auditor is a trained professional employee appointed by the company who works for the company management. The internal auditor must be a Chartered Accountant (CA), a cost accountant, or any such professional accepted by the Board members. The internal auditor performs a multitude of tasks, including examining financial documents and records of the company. After their review, they report to the company their concerns, risks, fraud, and data inaccuracies and provide suggestions for better management.

External auditors

An external auditor is a public accountant who performs audits and examines the books of accounts and financial statements of a company for his client. The external auditor is independent of his clients, i.e., the external auditor does not work for any company. The external auditor is appointed with the shareholders’ votes. Since the external auditor is independent of the company, his view is regarded as an impartial assessment of the company.   

Powers of auditors

Section 143 of the Companies Act, 2013 provides the rights of an auditor, which empowers him to diligently perform his obligations.

Right to access books of accounts

Section 143(1) of the Act empowers an auditor of a company with the right to access books of accounts and vouchers of the company at all times, whether kept at the registered place of the company or any other place. The auditor also has access to the books of accounts and vouchers of subsidiaries and associate companies because the financial statements of the subsidiaries and associate companies merge with the financial statements of the parent company.

Section 128 of the Act requires every company to prepare books of accounts for every financial year. The books of accounts provide a record of the following:

1. All sums of money received and spent by the company and the subject matter on which those receipts and expenditures take place.
2. All sales and purchases by the company.
3. All assets and liabilities of the company.
4. All items of cost, materials, and labour utilised by certain companies engaged in the production of goods and services directed by the central government must be included in the books of accounts. (Section 148)

The term “voucher” includes all documents and agreements that assist the financial transactions of a company, directly or indirectly.

Right to obtain information and explanation

Section 143(1) provides that the auditor is entitled to seek any explanation or information from officers for the performance of his duties as an auditor. The term “officer” includes manager, director, any key managerial personnel, or any qualified person appointed by the instructions of the board of directors.

The auditor also has the right to inquire about the financial transactions of the company. The right to obtain all information and explanation from the officers enables the auditor to inspect the financial undertakings of the company and allows the auditor to remove any vulnerabilities and ensure the proper functioning of the company.

Right with respect to the branch offices

When multiple branch offices of a company are formed in different locations from the parent office, Section 143(8) provides that the company can appoint any other qualified person to audit the accounts of such a branch office.

Where the branch office is located in a foreign country, the accounts of such a branch office can be managed by the company’s auditor, an accountant, or any qualified person appointed by the company to act as an auditor. The foreign branch office must operate in accordance with the laws of the respective nation. The auditor of the branch office must send the report of the accounts to the company’s auditor. In case, no auditor is appointed for the branch office, the company’s auditor can visit the branch office and have access to the books and accounts of the branch office.

Rule 12 of the Companies (Audit and Auditors) Rules, 2014 states that the company’s auditor can enjoy all powers and duties mentioned in sections 143(1) to 143(4) regarding the branch office, including the right to access books of accounts and vouchers, the right to explanation and information from the officers, and the duty to prepare the audit report.

Right to remuneration

The auditor is entitled to receive the agreed remuneration for the services conferred by the auditor upon the company. Section 142 of the Act states that the remuneration of the auditor will be fixed by the members in the general meeting of the company. The remuneration of the auditor also includes the expenses incurred by him during the process of preparing the audit for the company and other facilities extended to the auditor in connection with his work. But the remuneration does not include services rendered by him other than the designated work of an auditor, even upon request from the company. Section 142 also states that the amount of remuneration for the first auditor of the company shall be fixed by the board of directors.

Right to lien

The right to lien, in a simpler sense, means the right to retain the possession of goods and securities of another person until the repayment of debt or performance of any promise. The general principles of law state that a person can retain goods and securities from the real owner in case of refusal or failure to pay the dues for the work done. Likewise, the auditor also has the right to lien against the book of accounts, vouchers, and other important documents of the client for the non-payment of money for the work done by the auditor. The Institute of Chartered Accountants in England and Wales provides a few conditions for the auditor to avail themselves of the right to lien:

1. The documents retained by the auditor must belong to the clients who owe their money to the auditor.
2. The documents must be in the possession of the auditor, with the knowledge and authority of the client. The auditor should not obtain documents by any illegal or non-authoritative means. In the case of the company’s auditor, he must receive documents through the board of directors.
3. The auditor possesses the right of lien only after the completion of the assigned work on the documents.
4. Only those documents can be retained by the auditor, and the client does not pay the fee.

