Ceneral duLles

4 (1) ln audlLlng any accounLs ln accordance wlLh Lhls AcL

an audlLor shall by examlnaLlon of Lhe accounLs and oLherwlse
saLlsfy hlmself or herself LhaL Lhe accounLs
(a) glve a Lrue and falr vlew of Lhe flnanclal affalrs of Lhe
relevanL body for Lhe perlod or aL Lhe daLe Lo whlch
Lhey relaLe as Lhe case may be
(b) comply wlLh any regulaLlons under secLlon 12 and any
dlrecLlons under secLlon 13 whlch are appllcable Lo
Lhem and
(c) comply wlLh Lhe requlremenLs of any oLher sLaLuLory
provlslon appllcable Lo Lhem
(2) ln audlLlng Lhe accounLs Lhe audlLor shall also conslder
wheLher
(a) Lhe appllcaLlon by or on accounL of Lhe relevanL body of
money provlded by 1ynwald
(b) Lhe paymenL or appllcaLlon of money or oLher properLy
held or recelved by or on accounL of Lhe body or
(c) a LransacLlon effecLed by or on accounL of Lhe body
ls or wlll be conLrary Lo law
(3) ln audlLlng Lhe accounLs Lhe audlLor shall also conslder
(a) wheLher Lhe lnLernal organlsaLlon of Lhe relevanL body
and Lhe lnLernal conLrols malnLalned by lL are such as
Lo secure Lhe proper managemenL of Lhe flnances of Lhe
body and economy and efflclency ln Lhe use of lLs
resources and
(b) where Lhe relevanL body ls a deslgnaLed body for Lhe
purposes of Lhe 1reasury AcL 1983 wheLher Lhe body has
complled wlLh any prlnclples or code of conducL prescrlbed
by Lhe Councll of MlnlsLers and speclfled for Lhe purpose
of Lhls paragraph by dlrecLlon of Lhe 1reasury
3 (1) ln relaLlon Lo any accounLs Lo be audlLed ln accordance
wlLh Lhls AcL Lhe relevanL body shall provlde Lhe audlLor wlLh
c23


The Companies Act, 1956


Powers and duties of auditors

(1) Every auditor of a company shall have a right of access at all times to the books and
accounts and vouchers of the company, whether kept at the head office of the company
or elsewhere, and shall be entitled to require from the officers of the company such
information and explanations as the auditor may think necessary for the performance of
his duties as auditor.

1
[1A) Without prejudice to the provisions of sub-section (1), the auditor shall inquire

(a) 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 not
prejudicial to the interest of the company or its members;

(b) whether transactions of the company which are represented merely by book entries
are not prejudicial to the interests of the company;

(c) where the company is not an investment company within the meaning of section 372
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;

(d) whether loans and advances made by the company have been shown as deposits;

(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and papers 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.]

(2) The auditor shall make a report to the members of the company on the accounts
examined by him, and on every balance-sheet and profit and loss account and on every
other document declared by this Act to be part of or annexed to the balance-sheet or
profit and loss account which are laid before the company in general meeting during his
tenure of office, and the report shall state whether, in his opinion and to the best of his
information and according to the explanations given to him, the said accounts give the
information required by this Act in the manner so required and give a true and fair
view

(i) in the case of the balance-sheet, of the state of the company's affairs as at the end of
its financial years; and

(ii) in the case of the profit and loss account, of the profit or loss for its financial year.

(3) The auditor's report shall also state

(a) whether he has obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purposes of his audit;

(b) 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;

[(bb) whether the report on the accounts of any branch office audited under section 228
by a person other than the company's auditor has been awarded to him as enquired by
clause (c) of sub-section (3) of that section and how he has dealt with the same in
preparing the auditor's report;]

(c) whether the company's balance-sheet and profit and loss account dealt with by the
report are in agreement with the books of account and returns;

[(d) whether, in his opinion, the profit and loss account and balance-sheet comply with
the accounting standards referred to in sub-section (3C) of section 211;]

[(e) in thick type or in italics the observations or comments of the auditors which have
any adverse effect on the functioning of the company;

(f) whether any director is disqualified from being appointed as director under clause (g)
of sub-section (1) of section 274.]

5
[(g) whether the cess payable under section 441A has been paid and if not, the details
of amount of cess not so paid.].

(4) Where any of the matters referred to in clauses (i) and (ii) of sub-section (2) or in
clauses (a), (b),
6
[(bb)]

[(c) and (d)] of sub-section (3) is answered in the negative or

with a qualification, the auditor's report shall state the reason for the answer.

[(4A) The Central Government may, by general or special order, direct that, in the case
of such class or description of companies as may be specified in the order, the auditor's
report shall also include a statement on such matters as may be specified therein:

Provided that before making any such order the Central Government may consult the
nstitute of Chartered Accountants of ndia constituted under the Chartered Accountants
Act, 1949 (38 of 1949), in regard to the class or description of companies and other
ancillary matters proposed to be specified therein unless the Government decides that
such consultation is not necessary or expedient in the circumstances of the case.]

9
[(5) The accounts of a company shall not be deemed as not having been, and the
auditors report shall not state that those accounts have not been properly drawn up on
the ground merely that the company had not disclosed certain matters if

(a) those matters are such as the company is not required to disclose by virtue of any
provisions contained in this or any other Act, and

(b) those provisions are specified in the balance-sheet and profit and loss account of the
company.]




