AUDITOR

INTRODUCTION

Sections 138 to 148 of the Companies Act deal with accounts, audit and auditors. These
provisions will have far reaching implications for the audit profession. In this article some
important provisions contained in the companies act, 2013 are discussed.

DEFINITION

An auditor is an independent professional person qualified to perform an audit. In

accounting, an auditor is someone who is responsible for evaluating the validity and reliability of
a company or organization’s financial statements. The term is sometimes synonymous with
“comptroller”.

APPOINTMENT OF AUDITOR

As per section 139, it is a prime requirement that every company shall at the first annual
general meeting appoint an auditor who can either be an individual or a firm. Appointment
includes reappointment.

The manner and procedure of selection of auditors by the members of the company will
be such as may be prescribed. It is a mandatory condition that before such appointment is made,
the written consent of the auditor to such appointment, and a certificate from him stating that the
appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be
obtained from the auditor.

TENURE

Company can appoint an individual as an auditor for more than one term of five
consecutive years and an audit firm as an auditor for more than two terms of five consecutive
years.

Government Company

In a Government company, the Comptroller and Auditor-General of India shall, in respect

of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies
under this Act, within a period of one hundred and eighty days from the commencement of the
financial year, who shall hold office till the conclusion of the annual general meeting.

ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITORS

A person will b qualified to be appointed as an auditor of a company only if he is a

chartered accountant. Where a firm is appointed as an auditor of a company, only the partners
who are chartered accountants shall be authorized to act and sign on behalf of the firm. A person
will be disqualified if he is falling under the following:
i. an officer or employee of the company;

ii. A person whose relative is a director or is in the employment of the company’s a director or
key managerial personnel;

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

iv. A person who is a partner, or who is in employment, of an officer or an employee of a

Company.

v. A person who is in full-time employment elsewhere or a person or a partner of the firm

holding an appointment as its auditor, if such a partner is holding an appointment as auditor of
more than 20 companies as on such date of appointment.

vi. Any person whose subsidiary or associate company or any other form of entity, is engaged as
on the date of appointment in consulting and specialized services. etc

REMOVAL AND CHANGE OF AUDITOR

i. Special resolution

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 the previous approval of the Central
Government in that behalf in the prescribed manner.

ii. Resignation

The auditor who has resigned from the company shall file within a period of thirty days
from the date of resignation, a statement in the prescribed form with the company and the
Registrar, and in case of Government company with the Comptroller and Auditor-General of
India, indicating the reasons and other facts as may be relevant with regard to his resignation. In
case of non compliance he shall be punishable with fine ranging between INR 50,000 to 5 lakh.

iii. Tribunal

The Tribunal either suo motu or on an application made to it by the Central Government
or by any person concerned, if it is satisfied that the auditor of a company has, whether directly
or indirectly, acted in a fraudulent manner in relation to the company or its directors or officers,
it may, by order, direct the company to change its auditors.

In the case of such an application by the Central Government for change of Auditors, the
Tribunal can, within 15 days, pass an order that the auditor shall not function as such and the
Central Government will be able to appoint another auditor.

CONSEQUENCES
  The auditor who is removed by the Tribunal cannot be appointed as an auditor of that
company for 5 years.
 Punishment with imprisonment for a minimum term of six months which may extent to
10 years and shall also be liable to pay a minimum fine of an amount involved in the
fraud which may extend to 3 times the said amount.
 If the fraud involves public interest the minimum period of imprisonment will be 3 years.

POWERS

1. 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. 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.

There is an inclusive list of matter for which auditor shall seek information and explanation. This
list helps auditor to take special care on serious issues. The list includes issues related to:

(a) Proper security for Loan and advances,

(b) Transaction by book entries

(c) Sale of assets in securities in loss

(d) Loan and advances made shown as deposits,

(e) Personal expenses charged to revenue account

(f) Case received for share allotted for cash

The auditor of holding company also has same rights.

2. Auditor 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, 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.

3. Auditor in general meeting:

It is a prime requirement under section 146, that the company must send all notices and
communication to the auditor, relating to any general meeting, and he shall attend the meeting
either through himself or through his representative, who shall also be an auditor. Such auditor
must be given reasonable opportunity to speak at the meeting on any part of the business which
concerns him as the auditor.
 As per section 101, notice of general meeting must be given before 21 days either in
writing or through electronic mode to the auditor in such manner as may be prescribed. Every
notice of a meeting shall specify the place, date, day and the hour of the meeting and shall
contain a statement of the business to be transacted at such meeting.

