ROLE OF AUDITORS

BY
Dr. Jasdeep Kaur
Auditing refers
to a systematic examination of books of accounts,
documents and vouchers
to ascertain how far the financial statements present a
true and fair view of the concern.
compliance i.e. ensuring that the books of accounts
are properly maintained by the entity as required by
law.
Who is an Auditor
 Independent accounting / auditing firms hired by
companies subject to an audit as per Companies Act,
2013.
External auditors express their own opinions on
whether the financial statements of the company in
question are free of material misstatements
Experts who possess knowledge in the field Auditing,
Assurance & taxation who fall within the definition of
Chartered Accountants Act, 1949
Professional Ethics of an Auditor
International Federation of Accountants (IFAC) emphasis the
following principles for professional accountants –
1. Integrity – Should be a person of integrity
2. Independence – Having no interest or control in the company
3. Objectivity – Be objective in giving opinion or report
4. Confidentiality – Be confidential about the business of the
customer
5. Technical Standards – Follow all accounting standards and
practices
6. Competence – Should be professionally competent to perform
his duties
Company Auditor – Ethical Liabilities

 To serve the clients wholeheartedly and be loyal to their duties in

work
• To study hard, renew existing knowledge, combine theory and practice
• To abide by state laws and regulations
• To exercise due professional care, fair and practical in handling audit
items
• To withdraw or cease from performing audit where auditors have
personal interests involved in the audited items
• To be obliged to safeguard state secrets and the audited bodies’ trade
secrets in the course of audit
• To be modest and prudent, treat others as equals and create a
reputable image
Company Auditor – Legal Status / Position

An Agent of the Shareholders – Auditor is expected to

safeguard the interests of the shareholders. He has to
examine the books of accounts and report the financial
position of the company to the shareholders.
• An Officer of the Company – To some extent auditor is
called an officer of the company as he should be aware of
the company policies and will be auditing the books of
that respective company.
• A Servant of the Company – Will be associated with an
attitude to serve and provide professional service to the
client. Auditor is paid for the services rendered.
Qualification

A company auditor must be qualified as chartered

accountant.
• A chartered accountant is a person who is a member of
the Institute of Chartered Accountants of India (ICAI).
• He will be deemed to be in practice of accountancy,
individually or in partnership with other chartered
accountant
Company Auditor - Appointment

