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COMPANY AUDITOR

 Company Auditor-
 Company Auditor- Qualifications and disqualifications,
 Company Auditor- Appointment, Rotation, Removal, Remuneration, Rights and Duties
 Auditor’s Report-Contents and Types
 Liabilities of Statutory Auditors under the Companies Act 2013

1. INTRODUCTION

The business of a Sole trading concern or a Partnership firm is managed by the owners themselves, where as in case of a company
the ownership and the management vest in different persons. The shareholders, who are the owners of the company, have no right
to take part in the management of business. The affairs of joint stock companies are managed by directors. To ensure that the
money invested by the shareholders is managed properly, the audit is compulsory under the Companies Act for all types of
companies, whether public or private. The emphasis of all these regulations is that the auditor should be independent. Hence,
appointment of auditor, his powers, his duties, etc., are governed by rules given in the Act.
According to Sec. 224 of the Companies Act 1956, every company shall appoint an auditor to audit its books of accounts. The
Companies Act 2013 has also made the audit of accounts of companies in India compulsory. After the completion of audit, the
auditor has to submit his report to the shareholders of the company. The shareholders do not take part in the day to day
management of the company. The auditor acts as an agent of the shareholders. The position of the auditor is therefore very vital. He
reports to the shareholders about the finances of the company.
Under the above backdrop, this chapter highlights the provisions of Companies Act relating to the auditor and his reports. You will
also learn who is an auditor, how auditor is appointed, what are the qualifications, rights and duties of the auditor, meaning of
auditor’s report and how and when auditors will qualify his opinion.

2. WHO IS AN AUDITOR

A person who conducts an audit is an “Auditor”. An auditor is a professional that accumulates and evaluates evidence to report
whether the company complies with the established set of procedures or standards. An auditor may function as an employee or an
independent professional.
When the auditor works for the organization, he or she is usually referred to as an Internal Auditor. The internal auditor often
conducts periodic audits that may encompass several areas on a rotating basis. As an example, the internal auditor may focus on
the manufacturing process during one quarter of the year, while devoting a second quarter to evaluating the financial record keeping
of the company. Often, the internal auditor will set up a schedule to ensure that audits are conducted on each critical portion of the
company at least once per calendar. So many acts require the organizations to get their accounts audited by an independent
external agency. This independent external agency is known as External Auditor of the organization. The external auditor has to
check the accounts of the organization, and their compliances to various rules and regulations. The idea behind using an external
auditor is that the audit will be free of bias and not influenced by office politics or internal relationships that exist among the
employees of the company. No connection to the company is permitted, as it may be construed as biasing the auditor’s report. To
be fair and equitable, an external auditor should familiarize himself with the nature of the business he is auditing prior to starting the
job.

3. ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF AN AUDITOR

The provision of section 141 of the Companies Act, 2013 provides for Eligibility, Qualifications and Disqualifications of Auditors of
company. This section corresponds to section 226 of the Companies Act, 1956 i.e. Qualifications and disqualifications of auditors.
Section 141 of CA 2013 has come into force on 1st April, 2014.

ELIGIBILITY AND QUALIFICATIONS OF AUDITORS OF A COMPANY

1. Chartered Accountants (CA): A person shall be eligible for appointment as an auditor of a company only if he is a chartered
accountant. The term “chartered accountant” means a chartered accountant as defined in clause (b) of subsection (1) of section
2 of the Chartered Accountants Act, 1949 who holds a valid certificate of practice under sub-section (1) of section 6 of that Act.
That means Chartered Accountants holding certificate of practice (CoP) can only be appointed as an auditor of a company. In other
words, an auditor must be a member of ICAI and he should also hold a valid CoP.
2. Firm of Chartered Accountants (CA Firm): A firm of Chartered Accountants is qualified for appointment as an auditor of a
company where majority of partners practicing in India. CA firm may be appointed by its firm name to be auditor of a company.

or its holding or associate company or subsidiary of such holding company or associate company shall not be eligible for appointment as an auditor of a company. or its subsidiary.  Guarantee or Security: A person who. of an officer or employee of the company shall not be eligible for appointment as an auditor of a company. In other words. 1956. if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 companies shall not be eligible for appointment as an auditor of a company. 1 lacs. there is no need to practice in India by all partners of a CA firm as required under the Companies Act. whose subsidiary or associate company or any other form of entity. or its holding or associate company or a subsidiary of such holding company. sale of products or services to the auditor. h) Convicted by Court: A person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction. 1949 and holding valid certificate of practice and acting in capacity as a) Individual b) Partnership Firm c) Limited Liability partnership It has been further provided that only partners who are Chartered Accountants will be authorised to sign on behalf of the firm. 2008 shall not be eligible for appointment as an auditor of a company b) Officer or Employee: An officer or employee of the company shall not be eligible for appointment as an auditor of a company.000. e) Business Relationship: A person or a firm who (whether directly or indirectly) has business relationship with the company. d) Relative or Partner: The following person including his relatives or partners shall also not be eligible for appointment as an auditor of a company. by companies engaged in the business of telecommunications. Limited Liability Partnership (LLP) : A Limited Liability Partnership (LLP) may also be appointed as an auditor of a company. then the firm will automatically be disqualified. is engaged as on the date of appointment in consulting and specialised services as provided in section 144. 3. so he will automatically be disqualified for appointment as an auditor. 2013. hospitals. or his relative or partner is holding any security of or interest in the company or its subsidiary. or its subsidiary. Thus. as customer. 5.  Indebted to Company: A person who. g) Full time Employment and Audit Limit: A person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor. the firm shall be eligible to be appointed as an auditor in a company. 4. or of its holding or associate company or a subsidiary of such holding company. in excess Rs. only the partners who are chartered accountants shall be authorised to act and sign on behalf of the LLP firm. k) In case of insolvency or unsound mind. However. f) Director or KMP: A person whose relative is a director or is in the employment of the company as a director or Key Managerial Personnel (KMP) shall not be eligible for appointment as an auditor of a company. or his relative or partner is indebted to the company. b) Ordinary Course of Business: Commercial transactions which are in the ordinary course of business of the company at arm’s length price – like. . . c) Partner or Employee: A person who is a partner. if majority of partners of a CA firm practicing in India. or his relative or partner has given guarantee or provide any security in connection with the indebtness of any third person to the company or its subsidiary. 00.  Security or Interest: A person who. or its holding or associate company or a subsidiary of such holding company for value in excess of Rs. It has been further provided that relative may hold security or interest in the company of face value not exceeding one lac rupees. airlines. a person ceases to be a member of ICAI. i) Consulting and Specialised Services: Any person. DISQUALIFICATIONS OF AUDITORS OF A COMPANY According to Provisions of Section 141(3) of the Companies Act. Here the business relationship shall be interpreted as any transactions enter into for a commercial purpose except: ‐ a) Nature of Professional Services: Commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm by the professional bodies regulated such members. Other Disqualifications j) If a partner is disqualified. only if all the partners practicing in India are qualified for appointment has now been changed under the New Companies Act. or who is in the employment. following persons shall not be eligible as auditor of the company: ‐ a) Body Corporate: A body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act. A person shall appointed as an auditor if he is chartered accountant within the meaning of Chartered Accountants Act. in the ordinary course of business. Thus the eligibility requirement that a firm could be appointed as an auditor. hotels and such other similar businesses. 2013. Accordingly.

