AUDIT OF COMPANIES
QUALIFICATIONS OF AN AUDITOR
(1) A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant: Provided that a firm whereof majority of partners practicing in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company.
(2) 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.
DISQUALIFICATION OF AN AUDITOR
The following persons shall not be eligible for appointment as an auditor of a company, namely:—
1. A body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008;
2. An officer or employee of the company;
3. A person who is a partner of an officer or employee of the company.
4. A person who is a relative or his partner of a company or holding or subsidiary company or associate company is disqualified in the following circumstances:
a. When he is holding any security, or
b. When he is indebted in excess of Rs.5,00,000, or
c. When he is given a guarantee or provided any security in connection with indebtedness in excess of Rs.1,00,000.
5. A person or a firm has a business relationship of such nature with a company or holding or subsidiary company or associate company.
6. A person whose relative is a director or is in employment of the company as director or key managerial personnel.
7. A person holding more than 20 company audit (20 company audits shall exclude one person company, small company, dormant company, private company with paid up capital less than Rs.100 Crore).
8. A person who has been convicted by a court of an offense involving fraud and a period of 10 years has not elapsed from the date of such conviction.
9. Any person who is engaged in consulting and specialized services.
ROTATION OF AN AUDITOR
Article explains Manner of Rotation of Statutory Auditors under Companies (Audit and Auditors) Rules, 2014 read with Section 139 of Companies Act, 2013.
A. Section 139(2) and Rule 5 of the Companies (Audit and Auditors) Rules 2014– Maximum term for appointment of auditors
1. In case of every listed company;
2. All Unlisted companies having paid up share capital of Rs 10 Crore or more;
3. All Private companies having paid up share capital of Rs 50 crore of more;
4 All companies having borrowings from financial institutions, banks or public deposit of Rs 50 Crore or more shall appoint or reappoint-
a. an Individual more than one term of 5 Consecutive years;
b. An Audit firm as auditor for more than 2 terms of 5 consecutive years;
B.Recommendation by Audit Committee Rule 6(1) - The name of the Audit Firm or Individual who may be appointed or replace the incumbent auditor on expiry of the term of such incumbent, shall be recommended by the Audit Committee to the Board of Directors of the Company.
C.Appointment of auditor in next auditor Rule 6(2) - The Audit Committee shall recommend to the board in case company is required to constitute an audit committee otherwise itself consider the matter for rotation of the auditors and makes its recommendation for appointment of the next auditor by the member in the AGM.
D. Explanation for rotation of Auditor
a. A break in term for continuous 5 years shall be considered as fulfilling the requirement of rotation of auditors b. if any audit firm whose partner was incharge or it and he also certifies the financial statements of the company and he retires from the said firm and joins another firm, in such a case such other firm, shall also not be eligible to be appointed for a period of 5 years.
APPOINTMENT OF COMPANY AUDITOR
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.
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-
(i) Before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him or her that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor.
(ii) The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141.
(iii) 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.
4. Appointment of Subsequent Auditors in case of Government Companies:
As per section 139(5), 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 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.
5. Casual Vacancy of an Auditor
As per Section 139(8), any casual vacancy in the office of an auditor shall-
(i) 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.
(ii) 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.
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.
6. Reappointment of Retiring Auditor: Sec 139 (9)
Such auditor can be reappointed at annual general meeting if:
He is not disqualified for reappointment.
He has not given notice to the company of his unwillingness.
REMOVAL OF AUDITOR [Sec. 140] ·
An auditor can be removed before the expiry of the term by obtaining the prior approval of the Central Government by filling an application.
The Company shall hold the general meeting within 60 days of receipt of approval of the Central Government for passing the special resolution.
The auditor concerned shall be given a reasonable opportunity of being heard.
RESIGNATION OF AUDITOR [Sec. 140 & (3)]
The auditor who has resigned from the Company shall file a statement in the prescribed form stating the reasons for his resignation to the Comptroller and Auditor General of India in case of a Government Company and to the Registrar of Companies in case of Non-Government Companies.
While filing the statement, reasons for resignation and other facts as may be relevant with regard to his resignation shall also be indicated.
In case of non-compliance, he shall be punishable with fine ranging from ₹.50,000 to ₹.5,00,000.
REMUNERATION OF AUDITOR
The company fixes the remuneration of the auditor in the general meeting. However, where the Board of Directors appoint the first auditors of the company they can fix his remuneration. The remuneration is in addition to the fees payable to him. It includes any expenses incurred by the auditor in relation to the audit and any facility given to him. However, this remuneration does not include any amount paid to him for the rendering of any services other than audit.
RIGHTS OF AN AUDITOR [Sec. 143]
The Companies Act has conferred certain rights on auditor's so as to enable them to discharge their duties smoothly.
1. Right to Access Books and Vouchers: Every auditor of a company has a right to access book of accounts and vouchers of the company at all times. Vouchers include all documents, correspondence, agreements, etc. Books include financial, accounting, statutory and statistical books of the company. The term all times means only during the normal business hours.
