maintained by other entities including suppliers, customers, and financial institutions is also a part of ensuring

operational control.

Personnel Controls

There should be clear and transparent procedures to select and recruit employees subjected to verification
processes. Once recruited, adequate training should be conducted before allowing them to perform their
designated duties. Independent checks on employee performance such as supervision should also be
conducted.

The above controls are designed and implemented based on the risks the company is exposed to. Thus, it is
essential to regularly review the effectiveness of internal controls and whether they are operating as intended.
The same is done through internal and external audit. Internal and external audit functions provide independent
and objective assurance that an organization’s internal control and risk management systems are functioning
effectively.

Internal Check vs Internal Control

Internal check refers to the way of
allocating responsibility, segregation of
work, where work of the subordinates is
checked by the immediate supervisors to
verify that the work is carried out
according to the company policies and
guidelines.
Internal control is the system
implemented by a company to ensure
the integrity of financial and accounting
information and that the company is
progressing towards fulfilling its
profitability and operational objectives
in a successful manner.

Scope

Scope of internal check is narrower Internal control is a broader aspect in

compared to internal control. which internal check play a vital role.

Nature

Internal checks are implemented at all Internal controls are designed and
organizational levels such as tactical and documented at the corporate
operational level. management level.

CHAPTER IV: COPANY AUDITOR AND AUDIT REPORT

4.1.Provisions regarding Qualification, Dis-Qualification, appointment, removal of
Company Auditor as per the Companies Act, 2013

What is Auditor?

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An auditor is a person or a firm appointed by a company to execute an audit. To act as an auditor, a person
should be certified by the regulatory authority of accounting and auditing or possess certain specified
qualifications. All the government and non-government organizations have to keep track of their accounts and
audit reports as the financial year approaches. The financial statements of these firms need to be thoroughly
analyzed and assessed before submitting them to the authorized departments. This assessment of financial
documents is done by an Auditor. In case of any discrepancy in the reports, the auditor is held responsible.
Thus, the requirement of an auditor is a must for every organization.

Qualification

According to Provisions of Section 141(1) of the Companies Act, 2013 “a person shall be eligible for
appointment as an auditor of a company only if he is a chartered accountant within the meaning of Chartered
Accountants Act, 1949 and holds a valid Certificate of Practice.

It has been further provided that the firm shall also considered to appointed by its firm name whereof majority
of partners practising in India are qualified for appointment as auditor of a company.

According to Provisions of Section 141(2) of the Companies Act, 2013, a firm including limited liability
partnership who are chartered accountants shall be authorised to act as auditor and sign on behalf of the such
limited liability partnership or firm

Summary:

A person shall appointed as an auditor if he is chartered accountant within the meaning of Chartered
Accountants Act, 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.

Disqualification of Auditor

According to Provisions of Section 141(3) of the Companies Act, 2013 , following persons shall not be eligible
as auditor of the company: ‐

a) A body corporate other than LLP registered under the LLP Act, 2008

b) An officer or employee of the company.

c) A person who is partner or who in the employment, of an officer or employee of the company.

d) A person who or his relative or partner

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 • (i) is holding any security/interest in the company or its subsidiary or of its holding or associate
company or subsidiary of such holding company. It has been further provided that an relative may hold
security or interest in the company of face value not exceeding one lac rupees.
• (ii) is indebted to the company or its subsidiary, or its holding or associate company or subsidiary of
such holding company, in excess of Rs. 5 lacs rupees
• (iii) has given guarantee or provide any security in connection with the indebtness of any third person
to the company or its subsidiary, or its holding or associate company or a subsidiary of such holding
company for value in excess of Rs. 1 lacs.

e) A person or a firm who (whether directly or indirectly) has business relationship with the company, or its
subsidiary, or its holding or associate company or subsidiary of such holding company or associate company.

Here the business relationship shall be construed as any transactions enter into for a commercial purpose
except: a) 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.

b) Commercial transactions which are in ordinary course of business of the company at arm’s length price as
customer.