Section 139 of the Companies Act. 2013 contains provisions regarding Appointment of Auditors. 2. where a person appointed as auditor of the company incurs any of the disqualification mentioned in Section 141(3) of the Companies Act. whether public or private and whether having a share capital or not are required to maintain proper books of accounts under the provisions of section 128 of the Companies Act. he shall vacate his office as such auditor and such vacancy shall be deemed to be casual vacancy in the officer of the auditor. Company Appointment by Appointment Appointment by Appointment by BoD by C&AG Members in GM C&AG Hold the office till Hold the office Hold the office Hold the office till till conclusion from 1st AGM to the conclusion of conclusion of 1st 6th AGM of 1st AGM AGM AGM SITUATIONS FOR APPOINTMENT OF AUDITOR A. 2013 after his appointment. Appointment of First Auditor of the Company a) In Non-Government Companies b) In Government Companies B. APPOINTMENT OF AUDITOR All the companies registered under the Companies Act. there is need to appoint Statutory Auditor. 5. Discussion on appointment of auditors may be grouped under two broad headings- 1.VACATION OF OFFICE BY AN AUDITOR OF A COMPANY [SECTION 141(4)] Further According to Provisions of Section 141(4) of the Companies Act. 2013. Appointment of Auditor in First Annual General Meeting a) In Non-Government Companies b) In Government Companies C. Appointment of Subsequent Auditors Appointment of Auditor First Auditor Subsequent Auditor Other than Goverment Other than Goverment Company Govt. Appointment of First Auditors. Appointment of Auditor due to non ratification of Auditor E. 2013. Appointment of Retiring Auditor . Companies have also to get their Books of accounts audited as required under section 139 of the Act. Company Company Govt. 2013 or any previous Company law. vouchers and other relevant records to ensure that the entries made therein give a true picture of business Therefore. Appointment of Auditor due to Casual Vacancy a) Casual Vacancy due to resignation of Auditor b) Casual Vacancy due to any other Reason D. It involves an intelligent scrutiny of the books of account of a Company with reference to documents. Audit is an examination of accounting records undertaken with a view to establish the correctness or otherwise of the transactions reflected therein.

As states above. shall within 60 days from the date of information being sent to them. the Board of Directors of the Company shall appoint such auditor within the next 30 days (60+30=90). triggers immediately on receipt of information of non –appointment by the Board. In case of No auditor is appoint in AGM. appoint auditor and such auditor shall hold office till the conclusion of the first annual general meeting. a written consent of the auditor to such appointment. • However in every Annual General Meeting. • As states above. The members. appoint auditor and such auditor shall hold office till the conclusion of the first annual general meeting. and a certificate from him that if the appointment is made. who shall hold office till the conclusion of the first annual general meeting. Appointment of First Auditor in case of Government Company The First auditor shall be appointed by the Comptroller and Auditor General within 60 days from the date of registration of Company. The Board of Director will recommend the name of auditor or auditor firm to Shareholder. who shall within 90 days at an extraordinary general meeting appoint the first auditor and such auditor shall hold office till the conclusion of the first annual general meeting. In case of failure of appointment by C&AG: In case the Comptroller and Auditor-General of India does not appoint such auditor within the said period of 60 days. Remuneration: Section 142 of the Act prescribed that Board may fix remuneration of the first auditor appointed by it. it shall inform the members of the Company.1 APPOINTMENT OF FIRST AUDITOR Appointment of First Auditor for Non-Government Companies The first auditor of a company (other than Government companies) shall be appointed by the Board of Directors within thirty days from the registration of the company. the duty of the Board to inform members about their failure to appoint first auditor. Before the appointment of auditor is made. then how to appoint auditor 5. the Board shall appoint another individual or Firm as Auditors as per procedures laid down under the Act. In case of Board fails to appoint First Auditor • Section 139(6) also provides that in the case of failure of the Board to appoint the first auditors within 30 days of incorporation of the Company. triggers immediately on receipt of information of non –appointment by the Board. Shareholder in after discussion EGM will appoint the auditor by passing of Ordinary Resolution. RELEVANT PROVISIONS RELATING TO APPOINTMENT OF FIRST AUDITOR OF COMPANY Which Section will apply for appointment of First Section 139(1) Auditor Board of Directory By Passing Board Resolution in Board Who will Appoint First Auditor Meeting Time Limit for Appointment of First Auditor Within 30 days from Incorporation of Company Who will Appoint Fist Auditor if Board of Director Members of Company by Passing of Ordinary Resolution Fails to Appoint First Auditor in Extra Ordinary General Meeting . the duty of the Board to inform members about their failure to appoint first auditor. In case of failure of appointment by C&AG and Board Both In the case of failure of the Board to appoint such auditor within the next 30 days. triggers immediately on expiry of the 30 days period whereas the duty of the members of the Company to appoint first auditor. triggers immediately on expiry of the 90 days period whereas the duty of the members of the Company to appoint first auditor. Tenure: First Auditor appointed by EGM shall hold office till the conclusion of the first annual general meeting of the Company. Tenure: First Auditor appointed by Board shall hold office till the conclusion of the first annual general meeting (AGM) of the Company. F. The members. shall within 90 days from the date of information being sent to them. it shall be in accordance with the conditions as may be prescribed. Resolution involved: Appointment of First auditor by passing of Board Resolution whether in the Meeting of Board of Directors or by Circular Resolution on the recommendation of the Comptroller and Auditor General. If ratification of appointment is not made by the members in the Annual General meeting. the appointment of Statutory Auditors should be ratified. it shall inform the members of the Company who shall appoint such auditor within the 60 days at an extraordinary general meeting. shall be obtained from the auditor.