uu1lLSClAnAuul1C8
1he sLaLuLory duLles of Lhe audlLor baslcally enLall Lhe followlng
1 uuLy Lo make cerLaln lnqulrles
2 uuLy Lo make a reporL Lo Lhe company on Lhe accounLs examlned by hlm
3 uuLy Lo make a sLaLemenL ln Lerms of Lhe provlslons prescrlbed
1he audlLor has a duLy Lo lnqulre lnLo cerLaln maLLers and seek any lnformaLlon
requlred for Lhe audlL from Lhe company 1hls could be ln relaLlon Lo securlLy on loans
and advances made by Lhe company any LransacLlons enLered lnLo by Lhe company and
wheLher Lhey are pre[udlclal Lo Lhe lnLeresLs of Lhe company wheLher personal expenses
are recorded and charged Lo proper accounLs any LransacLlon wlLh respecL Lo sale of
shares and wheLher Lhe poslLlon deplcLed ln Lhe books and balance sheeL ls correcL
honesL and proper
lf Lhere are any susplclous clrcumsLances or unusual LransacLlons llke
unavallablllLy of orlglnal documenLs or sudden lncrease or decrease ln shareholdlngs or
debL employees glven Lhe llberLy Lo access unauLhorlzed documenLs eLc Lhen Lhe audlLor
ls under a clear duLy Lo probe lnLo Lhese LransacLlons" and ensure LhaL Lhey are proper
and legal AL all Llmes audlLor has Lo acL wlLh care and sklll of a professlonal of
reasonable compeLence 1he degree of care and sklll requlred however varles from case
Lo case
AudlLor's8eporL
under SecLlon 227 of Lhe Companles AcL Lhe audlLor ls supposed Lo reporL Lo
Lhe beneflclarles of Lhe company le Lhe shareholders ln Lhe general meeLlng abouL Lhe
books and accounLs of Lhe company Lhe balance sheeL and proflL and loss accounL on
Lhe basls of Lhelr assessmenL 1hey have Lo glve Lhelr oplnlon on Lhe flnanclal poslLlon of
Lhe company and also make sure LhaL lL has been falrly Lruly and honesLly deplcLed
As per SecLlon 227 of Lhe Companles AcL Lhe reporL should also sLaLe 3
1 1haL Lhe audlLor has obLalned all lnformaLlon and explanaLlons whlch are
Lo Lhe besL of hls knowledge and bellef necessary for hls purpose
2 WheLher ln hls oplnlon all Lhe books of accounLs and requlslLe
documenLs necessary for Lhe audlL have been furnlshed by Lhe company
3 WheLher Lhe balance sheeL and proflL and loss accounL comply wlLh Lhe
books of accounLs and
4 Any observaLlon and commenLs on Lhe funcLlonlng of Lhe company
especlally whlch may have an adverse effecL on Lhe company
Pe ls Lhus requlred Lo reporL noL merely on Lhe balance sheeL buL on Lhe accounLs
he examlnes and he also has Lo express hls oplnlon wheLher Lhe company has properly
kepL all Lhe books as per law and wheLher Lhe balance sheeL and proflL and loss accounL
are ln accordance wlLh Lhe accounLlng sLandards and procedures prescrlbed by Lhe lCAl
1he reporL should be compleLe conclse clear and unamblguous and Lhe audlLor
should be careful abouL Lhe language used as Lhe readers of Lhe reporL are all laymen
AudlLor's oplnlon can be quallfled or unquallfled A quallfled oplnlon ls an
oplnlon sub[ecL Lo cerLaln reservaLlons 1haL means LhaL Lhe audlLor ls unable Lo saLlsfy
hlmself LhaL Lhe accounLs presenL a Lrue and falr vlew of Lhe company's flnanclal poslLlon
As per SecLlon 227(4) of Lhe Companles AcL Lhe naLure and reasons of quallflcaLlon
should also be clearly sLaLed lnsLead of merely sLaLlng grounds for susplclon
lor Lhe purpose of drawlng up Lhe reporL Lhe audlLor ls glven Lhe rlghL Lo lnspecL
and examlne Lhe books and accounLs balance sheeLs and vouchers or any oLher requlslLe
documenLs necessary for Lhe purpose of Lhe audlL 1hese documenLs can be accessed by
Lhe audlLor aL all Llmes lrrespecLlve of where Lhey are kepL 1he audlLor can also ask for
any lnformaLlon and explanaLlon from Lhe offlcers of Lhe company and Lhe offlcer would
be under a duLy Lo furnlsh Lhe lnformaLlon and explanaLlon so needed
uuLyLoreporLfraud
uurlng Lhe course of Lhe audlL Lhe audlLor could come across slLuaLlons where he
dlscovers LhaL a senlor employee ls defraudlng Lhe company or uslng unfalr pracLlces 4
Lhen an obllgaLlon arlses of Lhe audlLor Lo reporL whaL he has dlscovered Lo Lhe
managemenL lmmedlaLely so LhaL approprlaLe acLlon can be Laken lf Lhe audlLor ldenLlfles
Lhe posslble exlsLence of fraud or oLher lrregularlLles ln accounLlng pracLlces Lhe audlLor
should aLLempL Lo clarlfy lL or reporL lL 1here may be clrcumsLances where Lhe audlLor
needs Lo reporL Lo a Lhlrd parLy wlLhouL Lhe consenL and knowledge of Lhe managemenL
when he suspecLs LhaL Lhe managemenL may be lnvolved 1he audlLor should conslder
Lhe magnlLude of loss LhaL wlll occur due Lo Lhe fraud and lrregularlLy and Lhe number of
people LhaL wlll be affecLed by lL or Lhe posslblllLy of recurrence of Lhe fraud lf gone
unreporLed As a measure of recoverable loss Lhe courL noLed LhaL no losses would have
been lncurred from Lhe daLe of dlscovery lf Lhe audlLor had Laken some acLlon Lo blow
Lhe whlsLle
2

AudlLor'sduLlesLoLhlrdparLles
1he courLs have held LhaL lf Lhe audlLors know or have reason Lo belleve LhaL Lhe
accounLs so prepared by Lhem wlll be relled upon by Lhlrd parLles Lhey are under a duLy
Lo ensure LhaL Lhose accounLs are carefully prepared and LhaL Lhey don'L conLaln any false
lnformaLlon or negllgenL mlssLaLemenLs and LhaL Lhey reflecL a Lrue and falr reflecLlon of
Lhe company's flnanclal poslLlon
1here ls no legal prlnclple LhaL a holdlng company ls unable Lo recover damages
for loss ln Lhe value of lLs subsldlary resulLlng dlrecLly from a breach of duLy owed Lo Lhe
company lLself as dlsLlncL from a duLy owed Lo Lhe subsldlary
3