Section 128 states that the books of accounts and documents must be kept at the registered office, and directors and other authorised officers also have the right to inspect the accounts. Considering the whole situation, the auditors’ right to lien is looked at as impractical for practical reasons.

Right to attend general meetings

Section 146 states that the auditor is entitled to attend the general meetings of the company. All the notices, information, and other communication regarding the general meeting will be forwarded by the officers to the auditor. The auditor has the right to receive all the information about the meetings that concern him as an auditor and is entitled to give his statements and explanations in the general meeting. In circumstances where the auditor cannot attend the general meetings, he has the right to send an authorised representative qualified to be an auditor to attend the meeting. Section 101 states that the notice for the general meeting must be sent 21 days before, either in writing or through electronic mode. The notice should specify the place, date, day, and hour of the meeting.

Section 145 provides that the auditor must inform the members in the general meeting of the observations or comments made on financial transactions in the auditor’s report that may have an adverse effect on the overall performance of the company. The auditor’s report will be open to the inspection of the members to discuss the situation of the company and find solutions to overcome it.

Right to sign audit reports

Section 145 determines that only an auditor has the authority to sign the auditor report and certify other documents of the company. Section 141 states that a person can be appointed as an auditor only when he is qualified as a chartered accountant. Section 141(2) of the Act discusses the eligibility of auditors to sign the audit report. When a firm, including a limited liability firm, is appointed to audit the accounts of a company, only the partners who are Chartered Accountants can be authorised to sign the audit report. Other members of the firm are not eligible to sign the report.

Duties of auditors

The auditor has a duty to verify the accuracy of the financial statements using the information provided by the company. Apart from these, an auditor has the following duties:

Duty to inquire on certain matters

Section 143(1) states that the auditors have the authority to inquire about certain matters for the proper execution of their duties as auditors. This is considered a right and an obligation of the auditor.

1. The auditor should ascertain the securities on which the loans and advances issued by the company must be fully or partially secured to avoid any potential risks against the company. The auditor also must check that the terms of such securities are not against the interests of the company or its members.
2. The auditor has to closely examine all transactions in the book entries and determine that such transactions are not prejudicial to the interests of the company.
3. Except for the investment company and banking company, the auditor must ensure that all assets, including the shares, debentures, and other securities of the company, must be sold off at a lesser price than the cost of acquisition of those assets benefiting the company. 
4. The auditor must make sure that the loans and advances made by the company are shown as deposits.
5. The auditor should ensure that no personal expenses of the officers, including the director, manager, any key managerial personnel, and any other officers of the company, must be charged to the revenue account.
6. The auditor must inquire whether the shares allotted by the company for the cash in return have been received by the company. If the company does not receive the cash, it is the responsibility of the auditor to ensure that the position stated in the account books and balance sheets is correct; if not, the auditor must place the amount correctly in the account books.

Duty to prepare the audit report

The auditor is entrusted with the duty to prepare a report to the members of the company on the accounts and the financial statement examined by him in the general meeting of the company. The report should mention whether the company is in compliance with the provisions mentioned in the Act’s accounting rules and auditing standards. This report is known as the audit report. Section 143(2) states that the auditor must provide all the information to the best of his knowledge of the accounts and the financial statement in the audit report and must mention the true and fair view of the state of affairs of the company’s affairs at the end of each financial year. The report should also include the profit or loss incurred and the cash inflows of the company.

Section 143(11) mandates that the audit report should also include a general or specific order issued by the central government in consultation with the National Financial Reporting Authority with regard to the class or description of companies.

Section 143(3) requires an auditor to include the following matters in the audit report:

1. The auditor must disclose all the details and information he obtained for the purpose of the audit and must explain the impact of such information on the financial statements of the company. The auditor for the collection of such information can rely upon the officers of the company. The auditor must exercise reasonable skill and care and collect data from only such officers whom he can trust. If, for any reason, the auditor suspects the reliability of the information, the auditor has to inspect the data thoroughly before performing the audit. The auditor is expected to perform his duty with professional standards of diligence and care. However, the auditor is not required to perform his obligations beyond reasonable care and skill.