2 APPOINTMENT OF SUBSEQUENT AUDITOR / REAPPOINTMENT OF AUDITOR Appointment of Subsequent Auditor in case of Non-Government Companies: Every Non-Government company shall. Whether First Auditor can be remove before First Yes. 5. By Board of Directors Board Meeting. then all appointments of Auditor including filling of casual vacancy. if made. Central Government in that behalf Whether First Auditor can be Appoint Through AOA No. Company will not be valid. by Members of Company by Passing of Special Annual General Meeting. If appointed in General Resolution. (ii) Before such appointment is made. (iv) The company shall inform the auditor concerned of his or its appointment. shall be made after taking into account the recommendations of the Committee. Company shall inform the auditor concerned of his or its appointment and also file a notice of such appointment with the Registrar in Form ADT- 1 within 15 days of the meeting in which the auditor is appointed. [6] . (iii) The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141. with the meeting wherein such appointment has been made being counted as the first meeting Appointment of Subsequent Auditor in Government Companies: In case of subsequent auditor for existing government companies. at the first annual general meeting appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. After obtaining the previous approval of Meeting. and a certificate from him or it that the appointment. appoint an individual or a firm as an auditor on the recommendation of C&AG who shall hold office from the conclusion of next Annual General Meeting (AGM). First Auditor may hold office until conclusion of First What is the Tenure of Office of First Auditor? Annual General Meeting Whether First Auditor can be remove before First Annual General Meeting. The following points need to be noted in this regard- (i) The company shall place the matter relating to such appointment of ratification by member at every Annual General Meeting. the written consent of the auditor to such appointment. Company shall at the first annual general meeting. If appointed in Yes. the Appointment of First Auditor by the Articles of & MOA. and also file a notice of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed. shall be obtained from the auditor. shall be in accordance with the conditions as may be prescribed. the Comptroller & Auditor General shall appoint the auditor within a period of 180 days from the commencement of the financial year and the auditor so appointed shall hold his position till the conclusion of the Annual General Meeting Audit Committee: The Act also provides that in case the Company has an Audit Committee. Manner and Procedure of Selection of Auditors: Tenure: The auditor appointed in the AGM meeting shall hold office from the conclusion of that meeting till the conclusion of the sixth annual general meeting.

4 APPOINTMENT OF AUDITOR DUE TO NON-RATIFICATION OF AUDITOR Here ratification means ‘formal consent’ of shareholders for continuance as auditors. If in any AGM auditor is not ratified by the Shareholders then exiting auditor shall be liable to leave its post and such vacant place of auditor in the Company will be consider as Casual Vacancy. and a certificate from him that if the appointment. etc. WHEN NONE IS APPOINTED IN AGM . It has been held in the case of the Institute of Chartered Accountants of India v Jnanendranath Saikia (1955) 25 Comp Case 53. Casual Appointment in Government Companies Filing of Casual Vacancy by C&AG In the case of a company.6 APPOINTMENT OF AN AUDITOR. Before the appointment of auditor is made. In this view. However. and c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed. whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India. passing a resolution for that purpose at the annual general meeting is essential for the re-appointment/ratifying for the appointment of the retiring auditor who is still qualified and willing to act. 5. resignation. it shall be in accordance with the conditions as may be prescribed. the written consent of the auditor to such appointment. 2013 prescribed that the Board of Director fill casual vacancy in the office of an auditor due to reason other than resignation within 30 days of such resignation. 5. is made. Simply stated. if following three conditions are satisfied: a) he is not disqualified for re-appointment. 56 (Assam) that casual vacancy is not a vacancy created by any deliberate omission on the part of the company to appoint an auditor at its annual general Meeting. the retiring auditors shall stand re-appointed as auditors of the company. Casual Appointment in Non-Government Companies Filing of Casual Vacancy by Board of Directors: Section 139(8) of the Companies Act. Remuneration: Section 142 of the Act prescribed that the remuneration of the auditor of a Company shall be fixed by members in General Meeting. disqualification. Tenure: Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next Annual General Meeting. shall be obtained from the auditor. a casual vacancy in the office of an auditor means a vacancy caused in the office of an auditor by his death. Certificate shall also indicate whether the auditor satisfies the criteria provided in [7] section 141. In case of casual vacancy arising out of resignation of the existing auditor. It is not mandatory to reappoint the retiring auditor even if 3 things stipulated above are not attracted. As per explanation of rule 3 Board of Director shall appoint new auditor after following the process of casual vacancy. be filled by the Comptroller and Auditor-General of India within 30 days of such casual vacancy. it is not correct to say that in the absence of the resolution to the effect that the retiring auditors shall not be re-appointed. Filing of Casual Vacancy by Members in AGM: If any casual vacancy in the office of an auditor is caused by the Resignation of an Auditor. the Board of Directors shall fill the vacancy within next 30 days (30+30=60). *There is no provision of ratification of auditor in case of government Companies because tenure of the auditor in Government Companies up to next Annual General Meeting of the Company only. Till this is done. Filing of Casual Vacancy by Board in case of failure of C&AG If vacancy is not filled by the Comptroller and Auditor General of India within 30 days. b) he has not given the company a notice in writing of his unwillingness to be re-appointed. 5. a retiring auditor cannot be said to have been re-appointed as contemplated by the section.Tenure: The auditor appointed in the AGM meeting shall hold office from the conclusion of that meeting till the conclusion of next general meeting.3 APPOINTMENT OF AUDITOR IN CASE OF CASUAL VACANCY What is 'Casual Vacancy’? The expression 'casual vacancy' has not been defined in the Companies Act.5 RE-APPOINTMENT OF RETIRING AUDITOR A retiring auditor may be reappointed at an annual general meeting. such vacancy shall only be filled by the company in general meeting convened within three months of the recommendation of the Board. the board shall recommend appointment of an Individual or audit firm as auditor within 30 days of the date of casual vacancy and the shareholders shall appoint within 3 months from the date of such recommendation of the Board and the said Individual or Audit firm shall hold the office till conclusion of the next annual general meeting. 5.

