concept of auditors

8/13/2019 Concept of Auditors

1/28

B.A LL.B( With Specialization in Energy Laws)UNIVERSITY OF PETROLEUM STUDIES


2/28

InvestopediaAn official whose job it is to carefully check the accuracy of business

records. An auditor can be either an independent auditor unaffiliated

with the company being audited or a captive auditor, and some are

elected public officials. The term is sometimes synonymous with

"comptroller." Auditors are used to ensure that organizations are

maintaining accurate and honest financial records and statements.

WHAT IS AUDIT ?

Audit is an examination of accounting records undertaken with a view to

establishing the correctness or otherwise of the transactions reflected

therein. It involves the intelligent scrutiny of the books of account of acompany with reference to documents, vouchers & other documents,

vouchers & other relevant records to ensure that entries made therein

give a true picture of the business conducted during the period under

review, that every transaction has been properly authorized by the

appropriate authority & that effect of all the entries in the books ofaccount has been duly reflected in the final accounts.


3/28

The main object of audit is to ensure that the

statement of accounts of the relevantfinancial year truly & fairly reflect the state ofaffairs of the company. Audit also provides amoral check on those who are entrusted with

the task of running business and maintainingthe books of account of the company.


4/28

Companies Act 1956 COMPANIES Act 2013

226. QUALIFICATIONS he should be a chartered

accountant:

shall be a auditor in eyes of the law

Disqualifications -a body corporate ;-an officer or employee of company

-a partner, or employee, of an officeror employee of the company ;

-a person indebted to the companyfor an amount < Rs1000, orguarantor or guarantor inconnection with the indebtednessof 3rd person to the company for

amount < Rs.1000.

141. QUALIFICATIONS He should be a C.A

Provided that a firm where ofmajority of partners practising inIndia are qualified for appointmentas aforesaid may be appointed byits firm name to be auditor of a

company.

(2)Where a firm including a LLP isauditor of a company, only thepartners who are C.A shall beauthorised to act & sign on behalfof the firm.

Disqualification-a body corporate other than alimited liability partnershipregistered under the LLP Act,2008;


5/28


-director or member of a

private company, or apartner of a firm, which isthe managing agent or thesecretaries & treasurers ofcompany

-director, or the holder ofshares exceeding 5% innominal value of the

subscribed capital, of anybody corporate which isthe managing agent or thesecretaries and treasurers,

of the company :

-officer or employee of thecompany;-a partner, or employee,of an officer or employeeof the company;

-a person who, or hisrelative or partner

Holder of security or

interest in the company orits subsidiary, or

of its holding or associatecompany or a subsidiaryof such holding company:


6/28


Provided that shares held bysuch person as nominee ortrustee for third person andin which the holder has nobeneficial interest shall beexcluded in computing the% of shares held by him for

the purpose of this clause.

disqualified forappointment of any otherbody corporate which is

that company's subsidiaryor holding company or asubsidiary of thatcompany's holdingcompany, or would be so

disqualified if the bodycorporate were a company.

Provided that the relative may holdsecurity or interest in the company

of face value not exceeding Rs.1000 or such sum as may beprescribed;

- is indebted to the company, or itssubsidiary, or its holding or

associate

- company or a subsidiary of suchholding company, in excess of suchamount as may be prescribed; or

- as given a guarantee or providedany security in connection with theindebtedness of any 3rd person tothe company, or its subsidiary, orits holding or associate company or

a subsidiary of such holding


7/28


If an auditor becomes subject,after his appointment, to anyof the disqualificationsspecified in sub-sectionsabovementioned.

and (4), he shall be deemed tohave vacated his office as such.

a person or a firm who, whether directlyor indirectly, has business relationshipwith the company, or its subsidiary, orits holding or associate company orsubsidiary of such holding company orassociate company of such nature as

may be prescribed;

- a person whose relative is a director oris in the employment of the companyas a director or key managerial

personnel;


8/28


- a full time employee elsewhere or aperson or a partner of a firmholding appointment as its auditor,if such persons or partner is at thedate of such appointment orreappointment holding

appointment as auditor of morethan 20 companies;

- convict of an offence involvingfraud & a period of 10 years hasnot elapsed from the date of such

conviction;

-any person whose subsidiary orassociate company or any otherform of entity, is engaged as onthe date of appointment inconsulting and specialised services


9/28


Sec.224 Auditor shall be

appointed at each AGM. Term from the

conclusion of AGM till theconclusion of next AGM.