In the London and General Bank Ltd. (1895) case, the Court held, “An auditor, however, is not bound to do more than exercise reasonable care and skill in making inquiries and investigations. He is not an insurer; he does not guarantee that the books correctly show the true position of the company’s affairs; he does not guarantee that his balance sheet is accurate according to the books of the company; if he did, he would be responsible for an error on his part, even if he were himself deceived without any want of reasonable care on his part, by the fraudulent concealment of a book from him.”

2. The auditor, after a thorough examination of the books of accounts, must include in the audit report whether the company has maintained a proper record of the books of accounts for the financial year. The auditor also must examine whether all the branch offices have sent adequate returns to the company for the purpose of conducting the audit. The books of accounts should comply with the auditing standards.
3. The auditor should record all audited reports sent by the branch office to the main office of the company if the audit of those branch offices is performed by any other person appointed under Section 143(8) of the Act other than the company’s auditor. The company’s auditor has the power to access the books and accounts of the branch offices and visit them for the performance of his duty. Therefore, it is the responsibility of the company’s auditor to ascertain that the branch offices maintain the correct records of their accounts and financial statements and ensure that the audit of the branch offices is properly performed. The auditor must also describe the manner in which he approached the records of the branch office while preparing the company’s audit report.
4. The auditor must ensure that the balance sheet of the company and the profit and loss account dealt with in the audit report are consistent with the books of accounts and returns of the company. The auditor is in charge of the proper maintenance of books and accounts and other financial accounts and the performance of the company’s audit; hence, it is the auditor’s duty to verify that the audit report is in agreement with the books of accounts. However, if the auditor fails to discharge his duty and there arises any inconsistency in the company’s accounts and the books’ entries, he must record such inconsistency in the audit report.
5. The financial statements of a company must be in compliance with auditing standards. The auditor should make sure that the balance sheet of the company and the profit and loss account dealt with in the audit report conform to the auditing standards of the company as mentioned in Section 143(8) of the Act.
6. The auditors should report their observations or comments on the financial statements or any such matters that have an adverse effect on the functioning of the company. The auditor is responsible for maintaining proper books of accounts, financial statements, and financial transactions of the company. Hence, the auditor is accountable for informing the company of any matter detrimental to the financial interests of the company in the audit report.
7. The auditor should report whether any director of the company under the audit is disqualified under Section 164(2) in the audit report. Section 164(2) of the Act states that the director of a company can be disqualified for the following reasons:

• If the director has not filed financial statements or annual reports of the company for three consecutive financial years.
• If the director has failed to repay the deposits accepted by the company or the interests of such deposits or to redeem any debentures on the due date, or pay any dividend for one year. 

The auditor has access to the registrar of directors to find out whether any director of the company has been disqualified under the provisions of Section 164(2). The auditor is empowered to gather relevant information from the officers of the company regarding the disqualification of the directors. The auditor is also advised to look into the books of appointment of the directors to ensure whether a director is disqualified on the basis of Section 164(2). However, the auditor cannot mention the disqualification of a director in the audit report solely based on the information supplied by the company; he is required to perform extensive research before submitting the report.

In the case of Pawan Jain v. Hindustan Club Ltd. (2005), the Court held that “from the careful perusal of Section 227 of the Act, which provides the power and duties of the auditors, the auditor cannot submit a report on the basis of the statement supplied by the company alone. He has to examine and even he has to make an independent inquiry about the collected materials from other sources to submit a report regarding Clause (f) of Sub-section (3) about the disqualification of the directors under Section 274(1) Clause (g)”.

Section 227 was changed to Section 143 and Section 274 to Section 164 after the amendment of the Companies Act in 2013.

8. If the auditor has any reservations or objections regarding the maintenance of the financial accounts or any other matter related to it that could be detrimental to the interest of the company, he must report such issues in the audit report.
9. The auditor must include his observations on whether the company possesses adequate internal financial controls with reference to the maintenance of proper financial statements and other matters related to it. The auditor is also required to comment on the maintenance and care of such financial controls. The maintenance of the financial controls is the responsibility of the company’s internal management; the auditor is only required to report any defects or weaknesses found in the management of the internal financial controls of the company.
10. The auditor can report any relevant information with regard to the audit report as prescribed in the Companies Act. Rule 11 of the Companies (Audit and Auditors) Rules, 2014 provides the additional matters that are to be included in the audit report. They include:

• The auditor must check whether the impact of pending litigation on the financial statements of the company is mentioned in the audit report.
• The auditor should inspect whether the company has made any provisions in relation to accounting standards for material foreseeable losses on long-term contracts, including derivative contracts.
• The auditor is also required to report any delays that occurred in transferring the amount to the Investor Education and Protection Fund by the company.

