Auditing & corporate governance B.

Com 6th Semester

B.COM 6TH SEMESTER

AUDITING AND CORPORATE GOVERNANCE

Unit-2- Audit of Limited Companies: Company Auditor- Qualifications and

disqualifications, Appointment, Rotation, Removal, Remuneration, Rights and Duties
Auditor’s Report-Contents and Types. Liabilities of Statutory Auditors under the Companies
Act 2013

INTRODUCTION
Companies Act, 2013 is rule based Act. Sections 138 to 148 of the Companies Act, 2013 deal
with provisions relating to audit of companies. Therefore, it is quite important to understand
these provisions very carefully. The provisions relating to ‘audit’ broadly deal with who can
be appointed as an auditor under the Act, i.e., qualifications and disqualifications, the manner
of appointment and removal of an auditor and rights and duties of an auditor. A scheme of the
provisions of the Act relating to audit is given below for quick reference:

Sections Deal with Provisions Relating to Audit of Companies

138 Internal Audit.
139 Appointment of auditors.
140 Removal, resignation of auditor and giving of special notice.
141 Eligibility, qualifications and disqualifications of auditors.
142 Remuneration of auditors.
143 Powers and duties of auditors and auditing standards.
144 Auditor not to render certain services.
145 Auditors to sign audit reports, etc.
146 Auditors to attend general meeting.
147 Punishment for contravention.
148 Central Government to specify audit of items of cost in respect of certain
companies.

QUALIFICATIONS AND DISQUALIFICATIONS OF AN AUDITOR

The provisions relating to eligibility, qualifications and disqualifications of an auditor are
governed by section 141 of the Companies Act, 2013. The main provisions are stated below:

 A person shall be eligible for appointment as an auditor of a company only if he is a

chartered accountant.

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 Where a firm including a limited liability, partnership 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.
 Under sub-section (3) of section 141 along with Rule 10 of the Companies Rule, 2014
the following persons shall not be eligible for appointment as an auditor of a
company, namely: -
 a body corporate other than a limited liability partnership registered under the
Limited Liability Partnership Act, 2008;
 an officer or employee of the company;
 a person who is a partner, or who is in the employment, of an officer or
employee of the company;
 a person who, or his relative or partner –
 is holding any security of or interest in the company or its subsidiary,
or of its holding or associate company or a subsidiary of such holding
company not exceeding rupees one lakh.
 is indebted to the company, or its subsidiary, or its holding or associate
company or a subsidiary of such holding company, in excess of rupees
five lakh; or
 has given a guarantee or provided any security in connection with the
indebtedness of any third person to the Company or its Subsidiary, or
its Holding or Associate Company or a Subsidiary of such Holding
Company, in excess of one lakh rupees.
 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, of such nature as
may be prescribed;
 a person whose relative is a Director or is in the employment of the Company
as a director or key Managerial Personnel;
 a person who is in full time employment elsewhere or a person or a partner of
a firm holding appointment as its auditor, if such person or partner is at the
date of such appointment or reappointment holding appointment as auditor of
more than twenty companies;
 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;
 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
as provided in section 144.

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 Where a person appointed as an auditor of a company incurs any of the

disqualifications mentioned in sub-section (3) after his appointment, he shall vacate
his office as such auditor and such vacation shall be deemed to be a casual vacancy in
the office of the auditor.

APPOINTMENT OF AUDITOR

Section 139 of the Companies Act, 2013 contains provisions regarding Appointment of
Auditors. Discussion on appointment of auditors may be grouped under two broad headings
 Appointment of First Auditors.
 Appointment of Subsequent Auditors

Appointment of First Auditors in the case of a company, other than a Government

Company:
 As per Section 139(6), the first auditor of a company, other than a Government
company, shall be appointed by the Board of Directors within 30 days from the date
of registration of the company.
 In the case of failure of the Board to appoint the auditor, it shall inform the members
of the company.
 The members of the company shall within 90 days at an extraordinary general
meeting appoint the auditor. Appointed auditor shall hold office till the conclusion of
the first annual general meeting.