WlLh respecL Lo Lhe duLy of audlLors Lowards shareholders and lnvesLors ln Lhe
case of Caparo lndusLrles lc vs ulckman
4
Lhe plalnLlff company ln an aLLempL Lo make
a bld for Lhe Lakeover of anoLher company relled upon Lhe accounLs and sLaLemenLs
prepared by Lhe audlLors of Lhe LargeL company and suffered a loss due Lo lnaccuracy of
Lhe accounLs ln an acLlon agalnsL Lhe audlLors Lhe courL held LhaL Lhe audlLor owed a
duLy Lo Lhe company's shareholders buL noL Lo poLenLlal lnvesLors 1hls rullng was
afflrmed ln a number of cases LhereafLer

2
Sasea llnance LLd vs kMC (2000) 1 8CLC 236 aL 241242
3
8arlngs lc vs Cooper Lybrand (1997) 1 8CLC 427 (CA)
4
(1990) 8CLC 273 3
8uL posL Lhe rullng of Columbla Coffee 1ea Ly LLd vs Churchlll
3
Lhe
Supreme CourL of new SouLh Wales held LhaL a company's audlLors do owe a duLy of
care Lo poLenLlal purchasers alLhough slnce ln Lhls case no rellance was placed on Lhe
audlLor's reporL Lhe audlLors were noL held llable 1hls has now been overruled buL Lhe
law now sLaLes LhaL under speclal clrcumsLances Lhere may arlse a dlrecL relaLlonshlp
beLween a Lhlrd parLy and Lhe audlLors ln Lhe absence of such clrcumsLances an audlLor
ls generally noL found Lo owe any duLy Lo Lhe Lhlrd parLy unless he or she lnLended LhaL
person Lo rely on Lhe sLaLemenL or lf Lhere ls an assumpLlon of responslblllLy
uuLyasLoconslderableaccuracy
1he audlLor's funcLlon ls noL [usL Lo verlfy Lhe arlLhmeLlcal accuracy of Lhe
accounLs buL LhaL lL lncludes all Lhe parLlculars requlred by law and LhaL lL presenLs a
correcL and honesL vlew of Lhe company's flnanclal sLandlng 1herefore he musL examlne
all Lhe records and books of Lhe company wlLh uLmosL care and preclslon
ueLecLlonandrevenLlonoflraud
1he Lerm fraud ls deflned as
An lnLenLlonal perverslon of Lhe LruLh for Lhe purpose of lnduclng anoLher ln
rellance upon lL Lo parL wlLh some valuable Lhlng belonglng Lo hlm or Lo surrender a
legal rlghL A false represenLaLlon of a maLLer of facL wheLher by words or by conducL by
false or mlsleadlng allegaLlons or by concealmenL of LhaL whlch should have been
dlsclosed whlch decelves and ls lnLended Lo decelve anoLher so LhaL he shall acL upon lL
Lo hls legal ln[ury A generlc Lerm embraclng all mulLlfarlous means whlch human
lngenulLy can devlse and whlch are resorLed Lo by one lndlvldual Lo geL advanLage over
anoLher by false suggesLlons or by suppresslon of LruLh and lncludes all surprlse Lrlck
cunnlng dlssembllng and any unfalr way by whlch anoLher ls cheaLed
6

lraud baslcally falls lnLo Lhe followlng Lhree caLegorles

3
(1992) 29 nSWL8 141(AusL)
6 8lacksLawulcLlonary(SlxLh LdlLlon 1990) 6
- ManagemenLfraud when Lhe senlor managemenL ls lnvolved and Lhey
are manlpulaLlng Lhe flnanclal sLaLemenLs and mlsrepresenLlng Lhe real
plcLure or LhefL or lmproper use of company resources
- Lmployeefraud whlch lnvolves nonsenlor employee LhefL or lmproper
use of company resources and carrylng ouL of pracLlces and LransacLlons
under Lhe Lable and
- LxLernal fraud whlch lnvolves LhefL or lmproper use of resources by
people who are nelLher managemenL nor employees of Lhe flrm
7

lnLernal audlL sLaff and exLernal audlLors have Lo perform an essenLlal funcLlon of
fraud prevenLlon and deLerrence as Lhey are up Lo speed experlenced and Lralned ln Lhe
same and can see Lo lL LhaL Lhe loopholes ln Lhe sysLem and Lhe rlsk areas are ldenLlfled
and lnvesLlgaLed Cnce Lhey are ldenLlfled qulck acLlon has Lo be Laken Lo address and
recLlfy Lhem 1he lnLernal processes and programs have Lo be LesLed aL regular lnLervals
Lo LesL Lhelr effecLlveness

ln order Lo do Lhls Lhe audlLor needs Lo ensure LhaL effecLlve anLl fraud programs
are ln place whlch noL only prevenLs fraud buL also asslsLs ln lLs deLecLlon and cure
1hls can be done by
1 Cbservlng Lhe modus operandl of flnanclal reporLlng
2 Cverseelng Lhe lnLernal audlL and conLrol sysLem and
3 8eporLlng flndlngs Lo Lhe managemenL
Some of Lhe facLors LhaL lndlcaLe Lhe exlsLence of fraud are unavallablllLy of
orlglnal documenLs unusual relaLlonshlps unauLhorlzed LransacLlons and unexplalned
lLems ln Lhe accounLs sudden lncrease or decrease ln Lrends employees glven llberLy Lo
access sysLem and records dlsparlLles ln accounLs and spur of Lhe momenL ad[usLmenLs ln
Lhe books
Cnce Lhe fraud ls deLecLed Lhe audlLor can lnvesLlgaLe lL furLher by auLhenLlcaLlon
of orlglnal documenLs lmprompLu LesLs and locaLlon vlslLs conLacLlng ma[or cusLomers
and suppllers lnLervlewlng Lhe personnel and LesLlng Lhe veraclLy of compuLer records