Appointment of First Auditor – Appointed by the board of

directors within one month of the registration of the company.
Appointment of Subsequent Auditors – Appointed after the
first auditor every year at every annual general meeting by the
shareholders.
Appointment by Central Government – An order from the
central government involving appointment by Comptroller
and Audit General.
Appointment in case of Casual Vacancy – It is caused by
resignation of existing auditor and is appointed by the board
of directors.
 Appointment by Special Resolution – The board of
directors will appoint an auditor by passing a special
resolution in the annual general meeting.
• Appointment in place of Retiring Auditor – This
appointment takes place at the event of an auditor’s
retirement.
• Appointment through Audit Committee – If the audit
committee is constituted, then all appointments of
auditor shall be made after considering their
recommendations.
Company Auditor – Rights & Powers
Right to receive information and explanation – For the purpose
of audit and drawing conclusions, the auditor has to obtain
explanations and information from the concerned staff of the
company.
• Right to accessibility to the books and records – In order to
provide findings on financial statements, the auditor has to
access the concerning books, vouchers, evidences and records
of the company.
• Right to visit branches – The results of branch operations have
to be displayed in the financial statements. Hence may have to
visit the respective branches to understand their functioning
status.
 Right to lien – It means the right of possession. Enjoys
this right over the books of the clients if there is a fee
due to be cleared. It can be retained by the auditor till
all dues are cleared by the client.
Right to attend general meetings – Has the right to
receive notice of general meeting and attend it
accordingly. But he cannot participate in the
discussions unless and until directed by
shareholders/management. Only a right and not a
duty. Purpose it is to clarify doubts raised.
Company Auditor – Duties & Liabilities
 Duty to enquire – Enquiry on loans & advances, transactions
in book entries, assets & liabilities of the company, regarding
shares & debentures, personal / business expenses.
• Duty to make a report – On financial position of the company
at the end of the financial year. Repot on Balance Sheet and
P/L Account.
• Duty to state the following in the audit report – Whether he
has obtained all the required information and explanation
from the concerned staff. Previous years financial
statements, observations and his opinion on books of
accounts.
Duty to provide reasons for negative answers – He may
have to clarify with justifiable reasons for the
comments made on his report.
Duty to sign the auditor’s report – Auditor’s Signature
is mandatory on the auditor’s report.
 Duty to certify the prospectus and statutory report –
Certification by the auditor is compulsory.
Duty to attend audit committee meetings – Important
to understand the proceedings of the audit committee,
hence mandatory to attend.
Auditor should examine the following books, accounts
and documents:
• MOA
• AOA
• Prospectus
• Director’s Minute Book
• Share Register, Application of Shares and Application
Book
• Letters of Allotment and Allotment Book
• Copies of Letters of Regret, Letter of Calls, Calls Book
• Cash Book, Pass Book, Refunds of excess Application
Money
Examine following items in respect of Liabilities
• Share Capital
• Reserves and Surplus
• Secured Loans
• Unsecured Loans
• Current Liabilities and Provisions
• A foot note for contingent liability
Examine following items in respect of Assets
• Fixed Assets
• Investments
• Current Assets, Loans and Advances
• Miscellaneous Expenditure
• Profit and Loss Account (Debit Balance)
Examine following items with respect to Expenses –
• Consumption of raw materials / purchase of goods
• Opening stock of finished goods, work in progress
• Consumption of stores, spares
• Power and fuel
• Staff expenses – salaries, wages, bonus, welfare,
provident fund
• Rent
• Repairs to building and machinery
• Depreciation, Insurances, Taxes, Interests
Examine following items with respect to Revenue –
• Sales
• Closing stock of finished goods / closing work in
progress
• Income from investments
•Dividend from subsidiaries
• Miscellaneous income
Brief About Companies Act, 2013
 Companies Act 2013 has bought a lot of revolutionary
changes relating to appointment, disqualification,
many other new terms of auditor.
Penalties are something which got a special status and
makes an auditor go bankrupt.
Provisions Governing Auditors
Section139: Appointment of Auditors
Section140: Removal, Resignation of auditor and giving of special notice.
 Section141 Eligibility, qualifications and disqualifications of auditors.
Section142 Remuneration of auditors.
Section143 Powers and duties of auditors and auditing standards.
Section144 Auditor not to render certain services.
Section145 Auditors to sign audit reports, etc.
Section146 Auditors to attend general meeting.
Section147 Punishment for contravention.
 Section148 Central Government to specify audit of items of cost in
respect of certain companies.(Cost Audit)
Section 143 – Powers & duties of auditors & Auditing
Standards Powers and Right of Auditor.
Auditor have right to access all time books of accounts kept
at any place on his tenure of audit. Auditor have also
entitled to get explanation form any officer of the company
and amongst other inquire into following matters, namely;
which they have been made are prejudicial to the interest of
the company or its member ;
• Loan and advances made on the basis of securities and
properly secured.
• Transactions of the company which are represent merely
by book entries.
• Non investment or non banking company which have
more investment as an assets and sold less than purchase
price.
Section 143 – Powers & duties of auditors & Auditing
Standards
• Whether loans and advances made by the company
have been shown as deposits.
• Whether personal expenses have been charged to
revenue account.
• where shares allotted for cash; whether cash has
actually been received or no, whether position of the
books of account and balance-sheet is correct, regular
and not misleading.
Holding company’s auditor also have right to access all
subsidiary company for its consolidated financial
statement.
Duties of auditors
•Duty to make report to the member of the
company on the accounts examined by him.
The audit report shall also state;
• Details of obtained information and the effect of
such information on the financial statements.
• Examination of those books required by law and
proper returns adequate for the purpose of his
audit have been received from branches not visited
by him.
• Report on account of Branch office.
• Comply with Accounting standards.
• Any adverse effect on the functioning of the
company
•In case of govt. company auditor so appointed shall
submit report to CAG and CAG have right to conduct
on a supplementary audit within 60 days from the date
of receipt of report.
•Every auditor shall comply with the auditing standard
issued by ICAI support with CG and NFRA.
•If any officer or employee has been committed any
fraud against his company then auditors duty to
immediately report to CG. If auditor not comply with
this provision, he shall punishable with fine rupee 1
lakh to 25 lakh.
Section 144 – Auditing not to render certain services.
This section is newly inserted in the Act.
An auditor appointed under this Act shall provide to the
company only such other services as are approved by the
Board of Directors or the audit committee, as the case may
be, but which shall not include any of 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;
(g)rendering of outsourced financial services;
Section 146 – Auditors to attend general meeting.
All notices of, and other communications relating to,
any general meeting shall be Auditors to attend
general forwarded to the auditor of the company, and
the auditor shall, unless otherwise exempted by the
company, attend either by himself or through his
authorised representative, who shall also be qualified
to be an auditor, any general meeting and shall have
right to be heard at such meeting on any part of the
business which concerns him as the auditor.
Section 147 – Punishment for contravention.
For The company and every officer of the company
• Contravention of section 139 to 146 , Shall be punishable
with fine Rs. 25,000 to 5,00,000 to Company.
And every officer who is in default then punishable with
imprisonment for a term extend to 1 years or Rs. 10,000 to
1,00,000 or both.
For auditor
• Contravenes of section 139, 143, 144 and145 shall be
punishable with Rs. 25000 to 5,00,000.
• if auditor willfully or knowingly contravened the above
section with the intention to deceive the company or
stakeholder, he shall be punishable with imprisonment
for the period which extended to 1 year and with fine 1
lakh to 25 lakh.
For auditors
• Where auditor has convicted under sub-section (2),
he shall be liable to refund remuneration and pay for
damages arising out of incorrect or misleading
statements made in his audit report.
• The company or authority has to file report with
the CG in respect of such damages by auditor in
prescribed manner.
• The partner or partners of the audit firm has or
have acted in fraudulent manner for such act shall be
of partner or partners concerned of the audit firm
and of the firm jointly and severely.
Section 148 – CG. to specify audit of items of cost in respect of certain
companies.
The central govt. may be, by order to company for cost audit if
companies engaged in the production of such goods or
providing such services as may be prescribed, direct that
particulars relating to the utilization of material or labour.
• Company have net worth and turnover excess limit
prescribed by CG. then necessary to conducting cost audit by
cost auditor with comply of Cost auditing standard issued by
Institute of Cost and Works Accountant of India (ICWAI)
under ICWA (Cost and Work Account)Act, 1959 with approval
of CG.
• Cost auditor duty to report on conducted cost audit with
explanations
• Company shall duty to furnish report to central government
within 30 days from receipt of audit report.
• If any default is made; for every officer liable under section
147(1) and for the auditor liable under section 147(2-4)