Appointment of First Auditors in the case of Government Company:

 Section 139(7) provides that in the case of a Government company or any other
company owned or controlled, directly or indirectly, by the Central Government, or
by any State Government, or Governments, or partly by the Central Government and
partly by one or more State Governments, the first auditor shall be appointed by the
Comptroller and Auditor General of India within 60 days from the date of registration
of the company.
 in case the Comptroller and Auditor-General of India does not appoint such auditor
within the above said period, the Board of Directors of the company shall appoint
such auditor within the next 30 days.
 Further, in the case of failure of the Board to appoint such auditor within next 30
days, it shall inform the members of the company who shall appoint such auditor
within 60 days at an extraordinary general meeting.
 Auditors shall hold office till the conclusion of the first annual general meeting.

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Appointment of subsequent auditors in case of Non-Government Companies:

 Section 139(1) of the Companies Act, 2013 provides that every company shall, at the
first annual general meeting appoint an individual or a firm as an auditor who shall
hold office from the conclusion of that meeting till the conclusion of its sixth annual
general meeting and thereafter till the conclusion of every sixth meeting.
 The following points need to be noted in this regard
 The company shall place the matter relating to such appointment of
ratification by member at every Annual General Meeting.
 Before such appointment is made, the written consent of the auditor to such
appointment, and a certificate from him or it that the appointment, if made,
shall be in accordance with the conditions as may be prescribed, shall be
obtained from the auditor.
 The certificate shall also indicate whether the auditor satisfies the criteria
provided in section 141.
 The company shall inform the auditor concerned of his or its appointment, and
also file a notice of such appointment with the Registrar within 15 days of the
meeting in which the auditor is appointed.
Appointment of subsequent auditors in case of Government Companies:
 As per Section 139(5), in the case of 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
180 days from the commencement of the financial year, who shall hold office till the
conclusion of the annual general meeting.

Filling of a Casual Vacancy:

As per Section 139(8), any casual vacancy in the office of an auditor shall –
 In the case of a company other than a company whose accounts are subject to audit by
an auditor appointed by the Comptroller and Auditor-General of India, be filled by the
Board of Directors within 30 days.
 If such casual vacancy is as a result of the resignation of an auditor, such appointment
shall also be approved by the company at a general meeting convened within three
months of the recommendation of the Board and he shall hold the office till the
conclusion of the next annual general meeting.
 In the case of a company whose accounts are subject to audit by an auditor appointed
by the Comptroller and Auditor-General of India, be filled by the Comptroller and
Auditor-General of India within 30 days.

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 It may be noted that in case the Comptroller and Auditor-General of India does not fill
the vacancy within the said period the Board of Directors shall fill the vacancy within
next 30 days.
 Casual Vacancy by Resignation: As per section 140(2), the auditor who has
resigned from the company shall file within a period of 30 days from the date of
resignation, a statement in the prescribed Form ADT–3 (as per Rule 8 of CAAR) with
the company and the Registrar, and in case of the companies referred to in section
139(5) i.e. Government company, the auditor shall also file such statement 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 failure the auditor shall be
punishable with fine which shall not be less than fifty thousand rupees but which may
extend to five lakh rupees as per section 140(3).

Other important provisions regarding appointment of auditors

 A retiring auditor may be re-appointed at an annual general meeting, if-
 he is not disqualified for re-appointment;
 he has not given the company a notice in writing of his unwillingness to be re-
appointed; and
 a special resolution has not been passed at that meeting appointing some other
auditor or providing expressly that he shall not be re-appointed.
 Where at any annual general meeting, no auditor is appointed or re-appointed, the
existing auditor shall continue to be the auditor of the company.

ROTATION OF AUDITOR
Applicability of section 139(2) Rotation of Auditor: As per rules prescribed in Companies
(Audit and Auditors) Rules, 2014, for applicability of section 139(2) the class of companies
shall mean the following classes of companies: -
 all unlisted public companies having paid up share capital of rupees ten crore or more;
 all private limited companies having paid up share capital of rupees twenty crore or
more;
 all companies having paid up share capital of below threshold limit mentioned in (a)
and (b) above, but having public borrowings from financial institutions, banks or
public deposits of rupees fifty crores or more.