7
hLLp//wwwalcpaorg/audcommcLr/LoolklLsnpo/lraudhLm 7
1he audlLor should Lhen reporL of Lhls Lo Lhe dlrecLor or Lhe managemenL unless
clrcumsLances are such LhaL Lhelr lnvolvemenL ls suspecLed 1he posslblllLy of deLecLlon ls
a loL less ln such cases Powever Lhen Lhe audlLor can elLher approach a Lhlrd parLy or
conslder legal counsel
1he audlLor ls aL all Llmes requlred Lo acL wlLh reasonable care and sklll buL he ls
noL requlred Lo always be on Lhe lookouL for fraud or a lle unless he comes across such
lnformaLlon or slLuaLlon whlch ls unusual and lnsLlgaLes hlm Lo acL wlLh susplclon of a
professlonal man of reasonable compeLence An audlLor's maln funcLlon ls Lo assess Lhe
flnanclal poslLlon of Lhe company and deplcL Lhe same ln Lhe accounLs le Lhe balance
sheeL and proflL and loss accounL 1here ls no hard and fasL rule for deflnlng reasonable
sklll and care and LhaL varles from case Lo case lf Lhere are susplclous and unusual
LransacLlons and feaLures ln Lhe accounLs or oLher prlma facle reasons reasonable sklll
and care has Lo be exerclsed
An audlLor ls noL Lo be conflned Lo Lhe mechanlcs of checklng vouchers and
maklng arlLhmeLlcal compuLaLlons Pe ls noL Lo be wrlLLen off as a professlonal adderupper and
subLracLor" Pls vlLal Lask ls Lo Lake care Lo see LhaL errors are noL made of
omlsslons commlsslons or downrlghL unLruLhs 1o perform hls duLy properly he musL
come Lo lL wlLh an lnqulrlng mlnd noL susplclon or dlshonesLy


LlA8lLl1lLSClAnAuul1C88
1he audlLor has a flduclary relaLlonshlp vlsvls Lhe shareholders of a company
Lherefore he has a moral obllgaLlon Lo see LhaL ensurlng LhaL Lhe sLaLemenLs lssued are
made wlLh Lhe uLmosL sklll safeguards Lhelr lnLeresLs and care and deplcL Lhe Lrue and falr
sLaLe of affalrs of Lhe company
SecLlon 233 of Lhe Companles AcL lmposes a penalLy for on Lhe audlLors for noncompllance of SecLlons
227 and 229 wlLh paymenL of flne lf Lhere ls wllful negllgence and
defaulL 1he audlLor may have Lo compensaLe Lhe members or shareholders of Lhe
company who have suffered losses aLLrlbuLable Lo Lhe negllgence ln performance of Lhe
audlLor's duLles 1he audlLor may be held llable ln LorL for fraud and lf Lhere ls negllgence
ln deLecLlon of errors LhaL may cause loss Lo Lhe company
ln order Lo hold Lhe audlLor llable for fraud Lhe followlng condlLlons musL be
saLlsfled
1 LhaL Lhe sLaLemenL slgned by Lhe audlLor ls unLrue and false
2 LhaL he knew lL Lo be unLrue elLher or dld noL apply reasonable care and
sklll
3 LhaL he lnLended Lhe reporL Lo be relled on by oLhers and
4 LhaL Lhe parLles on relylng upon Lhe reporL suffered loss
1he Companles AcL 1936 lmposes a Crlmlnal llablllLy under SecLlon 628 on any
person who makes a false or unLrue sLaLemenL Lhrough any documenL llke balance sheeL
proflL and loss accounL reLurn prospecLus lnLenLlonally Lhereby causlng a loss Lo Lhe
people who rely on such documenLs
1he audlLor who knowlngly doesn'L make a falr and honesL reporL of Lhe
company's flnanclal poslLlon ln any reporL cerLlflcaLe reLurn prospecLus or oLher
documenLs and makes false sLaLemenLs Lhereln ls llable

1he shareholders lnLeresLs are dependanL on Lhe degree of care and sklll applled
by Lhe audlLor Lo draw up an accuraLe and honesL reporL of a company's sLaLe of affalrs
1herefore Lhe audlLors should employ uLmosL good falLh care and vlgllance ln Lhe
carrylng ouL of Lhelr duLles lf Lhere ls Lhe sllghLesL blL of susplclon of Lhe legallLy and 9
lnLegrlLy of a record or LransacLlon Lhe audlLor ls under a duLy Lo lnvesLlgaLe and reporL lL
before he cerLlfles lL Lo be Lrue



AU0ITDPS - PPDVISIDNS UN0EP CDhPANIES ACT, 156





UALIFICATIDNS: As per Sub SectIon (1) of SectIon 226 provIdes that member of
nstItute of Chartered Accountant of ndIa and holdIng practIcIng certIfIcate name as
a AudItor of a Company.

Two or more chartered accountants can be appoInted by Its fIrm name as a AudItors
of a company If

All the partners are members of nstItute of Chartered Accountant of ndIa

All of them practIce In ndIa.


0ISUALIFICATIDNS: As per Sub sectIon (J) of SectIon 226 , none of the followIng
persons shall be qualIfIed for appoIntment as AudItor of a Compny.

a) ody corporate
b) An offIcer or employee of the company
c) A person who Is a partner, or who Is In the employment, of the offIcer or
employees of the company
d) A person who Indebted to the company for an amount of more than
Fs.1000/
e) A person who has gIven any guarantee or provIded any securIty In
connectIon wIth the Indebtness of any thIrd person to the company for an
amount exceedIng Fs,1000/
f) A person holdIng any securIty of that company ( After a perIod of one year
from the date of commencement of the CompanIes (Amendment ) Act, 2000)
or the purpose of securIty means an Instrument whIch carrIed votIng rIghts.