Removal (Sub – section 1): The auditor may be removed from his office before expiry of his term only by special resolution after approval from central government. within a period of thirty days from his resignation a statement with the company and the Registrar indicating the reason and other facts as may be relevant with regard to his resignation. 7. Hence. 3. a special notice shall be required to be circulated for the resolution. In case of Government Company. there should not be any treat for unfair removal and right to resign to protest. However. If the Tribunal is satisfied on an application either of the company or any other aggrieved person that the right of making representation are being abused by the auditor. all unlisted public companies having paid up share capital of rupees ten crore or more. Unless such representation received too late for circulation. a copy of the representation shall be filed with the Registrar. Tenure: If no auditor is appointed in AGM then retiring auditor will continue as auditor of the company from the conclusion of this AGM to conclusion of 6th Annual General Meeting of the Company subject to ratification by shareholder in every AGM. may still be automatically appointed if the Company fails to appoint an Auditor in place of the existing auditor. Resignation (Sub – section 2): The auditor who resigns from the company shall file. the company shall immediately send a copy of such notice to retiring auditor. banks or public deposits of rupees fifty crores or more. all private limited companies having paid up share capital of rupees twenty crore or more. On receipt of copy of such notice. all listed public companies 2. Denial of Re –appointment (Sub – section 4): If. he or it shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees. the copy of the representation may not be sent and the representation need not be read out at the meeting. The auditor concern shall be given opportunity of being heard. If auditor does not file such statement. no auditor is appointed or re-appointed. REMOVAL AND RESIGNATION OF AUDITOR To maintain independence and fearless audit. 6. it is clear that the retiring (existing) auditor even if not re- appointed. On receipt of special notice of such resolution. If the copy of the representation is not sent to members. the existing auditor shall continue to be the auditor of the company. the company shall (a) state the fact of such representation in the notice of the resolution to members of the company and (b) send a copy of the representation to every member of the company to whom the notice of meeting is sent. this statement shall also be filed with the Comptroller and Auditor General of India. it is proposed to appoint another auditor in place of retiring auditor or not to re – appoint retiring auditor except where retiring auditor has completed his tenure of five or ten years as the case may be.Sub-Section (10) of section 139 stipulates that where at any annual general meeting. Above said companies shall not be permitted to appoint or reappointment (a) an individual as auditor for more than one term of five consecutive years. the following companies are compulsorily required to appoint or reappointment company auditor on rotation basis: 1. companies existing before Companies Act 2013 and falling under any of the above categories are required to comply with above requirements within 3 years from the date commencement of new companies Act. the retiring auditor may make a representation of reasonable length and request its notification to the members of the company. then. ROTATION OF AUDITOR As per new Companies Act 2013. Change of Auditor by order of Tribunal (Sub – section 5): . and (b) an audit firm as auditor for more than two terms of five consecutive years: This means rotation of company auditor will not be possible after completion of 5 consecutive years in case of an individual auditor and 10 consecutive years in case of an audit firm. all companies public borrowings from financial institutions. 4.

Please note.The tribunal either its own or on an application made by the central government or by any concerned person may by order direct the company to change its auditor. Independence of Audit Remuneration: The remuneration shall include the expenses. As per the provisions contained in the companies Act 2013. no further reporting is required. term ‘appointment’ include re – appointment. e) Charging of Personal expenses to revenue account: Auditor should inquire as to “whether personal expenses have been charged to revenue account”. 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. the following rights have been given in order to enable him to discharge his duties properly: 1. POWERS / RIGHTS OF AUDITORS Auditor will have access to books of accounts and vouchers. it shall within fifteen days of receipt of application make an order that he shall not function as an auditor and the central government may appointment another auditor in his place. The list includes issues related to: a) Loans and Advances made by the Company: Auditor shall inquire into “whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interest of the company or its members. c) Sale of investments: Auditor should inquire. The auditor should verify that the security held against the loans and advances made by the company are legally enforceable and also ascertain the valuation of securities to see whether the loan is fully secured or partly secured. Auditor must verify the cases where securities are sold at a price less than their cost of acquisition and if he finds that such sale is bona fide the price realized is considered to be reasonable. . directly or indirectly acted in a fraudulent manner or abetted or colluded in any fraud by or in relation to the company or its directors or officers. REMUNERATION OF AUDITOR (SECTION 142) Independence from any bias of management in fixation of remuneration is a key of good governance and audit. 9. Fixing Remuneration: The remuneration of an auditor shall be fixed in general meeting in such manner or in such manner as may be determined therein. auditor of a holding company shall have access to the books of all of its subsidiary companies for the purpose of consolidation of financial statements of holding company and its subsidiaries. having regards to the circumstances of each case. against whom final order has been passed by the Tribunal under this section. There is an inclusive list of matter for which auditor shall seek information and explanation. The remuneration of first auditor shall be fixed by board of directors. 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. b) Transactions represented by book entries: Auditor is required to inquire “whether the transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company”. “whether so much of the assets of the company (except an investment company or a banking company) as consists of shares. If such application was made by the Central government and the tribunal is satisfied that any change is required. have been sold at a price less than that at which they were purchased by the company”. 8. when it is satisfied that the auditor has. He should verify the all book entry transactions and determine whether such transactions have actually taken place and are not prejudicial to the interest of the company. the explanation to sub – section (1) of section 139 clarifies that for this chapter dealing with Audit and Auditors. debentures and other securities. Auditor must ensure that no personal expenses of directors and officers of the company have been charged to revenue account. Also. 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. shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447.” It is applicable to all loans and advances made on the basis of security. The tribunal shall make such order. The auditor must inquire in respect of all the deposits shown by the company and satisfy himself that the loans and advances have not been shown as deposits. Such access shall be available at all times. d) Loans and Advances shown as deposits: Auditor must verify “whether loans and advances made by the company have been shown as deposits”. which deals with punishment for fraud. The auditor. not only to those kept at registered office of the company but also to those kept at any other place. if any.

