Company Audit - I

COMPANY AUDIT - I
APPOINTMENT OF AUDITOR
I A
Appointment of Appointment of
T H
Subsequent Auditor

S E
First Auditor

Non-Government
Company – Sec. 139(1)
Government
Companies – Sec. 139(5)
H A
Non-Government Company
– Sec. 139(6)
Government
Companies – Sec. 139(7)

Condition
K S Details of condition Government
Non-Government Company
– Sec. 139(1) 1. Ratification
I Omitted Companies – Sec. 139(5)
Appointment will be at First
AGM
A M
2. Written consent Before appointment company shall obtain
(a) Written consent
By CAG
↓
till conclusion of 6th AGM; and
thereafter till conclusion of S
3. Certificate
(b) Certificate
→ Certificate shall indicate
Within a period of 180 Days
↓
every 6th AGM

C A
Subject to following conditions:
4. Intimation to
ROC
→ criteria as provided u/s 141 satisfied
→ Inform auditor and ROC
From commencement
of financial year
↓
within 15 days of appointment.
→ Intimation to ROC in Form ADT-1 Tenure: till the conclusion
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 Company Audit - I

Appointment of First Auditor

Non-Government Company – Sec. 139(6) Government Company – Sec. 139(7)

I A
By Board of Directors
↓
by CAG
↓
T H
Within 30 days
↓
of registration of company
↓
If CAG fails SE
Within 60 days of registration of company

↓
If Board fails, Board shall
H A ↓
BOD will appoint within next 30 days
inform the members
↓
K S ↓
If Board fails, Board shall inform the members
Members shall within 90 days
I ↓
↓
at an EGM
A M Members shall within 60 days
at an EGM
↓
appoint the first auditorS ↓
appoint the first auditor

C A↓
Tenure: till
conclusion of first AGM
LEARNING TECHNIQUE: 30-90
2 |CMA Inter Auditing Summary
↓
Tenure: till
conclusion of first AGM
LEARNING TECHNIQUE: 60-30-60
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 Company Audit - I

ROTATION OF AUDITOR

Sec. 139(2) Rule 5: Prescribed Companies

I A Sec. 139(3)
Listed companies and Other prescribed
companies Shall not appoint
 Unlisted Public Companies
with PUSC ≥ ` 10 Crore
T H
Members may resolve the
following:
↓
An individual as auditor for more than
one term of five consecutive years
 Private Companies with
PUSC ≥ ` 50 Crore
Companies not covered SE (a) Rotation of auditing
partner & his team at
such interval as may be
↓
An Audit Firm as an auditor for more
H A
above if public borrowings
from banks and FI/ public
prescribed.
(b) That audit shall be
than two terms of five consecutive
years
K S
deposits ≥ ` 50 Crore conducted by more than

I one auditor: Joint Audit

A M Rule 6 – Manner of Rotation

1.
2. S
For calculating period of 5 years / 10 years, period served prior to commencement of this Act, shall also be considered.
Individual auditor / Audit Firm not eligible for appointment for a period of 5 years if it belongs to same network to whom retiring

3.
auditor belong to.

C A
Break in the term should be for a continuous period of 5 years.
4. Auditing partner retires from Firm and joins Other Firm, latter becomes ineligible

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 Company Audit - I

1st Proviso Cooling Period Individual Auditor for 5 years after completing of tenure

Audit Firm
I A
for 5 years after completing of tenure

2nd Proviso Common Partner Audit Firm having common partner with firm
T H
Whose tenure has just expired

S E
Shall not be appointed as auditor of same company
For a period of five years

3rd Proviso Company

H A
Comply with requirement of Sec. 139(2)
existing before

K S
Within a period not later 3 years from the date of commencement of this Act.
commencement of
this Act
I
4th Proviso
prejudice the
A M
Sec. 139(2) shall not Right of company to remove auditor
Right of auditor to resign.

S
C A
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 Company Audit - I

OTHER PROVISIONS OF SEC. 139

Filling of Casual Reappointment of Auditor No auditor Appointed at

I A Recommendation of Audit
vacancies – Sec. 139(8) – Sec. 139(9)
Retiring auditor may be reappointed if-
AGM – Sec. 139(10)

T
If no Auditor appointed H Committee – Sec. 139(11)
Where a company is required to
•Not disqualified under law
•Not unwilling to continue AND
•No SR has been passed w.r.t.
↓

S
at AGM
↓
E constitute an audit committee
(Sec. 177)
↓
(a) Appointing someone else as auditor
(b) providing expressly that retiring
H A
Existing auditor will continue All appointments including
filling casual vacancies
auditor shall not be reappointed.

K S ↓

Non Govt. Co. – Sec. 139(8)(i)

I
Govt. Co.- Sec. 139(8)(ii)
Shall be made only after
considering the recommendations

Due to resignation
A M Filled by → CAG → Within 30 days
of audit committee.