AccordIng to Sub sectIon (4 ) of SectIon 226 provIdes that If a person dIsqualIfIed as
a AudItor for the reasons enumerated In sub sectIon (J) of SectIon 226 then he
cannot be appoInted as AudItor of any body corporate whIch Is

1) A subsIdIary of that company or
2) oldIng company of that company or
J) A subsIdIary of that company's holdIng company

The dIsqualIfIcatIon comes Into effect ImmedIately after the reasons enumerated In
sub sectIon (J) or Sub SectIon (4) of the CompanIes Act, 1956.


AppoIntment of FIrst AudItor:

AccordIng to sub sectIon 5 of SectIon 224, the board has vested wIth power to appoInt
fIrst audItor wIthIn one month of IncorporatIon of the company. The date of
appoIntment to be wIthIn one month from the date mentIoned In CertIfIcate of
IncorporatIon Issued by FegIstrar of CompanIes I.e. exIstence of the company from
date I. e legal entIty.

CertIfIcate to be obtaIned under SectIon 224 (1) : ThIs provIsIon wIll not be
applIcable to PrIvate company on and after the commencement of CompanIes
(Amendment) Act, 2000 . The publIc lImIted companIes are supposed to receIve the
certIfIcate from the AudItor before appoIntment that If they are appoInted as a
AudItor of the CompanIes the appoIntment wIll be wIthIn lImIts specIfIed In sub
sectIon (1) of SectIon 224 of the CompanIes Act, 1956.

ExplanatIon to SpecIfIed number

There are two categorIes

a) A person or fIrm can audIt twenty such companIes have paId up capItal of
less than Fs.25 lakhs
b) n any other case In the specIfIed lImIt, out of twenty companIes not more
than 10 shall be companIes each of whIch has a paId up share capItal of Fs.25
lakhs or more.

After the oard |eetIng:

The company should gIve IntImatIon to the appoIntment to the audItor that the oard
of 0Irectors of the company appoInted them/hIm as theIr AudItors of the company.

The audItor In turn to fIle necessary IntImatIon to FDC vIde orm No.2J of hIs
appoIntment.


FIPST AU0ITDPS NDT APPDINTE0 WITHIN DNE hDNTH:-


Normally the fIrst audItor to be appoInted wIthIn one month from date of
IncorporatIons. n case If the fIrst audItors not appoInted wIthIn J0 days of It
IncorporatIon, the shareholders appoInt hIm general meetIng. The general meetIng Is
expressIon extra ordInary general meetIng. The resolutIon for appoIntment of
audItors to be an ordInary resolutIon. n EC|, all busIness are transacted are to be
taken as SpecIal usIness. Even though the audItor appoIntment at Annual Ceneral
meetIng the appoIntment of an audItor wIll be ordInary busIness and ordInary
resolutIon.

n PublIc lImIted companIes are supposed to obtaIn statutory report as well as to
conduct statutory meetIng. To meet thIs requIrements, the oard of publIc lImIted
companIes necessarIly appoInt fIrs audItors wIthIn J0 days from the date of
IncorporatIon.

APPDINThENT DF AU0ITDPS AT ANNAUL CENEPAL hEETINC:

After the appoIntment of fIrst audItors In oard meetIng, the audItor hold offIce upto
the conclusIon of fIrst annual general meetIng. After the fIrst annual general
meetIng, every annual general meetIng, the company must appoInt hIm.

efore reappoIntIng hIm, the company has to obtaIn an certIfIcate from the audItors
under SectIon 224 (1) of the CompanIes Act, 1956. The lImIt prescrIbed under
SectIon 224 (1) wIll not be applIcable to PrIvate company.

Dnce the Annual Ceneral meetIng wIll be over, the company has to IntImate hIm
wIthIn 7 days of the meetIng that he has been reappoInted or appoInted. Thereafter
the audItor has to fIle forms under 2J to fIled wIthIn J0 days to FegIstrar of
CompanIes.

FDLLDWINC CIPCUhSTANCES THE PETIPINC AU0ITDP SHALL NDT E PEAPPDINTE0

As per Sub sectIon (2) of SectIon 224 , the followIng cIrcumstances, the retIrIng
audItor shall not be reappoInted.

a) e Is not qualIfIed for reappoInted
b) e has gIven the company notIce In wrItIng of hIs unwIllIngness to be
reappoInted.
c) A resolutIon has been passed at that Annual general meetIng appoIntIng
somebody Instead of hIm of provIdIng expressly he shall not be reappoInted.
d) A notIce of the Intended resolutIon to appoInt some person or persons In
the place of a retIrIng audItor, and by reasons of death, IncapacIty or
dIsqualIfIcatIon of that person or of all those persons as the case may be, the
resolutIon cannot be proceeded wIth.


AU0ITDP NDT TD E APPDINTE0 EXCEPT WITH THE APPPDVAL DF THE
CDhPANY Y SPECIAL PESDLUTIDN IN CEPTAIN CASES SECTIDN 224A DF THE
CDhPANIES ACT, 156.

The audItor appoIntment through ordInary resolutIon to be passed at the Annual
Ceneral |eetIng of the company. n certaIn cases, the act provIdes that the saId
appoIntment of audItor to be passed through specIal resolutIon. A company whose
subscrIbed capItal not less than 25 Is held sIngly or In any combInatIon by : ( Sub
sectIon (1) of SectIon 224A)

a) A PublIc InancIal nstItutIons
b) A Covernment Company
c) Central Covernment
d) State Covernment
e) Any fInancIal InstItutIon or any other InstItutIon establIshed by ProvIncIal of
State Act In whIch a State Covernment holds not less than 51 of the
subscrIbed capItal.

As per sub sectIon (2) of SectIon 224 A that any company referred to In sub
sectIon (1) faIls or omIts to pass at Its general meetIng any specIal
resolutIon appoIntIng an audItor or audItors , It shall be deemed that no
audItor or audItors has been appoInted by the company at Its general
meetIng and thereupon the provIsIons of sub sectIon (J) of SectIon 224 shall
become applIcable to such company.