Right to report to the members of the company on the accounts examined by him: The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act. whether the position as stated in the account books and balance sheet is correct. from any other company. the company’s auditor shall be entitled to visit the branch office. When the auditor is not provided the information required by him or is denied access to books. who shall also be an auditor. may retain the property for non-payment of his dues on account of the work done on the property. if any. However. any person having the lawful possession of somebody else’s property. address and consent of the auditors of the company. It must include the expenses. etc. for work done on the books and documents. the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made there under or under any order made under this section and to the best of his information and knowledge. 4. the company must mention in their prospectus the name. 7. 8. auditor can exercise lien on books and documents placed at his possession by the client for non-payment of fees. Right to Lien: In terms of the general principles of law. 9. that the company must send all notices and communication to the auditor. which may not be known from an examination of the books. The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein. the auditor would not be able to obtain details of amount collected by the directors. In this connection. Right to remuneration On completion of his work an auditor is entitled to his remuneration. auditor must ensure in respect of shares allotted in cash by the company that cash has actually been received in respect of such allotment by the company. the said accounts. Right 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. his only remedy would be to report to the members that he could not obtain all the information and explanations he had required or considered necessary for the performance of his duties as auditors. where the accounts of any branch office are audited by a person other than the company’s auditor. He shall also have access at all times to the books. 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.. f) Allotment of shares for cash: Auditor should inquire as to “whether cash has actually been received in respect of shares stated to have been allotted for cash and if no cash has actually been so received. and he shall attend the meeting either through himself or through his representative. etc. if the auditor is allowed access to such copies of. accounts and vouchers of the company maintained at the branch office. Right to receive notices and to attend General Meeting It is a prime requirement under section 146. Right to be mentioned in Company Prospectus As per section 26. 3. Right to inspect Branch Accounts According to section 143(8). 6. 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. The rights of the auditor cannot be limited or abridged either by articles or resolution of the members. regular and not misleading”. if he deems it necessary to do so for the performance of his duties as an auditor. on which he has worked. 2. Right to obtain information and explanation from Officers This right of the auditor to obtain from the officers of the company such information and explanations as he may think necessary for the performance of his duties as auditor is a wide and important power. financial statements give a true and fair view of the state of the company’s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed. in the case of banking companies having a branch office outside India it shall be sufficient. . and extracts from. firm or person as well as of any benefits in kind derived by the directors from the company. relating to any general meeting. 5. It is for the auditor to decide the matters in respect of which information and explanations are required by him. the books and accounts of the branch as have been transmitted to the principal office in India. Such auditor must be given reasonable opportunity to speak at the meeting on any part of the business which concerns him as the auditor. On this premise. In the absence of such power.

The government may also notify that auditors’ report shall include a statement on such matters as notified. DUTIES OF AUDITORS The duties of a company auditor under Companies Act 2013 may be discussed under the following heads: 1. AUDITOR’S REPORT Concept and Definitions An Audit report is the end product of the auditing. 8. the action taken and the impact thereof on the Company’s accounts and financial statement. The Central Government shall notify these standards in consultation with National Financial reporting Authority. 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. 1971. the accounts of that office shall be audited either by the auditor appointed for the company. Winding up: As per section 305. 3. Powers and Conditions of Service) Act.  In case an existing company issues prospectus.Powers of Comptroller and Auditor General of India in Case Government Company In case of Government Company. 2. and . These are:  The auditor should give all possible assistance to the inspectors in case of an investigation of the affairs of the company. shall include the directions. (a) Preliminary work for audit. 6. he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed. cause test audit to be conducted of the accounts of company covered u/s 139 (5) or 139 (7) and the provisions of section 19A of the Comptroller and Auditor-General’s (Duties. 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. 7. Liable to pay damages: As per section 245.(c) Whether company’s balance sheet and profit and loss account are in agreement with books of accounts and returns. It is the duty of auditor to certify all these statements. Make report: The auditor shall make a report to the members of the company on accounts examined by him on every financial statement and shall state:(a) Whether he has sought and obtained all the necessary information and explanations. The Comptroller and Audit – General of India may cause test audit to be conducted of the accounts of such company. Provided that any comments given by the CAG upon. issued by the Comptroller and Auditor –General of India (CAG). The CAG may. the Audit Report among other things. there are other duties of an auditor to be performed in course of his audit. The CAG shall have a right to the conduct a supplementary audit of financial statement of the company and comment upon or supplement such audit report within 60 days from the date of receipt of the audit report u/s 143 (5).(b) Whether proper books of account have been kept. The Comptroller and Audit – General of India shall within 60 days of receipt of the report have right to (a) conduct a supplementary audit and (b) comment upon or supplement such audit report. 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 audit report shall be sent by the company to every person entitled to copies of audited financial statements u/s 136 (1) and also be placed before the annual general meeting of the company at the same time and in the same manner as the audit report. 11. if any. or supplement to. Branch Audit: Where a company has a branch office. 5. (b) Conduct of actual audit. Auditing Standards: Every auditor shall comply with the auditing standards. 4. Other Duties: Besides the above duties. by an order. It is concluding part of the audit process as an auditor has to go through following three phases while conducting an audit. it should contain a statement of profit & losses for the last 5 years showing the rate of dividends paid each classes of shares for each year and a statement of assets & liabilities of the company. 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. Fraud Reporting: If an auditor of a company. 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. in the course of the performance of his duties as auditor. They also have right to claim damages or compensation from the auditor for any improper or misleading statement made in his audit report or for any fraudulent or unlawful conduct. shall apply to the report of such test audit 10. or by any other person qualified for appointment as an auditor of the company. 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.