As per Section 139(2), no listed company or a company belonging to such class or classes of
companies as mentioned above, shall appoint or re-appoint-
 an individual as auditor for more than one term of five consecutive years; and

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 an audit firm as auditor for more than two terms of five consecutive years. Provided
that –
 an individual auditor who has completed his term under clause (a) shall not be
eligible for re-appointment as auditor in the same company for five years from
the completion of his term;
 an audit firm which has completed its term under clause (b), shall not be
eligible for re-appointment as auditor in the same company for five years from
the completion of such term.

The following points merit consideration in this regard-

 As on the date of appointment, no audit firm having a common partner or partners to
the other audit firm, whose tenure has expired in a company immediately preceding
the financial year, shall be appointed as auditor of the same company for a period of
five years.
 Every company, existing on or before the commencement of this Act which is
required to comply with provisions of this sub-section, shall comply with the
requirements of this sub- section within three years from the date of commencement
of this Act.
 It has also been provided that right of the company to remove an auditor or the right
of the auditor to resign from such office of the company shall not be prejudiced.
 The Central Government may, by rules, prescribe the manner in which the companies
shall rotate their auditors.

REMOVAL OF AUDITORS

 Removal of Auditor before Expiry of Term: According to Section 140(1), the

auditor appointed under section 139 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 as per Rule 7 of CAAR, 2014:
 The application to the Central Government for removal of auditor shall be
made in Form ADT-2 and shall be accompanied with fees as provided for this
purpose under the Companies (Registration Offices and Fees) Rules, 2014.
 The application shall be made to the Central Government within 30 days of
the resolution passed by the Board.
 The company shall hold the general meeting within 60 days of receipt of
approval of the Central Government for passing the special resolution.

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 It is important to note that before taking any action for removal before expiry
of terms, the auditor concerned shall be given a reasonable opportunity of
being heard.
 Appointment of Auditor other than retiring Auditor: Section 140 lays down
procedure to appoint an auditor other than retiring auditor who was removed:
 Special notice shall be required for a resolution at an annual general meeting
appointing as auditor a person other than a retiring auditor, or providing
expressly that a retiring auditor shall not be re-appointed, except where the
retiring auditor has completed a consecutive tenure of five years or as the case
may be, ten years, as provided under sub-section (2) of section 139.
 On receipt of notice of such a resolution, the company shall forthwith send a
copy thereof to the retiring auditor.
 Where notice is given of such a resolution and the retiring auditor makes with
respect thereto representation in writing to the company (not exceeding a
reasonable length) and requests its notification to members of the company,
the company shall, unless the representation is received by it too late for it to
do so, -
 in any notice of the resolution given to members of the company, state
the fact of the representation having been made; and
 send a copy of the representation to every member of the company to
whom notice of the meeting is sent, whether before or after the receipt
of the representation by the company. and if a copy of the
representation is not sent as aforesaid because it was received too late
or because of the company's default, the auditor may (without
prejudice to his right to be heard orally) require that the representation
shall be read out at the meeting.

AUDITOR’S REMUNERATION

 As per section 142 of the Act, the remuneration of the auditor of a company shall be
fixed in its general meeting or in such manner as may be determined therein.
However, board may fix remuneration of the first auditor appointed by it.
 Further, the remuneration, in addition to the fee payable to an auditor, 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.
 Therefore, it has been clarified that the remuneration to Auditor shall also include any
facility provided to him.

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CEILING ON NUMBER OF AUDITS

 It has been mentioned earlier that before appointment is given to any auditor, the
company must obtain a certificate from him to the effect that the appointment, if
made, will not result in an excess holding of company audit by the auditor concerned
over the limit laid down in section 141(3)(g) of the Companies Act, 2013 which
prescribes that a person who is in full time employment elsewhere or a person or a
partner of a firm holding appointment as its auditor, if such person or partner is at the
date of such appointment or reappointment holding appointment as auditor of more
than twenty companies, shall not be eligible for appointment as an Auditor of a
Company.
 In the case of a firm of auditors, it has been further provided that ‘specified number of
companies’ shall be construed as the number of companies specified for every partner
of the firm who is not in full time employment elsewhere.