4. Right to remuneration

The remuneration of the auditor of a company shall be fixed in its general meeting or in
such manner as may be determined therein. It must include the expenses, if any, 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.

5. Consent of auditor

As per section 26, the company must mention in their prospectus the name, address and
consent of the auditors of the company.

DUTIES

1. Make report

The auditor shall make a report to the members of the company on accounts examined by
him on every financial statements.

The auditor report shall also state:

(a) Whether he has sought and obtained all the necessary information and explanations,

(b) Whether proper books of account have been kept,

(c) Whether company’s balance sheet and profit and loss account are in agreement with books of
accounts and returns,

2. 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. 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 Comptroller and Audit – General of India shall within sixty days of receipt of the
report have right to (a) conduct a supplementary audit and (b) comment upon or supplement such
audit report.
 The Comptroller and Audit – General of India may cause test audit to be conducted of the
accounts of such company.

3. Liable to pay damages

As per section 245, 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

They also have right to claim damages or compensation from the auditor including audit
firm of the company for any improper or misleading statement of particulars made in his audit
report or for any fraudulent, unlawful or wrongful act or conduct.

4. Branch Audit :

Where a company has a branch office, the accounts of that office shall be audited either
by the auditor appointed for the company, or by any other person qualified for appointment as an
auditor of the company. 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.

Where the auditor is the branch auditor and not the auditor of the company, he will lend
assistance in the completion of the branch audit. He shall prepare a report based on the accounts
of the branch as examined by him and then send it across to the company auditor. The company
auditor will then incorporate this report into the main audit report of the company. In addition to
this, on request, if he wishes to, he may provide excerpts of his working papers to the company
auditor to aid in the audit.

5. Auditing Standards :

Every auditor shall comply with the auditing standards. The Central Government shall
notify these standards in consultation with National Financial reporting Authority. The
government may also notify that auditors’ report shall include a statement on such matters as
notified. The Auditing Standards are issued by the Central Government in consultation with the
National Financial Reporting Authority. These standards aid the auditor in performing his audit
duties with relevant ease and accuracy. It is the duty of the auditor to comply with the standards
while performing his duties as this increases his efficiency comparatively.

6. Fraud Reporting :

If an auditor of a company, in the course of the performance of his duties as auditor, 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, he shall immediately report the matter to the
Central Government within such time and in such manner as may be prescribed.
 Generally, in the course of performing his duties, the auditor may have certain suspicions
with regard to fraud that’s taking place within the company, certain situations where the financial
statements and the figures contained therein don’t quite add up. When he finds himself to be in
such situations, he will have to report the matter to the Central Government immediately and in
the manner prescribed by the Act.

7. Winding up

As per section 305, 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.

8. Form a negative opinion, where necessary

The auditor’s report has a high degree of assurance and reliability because it contains the
auditor’s opinion on the financial statements. Where the auditor feels that the statements do not
depict a true and fair view of the financial position of the business, he is also entitled to form an
adverse opinion on the same.

Additionally, where he finds that he is dissatisfied with the information provided and
finds that he cannot express a proper opinion on the statements, he will issue a disclaimer of
opinion. A disclaimer of opinion basically indicates that due to the lack of information available,
the financial status of the entity cannot be determined. However, it is to be noted that the reasons
for such negative opinion is also to be specified in the report.

9. Make inquiries

One of the auditor’s important duties is to make inquiries, as and when he finds it
necessary. A few of the inquiries include:-

 Whether loans and advances made on the basis of security are properly secured and the
terms relating to the same are fair
 Whether any personal expenses (expenses not associated with the business) are charged
to the Revenue Account
 Where loans and advances are made, they are shown as deposits. d. Whether the financial
statements comply with the relevant accounting standards

10. Adhere to the Code of Ethics and Code of Professional Conduct

The auditor, being a professional, must adhere to the Code of Ethics and the Code of
Professional Conduct. Part of this involves confidentiality and due care in the performance of his
duties. Another important requisite is professional scepticism. In simple words, the auditor must
have a questioning mind, must be alert to possible mishaps, errors and frauds in the financial
statements.

11. Assistance in an investigation

 In the case where the company is under the scope of an investigation, it is the duty of the
auditor to provide assistance to the officers as required for the same. Hence, it can be seen that
the duties of the auditor are pretty diverse, it has an all-round and far-reaching impact. The level
of assurance provided by a set of audited financial statements is comparatively far higher as
compared to regular unaudited financial statements.

CONCLUSION

An auditor has a very special role to play in the affairs of Company. Their role can never
be undermined in the context of a Company. Their roles and responsibilities are clearly laid
down and they are required to comply with the roles assigned to them.