Final Course Paper 4 Corporate and Allied Law

S Sundar Raman, FCA

The Institute of Chartered Accountants of India

Recorded on: 20-October-2014

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This lecture has been delivered by faculty members to supplement the

Study Material, Practice Manual and other content

The views expressed in this lecture are of the Faculty Member.

The content of this video lecture has not been specifically discussed
by the Council of the Institute or any of its Committees and the views
expressed herein may not be taken to necessarily represent the views
of the Council or any of its committees

This e-Lecture was Recorded on:

October 20, 2014

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The e-Lectures, PPT, Podcasts

and Video lectures on ICAI
Cloud Campus aim to
supplement the Study Material,
Practice Manual and
Supplementary Study Material

The lecture recordings are made

according to the syllabus and
laws existing/ applicable as on
the date of recording.

Due to changes in law, there is

likely to be some time gap
between these changes and the
recording of updated lectures.

Hence, students are advised to

refer to the Study Material
including Supplementary Study
Material, if any, and other
relevant legislation for latest
provisions/ amendments
required for forthcoming
examination.

Eligible Person as Auditor

of Company = Chartered
Accountant

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Firm as Auditor (including

LLP) = If majority of the
Partners practising in India
are Chartered Accountants
=> Only CA can sign on
behalf of the Firm

A Pvt ltd wherein both the members are CAs.

Mr.Ranjith qualified CA who is a Director of the company.
Mr.Balu qualified CA who is a partner of Mr.Ganesh in Ganesh and
Bala LLP. Mr. Ganesh is the company secretary of MNC India Ltd.
Mr.Pillai, CA - whose brother Mr.Kathir has subscribed to
5000 shares of Rs.10/- each in MNC India.
7500 shares of Rs.10/- each in PQR India sub of MNC India
6000 shares of Rs.10/- each in ST India in which MNC has 25% voting power

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Brother
Including
Step
Brother

Father
(Including
Step
Father)

Sister
Including
Step
Sister
Individual

Daughter
Daughters
Husband

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Spouse

Mother
(Including
Step
Mother)

Son
(including
Step Son)
Sons
Wife

a. A body
corporate other
than LLP

b. An officer or
employee of the
Company

c. Partner or in
the employment
of /with above

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d. A person or his relative or partner (i) Holding any security in Company / Subsidiary / Holding / Associate
Company (Relative may hold FV not exceeding Rs.1 Lakh)
(ii) is indebted to company/subsidiary/holding/ associate company for
amount > Rs. 5 Lakhs
(iii) has given a guarantee /security for 3rd person to
company/subsidiary/holding/associate company for amount > Rs. 1 Lakh

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(e) Person / Firm has business relationship with company directly or

indirectly with the Company, or its Subsidiary, Holding or Associate
Company or Subsidiary of such Holding Company or Associate Company
(except prof services and transactions at FMV as customer in case of
telecommunication, airline, hotel and other similar business)

(f) a person whose relative is director / KMP

(g) a Person who is in full time employment elsewhere or a person or a

Partner of a Firm holding audits of more than 20 Companies on the
date of appointment or reappointment as Auditor,

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(h) a Person who has been

convicted by a Court, of an
offence involving fraud, and
a period of 10 years has not
elapsed from the date of
such conviction.

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(i) 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 Sec.144.

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Auditor after
appointment =
becomes subject to
any of the above
disqualifications

Deemed to have
automatically
vacated the office

Vacancy = Casual
Vacancy.

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DOI = 01.4.2014
Within 30 days from
date of registration

Appt of Aud = 30.4.2014 - BOD

Within 90 days from

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Appt of Aud = 29.7.2014 = Members in EGM

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First Auditor appointed on 30.4.2014

1 year

Hold Office till = Conclusion of First AGM

F.Yr ending 31.03.2015 => 6 mts => 30.9.2015

Auditor appointment in First AGM (for next Year)

5 years

Hold Office till = Conclusion of 6th AGM

F.Yr ending 31.03.2020

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DOI = 01.4.2014

Appt of Aud = 30.5.2014 C &AG

Within 60 days from

date of registration

Within 30 days from

failure

Appt of Aud = 29.6.2014 = BOD

Appt of Aud = 28.8.2014 = Members in EGM

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Within 60 days from

failure

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First Auditor-Appointment by Board within 30 days from

Managing Director of PQR Ltd. himself wants to
date of registration
(DOI)
appoint Mr.Ram, a practicing Chartered Accountant,
as first auditor of the company.

Board Failure: Company

Can MDindoEGM
so? within 90 days to
appoint and auditor shall hold office till first AGM
NO.
First Auditor C & AG cases Only
withinBoard
60 days from DOI
C & AG failure => Failing which BOD to appoint in next 30
days. Failing which company in GM to appoint in next 60
days

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BOD within 30 days can fill the vacancy. (If due to

resignation SH to ratify within 3 months)
Tenure: Shall hold office until the conclusion of the
next annual general meeting.
C & AG Apt: C & AG within 30 days failing which BOD
within next 30 days.