Provided:Before appointment acertificate shall beobtained from suchauditor to the effects asprovided in section 224[1(B)].

Sec139 Auditor shall be appointedat each AGM.

Term: from the conclusion of AGMtill the conclusion of 6th AGM &thereafter till the conclusion ofevery 6th meeting.

Provided: ratification by membersof each company at everysubsequent AGM.

Provided further that before suchappointment is made, a certificate

from him or it that theappointment, if made, shall be inaccordance with the conditions asmay be prescribed, shall beobtained from the auditor:


10/28


224[1(A)]Auditor so

appointed to inform theregistrar within 30 days ofhis acceptance or refusal.

224 [1(B)] that suchappointed auditor is notfull time employeeelsewhere and also notacting as auditor in more

than the specified no. ofcompanies

Provided also that the companyshall inform the auditor

concerned of his appointment,and also file a notice of suchappointment with the Registrarwithin fifteen days of themeeting in which the auditor is

appointed.

And thereafter till theconclusion of every 6thmeeting

and the manner and procedureof selection of auditors by themembers of the company atsuch meeting shall be such asmay be prescribed:


11/28


Sec. 224 Subject to sub-sec (1B) &sec 224A, at any AGM, a retiring

auditor, shall be re-appointed,unless - not qualified for reappointment ;

(b) he in writing expresses hisunwillingness to be re-appointed ;

(c) a resolution has been passedsomebody else as auditor orproviding he shall not be re-appointed ; or

(d) notice has been given of anintended resolution to appointsomebody else, & by reason of thedeath, in capacity ordisqualification, the resolution

cannot be proceeded with.

Sec. 139 (2) - No listed company or acompany belonging to such class asmay be prescribed, shall appoint or

re-appoint

a) (a) an individual as auditor formore than 1 term of 5 consecutiveyears;

(b) an audit firm as auditor for morethan 2 terms of 5 consecutive years:

Provided that(i) an auditor who hascompleted his term under clause

(a) shall not be eligible for re-appointment as auditor in the samecompany for 5 years from thecompletion of his term;

(ii) an audit firm which hascompleted its term under clause (b),shall not be eligible for re-appointment as auditor in the samecompany for 5 years from thecompletion of such term:


12/28


13/28

(5) Notwithstanding sub-sec (1), the CAG of India shall,in the case of a Governmentcompany or any other company owned or controlled, directly or indirectly, by the C.G,or by any S.G or Governments, or partly by the C.G & partly by one or more S.G, inrespect of a financial year, appoint an duly qualified auditor (under this Act) , within a

period of 180 from the commencement of the financial year, who shall hold office tillthe conclusion of the AGM.

(6) Notwithstanding sub-sec (1), the 1st auditor of a company, other than aGovernment company, shall be appointed by the B.O.D within 30 days from the dateof registration of the company & in the case of failure of the Boar, it shall inform the

members of the company, who shall within 90 days at an extraordinary generalmeeting appoint such auditor and such auditor shall hold office till the conclusion ofthe first AGM.

(7) Notwithstanding sub-sec (1) or (5), in the case of a Government company or anyother company owned or controlled, directly or indirectly, by the C.G, or by any S.G, or

Governments, or partly by the C.G & partly by one or more S.G, or, the first auditorshall be appointed by the CAG within 60 days from the date of registration of thecompany& in case the CAG does not appoint such auditor within the said period, theBOD of shall appoint such auditor within the next 30 days; and in the case of failure ofthe Board to appoint such auditor within the next 30 days, it shall inform themembers of the company who shall appoint such auditor within the 60 days at anextraordinary general meeting, who shall hold office till the conclusion of the first

AGM


14/28

(9) Subject to the provisions of sub-section (1) and the rulesmade there under, 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 hisunwillingness to be re-appointed; and

(c) a special resolution has not been passed at that meetingappointing some other auditor or providing expressly that he

shall not be re-appointed.

(10) Where at any annual general meeting, no auditor isappointed or re-appointed, the existing auditor shall continue

to be the auditor of the company.


15/28

Sec 619 of the Act provides that the auditor of agovernment company shall be appointed or re-appointment by the CAG. Further, the limits specified

in Sub-Sec (1B) & (1C) of Section 224 apply to suchauditors too.

