BY: CS R.S.

BHATIA
 INTRODUCTION
COMPARISON- COMPANIES ACT, 2013 &
COMPANIES ACT, 1956
APPOINTMENT/RE-APPOINTMENT OF AUDITORS
ROTATION OF AUDITORS
RESIGNATION/REMOVAL
DISQUALIFICATIONS
POWERS AND DUTIES OF AUDITORS.
 AUDITOR NOT TO RENDER CERTAIN SERVICES
AUDITORS LIABILITY IN CASE OF UNLAWFUL
ACTS.
AUDITORs LIABILITY TO THIRD PARTIES IN
RELATION TO CONTENTS OF PROSPECTUS
DUTIES AND RESPONSIBILITIES OF AN AUDITOR
IN CASE OF MATERIAL MISSTATEMENT
PUNISHMENT FOR CONTRAVENTION
PENALTIES ON AUDITOR
 There are tremendous Changes in new Provisions under the Companies Act,
2013 with respect to Auditors as compared to the old Companies Act, 1956.
The new Act intents to improve Corporate Governance and to further
strengthen regulations. The Onus and responsibilities of Auditors becomes
cumbersome. Lot of responsibilities imposed under the Act & Rules.
CAUTION
Perusal of the provisions with respect to Auditors, clearly reveals that,
Auditor should not listen to management advice during the finalization
of accounts and it should be purely independent finalization and Financial
statement should reflect true and fair view of the business Otherwise
auditor will be held responsible.
 Section No. as
Section No. as per
per Old
Section Name New Companies
Companies
Act,2013
Act, 1956
Appointment of Auditor 139 224
Removal, resignation of Auditor and giving of special
225
notice 140
Eligibility, Qualifications & Disqualifications of
141 226
Auditors
Remuneration of Auditor 142 224
Powers and Duties of Auditor and AS 143 227, 228
Auditors not to render certain services. 144 New insertion
Auditor to sign Audit report 145 229,230
Auditor to attend General Meeting 146 231
Punishment for contravention 147 232, 233
Central Govt. to specify audit of items of cost in
148 233B
respect of certain Companies.
Chapter X of the Companies Act, 2013 (Section 139 to 148) deal with Audit
and Auditors
SECTION 139:-
FIRST AUDITOR: First Auditor to be appointed in a Board Meeting within 30
days of registration of the Company else within 90 days in an EGM.
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. AUDITOR ALREADY APPOINTED BY THE
BOARD CAN BE APPOINTED BY THE SHAREHOLDERS AT THE FIRST AGM
*The company shall place the matter relating to such appointment for
ratification by members at every annual general meeting.
 Written consent along with a certificate is required to be given by the proposed

appointee. Certificate shall also indicate whether the auditor satisfies the criteria

provided in S. 141 & Rule 4 of (Audit & Auditors) Rules, 2014.

No audit firm having a common partners or partners whose tenure has expired

immediately preceding financial year shall be appointed as auditor of the same

company for a period of five years. It means though auditor is appointed at

AGM but he can conduct the audit for a particular financial year.

The Company has to inform the auditor and file form ADT-1 for appointment
with the Registrar within fifteen days of the meeting in which the auditor is
appointed.
 Listed company or a company belonging to such class or classes of companies as
may be prescribed in S.139(2) & Rule 5 of Companies (Audit & Auditors) Rules,
2014 shall not appoint or re-appoint
an individual as auditor for more than one term of 5 consecutive Years ; and

an audit firm as auditor for more than two terms of five consecutive years.

Provided that:
an individual auditor who has completed his term shall not be eligible for
reappointment in the same company for next five years .
Similarly, an audit firms which completed its terms shall not be eligible for
reappointment in the same company for five years
3 years transition period will be given to comply this requirement. However,
according to the rules, period of 5 years will be calculated from retrospective
effect
For the purposes of S.139, the classes of companies shall mean the
following classes of companies excluding one person companies and
small companies :-
a) **All unlisted public companies having paid up capital of Rs. 10
crore.
b) All private limited companies having paid up share capital of Rs. 20
crore.
c) All companies having paid up share capital of below threshold limit
mentioned in (a) & (b) above, but having public borrowings from
financial institutions, banks or public deposits of Rs. 50 crores or
more.
 A retiring auditor may be re- appointed at an AGM, if: [Sec 139(9)]
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 appointing some other
auditor or providing expressly that he shall not be appointed.
Where at an AGM, no auditor is appointed or re-appointed, the existing
auditor shall continue to be the auditor of the Company.
In case of Death: Casual Vacancy to be filled by BOD within 30 days. He shall
hold office till the conclusion of next AGM.
 In case of Resignation: Casual Vacancy to be considered by BOD within 30 days
and the same should be approved by the members in a general meeting to be
convened within 3 months of the recommendation of the Board. He shall hold office
till the conclusion of next AGM.
Where a company is required to constitute an Audit Committee u/s 177 all
appointments including the filing of casual vacancy shall be made after taking into
account the recommendations of such committee.(Sec 139(10).
A company which does not have audit committee, the Board shall take into
consideration the qualifications and experience of the individual or the firm
proposed to be considered for appointment as auditor and whether experience are
commensurate with the size and requirements of the company.
 Compulsory rotation of auditors by listed companies and classes
of companies as prescribed :