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Co. shall appoint Auditor(s) in First AGM

Tenure: From the conclusion of AGM - Until conclusion of 6th
AGM and thereafter till the conclusion of every 6th AGM
Selection made by Board based on the Recommendation to be
made by Audit Committee (Rule 3)
Company shall intimate the auditor & file the notice within 15
days to RoC in Form ADT -1
Auditor shall give written consent and certificate that
appointment satisfies the criteria u/s 141

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F.yr ending 31.3.2016 = 2nd AGM 1st AR

Ratification

F.yr ending 31.3.2017 = 3rd AGM 2nd AR

F.yr ending 31.3.2018 = 4th AGM 3rd AR

F.yr ending 31.3.2019 = 5th AGM 4th AR

Ratification

F.yr ending 31.3.2020 = 6th AGM 5th AR

Ratification

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Ratification

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Company shall place the matter for ratification at each and

every AGM.

If not ratified, the Board shall appoint another individual / firm as

auditor.

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The auditor appointed - u/r 3 shall submit a

certificate that The Individual or the Firm, is eligible and not disqualified
for appt under the Act or under the CA Act, 1949
The proposed appointment is as per the Act;
The proposed appointment is within the limits laid down by
or under the authority of the Act;
The list of proceedings against the auditor or audit firm
or any partner of the audit firm pending with respect to
professional matters of conduct, as disclosed in the
certificate, is true and correct.

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recommends

Board

Own recommendation

Audit
Committee

Send Back
Dis-Agrees

Agrees

AGM Appt
Recommends to Members in AGM
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Qualifications and Experience of the Individual / Firm.

Whether such Qualifications and Experience are commensurate with the size
and requirements of the Company.
Order /Pending Proceedings against Individual / Firm relating to professional
matter of conduct, before the ICAI /Competent Authority/Court.
Any other information which the Committee has called for from the Proposed
Auditor.

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Applicability:
(a) Listed Company
(b) Unlisted Company => Paid-Up Capital > Rs.10 crs
(c) Private Limited Cos => Paid-Up Capital > Rs.20 crs
(d) Any Coy having public borrowing from banks / FI /
Deposits > Rs.50 crs

Tenure / Cooling Period:

a)An individual auditor for 1 term of five consecutive
years Cooling period of 5 years
b)Firm for 2 term of 5 consecutive years cooling
period of 5 years

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Audit firm having a common partner or partners whose tenure has expired in
immediately pfy shall not be appointed for 5 years
Right given to members to decide about rotation of partners within the firm during
the tenure of appointment. Audit shall be conducted by more than one auditor
Period held before commencement of the act is taken into account s.t a
transition period of 3 years
Auditor or audit firm under the same network of audit firms shall not be eligible, under
rotation
Under this chapter Firm includes LLP

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Applicability:
a. Government company or
b. any other company owned or controlled, directly or indirectly, by
the CG, or SG or Governments
Time Limit: Within a period of 180 days from the commencement of the financial
year.
Tenure: Till conclusion of the annual general meeting.

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Retiring auditor may be re-appointed at AGM 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;
a special resolution has not been passed at that meeting for
appointing some other auditor or providing expressly that
he shall not be re-appointed

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Where No auditor apptd Existing auditor shall continue

Sec.139(10)

Where company has audit committee every matter has to be

done based on its recommendations

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Auditor may be removed

before expiry of term by
SR after obtaining CG
approval in Form ADT 2 . Auditor shall be given
opportunity of being
heard.

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Resigning Auditor shall

file to ROC within 30
days Form ADT - 3,
and In case of Govt
Companies, with C&AG
also, failing which Fine
Rs.50,000 Rs.5,00,000

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Grounds of seeking
removal of Auditor,

Details of Civil /
Criminal
Proceedings
pending,

Details of
Qualifications in
Accounts in past
3Yrs

Details of
Opportunity of
being heard given,

Special Notice
received for
Removal of Auditors

Percentage of
Capital held by
Members who
propose removal of
Auditors,

Whether all due

Audit Fees has
been paid to the
concerned Auditors
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Details of Other Services rendered by such Auditors to the

Company,
Number of years for which audit is pending
Stage of accounts for each financial year, e.g. yet to be
approved by Board, or yet to be handed over to Auditors, etc.
Dispute with regard to Books of Accounts in the possession
of Auditors but not delivered back to the Company.

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Special notice to be sent for appointment of auditor other than the existing
auditor before expiry of term
Company shall send notice to the auditor
Auditor shall send written representation
Company shall specify it in the notice and send to all members along with
notice, If not sent, it shall be filed with ROC
If the representation is delayed by the auditor , then it shall be read out at
the meeting
If auditor abuses the rights then representation needn't be sent/read out.
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Situation

Tribunal is satisfied that the Auditor of a Company has, directly

or indirectly,
1. acted in a fraudulent manner, or 2. abetted or colluded in any
fraud by the Company or its Directors or Officers.