POWERS/RIGHTS OF AUDITORS

The auditor has following powers/rights while conducting an audit:

 Right of access to books, etc.– The auditor of a company, at all times, shall have a
right of access to the books of account and vouchers of the company, whether kept at
the registered office of the company or at any other place and he is entitled to require
from the officers of the company such information and explanation as he may
consider necessary for the performance of his duties as auditor [Section 143(1)]. The
auditor can exercise this right at all times which implies normal business hours on any
working days.
 Right to obtain information and explanation from officers- This right of the
auditor to obtain from the officers of the company such information and explanations
as he may think necessary for the performance of his duties as auditor is a wide and
important power.

In the absence of such power, the auditor would not be able to obtain details of
amount collected by the directors, etc. from any other company, firm or person as
well as of any benefits in kind derived by the directors from the company, which may
not be known from an examination of the books.

It is for the auditor to decide the matters in respect of which information and
explanations are required by him. When the auditor is not provided the information
required by him or is denied access to books, etc., his only remedy would be to report

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to the members that he could not obtain all the information and explanations he had
required or considered necessary for the performance of his duties as auditors.

 Right to receive notices and to attend general meeting– The auditors of a company
are entitled to attend any general meeting of the company (the right is not restricted
to those at which the accounts audited by them are to be discussed); also to receive
all the notices and other communications relating to the general meetings, which
members are entitled to receive and to be heard at any general meeting in any part of
the business of the meeting which concerns them as auditors (Section 146).
 Right to report to the members of the company on the accounts examined by
him- The auditor shall make a report to the members of the company on the accounts
examined by him and on every financial statements which are required by or under
this Act to be laid before the company in general meeting and the report shall after
taking into account the provisions of this Act, the accounting and auditing standards
and matters which are required to be included in the audit report under the provisions
of this Act or any rules made there under or under any order made under this section
and to the best of his information and knowledge, the said accounts, financial
statements give a true and fair view of the state of the company’s affairs as at the end
of its financial year and profit or loss and cash flow for the year and such other
matters as may be prescribed.
 Right to Lien- In terms of the general principles of law, any person having the lawful
possession of somebody else’s property, on which he has worked, may retain the
property for non-payment of his dues on account of the work done on the property.
On this premise, auditor can exercise lien on books and documents placed at his
possession by the client for non-payment of fees, for work done on the books and
documents.

DUTIES OF AUDITORS

Sections 143 of the Companies Act, 2013 specifies the duties of an auditor of a company in a
quite comprehensive manner. It is noteworthy that scope of duties of an auditor has generally
been extending over all these years.

 Duty of Auditor to Inquire on certain matters: It is the duty of auditor to inquire

into the following matters-
 whether loans and advances made by the company on the basis of security
have been properly secured and whether the terms on which they have been
made are prejudicial to the interests of the company or its members;

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 whether transactions of the company which are represented merely by book

entries are prejudicial to the interests of the company;
 where the company not being an investment company or a banking company,
whether so much of the assets of the company as consist of shares, debentures
and other securities have been sold at a price less than that at which they were
purchased by the company;
 whether loans and advances made by the company have been shown as
deposits;
 whether personal expenses have been charged to revenue account;
 where it is stated in the books and documents of the company that any shares
have been allotted for cash, whether cash has actually been received in respect
of such allotment, and if no cash has actually been so received, whether the
position as stated in the account books and the balance sheet is correct, regular
and not misleading.
 Duty to Sign the Audit Report: The person appointed as an auditor of the company
shall sign the auditor's report or sign or certify any other document of the company, in
accordance with the provisions of sub-section (2) of section 141 and the
qualifications, observations or comments on financial transactions or matters, which
have any adverse effect on the functioning of the company mentioned in the auditors’
report shall be read before the company in general meeting and shall be open to
inspection by any member of the company.
 Duty to comply with Auditing Standards: As per sub-section (9) of section 143 of
the Companies Act, 2013, every auditor shall comply with the auditing standards.
Further as per sub-section 10 of section 143 of the Act, the Central Government may
prescribe the standards of auditing or any addendum thereto, as recommended by the
Institute of Chartered Accountants of India, constituted under section 3 of the
Chartered Accountants Act, 1949, in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority. Students may
note that until any auditing standards are notified, any standard, or standards of
auditing specified by the Institute of Chartered Accountants of India shall be deemed
to be the auditing standards.
 Duty to audit report: As per sub-section (3) of section 143, the auditor’s report shall
also state –
 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;

