5.

Chapter at a Glance

Sec. 139 Appointment of Auditors

Sec. 140 Removal, Resignation of auditor and giving of Special Notice

Sec. 141 Eligibility, qualification and disqualifications of auditors

Sec. 142 Remuneration of Auditors

Sec. 143 Powers and Duties of Auditors and Auditing Standards

Sec. 144 Auditor not to render certain services

Sec. 145 Auditor to sign Audit Reports etc.

Sec. 146 Auditor to attend General Meetings

Sec. 147 Punishment for contravention

Sec. 177 Audit Committee, constitution, functions and powers

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 5.2

Section 139 Particulars Non-Government company Government Company2 [Sec.

(Appointment of [Sec. 139(6)] 139(7)]
the first auditor1) Appointed Board of Directors Comptroller and Auditor General of
by India3 [CAG]
Time limit of
Within 30 days of date of Within 60 days of date of
appointment registration of the company registration of the company
Consequence In case the Board do not appoint In case the CAG of India does not
of failure to
the first auditor on time, it shall appoint the first auditor on time, the
appoint inform the members of the BOD of the company shall appoint
company, who shall within 90 such auditor within next 30 days;
days at an EGM shall appoint the In the case of failure of the Board to
auditor. appoint such auditor, it shall inform
the members of the company who
Nikkhil ₲upta shall appoint such auditor within 60
days at an EGM.
Tenure of First auditor shall hold office till First Auditor shall hold office till the
auditor the conclusion of the first AGM conclusion of the first AGM.
Test Your Case Study: Managing Director of Parrot Ltd. himself wants to appoint CA. Ms. Koyal,
Knowledge a practicing Chartered Accountant, as first auditor of the company.
Analysis: As per the provisions of Section 139(6) of the Companies Act, 2013 the first
auditor of a company shall be appointed by the Board of Directors (within 30 days from
the date of registration of the company).
In the instant case, the proposed appointment of CA. Koyal, a practicing Chartered
Accountant, as first auditor by the Managing Director of Pigeon Ltd. by himself is in
violation of Section 139(6) of the Companies Act, 2013, which authorizes the Board of
Directors to appoint the first auditor of the company.
Conclusion: In view of the above, the Managing Director of Pigeon Ltd. should be
advised not to appoint the first auditor of the company.

Case Study: The first auditor of Bhartiya Ispat Ltd., a Government company, was
appointed by the Board of Directors in its meeting after 10 days from the date of
registration.
Analysis: As per the provisions of Section 139(7) of the Companies Act, 2013, in the
case of a Government company, 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.
Hence, in the case of Bhartiya Petrol Ltd., being a government company, the first auditor
shall be appointed by the Comptroller and Auditor General of India.
Conclusion: Thus, the appointment of first auditor made by the Board of Directors of
Bhartiya Ispat Ltd., is null and void.
Sec. 139 – Particulars Non-Government company Government Company [Sec.
Appointment of [Sec. 139(1)] 139(5)]
subsequent Appointed Shareholders CAG
auditor4 by
Time limit of At the AGM Within 180 Days of commencement
appointment of the financial year ('FY')

1 First auditors – Auditors who are appointed in the first year of incorporation of a Company
2 Government Company is company which is owned or controlled by:-
- Central Government
- State Government
- Partly by Central and / or one or more State Government
3 The Comptroller and Auditor General of India is an authority, established by Article 148 of the Constitution of India, which audits all

receipts and expenditure of the Government of India and the state governments, including those of bodies and authorities substantially
financed by the government - Wikipedia
4 Subsequent auditors are those who are appointed post the first year of incorporation of the company