Companies (Audit’s Report) Order, 2020

The Companies (Audit’s Report) Order, 2020 (CARO) lays down additional auditing requirements for the auditor to prepare an audit report under Section 143. The Ministry of Corporate Affairs, under the powers conferred to it under Section 143(11), issued the Companies (Audit’s Report) Order, 2020, after consultation with the National Financial Reporting Authority.

These requirements are compulsory for all companies, including foreign companies, except banking companies, insurance companies, one-man companies, and companies that fall under Section 8 of the Act. The private companies that are holding or subsidiary companies of the public company and have a paid-up capital, reserves, and surplus less than one crore rupees on the balance sheet, which do not have total borrowings exceeding one crore rupees from any bank or financial institution at any point in time during the financial year, and which do not have total revenue exceeding ten crores as per the financial statements, are also exempted from following these requirements.

CARO requires auditors to include the following matters in the audit report:

Property, plant, and equipment

1. The auditor should include whether the company is maintaining proper records and showing full particulars along with quantitative details of property, plants, equipment, and other intangible assets.
2. Details of whether the property, plant, and equipment are physically verified by the management of the company. If the auditor finds any material discrepancies in such verification, he must ensure they are dealt with in the book of accounts.
3. The auditor must ensure that the title deeds of all immovable property are mentioned in the financial statements except for other properties where the company is the lessee and the lease agreements are duly executed in favour of the lessee.
4. The auditor must specify whether re-evaluated property, plant and equipment, and intangible assets are based on the valuation set by the registered valuer. If there is more than a 10% change in the net aggregate value of property after re-evaluation, it must be mentioned in the audit report.
5. The auditor must disclose any proceedings initiated against the company for holding any Benami property under the Benami Transactions (Prohibition) Act, 1988, and make sure that these details are mentioned in the financial statements of the company.  

Records relating to inventories

1. The auditor should specify whether the physical verification of inventory is conducted by the company. If discrepancies of more than 10% are found in each class of inventory in such verification, the auditor must ensure that such discrepancies are dealt with in the books of accounts.
2. The auditor should mention any working capital limits exceeding five crore rupees received by the company from banks or any financial institutions.
3. The auditor must ensure that the quarterly returns filed by the banks or financial statements comply with the books of accounts of the company.

Investments, loans, and advances

1. The auditor should mention all the investments made by the company and any guarantee, security, or secured or unsecured loans granted by the company to other companies, firms, or any limited liability partnership.
2. The auditor should specify the aggregate amount granted by the company in the form of loans, guarantees, and securities and the outstanding balance with respect to these loans, guarantees, and securities to the subsidiaries, joint ventures, and associates. The auditor should also mention the outstanding balance with respect to these loans, guarantees, and securities to other parties other than the subsidiaries, joint ventures, and associates.
3. The auditor must state whether the investment was made, guarantees and security were given, and the terms and conditions on which the loans are granted by the company are prejudicial to the interests of the company or not.
4. The auditor must specify the nature of loans granted by the company and the schedule of repayment of principal and payment of interest for these loans. The auditor must also state whether the company took the necessary steps for recovery of interest and principal if the amount is overdue or more than ninety days.
5. The auditor should mention any renewed loans, extended loans, or fresh loans granted by the company to settle the overdue debt of the parties.
6. The auditor must mention the aggregate amount on which loans are repayable on demand and loans without specifying any terms or periods granted by the company. The auditor must also specify the total amount of loans granted to promoters and related parties as defined in Section 2(76) of the Companies Act.

Compliance with Sections 185 and 186

The auditor should check whether the investments, loans, guarantees, and securities granted by the company are in compliance with Sections 185 and 186 of the Act. Sections 185 and 186 deal with provisions relating to the loans provided to directors and the loans and investments of the company.