a) Audit firm including LLP not more than 2 terms of 5

consecutive years
b) Individual auditor not more than 1 term of 5 consecutive years

c) During the cooling period ( of 5 years) even any audit firm

having one or more common partners with the audit firm being
rotated is not eligible to be appointed auditor of the same
company.
 The auditor can be removed before the expiry of his term by passing a special
resolution, provided previous approval of the Central Government in Form ADT-2 is
obtained. So be compliant and have all backups.(Rule 7)
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 Form ADT 3 with the
company and the Registrar. In the case of non-compliance, the auditor shall be
punishable with fine which shall not be less than Rs.50,000 to Rs.5,00,000. (Rule
8)
Appointing as auditor a person other than a retiring auditor or specifically providing
that retiring auditor shall not be reappointed.
Special notice as per section 115 shall be required for a resolution at an annual
general meeting. Auditor has a right to give representation.
Ensure before giving consent and certificate that:
You are not a Body corporate other than LLP
You are not an Officer or employee of the Company
You are not a partner of a person who is in the employment, of the
company.
Neither you or your relative or partner
is holding any security or indebtedness or guarantee or provided any
security in connection with the indebtedness of any third person to
the company or its subsidiary, or of its holding or associate company
or a subsidiary of such holding company exceeding Rs.1 Lakh
 Neither you or your firm, 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.
Your 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 persons 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.
a) Ensure compliance of all auditing standards

b) Consolidation of accounts Exercise your right to access to the records of

all its subsidiaries if required.

c) Ensure you have sought the desired information. Keep all backups preferably
certified copies.

d) The auditors report shall state any qualifications, reservation or adverse

remark relating to the maintenance of accounts and other matters connected
therewith.

e) The auditors report to state whether company has adequate internal financial
controls systems in place and operating effectiveness of such controls.
f) 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 Govt immediately but not later than thirty days of his
knowledge or information, with a copy to the audit committee or in case
the company has not constituted an audit committee, to the Board.

g) If the auditor does not report the fraud committed or being committed,
he shall be punishable with fine which shall be less than Rs. 1 lakhs but
may extend to Rs. 25 lakhs
The section provides that an auditor appointed under this Act shall not
directly or indirectly provide any of the following other services to auditee-
company or its holding company or subsidiary company:
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

Any other services as may be prescribed

 It is not clear whether the restriction will apply to rendering of non-
audit services by the auditor to its network firms wherever located to
the auditees holding company or subsidiary located outside India.