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 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;
 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 auditors
has been sent to him under the proviso to that sub-section and the manner in
which he has dealt with it in preparing his report;
 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;
 whether, in his opinion, the financial statements comply with the accounting
standards;
 the observations or comments of the auditors on financial transactions or
matters which have any adverse effect on the functioning of the company;
 whether any direct is disqualified from being appointed as a director under
sub-section (2) of the section 164;
 any qualification, reservation or adverse remark relating to the maintenance of
accounts and other matters connected therewith;
 whether the company has adequate internal financial controls system in place
and the operating effectiveness of such controls;
 Duty to report on frauds: As per sub-section (12) of section 143 of the Companies
Act, 2013, 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 prescribed in rule 13.
 Duty to report on any other matter specified by Central Government: The
Central Government may, in consultation with the National Financial Reporting
Authority, by general or special order, direct, in respect of such class or description of
companies, as may be specified in the order, that the auditor's report shall also include
a statement on such matters as may be specified therein
 Duties and powers of the company’s auditor with reference to the audit of the
branch: whether the report on the accounts of any branch office audited by a person
other than the company’s auditor has been forwarded to him and how he has dealt
with the same in his report
 Duty to state the reason for qualification or negative report: As per sub-section
(4) of section 143, where any of the matters required to be included in the audit report

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is answered in the negative or with a qualification, the report shall state the reasons
there for

AUDIT REPORT

 An audit report should be clear, specific and complete, in order that anyone who has
an occasion to read it may know exactly what is wrong with the company. An Auditor
who gives the shareholders “the means of information” in respect of company’s
financial position, does so, at his peril and runs the serious risk of being held
judicially to have failed to discharge his duty (Lindley L.J in Re London and General
Bank).
 The auditor should review and assess the conclusions drawn from the audit evidence
obtained as the basis for the expression of an opinion on the financial statements. This
review and assessment involve considering whether the financial statements have
been prepared in accordance with an acceptable financial reporting framework
applicable to the entity under audit. It is also necessary to consider whether the
financial statements comply with the relevant statutory requirements.
 The auditor’s report should contain a clear written expression of opinion on the
financial statements taken as a whole.

Contents of an Audit Report

The basic structure of an audit report as prescribed by the Standards on Auditing is as
follows:

Heading Brief of contents

Title Title should mention that it is an ‘Independent Auditor’s
Report’.
Addressee Should mention clearly as to whom the report is being given to.
For example, to the Members or Board of Directors
Management’s Mentions that it is the Management’s responsibility to Prepare
Responsibility for the Financial Statements. of the company.
Financial Statements
Auditor’s Responsibility Mention that responsibility of the Auditor is to express an
unbiased opinion on the financial statements and issue an audit
report.
Opinion Should mention the overall impression obtained from the audit
of financial statements.
For example, Modified Opinion, Unmodified Opinion

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Basis of the Opinion State the basis on which the opinion as reported has been
achieved. Facts of the basis should be mentioned.
Other Reporting If any other reporting responsibility exists, the same should be
Responsibility mentioned.
For example, Report on Legal or Regulatory requirements
Signature of the Auditor The engagement partner (auditor) shall sign the audit report.
Place of Signature The city in which audit report is signed.
Date of Audit Report Date on which the audit report is signed

Opinion in an Audit Report

There are primarily two kinds of opinions issued by an auditor in his / her audit report:

 Unmodified Opinion (also called Unqualified report)

 Modified Opinion (also called Qualified report)

Unmodified Opinion

 Issued for any audit where the auditor is satisfied that the financial statements present
a true and fair view of the operations and transactions in an enterprise during the
period.
 An audit report with an Unmodified Opinion is also known as a ‘Clean Report’. An
Unmodified report develops confidence among users of Financial statements and
annual reports of an enterprise.
 It provides an impression that the financial statements are reasonably free from any
misstatements and results as appearing there are true and fair.

Modified Opinion

 Whenever the auditor has specific findings during his / her audit and concludes that an
Unmodified Opinion cannot be issued due to the nature of findings, a Modified
Opinion is issued in the audit report.
 There are two basic reasons due to which an auditor concludes on issuing a Modified
Opinion:
 Based on the audit and evidence, finds out that the financial statements contain a
certain degree of material misstatements.
 Unable to obtain sufficient and appropriate evidences to conclude that the financial
statements are free from material misstatements.