Filled by BOD S
Other Reasons

Be filled by BOD
↓
If CAG fails

↓
Within 30 days
C A ↓
Within 30 days
↓
Filled by BOD
↓
↓ Within next 30 days
Approval by members in GM
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 Company Audit - I

SEC. 140 – REMOVAL, RESIGNATION OF AUDITOR AND GIVING OF SPECIAL NOTICE

I A
Sec. 140(1) – Removal before expiry Sec. 140(4) – Removal at AGM

T H Sec. 140(5) – Removal by

Sec. 140(2) & (3) – Resignation

Sec. 140(1) – Removal before expiry S E

Sec. 140(2) & (3) – Resignation
Tribunal

Requires
→ SR of Company & prior approval of CG
H A Resigning auditor
→ Shall file
in prescribed manner (Rule 7). → auditor

K S → Within 30 days of resignation

→ Form ADT-3
concerned should be provided an opportunity
of being heard. I → To Company & ROC
→ Application to CG in Form ADT-2.
→ Within 60 days of approval by CG,
A M (Also to CAG – in case of Govt. Companies)
→ Indicating the reasons and other facts
→ convene a general meeting
→ to pass SR S relating to resignation.
Sec. 140(3): Fine for non compliance

C A
Opportunity → Board Resolution
→ Application to CG → General Meeting
Lower of Audit fees or ` 50,000
Continuing Failure- `500 per day to `5 lakhs

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 Company Audit - I

Sec. 140(4) – Removal at AGM Sec. 140(5) – Directions for change of Auditor
Special notice shall be required
→ to pass the SR at AGM that-
I A
Tribunal may, by order, direct the company to change its auditors

a) Retiring Auditor shall not be re-

appointed or, person concerned,
T H
→ either suo motu or on an application made to it by C.G. or by any

b) To appoint as auditor any person

other than retiring auditor.
→ Copy of notice to be sent immediately
or abetted or colluded in any fraud.
S E
→ if it is satisfied that the auditor has acted in a fraudulent manner

→ If the application is made by the C.G. → Tribunal shall within 15

to concerned auditor.
→ Auditor has a right of representation
H A
days of receipt of such application, make an order that
• he shall not function as an auditor and
→ Copy of notice and representation

K S
• C.G. may appoint another auditor in his place.
needs to be sent to every person to
whom notice of AGM was given.
I
→ Such auditor shall be ineligible to be appointed as an auditor of any

→ Auditor may demand for reading the

representation in meeting.
A M company for a period of 5 years from the date of passing of the order
and the auditor shall also be liable for action u/s 447.

→ Representation need not be sent or

S
A
read out at meeting, if on application of
company or other person, Tribunal pass
such order.
C
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 Company Audit - I

SEC. 141 – ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITOR

I A
Sec. 141 (1) & 141 (2) –
Eligibility to be appointed as Auditor
Sec. 141(3) - Persons not eligible
for appointment & Rule 10
T H Sec. 141(4) –
Vacation of office

Sec. 141 (1) & 141 (2) – Eligibility to be appointed as Auditor S E Sec. 141 (4) Vacation of Office

Eligible persons-

H A Disqualifications incurred (Sec 141 triggered)

→ Chartered Accountant
→ A Firm whereof Majority of Partners
K S After appointment

→ Practicing in India
I Auditor to vacate office
→ are qualified
→ including LLP
A M To be deemed as Casual Vacancy
→ Signing partner =CA
S
C A
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 Company Audit - I

Sec. 141 (3) Disqualifications

(a)
(b)
Body Corporate other than LLP
Officer or Employee of the company
I A
(c)
(d) (i) person/
Partner/ Employee of Officer/ Employee of the company
is holding any security * or
T H Company /
relative/ interest in the
(ii) partner
(iii)
is indebted > ` 5 Lacs in the
S E
has given a guarantee in connection with indebtedness of 3rd person > ` 1 Lac in the
subsidiary /
holding /

(PRP)

H A
*no disqualification if relative holds any security in the company of face value upto `1 Lac.
associate, or
subsidiary of same holding.
(5 Companies)
(e)
S
Person or firm having business relationship with Company / Subsidiary / Holding /

K
(6 Companies)

(f)
I
Associate / Subsidiary of Such Holding or Associate Company
A Person whose relative is a director or is in employment of the company as a

(g)
Director or KMP.

A M
A person who is in full time employment elsewhere
Or
S
A person holding appointment as auditor or more than 20 companies other than OPC,

(h)
C A
dormant companies, Small Companies and private companies having paid up capital < 100Cr.
A person who has been convicted of an offence involving fraud and a period of 10 years
has not elapsed.
(i) Any person who directly or indirectly renders any service referred to in Sec. 144 to (3 Companies)
company or its holding company or ToitsRegister,
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 Company Audit - I

POWERS / RIGHTS AND DUTIES OF COMPANY AUDITOR (SEC. 143)

I A
RIGHTS OF AUDITOR – Sec. 143(1)

T H DUTIES of AUDITOR

Right of Access
→ at all times
→ to books of Account & Vouchers S E
Inquire into Propriety Matters – Sec. 143(1)
1. Loans and advances are properly secured and
terms are prejudicial.
→ whether kept at Regd. Office or at any other place.

H A 2. Book entries are prejudicial.