Applicatio Suomotu by Tribunal, or Application by CG / Application by any

n
person concerned.
Order of
Tribunal

1. Order change of its Auditors, on the above cited grounds.

2. CG Appln: Tribunal shall make an order within 15 days of receipt of
application, that the person shall not function as an Auditor. CG may
appoint another Auditor in his place.

Effect of
Tribunals
Final
Order

1. No Appt of that auditor in the company = for 5 years.

2. Liability = All partners of Firm
3. The erring Auditors are also liable for action u/s 447 (Fraud).
[Imprisonment of 6 mts to 10 Years and Fine not less than the amount
equal to fraud and a maximum of 3 times of amount of fraud]
4. In case of criminal liability of any Audit Firm, the liability other than
fine shall devolve only on the concerned Partner(s) who acted in a
fraudulent manner, or abetted or colluded in the fraud.

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Remuneration fixed by
Coy in GM or such
manner as the Coy in
GM determine

First Auditor Board

Meeting.

Remuneration = Audit
Fee + Expenses
Incurred + Facility
extended to auditor
Fees for other services

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Auditor shall have access to

BOA(incl subsidiary) at all times,
either at RO or other place

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Officers shall give info & expln to

the auditor for performance of
duties and other inquiries
regarding loans &
advances/prejudicial
transactions/personal
expenses/shares allotted for
cash etc.

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Whether loans and advances made by the company have

been properly secured and whether the terms are
prejudicial to members;
Whether transactions which are represented merely by
book entries are prejudicial to the company;
Where the company not being an investment company or a
banking company, whether shares were sold at less than
purchase price

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Whether loans & advances are 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.
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Items
reported on

The Auditor shall make a Report to the Members of the

Company
(a) on the accounts examined by him, and
(b) on every Financial Statements which are required by or
under this Act to be laid before the
Company in General Meeting.

Reporting
Considerations

The Report shall be made after taking into account, the following
(a) the provisions of the Act,
(b) the accounting and auditing Standards,
(c) matters which are required to be included in the Audit Report
under the provisions of the Act / Rules / Order u/s 143(11)
(d) best of his information and knowledge.

Essence of
Report

In addition to other reporting matters, the Audit Report shall state

whether the said Accounts, Financial Statements, give a true and
fair view of
(a) the state of the Companys affairs as at the end of the financial
year,
(b) Profit or Loss,
(c) Cash Flow for the year.

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Obtaining Info/Explanation
Proper BOA(incl Branch)
Observation on Maintenance of Accounts
BS and P&L = are in agreement with BOA / Returns
Truth & Fairness of FS
Observation on Financial Transactions having adverse effect on the functioning of the Company
Director Disqualification
Adequacy of Internal Financial Controls
Impact of pending litigations on the financial position
Adequacy of the provision towards losses (including towards derivative contracts)
Delay in transferring funds to Investor Education and Protection Fund.

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Branch shall be audited and reported by:

Company Auditor himself
Branch Auditor separately appointed
In case of Foreign branch, auditor as per Foreign laws

CG in consultation with NAFRA shall direct certain points to

be included in Audit Report
Non compliance with this Section Fine Rs.1,00,000 Rs.25,00,000

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Situation: 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
Report Immediately to Board / Audit Committee - to reply within 45 days

Report to CG along with Board / AC Opinion within 45 days from the receipt
of reply (Form ADT-4 / RPAD / E-mail)

Non compliance of above: Fine of Min - Rs.1,00,000; Max Rs.25,00,000

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 ICAI

Accounting and
book keeping
services;

Internal audit;

Design and
implementation of
any financial
information system;

Actuarial services;

Investment advisory
services;

Investment banking
services;

Rendering of
outsourced financial
services;

Management
services; and

Any other kind of

services as may be
prescribed .
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Auditor shall/certify Auditors report and subsequent qualifications

All general meeting notices shall be forwarded to the auditor
Penalty for Non-Compliance:

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Company : Rs.25,000 Rs.5,00,000

Officer: Imprisonment 1y &or Rs.10k Rs.1L
Auditor: Rs.25,000 Rs.5,00,000
Auditor(willingly): 1y Imp &or Rs.1L Rs.25L

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Once convicted, auditor shall:

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Refund remuneration to coy

Pay for damages to the coy/authorities etc.
CG shall ensure payment for damages
In case of Audit Firm, Partners shall be jointly/severally
liable

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Cost audit shall be conducted by Cost Auditor appointed by the Board,

who shall be a Cost Accountant and not the company auditor
All rights, duties and powers of Company auditor shall apply to cost
auditor
Cost audit is in additional to audit u/s 143
CG may call for additional explanation
Penalty : Same as given in Section 147

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 ICAI

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