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 There are three kinds of modified opinions which are issued according to the findings
and circumstances:
 Adverse Opinion
 Qualified Opinion
 Disclaimer of Opinion

Qualified Opinion

A Qualified Opinion is given in a situation where:

• The auditor concludes that misstatements are material but the impact is not so high
that it would render the whole financial statements unacceptable; or
• The auditor is unable to obtain sufficient or appropriate audit evidence but concludes
that there are indications of misstatements in the financial statements (but the degree
is not high).
• Example of a Qualified Opinion paragraph in audit report: In our opinion, except for
the incomplete disclosure of the information referred to in the Basis for Qualified
Opinion paragraph, the financial statements give the information required by the
Companies Act, 2013, in the manner so required and give a true and fair view in
conformity with the accounting principles generally accepted in India:
o In case of the Balance Sheet, of the state of affairs of the company as at March
31, XXXX;
o In case of Profit and Loss Account, of the profit/loss for the year ended on that
date; and
o In case of the Cash Flow Statement, of the cash flows for the year ended on
that date.

Adverse Opinion

• An Adverse opinion shall be issued by the auditor where he concludes that on the
basis of evidence obtained and procedures performed, there are material
misstatements in the financial statements and the impact of the same is high.
• Example of a Qualified Opinion paragraph in audit report: In our opinion, because of
the omission of the information in the Basis for Adverse Opinion paragraph, the
financial statements do not give the information required by the Companies Act,
2013, in the manner so required and also, do not give a true and fair view in
conformity with the accounting principles generally accepted in India:
o In case of the Balance Sheet, of the state of affairs of the company as at March
31, XXXX;

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o In case of Profit and Loss Account, of the profit/loss for the year ended on that
date; and
o In case of the Cash Flow Statement, of the cash flows for the year ended on
that date.

Disclaimer of Opinion

• A Disclaimer of Opinion is to be issued by an auditor in cases where the auditor

concludes that he / she is not able to obtain sufficient and appropriate evidences. In
such scenario, the auditor is not able to form an opinion and thus, disclaims form
providing an opinion on the financial statements. The impact of material
misstatements and degree of the same is high enough.
• Example of a Draft Disclaimer of Opinion:
o We were engaged to audit the financial statements of ABC Private Limited
which comprises the Balance Sheet as at March 31, XXXX,
o the statement of Profit and Loss, (the statement of changes in equity) and
o statement of Cash Flows for the year then ended, and
o notes to the financial statements, including a summary of significant
accounting policies.
• We do not express an opinion on the accompanying financial statements of the entity.
Because of the significance of the matters described in the Basis for Disclaimer of
Opinion section of our report, we have not been able to obtain sufficient and
appropriate audit evidence to provide a basis for an audit opinion on these financial
statements.

Emphasis of Matter paragraph in an Audit Report

• In a situation where the auditor concludes that it is important to draw the attention of
users of the financial statement to a particular reported item, he/she may include an
Emphasis of Matter paragraph in his / her audit report. In this case, the auditor is not
required to modify his / her opinion. The paragraph is added when the issue is not a
key audit matter and only requires disclosure for a better understanding of the
financial statements.
• Example of circumstances where the auditor shall include Emphasis of Matter
paragraph in audit report:
o To inform users of financial statements that the same has been prepared under
a special purpose framework;

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o The auditor discovers some facts after the date of an audit report and the
auditor issues new or amended audit report.
o Uncertainty about the future outcome of an ongoing litigation.

LIABILITY OF AN AUDITORS UNDER COMPANIES ACT, 2013

Lord Justice Topes had once famously remarked that

“The auditor is a watchdog and not a bloodhound.”

Companies Act, 2013 does not seem to echo this thought! The kind of stringent measures
prescribed in the Companies Act 2013 against auditors gives the picture that the Act indeed
expects the auditors to be bloodhounds in discharging their duties and not merely as watch
dogs. The Satyam saga seems to have cast a very looming image in the minds of regulators as
far the auditors are concerned.