Further, the Act does not define the terms such as investment
advisory services and management services which are subject to
varying interpretation.
 The auditors basic responsibility is to report that whether in his opinion the
accounts show a true and fair view and in discharging his responsibility he has
to see as how the particular situations affect his position.
The general thinking with regards to unlawful acts or default by the clients
appears to be that the auditor should not aid or abet but he is not under any
legal obligation to disclose the offence.
The INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA has considered
the role of a chartered accountant in relation to taxation frauds by the assessee
and has made the following major recommendations:
A professional accountant should keep in mind the provisions of section 126 of
the EVIDENCE ACT whereby a barrister, an attorney or vakil is barred from
disclosing any information made to him the course of and for the purpose of his
employment.
DISCLOSURES
o If the fraud relates to the past years when the CA did not represent the client,
the client should be advised to make a disclosure. The accountant should also
be careful that the past disclosure should not affect the current tax matters.
o In case of fraud relating to the accounts examined by the accountant himself, he
should advise the client to make a complete disclosure. In case, client refuses to
do so, the accountant should inform him that he is entitled to dissociate himself
from the case and he would make a report to the authorities that the accounts
prepared and examined by him are unreliable on account of certain information
obtained later.
o In case of suppression in current accounts the clients should be asked to make
a full disclosure. If he refuses to do so, the accountant should make a complete
reservation in his report and should not associate himself with the return.
 The question of liability of an auditor for unlawful acts or frauds by
the clients should be the considered in the light of broad parameters
given above. However, it appears that if an auditor was aware of any
unlawful act have been committed by the client in respects of
accounts audited by him and the unlawfulness was not rectified by
proper disclosure, the auditor owes a duty to make the suitable
report. if he does not, he may be held liable.
 Under Section 35 of THE COMPANIES ACT, 2013
Where the person has subscribed for securities of a company acting on any
statement included, or the inclusion or omission of any matter, in the
prospectus is misleading and he has sustained any loss or damage as a
consequence thereof, the company and every person who-
Is a director --------;
Has authorized himself to be named and is named in the prospectus as a
director of the company ---------------------;
Is a promoter -------------------;
 Is an expert referred in sub section 5 of the section 26, (AUDITOR is
Covered) shall without prejudice to any punishment to which any
person may be liable under the section 36, be liable to pay the
compensation to every person who has sustained such loss or damage.

Not withstanding anything contained in this section, where it is proved

that prospectus has been issued with intent to defraud the applicants
for the securities of a company or any other fraudulent purposes, every
person, (including auditor) referred to in the subsection (1) shall be
personally responsible, without any limitation or liability, for all or
any of the losses.

.
 Misstatement in financial information can arise from fraud or error. The term
FRAUD refers to the INTENTIONAL ACT by one or more individuals amongst
the management, those charged with governance.
The auditor is concerned with fraudulent acts that cause a material
misstatement in the financial statements.
Fraud involving one or more members of management those charged with
governance is referred to as MANAGEMENT FRAUD. The primary
responsibility for the prevention and detection of fraud rests with those
charged with governance and management of the entity.
Further, an audit conducted in accordance with the standards on auditing
generally accepted in India, is designed to provide reasonable assurance that
financial statements taken as a whole are free from material misstatement
whether caused by fraud or error.
 The fact that an audit is carried out may act as a deterrent, but the
auditor is not and cannot be held responsible for the prevention of error
and fraud.

An auditor does not guarantee that all material misstatement will be

detected because of such factors, as the use of judgment, the use of
testing, the inherent limitations of internal control and the fact that
much of the evidence available to the auditor is persuasive rather than
conclusive in nature.

Certain levels of management may be in a position to override control

procedures designed to prevent similar frauds by other employees.
Auditors opinion on the financial statements is based on the concept of
obtaining reasonable assurance hence in an audit the auditor does not
guarantee that material misstatements will be detected.
 If any of the provisions of S.139 to S.146 is contravened, the company
shall be punishable with fine which shall not be less than Rs.25000 but
which may extend to Rs.5 lakhs and every officer of the company who is in
default shall be punishable with imprisonment for a term which may
extend to one year or with fine which shall not be less than Rs.10000
but which may extend to Rs.1 lakhs or with both.

If the contravention by the auditor is willful or with intention to deceive

the company or its shareholders or creditors or tax authorities, he shall be
punishable with imprisonment for a terms which may extend to 1 year
and with fine not less than Rs. l lakhs to Rs. 25 lakhs

The auditor who has been convicted shall refund the remuneration and pay
for damages to company or the statutory bodies.
 Class action suit against the Auditors U/s 245
To protect investor interest, Section 245 of Companies Act
2013 has introduced the concept of class action suits,
through which shareholders, depositors can initiate legal
action against the company and auditors in the event of
fraudulent activity. A class of shareholders or deposit
holders can now claim damages or compensation or demand
other suitable action against the auditor, including the audit
firm, by filing an application with the NCLT.
Prosecution by NFRA (National Financial Reporting Authority) U/s
132
NFRA may investigate either suomoto or on a reference made to it by
the Central Government on matters of professional or other
misconduct committed by any member or firm of chartered
accountants, registered under the Chartered Accountants Act, 1949
chartered accountants. If professional or other misconduct is proved,
NFRA has the power to make order for
(A) imposing penalty of
(I) not less than one lakh rupees, but which may extend to five times of
the fees received, in case of individuals; and
(II) not less than ten lakh rupees, but which may extend to ten
times of the fee received, in case of firms;

(B) 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 six months or for such higher period not
exceeding ten years as may be decided by the National Financial
Reporting Authority.