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 5.3

Tenure of Till the conclusion of its 6th Till the conclusion of the AGM.
auditor AGM
Manner and Companies in which audit committee has been Companies in which audit
procedure of constituted committee has not been constituted
selection and Audit Committee (AC) should recommend the The Board should recommend the
appointment of name of the auditor, to the BOD. In case the name of the auditor to the members in
auditor (Rule 35) BOD do not agree with the name proposed by the the AGM.
AC, they should record the reasons for
disagreement. However, the decision of the BOD
is conclusive and should be forwarded to the
members in the AGM.
 Form ADT 1 is to filed for the appointment of the auditor
Pre-requisite Before appointment of the auditor is made, following certificates are required to be
before obtained from the auditor:
appointment of - the written consent of the auditor to such appointment;
auditor (Rule 46) - a certificate that the appointment, if made, shall be in accordance with the
conditions as prescribed
- the auditor satisfies the criteria provided in section 141 of the Companies Act.
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 in Form ADT -1.
Sec. 139(8) - Particulars Non-government company Government Company
Casual Vacancy7 New auditor Board of Directors [After considering CAG
(CV) appointed by the recommendations of the AC]
Time limit 30 days of the occurrence of vacancy 30 days of the occurrence of
vacancy. In case CAG doesn’t
fill the CV within the due date,
Board shall fill the vacancy till
next 30 days.
Special  The resigning auditor should file a  The resigning auditor should
conditions in statement with - a) the company file a statement with a) the
case of CV and b) the Registrar stating the company, b) the Registrar
on reasons for resignation and c) CAG stating the
resignation  The appointment of the new reasons for resignation
of the auditor auditor should be approved by the
[Refer Company at AGM within 3
Section months of recommendation of the
140(2) for Board.
details]  Such new auditor holds the office
till conclusion of the next AGM
only.
Sec. 139(9) –  He is not be disqualified for re-appointment under the Act [like he should not suffer
Conditions for from disqualifications under section 141(3), 141(4) and 144];
re-appointment  He has not given the company a notice in writing of his unwillingness to be re-
of retiring appointed; and
auditor  A special resolution has not been passed at that meeting appointing some other
auditor or providing expressly that he shall not be re-appointed
Where at any annual general meeting, no auditor is appointed or re-appointed, the
existing auditor shall continue to be the auditor of the company.

5
Companies (Audit & Auditors) Rules, 2014
6
Companies (Audit & Auditors) Rules, 2014
7 Vacancy which occurs after the appointment of the auditor, due to his death, resignation or disqualification etc. In

such a case, a new auditor is to be appointed

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 5.4

Sec. 139(2) Applicability  All listed companies

readwith Rule 5 –  Unlisted public company having:
Rotation of - Paid up capital of INR 10 crores or more, or
Auditors - Borrowings from financial institutions / banks of INR 50 crores or
more
 Private company having:
- Paid up capital of INR 50 crores or more, or
- Borrowings from financial institutions / banks of INR 50 crores or
more
Exclusions – One Person Company and Small Company
Type of Where an Individual is the Where a Firm / LLP is the auditor
Auditor Auditor
Tenure The retiring auditor (including the The retiring auditor (including the
auditor in the same network8) shall auditor in the same network) shall
not be reappointed for more than not be reappointed for more than
one term of 5 years two terms of 5 years
If a partner, who is in charge of an
audit firm and also certifies the
financial statements of the
company, retires from the said firm
and joins another firm of chartered
accountants, such other firm shall
also be ineligible to be appointed for
a period of five years.
Cooling Off 5 years from the completion of the 5 years from the completion of the
Period initial term initial term
Note – The members of a company may resolve to provide that in the audit firm appointed
by it, the auditing partner and his team shall be rotated at such intervals as may be
resolved by members [Section 139(3)]
Test Your Case Study: Find the lacuna in the following resolution passed in the AGM of M/s Carrot
Knowledge Ltd., a listed company:
“RESOLVED THAT M/s Rabbit & Associates, Chartered Accountants are appointed as
the auditors of the Company for two consecutive terms of 5 years each and 1 more year
thereafter, ie till the conclusion of 12th AGM.”
Analysis: As per the provisions of Section 139(1) an auditor shall be appointed till the
conclusion of 6th AGM. Further, as per the provisions of Section 139(2) readwith the
Companies (Audit and Auditors) Rules, 2014, a listed company cannot re-appoint the
firm of auditors beyond the initial two terms of 5 years each.
Conclusion: The appointment of M/s Rabbit & Associates is not valid as the appointment
can be made only for one term of five consecutive years and then another one more term
of five consecutive years. It can't be appointed for two terms in one AGM only.
Further, a cooling period of five years from the completion of term is required i.e. the
firm can't be re-appointed for further 5 years after completion of two terms of five
consecutive years.

Case Study: M/s XYZ & Co., is an audit firm having partner Mrs. X, Mr. Y and Mr. Z,
whose tenure has expired in the company immediately preceding the financial year. Mr.
Z being the in-charge of audit of this Company. Would M/s ABZ & Co., another audit
firm in which Mr. Z is a common partner, will also be disqualified for the same company
for the period of five years?