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

• (i) who is in full time employment elsewhere or

• (ii) a person or a partner holding appointment as its auditor is at the date of such appointment or
reappointment holding appointment as auditor for more than 20 companies.

h) A person who has been convicted by a court of an offence involving fraud and a period often years has
not elapsed from the date of such conviction.

i) Any person whose subsidiary or associate company or any other form of entity is engaged
as on the date of appointment in consulting or specialised services in reference to provision
of Section 144 of the Companies Act, 2013.
ii) Further According to Provisions of Section 141(4) of the Companies Act, 2013, where a
person appointed as auditor of the company incurs any of the disqualification mentioned in

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 Section 141(3) of the Companies Act, 2013 after his appointment, he shall vacate his office
as such auditor and such vacancy shall be deemed to be casual vacancy in the officer of the
auditor. It must be noted that the aforesaid provisions are applicable to all types of auditors
i.e. cost auditors, statutory auditors and secretarial auditors.

Appointment of Company Auditor

Appointment of first auditor[ Section 139(6) of Companies Act, 2013]

1. As per section 139(6), first auditor will be appointment.

2. The first auditor shall appointed by the board of directors within one month of the date of
registration of the company.

3. The first auditor so appointed shall hold office until the conclusion of the first Annual General
Meeting.

4. Appointment of first auditor should be by valid resolution at the board meeting. Merely naming in
the Article of Association will not be recognized as appointment under the act.

5. In case the board does not exercise its power in this regard, the board shall inform members of the
company who shall appoint the first auditor within 90 days at an extraordinary general meeting.

Appointment of First Auditor in case of Government Company [ Section 139(7) of Companies Act, 2013]

1. Where the company is the Government Company or any other company owned or controlled,
directly or indirectly, by CG, or by one or more State Government, or partly by CG & partly by one
or more State Government, the first auditor shall be appointed by CAG within 60 days of
registration of the company.

2. In case CAG does not appoint the first auditor within the said period of 60 days, the Board shall
appoint the first auditor within next 30 days.

3. In case of failure of the Board to appoint the first auditor within the said period of 30 days, the
Board shall inform the members of the company who shall appoint the first auditor within 60 days
at an extraordinary general meeting.

4. The first auditor shall hold office till the conclusion of the first AGM.
5. Government company means any company in which not less than 51% of the paid-up share capital
is held by
o CG b. SG(s)
o Partly by CG & partly by SG(s)

Government Company includes a company which is a subsidiary company of Government Company

Appointment in case of Casual Vacancy[ Section 139(8) of Companies Act, 2013]

1. Casual vacancy means vacancy in office of auditor resulting from accidental circumstances such as
death, incapacity or disqualification of the auditor.

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 2. Casual vacancy shall be filled within 30 days by the Board of Directors.

3. Where a vacancy is caused by the resignation of an auditor, the vacancy shall be filled within 30
days by the Board of Directors, & the appointment made by the board shall be approved in a general
meeting convened within 3 months of the recommendation of the Board.

4. Where casual vacancy arises in a company whose accounts are subject to audit by an auditor
appointed by CAG, such casual vacancy shall be filled within 30 days by CAG.

5. In case CAG does not fill the casual vacancy within prescribe time, the board shall fill the casual
vacancy within next 30 days.

6. Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next Annual
General Meeting.

Appointment of Subsequent Auditor in case of a Government Company[ Section 139(5) of the Companies Act
2013]

• This section applies to

• a. Government Company
• b. Any other company owned or controlled, directly or indirectly, by:
• – CG; or
• One or more State Government; or
• Partly by CG & partly by one or more SG

• In case of aforesaid companies, CAG shall appoint an auditor duly qualified to be appointed as an
auditor of companies under this act, within 180 days from the commencement of the financial year.

• The auditor shall hold office till the conclusion of the AGM.