Penalty for non-compliance with any of the provisions contained in Sections 139, 143,
144 and 145 of the Act –

 Section 139 contains provisions regarding appointment of auditors, Section 143

regarding power and duties of auditors, Section 144 regarding certain services which
an auditor cannot render and Section 145 regarding signing of audit report and other
documents by auditor.
 Auditor shall be punishable with fine which shall not be less than Rs. 25,000/- but
which may extend to Rs. 5,00,000/- If an auditor has contravened such provisions
knowingly or willfully with the intention to deceive the company or its shareholders
or creditors or tax authorities, he shall be punishable with imprisonment for a term
which may extend to 1 year and with fine which shall not be less than Rs. 1,00,000/-
but which may extend to Rs. 25,00,000/-.
 If the auditor is convicted under any of these sections, he shall be liable to refund the
remuneration received by him from the Company and pay for damages to the
company, bodies or authorities or to any other persons for loss arising out of incorrect
or misleading statements of particulars made in his audit report.

Penalty for failure to disclose fraud as per Section 143(12),

 An Auditor is duty bound that if in the course of the performance of his duties as
auditor, he 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.

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 In case of any failure on his part to comply with this duty, he shall be punishable with
fine which shall not be less than Rs.1,00,000/- but which may extend to
Rs.25,00,000/-.

Penalty for professional misconduct – NFRA – Watch on the watch dogs!

 National Financial Review Authority (NFRA) shall have power to investigate, either
suo motu or on a reference made to it by the Central Government into the matters of
professional or other misconduct committed by any member or firm of chartered
accountants, registered under the Chartered Accountants Act, 1949.Where
professional or other misconduct is proved, NFRA shall have the power to make order
for imposing penalty of—
 not less than Rs. 1,00,000/-, but which may extend to five times of the fees
received, in case of individuals; and
 not less than Rs. 10,00,000/-, but which may extend to ten times of the fees
received, in case of firms;
 debarring the member or the firm from engaging himself or itself from
practice as member of the Institute of Chartered Accountant of India referred
to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants
Act, 1949 for a minimum period of 6 months or for such higher period not
exceeding 10 years as may be decided by the National Financial Reporting
Authority.

Action in case of fraud by auditors

 Change of auditors by NCLT –

 Without prejudice to any action under the provisions of this Act or any other
law for the time being in force, the NCLT 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 or abetted or colluded in any fraud by, or in
relation to, the company or its directors or officers, it may, by order, direct the
company to change its auditors.
 An auditor, whether individual or firm, against whom final order has been
passed by the Tribunal under this section shall not be eligible to be appointed
as an auditor of any company for a period of 5 years from the date of passing
of the order and the auditor shall also be liable for action under section 447.
 Disqualification for appointment as auditor – A person who has been convicted by
a court of an offence involving fraud and a period of 10 years has not elapsed from

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the date of such conviction shall be disqualified to be appointed as auditor of any

company.
 Action under Section 447 – Without prejudice to any liability including repayment
of any debt under this Act or any other law for the time being in force, any person
who is found to be guilty of fraud, shall be punishable with imprisonment for a term
which shall not be less than 6 months but which may extend to 10 years and shall also
be liable to fine which shall not be less than the amount involved in the fraud, but
which may extend to 3 times the amount involved in the fraud.
 Liability of firm – Where, in case of audit of a company being conducted by an audit
firm, it is proved that the partner or partners of the audit firm has or have acted in a
fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the
company or its directors or officers, the liability, whether civil or criminal as provided
in this Act or in any other law for the time being in force, for such act shall be of the
partner or partners concerned of the audit firm and of the firm jointly and severally.

Class Action Suits

 Any 100 or more members/deposit holders of the company or 10% of the total
number of members/deposit holders of the company can file a class action suit to
claim damages or compensation or demand any other suitable action against the
auditor in the manner prescribed under Section 245 of the Act.
 Action under this section can be initiated against the auditor including audit firm of
the company for any improper or misleading statement of particulars made in the
audit report or for any fraudulent, unlawful or wrongful act or conduct.
 Where the members or depositors seek any damages or compensation or demand any
other suitable action from or against an audit firm, the liability shall be of the firm as
well as of each partner who was involved in making any improper or misleading
statement of particulars in the audit report or who acted in a fraudulent, unlawful or
wrongful manner.

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