3. Shares, debentures and other securities are sold
Right to Obtain Information

K S at a price less than acquisition cost in case of

→ From the officers of the company
→ As considers necessary I non banking and non investment company.
4. Loans and advances made are shown as deposits.

M
→ For performance of his duties

A
5. Personal expenses charged to revenue account.
6. Cash has actually been received on shares

S allotted for cash, if not received, correct position

shown in books and balance sheet.

C A That to the best of auditor information & knowledge,

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the accounts & financial statements give a true
and fair view of the state of the company affairs
as at the end of its financial year & profit & loss
and cash flow for the year.
 Company Audit - I

Reporting u/s 143(3)

1. Obtained all necessary information for the audit.
2. Proper books of accounts have been maintained.
3. Branch audit report has been received and manner of dealing with it.
I A
4. Balance Sheet and P & L Account agree with the books of accounts.
5. Financial statements comply with AS.
TH
7. Directors disqualified u/s 164(2).
8. Qualifications w.r.t. maintenance of accounts. SE
6. Comments on financial transactions having any adverse effect on functioning of company.

10. Other matters as prescribed.

H A
9. Adequacy and operative effectiveness of Internal Financial Controls with reference to FS

(Rule 11) Rule 11

K S
I
1. Disclosure of impact of pending litigations on financial position.
2. Provisions for Material Forseeable losses on long term contracts made.

M
3. Any delay in transferring amounts to IEPF.

A
S
Duties of Auditor of Govt. Cos. – Sec. 143(5)

C A
CAG – direct the auditor the manners in which accounts are to
be audited. Auditor report shall include:
Directions issued by CAG.
Action taken thereon
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 Company Audit - I

Supplementary Audit – Sec. 143(6) Reporting u/s 143(12)

Within 60 days of days of receipt of Audit Report
CAG has a Right
I A
Fraud involving prescribed amount
Committed by officers or employees
To order for supplementary audit of FS
By such persons as authorized by him
T H
 Reported to CG in prescribed manner (Rule 13)
Frauds below prescribed amount

Test Audit – Sec. 143(7)

CAG may If considers necessary
E
Should be reported to Audit Committee or BOD

S
Details of Such Frauds need to be disclosed in
Board’s report.
by an order
cause test audit
H A Nature of Fraud with description Approx. amount involved
Parties involves Remedial action taken
of accounts of Govt. companies

K S Rule 13

Sec. 143(8) Audit of Branch Accounts I Fraud ≥ ` 1 Crore.

Reported to Audit Committee / BOD within 2 days

A M
Sec. 143(9) Compliance with Auditing Standards
Seeking their reply within 45 days
If Reply

S
Sec. 143(10) SAs in consultation with NFRA Received Not Received

C A
Sec. 143(11) CARO,2016
Forward to CG
- Report, Reply of BOD/AC,
Forward to CG
- Report
Comments on Reply - Note that no reply recd.

Within 15 days in ADT-4

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 Company Audit - I

OTHER PROVISIONS (SEC. 142, 144, 145, 146 & 147)

I A
Sec. 142 – Remuneration
of Auditors
Sec. 144 – Auditor not to
render certain services
T
Audit Reports H
Sec. 145 – Signing of Sec. 146 –
Attending of
Authority to Fix remuneration
Shall be General meeting or in such
Other Services that may be
rendered
S E
Shall be in
General meetings

As approved by the BOD accordance with  All Notice & other
manner as may be determined therein.
May be BOD in case of first auditor if
appointed by BOD
H A
or Audit Committee.

Services that cannot be rendered

Sec. 141(2) communication of
general meetings shall

S
directly or indirectly to Co, Holding

K
be forwarded to Auditor.
Elements of remuneration
Shall include all expenses incurred in I or Subsidiary
Accounting & Book Keeping.
 Unless exempted auditor
shall attend either

extended to auditor.
A M
connection with audit and any facility Internal Audit
Design & Implementation of
himself or through his
authorized representative

S
Does not include remuneration paid
for any other service.
Financial Information System. any general meeting,

C A Actuarial Services.
Investment advisory.
Investment Banking
 Auditor shall have right
to be heard at such
meeting on part of
Outsourced Financial business which concerns
Management Services him as auditor.
Other Prescribed.
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 Company Audit - I

I A
Sec. 147 – Punishment for
Contravention
T H
On the Company & Officer in default
– 147(1)
Violation of Sec. 139-146 S E
Company – Fine from ` 25,000 to `
5,00,000
H A
 Officer in default–Imprisonment upto 1
year or fine from ` 10,000 to ` 1 Lac
K S
or both
I
On the Auditor – 147(2)

A M
Violation of Sec. 139, 143, 144, 145.
If auditor convicted u/s 147(2)
he shall be liable to

S
Fine from ₹25,000 to (₹5 Lacs or Refund the remuneration and Pay
for damages
is less).

C A
4 times the remuneration, whichever

 In case of Willful default –

Imprisonment upto 1 year and fine from
₹50,000 to (₹25 Lacs or 8 times the
remuneration, whichever is less).
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