SEBI Grade A 2020: COMPANIES ACT: CHAPTER X

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 SEBI Grade A 2020: COMPANIES ACT: CHAPTER X
Table of Contents

CHAPTER X: AUDIT AND AUDITORS ................................................................................. 3

Section 139: Appointment of auditors ............................................................................................................ 3
Section 140: Removal, resignation of auditor and giving of special notice ................................................... 4
Section 141: Eligibility, qualifications and disqualifications of auditors ....................................................... 4
Section 142: Remuneration of auditors........................................................................................................... 5
Section 143: Powers and duties of auditors and auditing standards ............................................................... 5
Section 144: Auditor not to render certain services ........................................................................................ 6
Section 145: Auditor to sign audit reports, etc ............................................................................................... 6
Section 146. Auditors to attend general meeting ............................................................................................ 6
Section 147: Punishment for contravention .................................................................................................... 7
Section 148: Central Government to specify audit of items of cost in respect of certain companies ............ 7

Dear Aspirants, as you all know that every Act contains Chapters, Section, Sub-
Section and Schedule. And for SEBI Grade A exam point of view, you are required to
remember some important Section numbers of Companies Act,2013, their Chapters, their
subject, and some important facts within the section. These notes are curated keeping in
mind the nature of questions asked in SEBI Grade A examination, hence language has
been simplified and many unnecessary sentences, subsections/clauses/subclauses have
been omitted.

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 SEBI Grade A 2020: COMPANIES ACT: CHAPTER X

CHAPTER X: AUDIT AND AUDITORS

• In this Chapter of Companies Act, 2013, we shall discuss Articles Number 139 to 148.

Section 139: Appointment of auditors

• Every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor
who shall hold office for 6 years.

• No listed company or a company belonging to such class or classes of companies can appoint or re-
appoint—
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years:

• Members of a company may resolve to provide that:

(a) in the audit firm appointed by it, the auditing partner and his team shall be rotated
(b) the audit shall be conducted by more than one auditor.

• In the case of a Government company, the Comptroller and Auditor-General of India shall appoint
an auditor, within a period of 180 days from the commencement of the financial year.

• The first auditor of a company, other than a Government company, shall be appointed by the Board
of Directors within 30 days from the date of registration of the company
And in the case of failure of the Board to appoint auditor, members of the company will appoint auditor
and auditor will hold office till the conclusion of the first annual general meeting.

• In the case of a Government company, the first auditor shall be appointed by the Comptroller and
Auditor-General of India within 60 days from the date of registration of the company
• And in case the Comptroller and Auditor-General of India does not appoint auditor, the Board
of Directors of the company will appoint auditor within the next 30 days;
• And in the case of failure of the Board to appoint auditor, the members of the company will appoint
auditor within sixty days at an extraordinary general meeting.

• Any casual vacancy in the office of an auditor will be filled by the Board of Directors within 30 days,
If such casual vacancy is as a result of the resignation of an auditor, appointment will also be approved
by the company at a general meeting convened within 3 months of the recommendation of the Board

• In the case of a company whose accounts are subject to audit by an auditor appointed by the
Comptroller and Auditor-General of India, casual vaccancy will be filled by the Comptroller and Auditor-
General of India within thirty days.
• If the Comptroller and Auditor-General of India does not fill the vacancy, the Board of Directors shall fill
the vacancy within next 30 days.

• A retiring auditor may be re-appointed at an annual general meeting, if—

(a) he is not disqualified for re-appointment;
(b) he has not given the company a notice in writing of his unwillingness to be re-appointed;
(c) a special resolution has not been passed against him.

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 SEBI Grade A 2020: COMPANIES ACT: CHAPTER X
• If no auditor is appointed or re-appointed, the existing auditor will continue to be the auditor of the
company.

• If a company is required to constitute an Audit Committee under section 177, all appointments,
including the filling of a casual vacancy of an auditor, will be made after taking into account the
recommendations of such committee.

Section 140: Removal, resignation of auditor and giving of special notice

• The auditor appointed may be removed from his office before the expiry of his term only by a special
resolution of the company, after obtaining an approval of the Central Government.