Acceptance of deposits

The auditor should mention whether the deposits accepted by the company are in compliance with the directives issued by the Reserve Bank of India and Sections 73, 74, 75, and 76 of the Companies Act, 2013 and other relevant Acts. The auditor should state whether the company functions in accordance with the order passed by the Company Law Board, the National Company Law Tribunal, the Reserve Bank of India, any court, or any other tribunal. 

Cost records

The auditor must specify whether cost records and other records and accounts are maintained in accordance with Section 148(1) of the Companies Act. 

Payment of statutory dues

The auditor must mention whether the company is regular at paying statutory dues, including provident fund, employees’ state insurance, income tax, sales tax, wealth tax, service tax, duty of customs, duty of excise, value-added tax or cess, and any other statutory dues. In cases of non-payment, the amount of outstanding statutory dues and the date from which they can be paid must be mentioned.

Unrecorded income

If any transactions are not recorded in the books of accounts but are disclosed in the tax assessments under the Income Tax Act, 1961, the auditor must ensure that the previously unrecorded income is now recorded in the books of accounts.

Loan default

1. If the company has defaulted in repayment of loans, borrowings, or any interest, the auditor must record it in the following format:

Nature of borrowing, including debt securities	Name of the lender	Amount not paid on the due date	Whether principal or interest	No. of days delayed or unpaid	Remarks, if any
	Lender-wise details are to be provided in case of defaults to banks, financial institutions and the government

2. If the company is declared a wilful defaulter by any bank, it must be recorded by the auditor.
3. The auditor must report whether the loans are used for the purpose for which they were obtained; if not, he must mention for what purposes the amount is utilised.
4. If the loans obtained for a short-term basis are utilised for a long-term basis, such amounts must be reported.
5. If a company obtains funds for the purpose of its subsidiaries, associates, or joint ventures, the nature of such transactions must be mentioned in the report.
6. The auditor must include if the company has raised a loan on securities held in its subsidiaries, joint ventures, or associate companies. The auditor must also include whether the company defaulted on such loans.

Utilisation of funds raised

1. The auditor must specify whether the money raised through a public offering has been utilised for the purpose for which the amount was raised; if not, the auditor must mention the steps taken by the company to meet the default.
2. The auditor must mention whether the preferential allotment or private placement of shares or convertible debentures of the company is in agreement with Section 42 and Section 62 of the Companies Act, 2013.

Frauds

1. The auditor must mention the nature and amount of fraud the company committed or fraud committed against the company. 
2. The auditor must specify any report filed by an auditor of a company under Section 143(12) in Form ADT-4 as prescribed under Rule 13 of the Companies (Audit and Auditors) Rules, 2014, with the Central Government.
3. The auditor must record any whistle-blower complaints during the financial year for the company.

Nidhi Companies

1. The auditor of the Nidhi Company (a company that borrows and lends to its members) has complied with the ratio of net owned funds to deposits in the ratio of 1:20 to meet the liability.
2. The auditor must mention whether the Nidhi Company keeps 10% of its unencumbered term deposits as specified in the Nidhi Rules, 2014.
3. The auditor should specify any default in repayment of the principal amount or payment of interest amount by the Nidhi Company.

Relevant party transactions

The auditor must mention whether the transactions between the company and the other parties are in compliance with Section 177 and Section 188 of the Companies Act, and the auditor must ensure that these details are disclosed in the financial statements as required by the applicable accounting standards.

Internal Audit

The auditor must mention whether the internal audit system is appropriate for the size and nature of the business of the company. The auditor must also state whether the reports of the internal auditors during the audit period were to be considered by the statutory auditor.

Non-cash transactions

The auditor must state, if the company enters into a non-cash transaction with the directors or any other person connected with him, whether such non-cash transaction is in compliance with the provisions mentioned in Section 192 of the Companies Act.

RBI transactions

1. The auditor is required to check if the company must register under Section 45-IA of the Reserve Bank of India Act, 1934, and if so, the auditor should look at whether the registration is obtained or not.
2. The auditor must verify if the company has conducted any non-banking financial or housing finance activities without a valid Certificate of Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of India Act, 1934.
3. If the company is a Core Investment Company (CIC) as defined in the regulations of the Reserve Bank of India, the auditor must check whether the company fulfils the criteria of a CIC. And, if the company is an exempted or unregistered CIC, the auditor must verify if the company fulfils such criteria.
4. If the group has more than one CIC, the auditor must mention the number of total CICs in the group.