which is ordinarily the city where the Audit Report is signed. assessing the accounting principles used in the preparation of the Financial Statements. which means submission of Audit Report. d) The Report should include a statement by the Auditor that the audit provides a reasonable basis for his opinion. b) The Report should include a Statement that the Financial Statements are the responsibility of the entity's management and a Statement that the responsibility of the Auditor is to express an opinion on the Financial Statements based on the audit. 6. the Audit Report is nothing but a statement of observation gathered & considered while proving conclusive evidence of company’s financial position. 8. the Report should be signed in the personal name of the Auditor and in the name of the Audit Firm. and the degree of responsibility he is taking. evidence to support the amounts and disclosures in Financial Statements. Date of the Report: The date of an Auditor's Report is the date on which the Auditor signs the Report expressing an opinion on the Financial Statements. 4. where appropriate. assessing significant estimates made by management. so drawn up as to give clear and concise information to persons who are not already in possession of the full facts of the subject matter of the report. It should state the Auditor's opinion as to whether the Financial Statements give a true and fair view in accordance with the financial reporting framework and. Therefore. Ordinarily. Opinion Paragraph: The Opinion paragraph of the Report should indicate the Financial Reporting framework used to prepare the Financial Statements.e. taken as a whole or an assertion to the effect that an opinion cannot be expressed when an overall opinion cannot be expressed. (c) Conclusion of audit.g. The Partner / Proprietor signing the Report should mention his ICAI Membership Number. where auditor’s name is associated with financial statements the report should contain a clear cut indication of the character of the auditor’s examination. 5. including the date of and period covered by the Financial Statements. on a test basis. It is an important part of the audit as it provides the results of the audit conducted by the auditor. & evaluating the overall position of Financial Statements. Board of Directors. It is a medium through which an auditor expresses his opinion on the financial statement under audit. reports of officers of the entity. Where a Firm is appointed as the Auditor. 2. Title: The Auditor's Report should have an appropriate title i. Place of Signature: The Report should name the specific location. Auditor's Signature: The Report should be signed by the Auditor in his personal name. b) The Report should include a statement that the audit was planned and performed to obtain reasonable assurance whether the Financial Statements are free of material misstatement. Ray In short. Opening or Introductory Paragraph: a) The Auditor's Report should identify the Financial Statements of the entity that have been audited. I. 3. Audit Report is called as the ultimate and final product of every audit. e. The meaning of Audit Report can be well understood from the following selected definitions “A Report is a statement of collected & considered facts. Addressee: The Auditor's Report should be appropriately addressed as required by the circumstances of the engagement and applicable laws and regulations. 7. whether the Financial Statements comply with the statutory requirements. in the preparation of Financial Statements. the Auditor’s Report is addressed to the authority appointing the Auditor. B. In all cases.”. the reason therefore should be stated. It should be distinguished from other Reports. The Auditor should not date the Report earlier than the date on which the Financial Statements are signed or approved by Management. c) The Auditor's Report should describe the Audit as including examining. if any.Lan Cester “The Report shall either contain as expression of opinion regarding the financial statements. "Auditor's Report". .”. BASIC ELEMENTS OF THE AUDITORS' REPORT The Basic Elements of the Auditors' Report are - 1. Scope Paragraph: a) The Auditor's Report should describe the scope of the audit by stating that the audit was conducted in accordance with auditing Standards generally accepted in India.J.

(b) The Auditor gives a Clean or Unmodified Report. have been properly determined and disclosed in the Financial Statements. In Unmodified Opinion. and (c) There is adequate disclosure of all material matters relevant to the proper presentation of the financial information. c) True and Fair: The Financial Statements prepared represent a true and fair summary of the transactions that took place during the year. Or. We will discuss later. there are two main types of audit opinion: Unmodified and Modified Opinion. adverse and disclaimer opinion.with Emphasis of Matter Paragraph. which may distort the real state of affairs. f) Free of Misstatements: There are no material misstatements in the Financial Statements. qualified. . However. an auditor issues this opinion to financial statements that prepared in all material respect and comply with accounting standards being use.  Any changes in the accounting principles or in the method of their application. b) Standards: Accounting entries passed in the books of account are in conformity with the generally applicable accounting principles and Accounting Standards followed consistently. e) Format: The form of Financial Statements is in accordance with the form prescribed by law. when the Auditor concludes that the Financial Statements give a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the Financial Statements. An Unmodified Opinion indicates the following -  The Financial Statements have been prepared using the Generally Accepted Accounting Principles. where applicable. Matters that do not affect the Auditor's Opinion . the Auditor has to satisfy himself that - a) Evidence: Reasonable evidence is obtained in support of transactions recorded in the books of account. adverse and disclaimer opinion. for Modified Opinion. there are four types of audit opinion such as. UNMODIFIED OPINION/REPORT (a) An opinion is said to be unmodified. when he does not have any significant reservation in respect of matters contained in the Financial Statements. subject to statutory requirements. Unmodified (unqualified).  The Financial Statements comply with relevant statutory requirements and regulations. his Report is said to be modified and it includes - i.TYPES OF AUDIT REPORT / AUDIT OPINION In general. MODIFIED AUDIT OPINION/REPORT When the Auditor issues any Report other than unqualified. and the effects thereof. No material transaction recorded in the books of account is illegal or beyond the legal competence of the Company. For issuing an Unmodified Audit Report. So. if any. there are three sub opinions which are issued to financial statements that are not prepared in material respect with others matter. Those three modified opinion are: qualified. d) Classification: The process of classification and aggregation followed in the preparation of the Financial Statements is fair and it does not hide a material fact nor does it highlight something. which have been consistently applied. in total.