8Network firms means – a) those having common partners; b) operating under common brand / trade name; and c) having common
control

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 5.5

Analysis: Firms / Network of firms having common partners are disqualified from
auditing the company for which any one firm of network has already audited the
financials for two consecutive term of 5 years
Conclusion: M/s ABZ would also be disqualified from auditing the company for next
five years. The tenure of XYZ & Co. is completed the same will also be applicable on the
firms having common partners as XYZ & Co.

Case study: Manner of rotation will not be applicable to Company A which has a paid
up share capital of Rs. 15 crores and having a public borrowing, from a nationalized bank,
of Rs. 50 crores because it is a private limited company. Comment
Analysis: According to Section 139 of the Companies Act, 2013, the provisions related
to rotation of auditors are also applicable to a private limited company having a share
capital of Rs. 50 crores or more or having public borrowings of Rs. 50 crores or more.
Conclusion: In the current case, Company A is having a public borrowing of Rs. 50
crore. Hence, the provisions of rotation are applicable to Company A.
Nikkhil ₲upta

Case Study: AMSHA Ltd, a subsidiary of NAMO Ltd, whose 20% shares have been
held by the CG, 25% by UP government, and 10% by MP Government. AMSHA
appointed Mr. R as statutory auditor for the year. Comment
Analysis: As per Section 139(7) of the Companies Act, 2013, the auditor of a
Government company shall be appointed by CAG of India.
Conclusion: NAMO Ltd has 55% shareholding by CG or the state governments.
Therefore, it is a Government Company. AMSHA Ltd is a subsidiary of NAMO Ltd,
hence AMSHA is also covered in the definition of Government Company. Therefore, the
auditor of AMSHA Ltd. should be appointed by the CAG. Appointment of Mr. R is
invalid.

Case Study: White Star Ltd. was incorporated on 01.08.2024 and Mr. T, who is a relative
to the Chairman and MD of the Company, is appointed as the statutory auditor by the
Board of Directors in their meeting on 04.09.2024. Comment
Analysis: There are two issues in this case – a) appointment of the first auditor and b)
relation of the auditor with the MD. As per Section 139(6) of the Companies Act, 2013,
the first auditor of company should be appointed by the BOD within 30 days of date of
registration of the Company. If the BOD fails to appoint the first auditor, it shall inform
the members of the Company, who shall within 90 days, at an EGM, make the
appointment.
Conclusion: In the given case, appointment of Mr. T is not valid. Hence the second issue
of relationship with the CMD becomes redundant.

Case Study: Mr. A was appointed auditor of AAS Ltd. by the Board to fill the vacancy
that arose due to death of the auditor originally appointed in AGM. Subsequently, Mr. A
also resigned on health grounds during the tenure of appointment. The Board filled the
vacancy by appointing Mr. B through a duly passed Board resolution. Comment
Analysis: As per Section 139(8) of the Companies Act, 2013, any casual vacancy in the
office of the auditor shall be filled by the Board within 30 Days. However, if the casual
vacancy is on account of resignation, such appointment shall also be approved by the
Company at the general meeting convened within 3 months of the recommendation of
the Board. The auditor in such a case shall hold the office till next AGM.
Conclusion: In the instant case, Mr. B was appointed by the Board on resignation of Mr.
A.
If the cause of vacancy is resignation, then the power of appointment shall vest with the
general meeting only. Hence the appointment by the Board is irrelevant.
Section 140(1) - a) Board resolution to be passed to remove the auditors before the expiry of their term
Removal before