Cash losses

The auditor must specify any losses suffered by the company in the immediate preceding financial year in the audit report.

Resignation of statutory auditors

If the statutory auditor resigns during the year, the new statutory auditor of the company must consider issues, objections, and concerns raised by the outgoing auditor and mention them in the audit report.

Ability to meet liabilities

Based on the financial ratio, expected date of realisation of financial assets and payment of financial liabilities, and knowledge of financial statements, the board of directors, and management plans, the auditor must state his opinion on whether the company is able to meet its liabilities on the date mentioned in the balance sheet.

The unspent amount

1. The auditor should mention in the audit report any remaining unspent amount transferred to a fund constituted under Schedule VII of the Companies Act for an ongoing project with the power conferred on the company under Section 135(5).
2. The auditor should mention in the audit report any remaining unspent amount transferred to a special account under Section 135(6) for an ongoing project.

Adverse remarks on CARO reports

The auditors of their respective companies must include the paragraph numbers of the Companies (Audit’s Report) Order, 2020, containing the qualifications or adverse remarks in the consolidated financial statements of the company.

Duty to report fraud

Section 143(12) of the Act mandates the auditor of a company to report the matter to the central government of any offence related to fraud committed by the members against the company in the course of his performance involving the amount of one crore or more in not less than sixty days of his knowledge. Rule 13 of the Companies (Audit and Auditors) Rules, 2014, lays down the procedure for auditors to report fraud committed against the company:

1. The auditor must report this matter to the board or the audit committee, seeking their reply or observations within forty-five days of his knowledge.
2. Upon receiving the reply, the auditor should forward his report along with the observations of the board or the audit committee along with his comments on the observations of the board within fifteen days of receipt of the observations.
3. In case the auditor fails to receive any reply or observations from the Board or Audit Committee within forty-five days, the auditor is empowered to send his report directly to the central government, including a note containing the earlier report sent to the board about the fraud to which the auditor did not receive any reply.

The report must be sent to the Secretary, Ministry of Corporate Affairs, in a sealed envelope by registered post or speed post, followed by an email for confirmation. In cases where fraud involves an amount greater than one crore rupees, Section 177 of the Act states that the auditor must report such matters to the board or audit committee within two days of his knowledge. However, the auditor is only to report fraud committed by members of the company in the course of his performance and must not include his personal beliefs and opinions.

Section 143(13) of the Act states that no duty of the auditor will be considered to be violated if the auditor reports any fraud committed against the company in good faith. 

Section 143(14) states that the provisions of this Act will mutatis mutandis, i.e., with the necessary changes, be applied to the cost accountant in practice conducting a cost audit under Section 148 and the company secretary in practice conducting a secretarial audit under Section 204. Section 143(15) penalises the auditors for the failure of their duties. It states that if an auditor, cost accountant, or company secretary fails to comply with the provision mentioned in Section 143(12), he will be punishable with a fine not less than one lakh rupees but which may extend to twenty-five lakh rupees.

Duty to state reasons for matters specified in the audit report

Section 143(4) provides that the auditor must include matters with qualifications or negative implications as specified in the audit report. The auditor is also required to mention reasons for such qualifications or negative implications in the audit report.

Duty to make a statement in the prospectus

Section 26(1)(b)(iii) of the Act states that the auditor is required to make a report on the prospectus of the company. It includes the profits and losses of the business of the company for every five financial years and the assets and liabilities of the company up to the last date up to which the accounts of the company are made up. It should not exceed more than one hundred and eighty days before the issue of the prospectus.

In the case of a new company, where five years have not elapsed since the date of incorporation, the report should include the profit and loss account from the date of incorporation. 

Audits in government companies

Sections 143(5) to 143(7) of the Companies Act provide provisions that govern the audit of government companies. Section 2(45) of the Act defines government companies as companies where the paid-up capital owned by the government, central government, state government, or partly central government and partly state government is more than 51 percent of the total share. The Comptroller and Auditor-General of India plays a significant role in the audit of government companies.

Appointment of auditors in government companies

Both Section 139(5) and Section 139(7) of the Companies Act regulate the appointment of auditors in government companies. In a government company or company directly or indirectly owned or controlled by the Central Government, by any State Government, or partly by the Central Government and partly by one or more State Governments, the first auditor is appointed by the Comptroller and Auditor-General of India.