• Within 30 days from the date of resignation, the auditor shall file a statement with the company and the
Registrar (Comptroller and Auditor-General of India for Govt Comapany), indicating the reasons and
other facts as may be relevant.

• If the auditor does not file a statement, it shall be punishable with fine of fifty thousand rupees which
may extend to five lakh rupees.

• the Tribunal may direct the company to change its auditors, if it finds that the auditor of a company has,
whether directly or indirectly, acted in a fraudulent manner.

Section 141: Eligibility, qualifications and disqualifications of auditors

• A person shall be eligible for appointment as an auditor of a company only if he is a chartered

accountant.

• If a firm including a limited liability partnership is appointed as an auditor of a company,

only the partners who are chartered accountants shall be authorised to act and sign on behalf of
the firm.

• The following persons shall not be eligible for appointment as an auditor of a company,
namely:
(a) a body corporate other than a limited liability partnership registered under the Limited
Liability Partnership Act, 2008
(b) an officer or employee of the company
(c) a person who is a partner of an officer or employee of the company
(d) a person who is indebted to the company
(e) a person or a firm who has business relationship with the company, or its subsidiary
(f) a person whose relative is a director or is in the employment of the company as a director or
key managerial personnel
(g) a person who is in full time employment elsewhere
(h) a person who has been convicted by a court for an offence

• If a person appointed as an auditor of a company incurs any of the disqualifications after his
appointment, he shall vacate his office.

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 SEBI Grade A 2020: COMPANIES ACT: CHAPTER X

Section 142: Remuneration of auditors

• The remuneration of the auditor of a company shall be fixed in its general meeting. However, the Board
may fix remuneration of the first auditor appointed by it.

• The remuneration shall, in addition to the fee payable to an auditor, include the expenses incurred by
the auditor in connection with the audit of the company.

Section 143: Powers and duties of auditors and auditing standards

• Every auditor of a company shall have a right of access at all times to the books of account and
vouchers of the company.
• The auditor shall make a report to the members of the company on the accounts examined by him
and on every financial statements will be laid before the company in general meeting.

• The auditor‘s report shall also state:

• whether he has sought and obtained all the information and explanations necessary for the purpose
of his audit. And if not, the details thereof and the effect of such information on the financial
statements;
• whether proper books of accounts have been kept by the company and proper returns adequate for
the purposes of his audit have been received.
• whether the company‘s balance sheet and profit and loss account dealt with in the report are in
agreement with the books of account and returns;
• whether the financial statements comply with the accounting standards;
the observations or comments of the auditors on financial transactions or matters which have
any adverse effect on the functioning of the company;
• whether any director is disqualified from being appointed as a director
• any qualification, reservation or adverse remark relating to the maintenance of accounts and other
matters;
• whether the company has adequate internal financial controls system in place and the operating
effectiveness of such controls;

• If any of the matters required to be included in the audit report is disqualified, the report shall state the
reasons for it.

• In the case of a Government company, the Comptroller and Auditor-General of India shall appoint the
auditor and direct auditor the manner in which the accounts of the Government company are required
to be audited.
And the auditor shall submit a copy of the audit report to the Comptroller and Auditor-General of India
which include the directions issued by the Comptroller and Auditor-General of India, the action taken
and its impact on the accounts and financial statement of the company.

• The Comptroller and Auditor-General of India shall within 60 days from the date of receipt of
the audit report have a right to
(a) conduct a supplementary audit of the financial statement of the company
(b) comment upon or supplement such audit report

• The Comptroller and Auditor-General of India may conduct test audit of the accounts of company.

• Every auditor shall comply with the auditing standards.

• The Central Government may prescribe the standards of auditing as recommended by the Institute of
Chartered Accountants of India, in consultation with the National Financial Reporting Authority.

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 SEBI Grade A 2020: COMPANIES ACT: CHAPTER X

• The Central Government may in consultation with the National Financial Reporting Authority,
direct that the auditor‘s report shall also include a statement on such matters as may be specified
therein.