CENTPAL CDVEPNhENT TD APPDINT AU0ITDPS

Sub sectIon (J) of SectIon 224 of the CompanIes Act, 1956 provIdes where at an
annual general meetIng no audItors are appoInted or reappoInted, the Central
Covernment may appoInt a person to fIll the vacancy.

CASUAL VACANCY DF THE AU0ITDPS

Sub sectIon 6 (a) of SectIon 224 of the CompanIes Act, 1956 provIdes that board
may fIll any causal vacancy In the offIce of an audItor. n case of joInt audItors, If
any such vacancIes contInues, the remaInIng audItor or audItors, If any may act.

n case of casual vacancy arIses on account of resIgnatIon of the audItor, the
resultIng vacancy shall only be fIlled by the Company In general meetIng.

The audItor appoInted In a casual vacancy shall hold offIce untIl the conclusIon of
next annual general meetIng.

APPDINThENT DF AU0ITDPS IN JDINT VENUTUPE CDhPANIES: oInt venture
companIes both partners need a mutual consent to appoInt an audItor of the
company. Some of the joInt venture company's artIcles provIde that certaIn
Items to be passed by specIal resolutIon. Dne of the Items may be appoIntment or
reappoIntment of audItors of the company. The Idea behInd that the consent of
joInt venture partner Is also requIred for the saId appoIntment. All major
decIsIons are to be taken as specIal resolutIon to be passed by the company at
theIr general meetIng.

PIghts of AudItors of the Company:

a) FIghts to collect InformatIon to be gIven In alance Sheet and ProfIt and
Loss Account ( SectIon 211 of the CompanIes Act, 1956)
b) FIght of access to books and vouchers (sub sectIon (1) of SectIon 227 of
the CompanIes act, 1956)
c) FIght to obtaIn InformatIon and explanatIons (sub sectIon (1) of SectIon 227
of the CompanIes act, 1956)
d) FIght to vIsIt branch offIce and access to branch accounts sub sectIon (2)
of SectIon 228 of the CompanIes Act, 1956
e) FIght to sIgnature for authentIcatIon ( SectIon 229 of the CompanIes Act,
1956)
f) FIght to receIve notIce ( SectIon 2J1 of the CompanIes Act, 1956)
g) FIght to attend general meetIng ( SectIon 2J1 of the CompanIes Act, 1956)




AN OVERVIEW RELATING TO AUDIT UNDER THE COMPANIES
ACT, 1956


Audit of Annual Accounts of a company is compulsory and is indispensable part of
incorporated business. Those who carry on business with the other peoples money have to
be accountable to the so-called owners. Management and accountancy demands specialised
skill. Shareholders are generally laymen. Thus there arises a need of an agency to stand in
between the shareholders and management. The agency, viz., statutory auditors, should be
technically qualified for the job and should be independent, and able to withstand the
pressure of management. It is because of this law demands for skill full and independent
auditor, who is appointed by the shareholders of the company so that they are reported by
a reliable person.


SectIon 224 (1) of iIc Comanics Aci, 1956 siaics iIai cvcry comany wIciIcr ii is
ullic or rivaic limiicd sIall Iavc an audiior io audii iis accounis. TIc aoinimcni
of audiior is mandaiory in iIc Annual Ccncral Mcciing for iIc cnsuing ycar. TIc
Audiiors aoinicd ai iIc Annual Ccncral Mcciing Iold iIc officc from iIc conclusion
of iIc Annual Ccncral Mcciing ai wIicI Ic is aoinicd uniil iIc conclusion of iIc
nci Annual Ccncral Mcciing. Tbus, tbe Act seeks to ensure tbat tbe appoIntment
oI audItors Is not In tbe bands oI tbe dIrectors and Is vested In tbe generaI body
oI sbareboIders.
owcvcr, iIc firsi audiiors of iIc Comany arc aoinicd ly iIc Doard of Dircciors
wiiIin onc moniI from iIc daic of incororaiion of a comany. TIc audiiors, so
aoinicd, Iold iIc officc uniil iIc conclusion of iIc firsi annual gcncral mcciing of
iIc Comany. If iIc Doard fails io aoini iIc firsi audiior, iIc comany may do so ai
a gcncral mcciing.


The first proviso of Section 224 (5) of the Companies Act, 1956, states that the company
may, at a general meeting, remove the first auditor appointed by the board and appoint in
its place other auditor of whose nomination a special notice has been given.

As the auditor is appointed from the conclusion of one annual general meeting until the
conclusion of the next annual general meeting, the auditor shall not cease to hold the office
in case the next annual general meeting is not held in each calendar year as required by
Section 166 of the Companies Act, 1956. Thus, he will continue in office until the next
annual general meeting is actually held and concluded. He cannot be deemed to have
retired on the date when the meeting ought to have been held.


MAXIMUM NUMBER OF COMPANIES FOR AN AUDITOR
Section 224 (1B) places a ceiling on the number of audits of
public companies which a Chartered Accountant not in full
time employment, or a firm of Chartered Accountants, can
conduct.

1. A person can be appointed as an auditor, who is not
in full-time employment elsewhere, of a maximum of 20
companies as described below
2. Where some companies have paid-up capital of or
more than 25 Lacs, a person can be appointed as auditor
of only 20 companies out of which not more than 10
companies can have paid up capital of or
exceeding Rs. 25 Lacs.
3. In a firm of auditors, total number of 20 companies
shall be for every partner of the firm who is not in full-
time employment elsewhere.

As per the fourth proviso added to sub-section (1B) by the
Companies (Amendment) Act, 2000, private companies have
been excluded from the existing ceiling of 20 audits per
partner and sub-ceiling of 10 audits for companies having a
paid up capital of Rs. 25 Lacs or more. Thus, apart from 20
audits of public companies, an auditor may conduct audit of
private companies without any ceiling.