Removal of Auditor

1. Removal of auditor before the expiry of his term

2. Resignation by Auditor
3. Requirement of Special Notice

Removal of auditor before the expiry of his term

• Previous approval of Central Government must be obtained within 30 days of passing of the Board
resolution.
• The company shall hold the general meeting within 60 days of receipt of approval of CG for passing
the special resolution.
• Before taking any action for removal, the auditor shall be given a reasonable opportunity of being
heard.

Resignation by Auditor

When an auditor resigns, he is required to file a statement in the prescribe form. The statement shall indicate
the reasons & other facts as may be relevant with regard to his resignation. The statement shall be filed with

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 • the company
• the Registrar
• CAG in case of a Government Company.

The statement shall be filed within 30 days from the date of resignation.

Requirement of Special Notice

1. At an AGM, special notice shall be required for

o Appointing as auditor a person other than the retiring auditor, or
o Providing expressly that the retiring auditor shall not be reappointed.

2. On the receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the
retiring auditor.

3. Retiring auditor is entitled to make a representation against his removal. The representation shall
be in writing & shall be sent to the company.

4. He may request the company to circulate the representation to the members of the company.

5. If copy of the representation is not sent because it was received too late or because of the company’s
default, then the auditor may require that the representation shall be read out at the meeting. A copy
of representation shall be filed with the registrar.

Auditors Remuneration

• Where appointment by the Board of Directors: When an auditor is appointed by the Board of
Directors, remuneration is also fixed by them. The resolution appointing the auditor should also
prescribe the remuneration.

• Where appointed by Shareholders: In this case, the remuneration is determined by the shareholders
at the AGM. Sometimes, shareholders may delegate the power of fixing remunerations to the Board
of Directors or the Chairman.

• Where appointed by the Comptroller & Auditor General of India: The remuneration shall be fixed
by the company in general meeting or in such manner as the company in general meeting may
determine.

• Remuneration other than audit fees: Where an auditor renders services other than those as an
auditor, he is entitled to get extra remuneration. Such remuneration may not be fixed in advance by
the appointing authority while appointing him as an auditor & while fixing his remuneration.

4.2 Rights, Duties and Liabilities of Company Auditor :

Rights of Company Auditors

According to Section 227(7) of the Companies Act, a company auditor has the following rights:

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1. Right of Access Books of Accounts: As per Section 227(1) of the Companies Act every auditor of the
company has the right to access at all times to the books of accounts and vouchers of the company, whether
kept at the head office of the company or elsewhere. Under section 209(1) (d), a company auditor has the right
to examine the cost records also which are required to be maintained by certain companies relating to
production sales, stores etc.

2. Right to Obtain Information and Explanations: An auditor can call for any information or explanation
from different officers of the company which he may think necessary for the performance of his duties.
Apart from the auditor’s right to obtain information and explanation it is the duty of every officer of the
company to furnish without delay the information to the company auditor. If the directors or officers of the
company refuse to supply some information on the ground that in their opinion it is not necessary to furnish
it, then the auditor has the right to mention that in his audit report.

3. Right to Receive Notices and Other Communication Relating to General Meetings and to attend
them: According to section 231, of the companies act an auditor of a company has the right to receive notices
and other communications relating to the general meetings in the same way as that of the members of the
company.
Similarly an auditor also has the right to attend any annual general meeting and also to be heard at those
meetings which he attends and which concerns him as an auditor.
The auditor also has the right to make a statement or explanation with regard to the accounts he has audited.
But he auditor is not expected to answer questions in the general meeting.

4. Right to Visit Branches: According to section 228 of the companies act the auditor of the company has the
right to visit the branch office or offices of the company.
He can also audit such accounts of eh offices of the company provided that there is not qualified auditor to
audit the accounts of the branch office or offices of the company, in such cases, the auditor has the right to
access at all times to the books of accounts and vouchers that the company maintains at branch office or offices.
Moreover section 226 of the companies act provides that in case of the company gets the branch accounts
audited by some of the local auditors, even the auditor has access at all times, to the books, accounts an
vouchers of the company and he can also visit the branches, if he feels necessary.