CAG of India v. Kamlesh Vadilal Mehta (2003) (1) Scale351Issue whether a CAG can Sub classify the eligibiltyqualification by inviting applications for empanelmentof firms of C.A for the purposes of auditing theaccounts of the government companies & PSUs by wayof debarring the proprietary firms even to submit their

application. S.c held that CAG cant create a sub-classification from the general class of eligible C.A &also observed that once a person is qualified,experienced & efficient then there is no ground ofdiscrimination against him.


16/28


224A. NO APPOINTMENT WITHOUT THE APPROVAL BYSPECIAL RESOLUTION IN CERTAIN CASES

(1) company where not less than 25% of subscribedshare capital is held, individually or in any combination,by -

(a) public financial institution or G. company or C.G orany S.G, or

(b) any financial or other institution established by any

Pro- vicinal or State Act in which a S.G holds not less than 50% of the subscribed share capital, or

(c) nationalised bank or insurance company carrying ongeneral insurance business,

the appointment or re-appointment at each annualgeneral meeting of an auditor or auditors shall be made

by a special resolution.

(b) send the representations to every member to whomnotice of the meeting is sent, before or after the receiptof the representations by the company ; & ifrepresentations is not sent because of delay or due todefault the auditor may (without prejudice to his right to

be heard) require that representations shall be read out


17/28

Companies Act1956 COMPANIES Act 2013

Sec 225. (1) Special notice for resolutionat AGM appointing auditor other than a

retiring auditor, or providing expresslythat retiring auditor not bereappointed.

(2) On receipt , the company to send acopy thereof to the retiring auditor.

(3) Where notice is given & the retiringauditor makes written representation tothe company (within reasonable length)& requests notification to members, thecompany shall, unless therepresentations are received by it toolate for it to do so,

a) in any notice of the resolution givento members, state the fact of therepresentations been made &

Sec 140 (4) (i) Special notice forresolution at AGM appointingauditor other than a retiring

auditor, or providing expresslythat retiring auditor not bereappointed, except where theretiring auditor has completeda consecutive tenure of fiveyears or, as the case may be,

ten years, as provided undersub-section (2) of section 139.

The auditor appointed sec 139may be removed only byspecial resolution of the

company, after obtaining theprevious approval of the C.G inthat behalf in the prescribedmanner:Provided, the auditorconcerned shall be given areasonable opportunity of


18/28

Companies Act 1956 COMPANIES Act 2013Provided that representations not be sentout representations not be read out atthe meeting if, on the application eitherof the company or of any other personwho claims to be aggrieved, & the C.L.Bis satisfied that the rights conferred bythis sub-sec are being abused to secureneedless publicity for defamatory matter; & [C.L.B] may order the company's costson such an application to be paid in bythe auditor, notwithstanding that he isnot a party to the application.

4) Sub-sec (2) & (3) to apply to a resolutionto remove the first auditors or any ofthem under sub-section (5)of section224 or to the removal of any auditor orauditors under sub-sec(7) of thatsection, as they apply in relation to aresolution that a retiring auditor shall notbe re-appointed

Provided that if theapplication is made by the

C.G & the Tribunal issatisfied that any change ofthe auditor is required, itshall within 15 days ofreceipt of such application,

make an order that he shallnot function as an auditor &C.G may appoint anotherauditor in his place.


19/28


The Board may fill casualvacancy ,but while any such

vacancy continues, theremaining auditor orauditors, may act :

Provided vacancy caused byresignation , the vacancyshall only be filled by thecompany in G.M

The auditor resigned shall file within30 days, a statement in prescribed

form with company & the Registrar, &in case of companies referred to insub-sec(5) of 139, the auditor shallalso file statement with the CAG ofIndia, indicating the reasons & otherfacts as may be relevant with regard to

his resignation. casual vacancy shall(i) in the case of

a company other than a companywhose accounts are subject to audit byan auditor appointed by the CAG ,befilled by the BOD within 30 days, but if

vacancy is as a result of theresignation of an auditor, suchappointment shall also be approved bythe company at GM WITHIN 3 monthsof the recommendation of the Board &he shall hold the office till the

conclusion of the next annual generalmeetin


20/28


Except as provided insec(5), any auditorappointed under this secmay be removed before

expiry of his term only bythe company in G.M, afterobtaining the previousapproval of the C.GGovernment in that behalf.

(ii) in the case company whoseaccounts are subject to audit by anauditor appointed by the CAG, befilled by the CAG within 30 days:

Provided that in case the CAG doesnot fill the vacancy within GIVENperiod, the BOD shall fill thevacancy within 30days.