CONFIRMATION FROM AUDITOR
efore a company makes an appointment or reappointment of an auditor, a written
certificate has to be obtained from the person concerned stating that the appointment or
reappointment, if made, will be within the limits specified above.


NOTICE TO THE AUDITOR AND INTIMATION BY THE AUDITOR
After appointment/reappointment of an auditor at the annual general meeting, the company
shall give intimation to the auditor, so appointed within seven days thereof. On receipt of
the intimation from the company, the auditor shall submit a return to the Registrar of
Companies within 30 days of the receipt of the intimation, informing the Registrar whether
he has accepted or refused to accept the appointment, in Form No. 23 as prescribed by
Companies (Central Governments) General Rules and Forms, 1956. However, the first
auditors are under no obligation to inform the Registrar.


REAPPOINTMENT OF AUDITORS
At every Annual General Meeting, a retiring auditor shall be reappointed unless:-
1. he is not qualified for re-appointment;
2. He has given the company notice, in writing, of his unwillingness to continue as
auditor;
3. A resolution has been passed at an annual general meeting appointing somebody or
stating that he shall not be reappointed.


Section 224(3) of the Companies Act, 1956 provides that where at an annual general
meeting no auditors are appointed or re-appointed, the Central Government may appoint a
person to fill the vacancy. For this purpose, an application has to be made by the company
to the Regional Director (to whom the powers have been delegated), within 7 days of the
conclusion of the meeting, for appointment of an auditor and fixing his remuneration.


CASUAL VACANCY [Section 224 (6)(a)]
A casual vacancy is a vacancy of a temporary nature that may occur during the currency of
the year after the appointment is made by the company at its general meeting. The auditor
appointed in a casual vacancy shall hold office till the conclusion of the next annual general
meeting. If the casual vacancy arises, the remaining auditors, if any, will continue to act as
the auditors of the company.
Where the casual vacancy arises due to death or disqualification, the oard of Directors may
appoint another auditor. ut where the casual vacancy is caused by resignation of an
auditor, the oard cannot fill up the casual vacancy but the vacancy so caused by
resignation, shall be filled by the company in general meeting.


RESIGNATION OF AUDITOR
An auditor may resign before his term of office expires by depositing a notice in writing to
that effect at the companys registered office. His resignation becomes effective on the date
he lodges such notice or on such later date as may be specified in the notice.


RETIRING AUDITOR CANNOT BE REMOVED BY THE BOARD [Section 224(7)]
The oard of Directors of the Company has no power to remove an auditor appointed by the
company in general meeting, i.e., the auditors can be removed only by the company in
general meeting and prior approval from the Central Government is also necessary for such
removal of the auditors.


REMUNERATION OF AUDITORS [Section 224(8)]
The oard fixes the remuneration of the First Auditors. Where the auditor is appointed or
re-appointed by the general meeting, the remuneration is fixed by the general meeting, or it
may be fixed in any manner as determined by a general meeting. Where Central
Government is approached for appointing the auditor, the Government fixes the
remuneration.(This power of the Central Government is delegated to the Regional Director)
The remuneration fixed for an auditor is inclusive of all expenses allowed to him so that he
cannot claim any amount additional to the remuneration fixed either as expenses or
otherwise.


QUALIFICATION & DISQUALIFICATION OF AUDITORS [Section 226]
Only individual, possessing the requisite knowledge and skill, can be appointed as auditor of
the company. The auditor should be independent in carrying out his work so that he is able
to give an unbiased opinion based on an objective assessment of facts. Thus, he should
have no interest, financial or otherwise and whether directly or indirectly, in the company
and/or its management.
A person, who is Chartered Accountant within the meaning of Chartered Accountants Act,
1949 and holds a certificate of practice, or a partnership firm where of all the partners are
Chartered Accountants holding certificates of practice, may be appointed as auditor of a
company. However, in the latter case, the appointment as an auditor may be made in the
firm name and any of its partners may act in the name of the firm.
The following persons cannot be appointed as auditor of a Company:
1. An officer or employee of the company;
2. A person who is partner with an employee of the company or employee of an
employee of the company;
3. Any person who is indebted to a company for a sum exceeding Rs. 1,000/- or who
have guaranteed to the company on behalf of another person for a sum
exceeding Rs. 1,000/-.
4. A person who is holding any security of that company, after a period of one year
from the date of commencement of Companies (Amendment) Act, 2000.
If an auditor, after his appointment, becomes subject to any disqualification mentioned
above, he shall be deemed to have vacated as such.


SPECIAL RESOLUTION FOR APPOINTMENT OF AUDITOR [Section 224A]
This Section provides for appointment or reappointment of auditors at an annual general
meeting by a special resolution when 25% or more of the subscribed share capital of the
company is held jointly or singly by a public financial institution, a Government company,
Central Government, any State Government, any institution established by a State Act in
which the State Government holds not less than 51% of the subscribed share capital, a
nationalised bank or an insurance company.
Certified copy of the special resolution so passed shall be filed with the Registrar within 30
days of passing, in Form No. 23.
It is also to be noted that, if, after notice of the annual general meeting is issued in the
usual course and before the holding of meeting, it happens that the holdings of the public
financial institutions have reached 25% of the total subscribed share capital, then the
meeting has to be adjourned and after issuing notice under this section, necessary special
resolution is to be passed for appointing the auditor(s).


SPECIAL NOTICE FOR APPOINTMENT OR REMOVAL OF AUDITORS [Section 225]
The Act provides that for appointing a person other than the retiring auditor or for not
appointing the retiring auditor, power has been given to a member to serve a special notice
on the company of his intention to move a resolution at the next Annual General Meeting.
On receipt of the notice, the company has to send a copy thereof to the retiring auditor.
The special notice should be given to the company at least 14 clear days before
the meeting.
Further the Company shall also give intimation of the same to all the members of the
company immediately and where it is not possible to do so, then the company shall give
notice to the members by advertisement in the newspaper circulating in the place of its
registered office, not less than seven days before the meeting.
Where the retiring auditor makes a representation, the company shall, if it is possible,
circulate the same to all the members of the company before the meeting. If it is not
possible to circulate the representation to the members, the auditor may require the same
to be read at the meeting. However, on an application by the company or an aggrieved
person, the Company Law oard may order that the copies of representation need not be
sent to the members or read at the meeting.