The Comptroller and Auditor-General of India shall appoint the first auditor of the company within sixty days from its registration. If the Comptroller and Auditor-General of India fail to appoint the auditor at the said time, the directors of the company shall appoint the auditor in the next thirty days. In the event that the directors of the company fail to appoint the auditor at the said time, the members of the company will appoint the auditor within sixty days in an extraordinary general meeting of the company. The auditor shall hold the officer till the conclusion of the first annual general meeting.

Provisions relating to audits in the government company

Sections 143(5) to 143(7) of the Act lay down provisions for audits of government companies. Section 143(5) provides that the Comptroller and Auditor-General of India can issue directions and instructions to the auditors of government companies on how their accounts are to be audited. The auditor of the government company is required to send a copy of the audit report to the Comptroller and Auditor-General of India. 

Section 143(6) of the Act confers on the person authorised by the Comptroller and Auditor-General of India to conduct supplementary audits on the financial statements of the company within sixty days from the date of receipt of the audit report from the government company. For the purpose of such a supplementary audit, the Comptroller and Auditor-General of India can provide any additional information to the authorised person. The Comptroller and Auditor-General of India can add comments to the audit report, and such an audit report with comments shall be sent to every person who is entitled to receive the audit report, and it shall be placed at the annual general meeting.

Section 143(7) states that the Comptroller and Auditor-General of India can order a test audit of the accounts of the company if found necessary. The provisions under Section 19A of the Comptroller and Auditor-General‘s (Duties, Powers, and Conditions of Service) Act, 1971, provide provisions for the report of the test audit. The reports of the test audit shall be placed before the government concerned and will be placed before the House of Parliament or State Legislature by the central government or state government, as the case may be.

Auditing standards 

Section 143(9) requires the audit to conform with the auditing standards as may be prescribed. Section 143(10) of the Act states that the central government will prescribe auditing standards with the recommendations of the Institute of Chartered Accountants of India, constituted under Section 3 of the Chartered Accountants Act, 1949, and with the consultation of the National Financial Reporting Authority. Until such auditing standards are notified by the central government, standards already specified by the Institute of Chartered Accountants are to be followed. The ICAI issued various auditing, review, and other standards.  

Conclusion 

Section 143 of the Companies Act, 2013 lays down the powers and duties of an auditor. Duties ensure auditors function in conformity with the Companies Act and other related statutes, and the powers of the auditor enable him to perform his duties without any hindrances. As a result, the auditor will do his job more effectively. Apart from these powers and duties, it also mentions the guidelines for the auditors for preparing the audit report. The Section also includes the process through which the audit is conducted at government companies. Section 143 also contains provisions related to auditing standards. Auditing standards are principles by which auditors prepare financial reports.

Frequently Asked Questions (FAQs) 

What is an audit?

An audit is the official examination or inspection of the books of accounts and financial documents of a company. The primary aim of the audit is to verify the financial statements, including the income statement, balance statement, and statement of cash flows, with the information provided by the company to maintain accuracy.

What are the types of auditors?

Auditors are predominately divided into two types: internal auditors and external auditors. The internal auditor is a trained professional employee appointed by the company who works for the company management, while an external auditor is a public accountant who performs audits for his clients.

What is a prospectus?

A prospectus is a legal document issued by a body corporate offering the public and investors to subscribe to the company’s securities. The prospectus is issued by public companies to invite applications for shares and debentures. It also contains information about the company’s background.

What is an audit report?

The audit report is an analysis issued by the auditor at the end of the auditing process. The audit report contains the auditor’s opinion on whether the company followed statutory and approved accounting standards. The audit report is required by banks, financial institutions, creditors, and regulations. 

References   

• Taxmann’s Company Law and Practice (25th Edition) 2022
• https://www.icsi.edu/media/portals/0/AUDIT%20AND%20AUDITORS.pdf
• https://static.careers360.mobi/media/uploads/froala_editor/files/The-Company-Audit.pdf
• https://economictimes.indiatimes.com/definition/audit
• https://www.investopedia.com/terms/a/auditor.
• https://tallysolutions.com/accounting/audit-repo rt/#gref

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