21/28


Sec 224 (8) (a) in the case of anauditor appointed by the Board or

the C.G, may be fixed by the Boardor the C.G, as the case may be ;

(a)in the case of an auditorappointed under section 619 by theCAG, shall be fixed by the companyin G.M or in such manner as thecompany in general meeting maydetermine &

(b) subject to clause (a), shall be

fixed by the company in G.M or insuch manner as the company inG.M may determine. For thepurposes of this sub-sec, any sumspaid by the company in respect ofthe auditors' expenses shall be

deemed to be included in theexpression "remuneration".

Sec142. (1) Theremuneration of the auditor

shall be fixed in its G.M or insuch manner as may bedetermined therein:

Provided that the Board mayfix remuneration of the first

auditor appointed by it. (2) The remuneration under

sub-sec(1) shall, in additionto the fee payable toauditor, include the

expenses, in connection withthe audit & any facilityextended to him but doesnot include anyremuneration paid to himfor any other service

rendered by him at therequest of the company.


22/28


powers Sec 227 Right to accessbooks accounts , vouchers &

enquire from other officers inregards to audit.

Duties-the auditor shall inquire into Loans & Advances - & terms on

which they are made are notdetrimental to the company & itsmembers.

Transaction merely represented bybook entries are not detrimental tothe interest of company.

If company not as in sec 372 orbanking company whether somuch of the assets of the companyas consist securities have been soldat a price less than that at whichthey were purchased

POWERS AND DUTIES NOSUBSTANTIAL CHANGE ASPROVIDED IN COMPANIESACT 1956


23/28


whether loans & advances

made by the company havebeen shown as deposits ;

whether personal expenses

have been charged torevenue account

where it is stated in thebooks & papers of the

company that any shareshave been allotted for cash,Whether cash received or not, & if not , then whether the

position as stated is correct& not misleading.


24/28


shall make a report on the accountsexamined by him, & on every

balance sheet & profit & lossaccount & on every other documentdeclared by this Act to be part of orannexed to the balance sheet orprofit & loss account, which are laidbefore the company in GM during

his tenure of office, & the reportshall state whether, in his opiniongive a true and fair view

a) in the case of the balancesheet, of the state of the company's

affairs as at the end of its financialyear ;

b)in the case of the profit and lossaccount, of the profit or loss for its

financial year.


25/28

Companies Act 1956 COMPANIES Act 2013The auditors' report shall also state

(a) whether, in his opinion, properbooks of account have beenkept & proper returns adequatefor the purposes of his audithave been received frombranches not visited by him ;

(b) whether report on the accounts

of any branch office audited by aperson other than the company'sauditor has been forwarded tohim & how he has dealt it inpreparing the auditor's report

(c) whether the company's balancesheet & p & L account dealtwith by the report are inagreement with the books ofaccount & returns.


26/28


(d) whether, in his opinion,

the P & L account &balance sheet comply withthe accounting standards

(e) In thick type or in italicsobservations or commentsof auditors which have anyadverse effect on thefunctioning of thecompany;

(f) whether any director isdisqualified from

appointment.


27/28

Council of institute of chartered accountants of India v.Rajaram (1960) 30 Comp. Cas 67C.A should himself verify the assets of the company ofwhich he has been appointed auditor, & should not rely onthe verification done by special examiners appointed bycompany itself according to articles. Therefore, an auditor is

personally liable for neglecting willfully to perform hisduties.

Fox Son v. Morrish Co. (1918) 35 T./L.R 126The auditor must check the companys own cash accountwith its bank pass book & cheque counterfoils & withstatements of its accounts obtained from the bank. He isnot entitled to assume that directors, officers or servants ofthe company who have kept its cash accounts have done so

correctly, & so dispense with checking.


28/28


MISELENEUOS 229. SIGNATURE OF AUDIT REPORT,

ETC. 230. READING AND INSPECTION OFAUDITOR'S REPORT.

231. RIGHT OF AUDITOR TOATTEND GENERAL MEETING

233. PENALTY FOR NON-COMPLIANCE BY AUDITOR WITHSECTIONS 227AND 229.- Fine upto 10, 000

MISELENEUOS 146 AUDITORS TO SIGN REPORT- Reading inspection 145 AUDITORS TO ATTENDGENERAL MEETING 147 PUNISHMENT FORCONTRAVENTION- 5 to 25 five lakhs fine- 1 lakh fine or 1 year imprisonmentwhen ( willingly and intentionalydecieved company)

concept of auditors

Documents