AUDITORS OF GOVERNMENT COMPANIES
Auditor of a Government Company shall be appointed or reappointed by the Comptroller &
Auditor General of India. Remuneration of the auditor of a Government Company has to
be fixed by the company in general meeting. However, the general meeting may, instead of
fixing the remuneration of auditors, authorise the oard of Directors in this behalf.


FOREIGN COMPANIES
In case of shipping and airlines companies, the accounts may be audited by the statutory
auditors of foreign companies; in case of other foreign companies, the accounts must be
audited by the practicing Chartered Accountants in India.


AUDIT OF ACCOUNTS OF BRANCH OFFICE [Section 228]
Where a company, whether a public or a private limited, has a branch office, its accounts
should also be audited. The audit of the accounts of branch office can be done either by:
i. the companys auditor; or
ii. by any other person who is qualified to act as the companys auditor
However, if the branch is situated in a country outside India, a person who is duly qualified
to act as auditor of the branch in accordance with the laws of that country, can also be
appointed as auditor of branch.


If the branch is not being audited by the companys auditor, he is then also entitled to visit
the branch office if he considers it necessary to do so for the performance of his duties as
the auditor. He has also a right of access at all times to books, accounts and vouchers of
the company maintained at branch office.


Only the auditor of the company, or where a firm is so appointed, only a partner in the firm
practising in India, may sign the auditors report. [Section 229]


The auditor report is required to be read out at the Annual General Meeting and shall be
open to inspection by any member of the Company. [Section 230]


Section 231 of the Companies Act, 1956 confers a right on the statutory auditor to attend
and to be heard at any general meeting on matters of his concern.


Thus, the Act seeks to ensure that the appointment of an auditor is not in the hands of the
directors but is vested in the general body of shareholders and where the shareholders fails
to exercise their power of appointing an auditor, the power vests with the Central
Government. Therefore, Auditors are not mere puppets in the hands of the Directors of
the Company.


The auditor makes his report to shareholders through the company and is responsible to the
company for any failure in the performance of his professional duty. The auditors carry out
such investigation as will enable them to form an opinion on whether proper books have
been kept and proper returns adequate for their audit have been received from branches
not visited by them and whether balance sheet and profit and loss account are in agreement
with the books and returns.


In addition to verifying compliance with the Act, the auditors have also to acquaint
themselves with their duties under the articles of the company, if any, so as to assure due
compliance with them.


The Companies Act lays down detailed provisions regarding various matters and casts an
obligation upon officers and directors of the company to carry out the requirements of law.
However, where there is contravention of legal requirements by a company which has a
bearing on the accounts and transactions of the company, the auditor


would in the normal course of his inquiry become aware of them and it would need to be
brought to the notice of the shareholders. The duty of the auditor is that he must
behonest; that he must not certify what he does not believe to be true and must
takereasonable care and skill before he believes that what he certifies to be true.


What is required of auditor is his subjective satisfaction after taking reasonable care and
skill. In this process, he is not barred from relying on the tried or trusted servants of the
company. He is entitled to assume that they are honest, and to rely upon their
representations, provided he takes reasonable care. Thus, Technical
Competence and Professional Independence plays a crucial role in discharging the
duties, in practice. It is extremely difficult to precisely define the role, scope, etc., of the
auditors. The above-mentioned provisions of the Act will pave the way to achieve the
desired objectives for which they are designed.





,-90s of ,3 Aud9or
An auditor must Iully realize his moral obligations to third parties and in view oI the Iact that the reports made by him are likely to be relied on,
he must use his utmost skill and care that the statements issued do reIlect the true and accurate state oI aIIairs and Iree Irom any ambiguity.
Section 227 oI the companies act imposes a penalty on the auditors Ior non-compliance oI sections 227 and 229 with payment oI Iine iI the
deIault is willIul.
An auditor is liable to make good the loss the members or investors oI a company may suIIer as a result oI the negligence on his part in the due
perIormance oI his duties. II there is Iraud on his part, the auditor will be liable in tort. Claims may arise Irom the auditor Iailing to detect
deIalcations or discover errors that may have put the company to loss .
For the auditor to be held liable Ior Iraud, it is necessary to prove the Iollowing Iour Iacts-
. the statement signed by him was untrue in Iact;
2. that the auditor knew that it was untrue or was recklessly ignorant whether it was true or not;
3. that the statement was made with the intent that the other party should act on it; and
4. that the other party did act in reliance on it and suIIered damage.

The Companies Act, 1956 also imposes criminal liability under section 628 on any person who intentionally makes a Ialse statement through
any return, report, certiIicate, balance sheet, prospectus, statement or other documents. The auditor who makes a Ialse statement in his report
that the balance sheet presents the true and Iair view oI the company's Iinancial aIIairs is also liable .
ThereIore, under this section the auditor will be liable iI-
. the statement complained oI is Ialse in material particular;
2. it has been made in any return, report, certiIicate, prospectus, statement, balance sheet or some other document required by or Ior the
purposes oI any oI the provisions oI the Act;
3. it has been made willIully knowing it to be Ialse.

The shareholders oI the company have mainly to depend upon the good Iaith and eIIiciency oI the auditor appointed to check the accounts and
certiIy the balance sheet oI the company. It is oI the highest importance that auditor's should perIorm their duties with scrupulous care, skill and
vigilance to ensure that no transaction is illegal or improper and iI he has reason to believe so, he must report it. Thus, the auditor must certiIy
what he does not believe to be true and he must take reasonable care beIore he believes what he certiIies to be true.