• If an auditor of a company has reason to believe that an offence involving fraud is being committed
against the company by officers or employees of the company, he shall immediately report the matter
to the Central Government.

• The provisions of this section shall apply to:

(a) the cost accountant in practice conducting cost audit under section 148; or
(b) the company secretary in practice conducting secretarial audit under section 204.

• If any auditor, cost accountant or company secretary in practice do not comply with the provisions of
this section, he shall be punishable with fine of one lakh rupees which may extend to twenty-five
lakh rupees.

Section 144: Auditor not to render certain services

• An auditor shall provide only those services which are approved by the Board of Directors or the audit
committee.

• An Auditor shall not provide the following services:

(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;

Section 145: Auditor to sign audit reports, etc

• The person appointed as an auditor of the company shall sign the auditor‘s report and certify any other
document of the company.

• And the qualifications, observations or comments on financial transactions or matters (which have any
adverse effect on the functioning of the company mentioned in the auditor‘s report) will be read before
the company in general meeting and will be open to inspection by any member of the company.

Section 146. Auditors to attend general meeting

• All notices of any general meeting shall be forwarded to the auditor of the company, and the auditor
shall attend either by himself or through his authorised representative any general meeting.

• Auditor will have right to be heard on any part of the business which concerns him as the auditor.

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 SEBI Grade A 2020: COMPANIES ACT: CHAPTER X
Section 147: Punishment for contravention

• If any of the provisions of sections 139 to 146 is contravened, the company shall be punishable with fine
of twenty five thousand rupees which may extend to five lakh rupees.

• And every officer of the company who is in default shall be punishable with imprisonment for a term
which may extend to one year or with fine of ten thousand rupees which may extend to one lakh
rupees, or with both.

• If an auditor of a company contravenes any of the provisions of section 139, section 143, section
144 or section 145, the auditor shall be punishable with fine twenty-five thousand rupees which
may extend to five lakh rupees.
• Provided that if an auditor has contravened such provisions knowingly or wilfully with the intention
to deceive the company, he shall be punishable with imprisonment for a term which may extend to one
year and with fine of one lakh rupees which may extend to twenty-five lakh rupees.
• And auditor will be liable to—
(i) refund the remuneration received by him to the company; and
(ii) pay for damages to the company, statutory bodies or authorities for loss arising out of incorrect or
misleading statements of particulars made in his audit report.

• The Central Government will specify any statutory body or authority or an officer for ensuring prompt
payment of damages to the company or the persons

• If audit of a company being conducted by an audit firm, and it is proved that the partners of the audit
firm have acted in a fraudulent manner, the liability for such act shall be of the partners concerned of
the audit firm.

Section 148: Central Government to specify audit of items of cost in respect of certain
companies

• The Central Government may direct that particulars relating to the utilisation of material or labour
shall also be included in the books of account.

• If the Central Government is of the opinion, it may direct that the audit of cost records of particular
class of companies shall be conducted in the manner specified in the order.

• And the audit shall be conducted by a Cost Accountant in practice who shall be appointed by the
Board. Provided that no person appointed under section 139 as an auditor of the company shall be
appointed for conducting the audit of cost records.

• Cost auditing standards mean such standards as are issued by the Institute of Cost and Works
Accountants of India, constituted under the Cost and Works Accountants Act, 1959, with the
approval of the Central Government.

• An audit conducted under this section shall be in addition to the audit conducted under section 143.

• The qualifications, disqualifications, rights, duties and obligations applicable to auditors under this
Chapter shall apply to a cost auditor appointed under this section.

• The report on the audit of cost records shall be submitted by the cost accountant to the Board of
Directors of the company.

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 SEBI Grade A 2020: COMPANIES ACT: CHAPTER X
• A company shall submit a copy of the cost audit report to the Central Government within 30 days
from the date of receipt of it.

• If, after considering the cost audit report, the Central Government finds that any further information or
explanation is necessary, it may call for such further information.

• If any default is made in complying with the provisions of this section, the company and every officer of
the company who is in default shall be punishable in the manner as provided in section 147.

• The cost auditor of the company who is in default shall be punishable in the manner as provided in
section 147.

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