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 5.6

expiry of term b) Application to be made to the central government (in e-form ADT 2) within 30 days
readwith Rule 7 of the Board resolution Nikkhil ₲upta
c) The Company shall hold the general meeting within 60 days of receipt of approval of
the Central Government for passing the special resolution.
d) the auditor concerned shall be given a reasonable opportunity of being heard before
removal.
Section 140(2) – a) The auditor shall file (within a period of 30 days from the date of resignation), a
Resignation of statement with the company and the Registrar in Form ADT 3.
the auditor b) The auditor of a government company shall additionally file such statement with
CAG, indicating the reasons and other facts as may be relevant with regard to his
resignation.
Section 140(3) – If the auditor does not comply with requirement of Sec. 140(2), he or it shall be
Breach of section punishable with following fine;
140(2)
a) In case of continuing failure - five hundred rupees for each day, during which
such failure continues; and
b) Other cases - Rs. 50,000 to or the amount equal to the remuneration of the
auditor, whichever is less.
(Subject to a maximum of Rs. 2 Lacs)
Section 140(5) – a) If Tribunal is satisfied that the auditor of a company has, acted in a fraudulent manner
Direction by in relation to, the company or its directors or officers, it may, by order, direct the
Tribunal for company to change its auditors.
removal of b) Such direction may be made:
auditor  Suo moto (by its own will) by the Tribunal or
 on an application made to Tribunal by the C.G. or by any person concerned
c) If the application is made by the C.G. and the Tribunal is satisfied that any change of
the auditor is required,
 it shall within 15 days of receipt of such application, make an order that he shall
not function as an auditor; and
 the C.G. may appoint another auditor in his place.
d) An auditor, against whom final order has been passed by the Tribunal under this
section shall not be eligible to be appointed as an auditor of any company for a period
of five years from the date of passing of the order
Note: In case of a firm, the liability shall be of the firm and that of every partner or partners
who acted in a fraudulent manner.
Section 141(1) a) A person shall be eligible for appointment as an auditor of a company only if he is a
and (2) - Chartered Accountant.
Eligibility to be b) A firm whereof majority of partners practising in India are qualified for appointment
appointed as as aforesaid may be appointed by its firm name to be auditor of a company.
auditor c) Where a firm including a LLP is appointed as an auditor of a company, only the
partners who are CA shall be authorised to act and sign on behalf of the firm.
Section 141(3) a) a body corporate other than a limited liability partnership registered under the Limited
readwith Rule 10 Liability Partnership Act, 2008;
– b) an officer or employee of the company;
Disqualifications c) a person who is a partner, or who is in the employment, of an officer or employee of
of an auditor the company;
d) a person who, or his relative9 or partner
Section 144 -  is holding any security of or interest in the company or its subsidiary, or of its
Auditor not to holding or associate company or a subsidiary of such holding company:

9 Relative means - anyone who is related to another - as members of a Hindu Undivided Family; husband and wife; Father (including
step- father), Mother (including step¬mother), Son (including step- son), Son's wife, Daughter, Daughter's husband, Brother (including
step- brother), Sister (including step- sister)

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 5.7

render certain Provided that the relative may hold security or interest in the company of face
services value not exceeding Rs. 100,000.
Provided further that in the event of acquiring any security or interest by a
relative above the threshold limit, the corrective action to maintain the limits as
specified above shall be taken by the auditor within 60 days of such acquisition
or interest.
 is indebted to the company, or its subsidiary, or its holding or associate company
or a subsidiary of such holding company, in excess of Rs. Five Lacs; or
 has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or its holding
or associate company or a subsidiary of such holding company, in excess of Rs.
One Lac.
e) a person or a firm who, whether directly or indirectly, has business relationship10 with
the company, or its subsidiary, or its holding or associate company or subsidiary of
such holding company or associate company of such nature as may be prescribed;
f) a person whose relative is a director or is in the employment of the company as a
director or key managerial personnel;
g) 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
(20) Companies, other than one-person company, dormant companies, small
companies and private companies having paid up capital less than 100 Crores
h) 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;
i) a person, who directly or indirectly, renders any service referred to in sec. 14411 to the
company or its holding company or its subsidiary company.
Test Your Case Study: Mr. A, a practicing Chartered Accountant, is holding securities of XYZ Ltd.
Knowledge having face value of Rs. 900. Whether Mr. A is qualified for appointment as an auditor
of XYZ Ltd.
Analysis: As per section 141(3)(d)(i), an auditor is disqualified to be appointed as an
auditor if he, or his relative or partner holding any security of or interest in the company
or its subsidiary, or of its holding or associate company or a subsidiary of such holding
company.
Conclusion: In the present case, Mr. A is holding security of Rs. 900 in XYZ Ltd.
Therefore, he is not eligible for appointment as an auditor of XYZ Ltd.

Case Study: Mr. P is a practicing Chartered Accountant and Mr. Q, the relative of Mr.
P, is holding securities of ABC Ltd. having face value of Rs. 90,000 (Market Value Rs.
500,000). Whether Mr. P is qualified from being appointed as an auditor of ABC Ltd.
Analysis: As per section 141(3)(d)(i), a person is disqualified to be appointed as an
auditor if he, or his relative or partner is holding any security of or interest in the company
or its subsidiary or of its holding or associate company or a subsidiary of such holding
company. Further, as per proviso to this section, the relative of the person may hold the
securities or interest in the company of face value not exceeding of 1,00,000.