2. Right to Obtain Information and Explanation: An auditor has the right to seek information and explanation from the directors and officers of the company. That will enable him to perform his duties successfully. Every officer of the company must furnish the necessary information to the auditor. If the officer refuses to do so, the auditor may report to the members of the company.
3. Right to Sign Audit Report [Sec.145]: The auditor has the right to sign the auditor’s report. The auditor can also sign or authenticate any document which the law requires to furnish.
4. Right to receive Notices and attend General Meeting [Sec.146]: The company must send all notices and communications to the auditor relating to any general meeting. The auditor shall attend the meeting either through himself or through his representative, who shall be an auditor. The auditor in general meeting must be given a reasonable opportunity to speak on any part of the business, which concerns him as the auditor.
5. Right to visit Branches: The auditor has the right to access all books and vouchers kept at the head office or at any branches of the company. In case the accounts of branches are audited by a person other than the company’s auditor, he shall be entitled to visit the branch office. The company auditor can get copies of accounts certified by the branch auditor.
6. Right to get Remuneration: The remuneration of the auditor of a company shall be fixed in its general meeting for auditing the books of accounts of the company. The auditor can claim remuneration from the appointing authority. At the time of winding up of the company, he can claim remuneration as creditor of the company.
7. Right to Report to Members: The auditor has the right and duty to report to the members of the company regarding the accounts examined by him. He is also required to give his opinion about whether the financial statements give a true and fair picture of the state of affairs of the company.
8. Right to seek Legal and Technical Advice: The auditor has the right to seek expert advice in respect of legal or technical matters at the expense of the company.
9. Right to give Suggestions to the Board: The auditor has the right to suggest some modifications in the books of accounts to the Board. The Board should comply with the suggestions made by the company auditor. If not, the auditor should report the same to the members. But the auditor cannot make changes in the books of accounts of his own.
10. Right to Correct Wrong Statements: The auditor has the right to correct wrong statements made by the directors relating to the accounts. But it should be remembered that any statement by him to this effect will not relieve himself of any omission or incompleteness in his report.
11. Right to be Indemnified: The auditor has the right to be indemnified out of the assets of the company against any liability incurred by him in defending himself against the civil or criminal proceedings by the company if it is proved that the auditor has acted honestly.
DUTIES OF AN AUDITOR [Sec 143]
1. Duty to report to the Members [Sec.143 (3)]
The auditor shall make a report to the members of the company on accounts and financial statements examined by him. The report shall state:
a. Whether he has sought and obtained all necessary information and explanations.
b. Whether proper books of accounts have been kept.
c. Whether the company's Balance Sheet and Profit and Loss account are in agreement with books of accounts and returns.
2. Duty to comply with Auditing Standards [Sec.143 (9)]
Every auditor shall comply with the auditing standards.
The Central Government shall notify standards in consultation with the National Financial Reporting Authority, (NFRA).
The government shall also notify that auditor’s report shall include a statement on such matters as notified.
3. Duty to report on Frauds [Sec. 143 (12)]
When an auditor suspects an offense involving fraud is being committed by officers or employees of the company, he shall immediately report the matter to the Central Government in such manner as may be prescribed.
6. Duty to assist investigation
It is the important duty of the auditor to assist the investigator to investigate the affairs of the company. Further, it is the duty of the auditor,
To provide and preserve the necessary documents which are in his custody to the investigator, and
To assist the investigator by providing all assistance in connection with the investigation.
7. Duty to be honest and exercise proper care
The auditor should be straightforward, honest and tactful and must not be influenced by others in discharge of his duties. He should be careful and cautious in performing his duties.
8. Duty to certify Statutory Report: The auditor has to certify statutory report as correct to the extent of –
Shares allotted by the company,
Cash received in respect of such shares, and
An abstract of receipts and payments of the company.
AUDIT REPORT
Audit report is the final stage of the audit process. The results of the audit are communicated through an 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 reports.
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 the subject matter of the report.”
Contents of Audit Report
1. Title of the report - The title of the audit report should help the reader to identify the report. It should disclose the name of the client. The title distinguishes the audit report from other reports.
2. Name of the Addressee - The addressee normally refers to the person who appoints the auditor. If a company appoints the auditor, the addressee should be shareholders. As per law, the complete address of the addressee is required. Addressee for the statutory audit shall be shareholders and in case of Special Audit, it is Central Government.
3. Introductory Paragraph - The introductory paragraph should specify that it is the auditor’s opinion on financial statements audited by him. The period covered by financial statements should be stated with exact dates.
4. Scope - This part should include the matter-of-fact relating to the manner in which the audit examination was made. The audit examination should cover the company's accounts, Profit and Loss Account, Balance Sheet and Cash Flow Statements. The examination should be as per the relevant law. The auditor should not curtail or limit any examination task.