5. Right to Correct Any Wrong Statement: The company auditor is required to make a report to the
members of the company on the accounts examined by him of the final accounts and the related documents
which are laid down before the company in the general meeting.

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6. Right to sign the Audit Report: As per section 229 of the companies act only the person appointed as
auditor of the company or where a firm is so appointed, only a partner in the firm practicing in India, may sign
the audit report or authenticate any other document of the company required by law to be signed.

7. Right to Being Indemnified: Under Section 633 of the Companies Act, an auditor is considered to be an
officer of the company and he has the right to be indemnified out of the assets of the company against any
liability incurred by him in defending himself against any civil and criminal proceedings by the company if it
is proved that the auditor has acted honestly or the judgment is delivered in his favour.

8. Right to seek Legal and Technical Advice: The company auditor has the full right to seek the opinion of
the experts and to take their legal and technical advice so as to discharge his duties efficiently.

9. Right to Receive Remuneration: As per Section 224(8) of the Companies Act, the company auditor has
the right to receive remuneration provided he has completed the work which he has undertaken to do so.

Duties and Liabilities of a Company Auditor (Section 227):

Duties towards the shareholders:
1. Report shareholders about true and fair state of affairs of the company
2. State that balance sheet and profit and loss a/c give all information required by law
3. State that balance sheet and profit and loss a/c agree with the books of account
4. State that balance sheet and profit and loss a/c agree with accounting standards
5. State that he has obtained all the necessary information
6. State whether the company has maintained all books as required by law;
7. State the reasons of qualification in his report
8. State that he has received the audit report on the branch accounts audited by other auditor and how he has
dealt with the same in preparing his report
9. Auditor shall state in his report whether:

a) The loans taken are properly secured and the terms of loans are not against the interests of the company
b) Loans given are shown as fixed deposits and the terms of loans are not against the interests of the company

10. Transactions recorded as book entry are not against the interests of the company
11. Personal expenses of directors have not been charged to revenue a/c of company;
12. The company fulfills the requirements of CARO 2003.

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Duties towards Company:
1. Prospectus: According to Sec 56, the auditor is required to certify profits or losses, assets & Liabilities and
dividend paid etc in the prospectus.

2. Statutory Report: Section 165 requires that the auditor has to certify the statutory report.

3. Public Deposits: Section 58AA requires the auditor to report about whether the company has followed all
rules and guideline of RBI in regard to public deposits or not.

4. Signature on Audit Report: Section 229: It is duty of auditor to sign on his report.

5. Insolvency (Section 488): If the company wants itself to be declared insolvent, it is duty of auditor to prepare
profit and loss a/c for the current period.

Duties towards Government:

1. CARO-2003: The auditor has to report para-wise that the company has fulfilled all the requirements of
CARO-2003.

2. Assist the Investigation u/s 237: It is duty of auditor to assist the investigation ordered by the CG u/s 237.

Duties towards General Public:

1. His office is of confidence and faith. He must be reliable in all respects.

2. He should reveal all material information regarding the state of affairs of the company to the company as
well as to the general public.

3. While issuing prospectus u/s 56, he should see that the prospectus does not include any misleading
information or material.

4.3 Professional Conduct and Ethics for Company Auditors:

• 1: Integrity, objectivity, and independence.