adverse opinion is more serious than. Matters that do affect the auditor's Opinion viz:  Qualified Opinion. those misstatements are not pervasive. While conducting the audit. ADVERSE OR NEGATIVE OPINION/REPORT Adverse opinion is issued to the financial statements where auditors examined and concluded that those financial statements are materially misstated and pervasive. make conclusion that there are material misstatement found in the financial statements. We will talk about disclaimer and adverse opinion later in this article. But. The auditor may qualify his report only when the subject matter of qualification affects the truthfulness and fairness of the financial statement materially. Pervasive here is a bit subjective as it is based on auditor’s judgment. but those misstatements are not pervasive. Under such situations. 25. The Onus and responsibilities of Auditors becomes cumbersome. adverse opinion. 1. he shall be punishable with imprisonment for a term which may extend to 1 year and with fine which shall not be less than Rs. misstatement is pervasive to financial statements if those misstatements are not affecting the financial statements and users’ decision making. Compared to qualified opinion. he may not be in a position to form an opinion. This is happen after auditor try their best to negotiate with client to obtain all of those importance information and client still reject no matter it is intention or unintentional. the auditor may fail to obtain the required information and explanation or the books of accounts may not be available due to various reasons. the qualified audit opinion is serious than unqualified. Auditor believe that. In other words. 00. This opinion is a bit different from qualified opinion. 144 AND 145 OF THE ACT Section 139 provides for appointment of auditors. qualifies opinion is type of modified audit opinion where auditors. LIABILITIES OF STATUTORY AUDITORS UNDER THE COMPANIES ACT 2013 There are tremendous Changes in new Provisions under the Companies Act. In the current write up. he may qualify his report. 5. Lord Justice Topes had once famously remarked that: “The auditor is a watchdog and not a bloodhound. 1956. For qualified opinion. 2013 with respect to Auditors as compared to the old Companies Act. In other words.but which may extend to Rs. which shall restrict the scope of the duties of the auditor. he shall give an adverse or Negative Report.000/-.000/. as said in standard. Section 144 is on certain services which an auditor cannot render and Section 145 is on signing of audit report and other documents by auditor. This opinion is the message to users of financial statements that they should not rely on these financial statements in their decision making. Auditor shall be punishable with fine which shall not be less than Rs. after their testing. In other words. In term of seriousness. auditor issues the disclaimer of opinion where they could not obtain and unable to access the audit evidence for individual items or in aggregation to support their testing.00. auditor found material misstatement in the financial statements. The Satyam debacle seems to have cast a very gloomy image in the minds of regulators as far the auditors are concerned. 25. 143. ii. or there may arise various situations.  Adverse Opinion and.000/.00. If the auditor is of the opinion that the financial statement does not show the true and fair view of the state of affairs of the business. Section 143 deals with power and duties of auditors. for those items that they are not able to access and obtain information could be materially misstate and pervasive.but which may extend to Rs. 2013 does not seem to echo this thought! The kind of stringent measures prescribed against auditors gives the picture that the Act indeed expects the auditors to be bloodhounds in discharging their duties and not merely be watch dogs. If an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities. .” But Companies Act. However. Lot of responsibilities imposed under the Act & Rules. DISCLAIMER OPINION/REPORT Disclaimer of opinion by the way is different from both qualified and adverse. and then the auditor shall disclaim giving an opinion. Yet.000/-. misstatements are both material and pervasive.  Disclaimer of Opinion QUALIFIED OPINION/REPORT If the auditor has any reservation in respect of the certain matters mentioned in the financial statements. PENALTY FOR NON-COMPLIANCE WITH ANY OF THE PROVISIONS CONTAINED IN SECTIONS 139. yet it is better than adverse and disclaimers. we have brought out the penal provisions and the actions which can be initiated by various regulatory and non regulatory authorities in case of any lapse on the part of the Auditors in discharging their duties effectively. The new Act intents to improve Corporate Governance and to further strengthen regulations.