5. Opinion - The auditor’s opinion on the books of account and financial statements examined by him is based on the information and free from bias. The auditor has to give his opinion as follows:
Whether the financial statements are arithmetically correct and correspond to the figures recorded in the books of accounts.
In case of unqualified opinion, whether the financial statements represent a true and fair view of the state of affairs and the results of operations.
In case of qualified opinion, if the Balance Sheet and Profit and Loss account do not present a true and fair view, the reasons for what and where is wrong.
6. Signature - The signature part should include the manual signature of the auditor.The personal name and signature of the auditor should be given. If the auditor is a firm, the signature in the personal name and firm name should be given.
7. Place of Signature - This should include the location of the auditor or the auditor firm, which is ordinarily their city.
8. Date of the Report - The date of completion of the audit work should be mentioned in this section.
Types of Audit Report
The audit report may be of the following types:
1. Clean or Unqualified Report: Clean or Unqualified report will be given by the auditor if the auditor is satisfied that the accounts, Balance Sheet, Profit and Loss Account and Cash Flow statement do represent a true and fair view and they are prepared in conformity with the accounting principles and statutory requirements.
2. Qualified Report : In the qualified report the auditor believes that overall financial statements are not fairly stated. The reasons for giving Qualified Report are be as follows:
i. The books of accounts, Profit and Loss Account and the Balance Sheet do not represent the true and fair view of the state of affairs and results of the operations, due to lack of conformity with the accounting principles and statutory requirements,
ii. The auditor is not able to verify the value and existence of certain assets,
iii. The information requested by the auditor is not furnished,
iv. Proper books of account are not maintained as required by law,
v. Part of audit examination done by other auditors.
3. Adverse or Negative Report: When there is sufficient basis for the auditor to form an opinion that the whole accounts and financial statements do not present a true and fair view of the financial condition and results of operation, the adverse or negative opinion will be given. The adverse or negative report will be given on the following grounds:
When the auditor is not satisfied with the truth and fairness of financial statements,
Non conformity with the Generally Accepted Accounting Principles,
Mistakes, discrepancies and material misstatement in the financial statements,
Omission of a material disclosure.
4. Disclaimer Report
The auditor may disclaim or refuse opinion on the accounts, Profit and Loss Account and the Balance Sheet, when he does not have sufficient information to base his opinion. In the scope and opinion paragraph, the auditor should give disclaimer information. This may happen on the following grounds:
The auditor has not been able to obtain sufficient information to form his opinion.
The audit examination is not adequate to form an opinion,
There are some material un-determined items in the audit examination.
AUDIT ATTESTATION
Attestation can be defined as, A legal acknowledgment to verify the authenticity of any document. It also includes verification that proper procedures and processes have been followed to get the document.
Audit attestation is a term used in the field of accounting and auditing to refer to a type of engagement where an independent auditor provides an opinion on the accuracy and fairness of financial information or the effectiveness of internal controls within an organization. The primary purpose of audit attestation is to enhance the credibility and reliability of financial statements and other information provided by a company. This is important for various stakeholders, including investors, creditors, and regulators, as it helps them make informed decisions.
Key points about audit attestation include:
Independence: In an attestation engagement, the auditor must be independent and have no conflicts of interest with the organization being audited.
Scope: The scope of an attestation engagement can vary and may include financial statement audits, reviews, or compilations, as well as assessments of internal controls, compliance with specific regulations, or other financial information and disclosures.
Reports: After conducting the attestation procedures, the auditor issues a report that provides their professional opinion on the subject matter. This report typically includes the auditor's findings, conclusions, and any recommendations for improvement.
AUDIT CERTIFICATES
An audit certificate is a document issued by an independent auditor attesting to the accuracy and reliability of a company's financial statements. It is used to provide assurance to stakeholders that the financial statements have been examined and found to be free from material misstatements and to confirm that the company's financial records comply with generally accepted accounting principles (GAAP). The audit certificate is typically included in a company's annual report and is required by law in many jurisdictions.
Advantages of Audit Certificates
Provides assurance to stakeholders that financial statements are accurate and reliable.
Helps detect and prevent fraud and mismanagement.
Improves the transparency and accountability of the organization.
Increases the credibility of the organization in the eyes of investors, lenders, and other stakeholders.
Helps organizations comply with legal and regulatory requirements.
Improves the overall efficiency and effectiveness of internal controls.
Enhances the reputation and image of the organization.
Disadvantages of Audit Certificates
Can be costly, as organizations must pay for the services of an auditor.
The process can be time-consuming and disruptive to the organization's operations.
The auditor's report may contain negative findings that can damage the organization's reputation.
The auditor's report may not be able to detect all instances of fraud or mismanagement.
Organizations may become too reliant on the auditor's report, rather than developing their own internal controls.
Can be viewed as a formality and may not be taken seriously by stakeholders.
May not be able to detect fraud if the company management is actively hiding it.
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