• 2: Financial, business, employment, and personal relationships.
• 3: Long association with the audit engagement.
• 4: Fees, remuneration, and evaluation policies, litigation, gifts, and hospitality.
• 5: Non-audit services provided to audit clients.
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4.4 Audit report:

4.4.1 Meaning, Importance and Contents of audit report:

Audit report is the final stage of audit process. The results of the audit are communicated through audit report.
Audit report is the written opinion of an auditor regarding companies financial statements. Audit report is a
document prepared by an auditor to certify the financial position and accounting records of a firm.
Meaning of Audit Report
Audit report is the statement included in the financial statements. It contains the opinion of the auditor in
financial statements. The auditor reports to the shareholders who have appointed him. He has to provide his
opinion on the truth and fairness of financial statements. Thus, the auditor protects the interest of shareholders
through audit report.
Definition of Audit Report
Lancaster has defined a report as “a report is a statement of collected and considered facts, so drawn up as to
give clear and concise information to persons who are not already in possession of the full facts of subject
matter of the report.”
According to Cambridge Business English Dictionary, Audit report is defined as a formal document that states
an auditor’s judgment of a company’s accounts.
Under Sec. 143(3), auditor of a company must report to its members.
(a) The accounts examined by him;
(b) Balance Sheet, Profit and Loss Account, and Cash Flow statement, which are laid in general meeting of a
company during his tenure of office; and
(c) The document declared to be attached to the Balance Sheet and Profit and Loss Account.

Contents of Audit Report

As per Sec. 143 of the Companies Act, the auditor’s report shall also state—
a. whether he has sought and obtained all the information and explanations which to the best of his knowledge
and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such
information on the financial statements;
b. whether, in his opinion, proper books of account as required by law have been kept by the company so far
as appears from his examination of those books and proper returns adequate for the purposes of his audit have
been received from branches not visited by him;
c. whether the report on the accounts of any branch office of the company audited under sub-section (8) by a
person other than the company’s auditor has been sent to him and the manner in which he has dealt with it in
preparing his report;
d. 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;
e. whether, in his opinion, the financial statements comply with the Accounting Standards;

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f. the observations or comments of the auditors on financial transactions or matters which have any adverse
effect on the functioning of the company;
g. whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;
h. any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters
connected therewith;
i. whether the company has adequate internal financial control system in place and the operating effectiveness
of such controls;
j. such other matters as may be prescribed.

4.4.2 Types of Audit Report: Qualified and Unqualified Report, Disclaimer of Opinion
and adverse opinion:

An audit report is an appraisal of a small business’s complete financial status. Completed by an independent
accounting professional, this document covers a company’s assets and liabilities, and presents the auditor’s
educated assessment of the firm’s financial position and future. Audit reports are required by law if a
company is publicly traded or in an industry regulated by the Securities and Exchange Commission (SEC).
Companies seeking funding, as well as those looking to improve internal controls, also find this information
valuable.

There are four types of audit reports: and unqualified opinion, a qualified opinion, and adverse opinion, and
a disclaimer of opinion. An unqualified or "clean" opinion is the best type of report a business can get .

Unqualified Opinion

Often called a clean opinion, an unqualified opinion is an audit report that is issued when an auditor
determines that each of the financial records provided by the small business is free of any
misrepresentations. In addition, an unqualified opinion indicates that the financial records have been
maintained in accordance with the standards known as Generally Accepted Accounting Principles
(GAAP). This is the best type of report a business can receive.

Typically, an unqualified report consists of a title that includes the word “independent.” This is done to
illustrate that it was prepared by an unbiased third party. The title is followed by the main body. Made up
of three paragraphs, the main body highlights the responsibilities of the auditor, the purpose of the audit and
the auditor’s findings. The auditor signs and dates the document, including his address.

Qualified Opinion

In situations when a company’s financial records have not been maintained in accordance with GAAP but
no misrepresentations are identified, an auditor will issue a qualified opinion. The writing of a qualified
opinion is extremely similar to that of an unqualified opinion. A qualified opinion, however, will include an
additional paragraph that highlights the reason why the audit report is not unqualified.

Adverse Opinion

The worst type of financial report that can be issued to a business is an adverse opinion. This indicates that
the firm’s financial records do not conform to GAAP. In addition, the financial records provided by the
business have been grossly misrepresented. Although this may occur by error, it is often an indication of
fraud. When this type of report is issued, a company must correct its financial statement and have it re -
audited, as investors, lenders and other requesting parties will generally not accept it.
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