unlawful or wrongful act or conduct. he 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. if in the course of the performance of his duties as auditor. Liability of firm: Where. The general thinking with regard to unlawful acts or defaults by clients appears to be that the auditor should not 'aid or abet' but he is apparently not under any legal obligation to disclose the offence.000/-. whether directly or indirectly. but which may extend to ten times of the fees received. NFRA shall have the power to make order for— (A) Imposing penalty of—  not less than Rs. A professional accountant would himself be guilty of a criminal offence if he advises his client to commit any criminal offence or helps or encourages in planning or execution of the same or conceals or destroys evidence to obstruct the course of public justice or positively assists his client in evading prosecution. On some occasions. 1949 for a minimum period of 6 months or for such higher period not exceeding 10 years as may be decided by the NFRA. if it is satisfied that the auditor of a company has. Action under this section can be initiated against the auditor including audit firm of the company for any improper or misleading statement of particulars made in the audit report or for any fraudulent. Penalty for professional misconduct – NFRA . he may acquire knowledge that his client has been guilty of some unlawful act. PENALTY FOR FAILURE TO DISCLOSE FRAUD As per Section 143(12).00. or in relation to. the company or its directors or officers. in case of individuals. unlawful or wrongful manner. default. it may. the company or its directors or officers.00. 25. or tax representative has access to a variety of information concerning his clients. (B) Debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act. the liability. Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm. Auditor shall immediately report the matter to the Central Government. Such an auditor shall not be eligible to be appointed as an auditor of any company for a period of 5 years from the date of passing of the order and the auditor shall also be liable for action under section 447. AUDITOR’S LIABILITY IN CASE OF UNLAWFUL ACTS OR DEFAULTS BY CLIENTS The auditor's basic responsibility is to report whether in his opinion the accounts show a true and fair view and in discharging his responsibility he has to see as to how the particular situations affected his position.Watch on the watch dogs! National Financial Review Authority (NFRA) shall have power to investigate.10. 1949. either suo motu or on a reference made to it by the Central Government into the matters of professional or other misconduct committed by any member or firm of chartered accountants.00. shall be punishable with imprisonment for a term which shall not be less than 6 months but which may extend to 10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud. 1.Convicted auditor shall refund the remuneration received by him from the Company and pay for damages to the company. direct the company to change its auditors.but which may extend to Rs. and  not less than Rs. in case of audit of a company being conducted by an audit firm. or other criminal offence. but which may extend to five times of the fees received. Class Action Suits: Any 100 or more members/deposit holders of the company or 10% of the total number of members/deposit holders of the company can file a class action suit to claim damages or compensation or demand any other suitable action against the auditor in the manner prescribed under Section 245 of the Act. or in relation to or by.000/. The duty of the professional accountant in such a case would depend upon the actual circumstances of the situation. Where professional or other misconduct is proved. bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report. Action under Section 447: Any person who is found to be guilty of fraud. Disqualification for appointment as auditor: A person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction shall be disqualified to be appointed as auditor of any company.000/-.000/-. fraud. ACTION IN CASE OF FRAUD BY AUDITORS Change of auditors by NCLT: The NCLT either suo motu or on an application made to it by the Central Government or by any person concerned. A professional accountant in his capacity as auditor. acted in a fraudulent manner or abetted or colluded in any fraud by. he shall be punishable with fine which shall not be less than Rs. registered under the Chartered Accountants Act. for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally. 1. it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by. by order. whether civil or criminal as provided in this Act or in any other law for the time being in force. but which may extend to 3 times the amount involved in the fraud. Due consideration should be given to the . the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent. 00. in case of firms. accountant. In case of any failure on his part to comply with this duty.

Auditor’s opinion on the financial statements is based on the concept of obtaining reasonable assurance. is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement whether caused by error or fraud. However. Fraud involving one or more members of management or those charged with the governance is referred to as “management fraud”. An audit does not guarantee that all material misstatement will be detected because of such factors. an attorney. RESPONSIBILITIES OF AN AUDITOR IN CASE OF MATERIAL MISSTATEMENT RESULTING FROM MANAGEMENT FRAUD Responsibilities of an auditor in case of Material misstatement resulting from management fraud: Misstatement in the financial statements can arise from fraud or error. as the use of judgment. In this regard. However. is he representing the client in income-tax proceedings or is he acting in the capacity of an auditor or an accountant or a consultant. an auditor cannot disclose confidential information unless permitted by the client or unless required by law. The question of liability of an auditor for unlawful acts or defaults by clients should be considered in the light of the broad parameters given above. but the auditor is not and cannot be held responsible for the prevention of fraud and error. (iv) In case of suppression in current accounts. the auditor owes a duty to make a suitable report. he should advise the client to make a complete disclosure. However. a pleader or a Vakil is barred from disclosing any communication made to him in the course of and for the purpose of his employment. It has been clearly established in various case laws that the auditor is expected to know the contents of documents and records and ascertain whether the affairs of the client are being conducted in an unlawful manner. hence in an audit. the inherent limitations of internal control and the fact that much of the evidence available to the auditor is persuasive rather than conclusive in nature. (ii) If the fraud relates to past years when the accountant did not represent the client. the accountant should make a complete reservation in his report and should not associate himself with the return. there is an unavoidable risk that some material misstatements of financial statements will not be detected. The Institute of Chartered Accountants of India has considered the role of chartered accountants in relation to taxation frauds by an assessee and has made the following major recommendations: (i) A professional accountant should keep in mind the provisions of Section 126 of the Evidence Act whereby a barrister. the auditor does not guarantee that material misstatements will be detected.e. It is in the course of the work. those charged with governance. it can be argued that the auditor has a professional obligation to ensure that the client is fully aware of the seriousness of the offence and to seriously consider full disclosure of the matter. he comes across any unlawful acts. Owing to the inherent limitations of an audit. The accountant should also be careful that the past fraud does not in any way affect the current tax matters. If he refuses to do so. the contents of the information as such should not be communicated unless the client consents in writing. In case the client refuses to do so. Further an audit conducted in accordance with the standards on auditing generally accepted in India. The primary responsibility for the prevention and detection of fraud rests with those charged with the governance and the management of the entity. The auditor is concerned with fraudulent acts that cause a material misstatement in the financial statements. The term fraud refers to an ‘Intentional Act’ by one or more individuals among management. The fact that an audit is carried out may act as deterrent.exact nature of services that a professional accountant is rendering to his client. the use of testing. even though the audit is properly planned and performed in accordance with the standards on auditing generally accepted in India. i. If he does not. Each case has to be judged on its circumstances. the client should be advised to make a disclosure. he may be held liable. Certain levels of management may be in a position to override control procedures designed to prevent similar frauds by other employees. Under the code. . the accountant should inform him that he is entitled to dissociate himself from the case and that he would make a report to the authorities that the accounts prepared or examined by him are unreliable on account of certain information obtained later. in every case he has to assess the implications of the unlawful act or default on the true and fair character of the accounting statements. it appears that if an auditor was aware of any unlawful act having been committed by client in respect of accounts audited by him and the unlawfulness was not rectified by proper disclosure or any other appropriate means. (iii) In case of fraud relating to accounts examined and reported upon by the professional accountant himself. In making such a report. the client should be asked to make a full disclosure. if the true and fair character of the accounts has been vitiated. one has to bear in mind the consequence of the act in relation to the professional code to which an auditor is subjected. it is his duty to bring it to the notice of the client as also to make a disclosure in his report in appropriate cases.

Explain briefly responsibilities of an auditor in case of material misstatement resulting from Management Fraud .QUESTIONS 1. Write a short note on .Auditor’s liability in case of unlawful acts or defaults by clients. 2.