10 Business Relationship: According to the Companies (Audit and Auditors) Rules, 2014, the term "business relationship" shall be
construed as any transaction entered into for a commercial purpose, except:
- commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm
under the Act and the Chartered Accountants Act, 1949 and the rules or the regulations made under those Acts;
- commercial transactions which are – a) in the ordinary course of business of the company and b) at arm's length price - like sale of
products or services to the auditor, as customer, in the ordinary course of business, by companies engaged in the business of
telecommunications, airlines, hospitals, hotels and such other similar businesses.
11 Consulting and Specialised Services specified in Section 144 of Companies Act, 2013: a) accounting and book keeping services; b)

internal audit; (c) design and implementation of any financial information system; (d) actuarial services; e) investment advisory
services; (f) investment banking services; (g) rendering of outsourced financial services; (h) management services; and (i) any other
kind of services as may be prescribed

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 5.8

Conclusion: In the present case, Mr. Q. (relative of Mr. P), is having securities of Rs.
90,000 face value in ABC Ltd., which is as per requirement of proviso to section 141
(3)(d)(i). Market Value is irrelevant. Therefore, Mr. P will not be disqualified to be
appointed as an auditor of ABC Ltd.

Case Study: M/s RM & Co. is an audit firm having partners CA. R and CA. M. The firm
has been offered the appointment as an auditor of ENN Ltd. for the Financial Year 2024-
25. Mr. Bee, the relative of CA. R, is holding 5,000 shares (face value of Rs. 10 each) in
ENN Ltd. having market value of Rs. 1,50,000. Whether M/s RM & Co. is disqualified
to be appointed as audit of ENN Ltd.
Analysis: As per section 141(3)(d)(i), a person shall not be eligible for appointment as
an auditor of a company, who, or his relative or partner is holding any security of or
interest in the company or its subsidiary, or of its holding or associate company or a
subsidiary of such holding company. However, as per proviso to this section, the relative
of the person may hold the securities or interest in the company of face value not
exceeding of Rs. 1,00,000.
Conclusion: In the instant case, M/s RM & Co. is an audit firm having partners. CA. R
and CA. M. Mr. Bee is a relative of CA. R and he is holding shares of Enn Ltd. of face
value of Rs. 50,000 only (5,000 shares X Rs. 10 per share).
Therefore, M/s RM & Co. is not disqualified for appointment as an auditors. of ENN Ltd.
as the relative of CA. R (i.e. partner of M/s RM & Co.) is holding the securities in ENN
Ltd. which is within the limit mentioned in proviso to section 141(3)(d)(i) of the
Companies Act, 2013.

Case Study: CA. Pasha is providing the services of investment banking to C Ltd. Later
on, he was also offered to be appointed as an auditor of the company for the current
financial year.
Analysis: Section 141(3)(i) of the Companies Act, 2013 disqualifies a person for
appointment as an auditor of a company who is engaged as on the date of appointment in
consulting and specialized services as provided in section 144. Section 144 of the
Companies Act, 2013 prescribes certain services not to be rendered by the auditor which
includes investment banking services.
Conlcusion: CA. Pasha is advised not to accept the assignment of auditing as the
investment banking service is specifically notified in the list of services not to be rendered
by him as per section 141(3)(i) read with section 144 of the Companies Act, 2013.

Case Study: “ABC & Co.” is an audit firm having partners “Mr. A”, “Mr. B” and “Mr.
C”, Chartered Accountants. “Mr. A”, “Mr. B” and “Mr. C” are holding appointment as
auditors in 4, 6 and 10 companies respectively.
a. Provide the maximum number of audits remaining in the name of “ABC & Co.”
b. Provide the maximum number of audits remaining in the name of individual partner
i.e. Mr. A, Mr. B and Mr. C.
Analysis: As per section 141(3)(g) of the Companies Act, 2013, a person shall not be
eligible for appointment as an auditor if he is in full time employment elsewhere or a
person or a partner of a firm holding appointment as its auditor, if such person or partner
is at the date of such appointment or reappointment holding appointment as auditor of
more than twenty companies other than one person companies, dormant companies, small
companies and private companies having paid-up share capital less than Rs. 100 crore.
a. In the instant case, Mr. A is holding appointment in 4 companies, Mr. B is having
appointment in 6 companies and Mr. C is having appointment in 10 companies. In
aggregate all three partners are having 20 audits. As per section 141 (3)(g), the limit of
20 company audits is per person. In the case of an audit firm having 3 partners, the overall
ceiling will be 3 × 20 = 60 companies’ audit.
Therefore, ABC & Co. can hold appointment as an auditor of 40 more companies:

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 5.9

Total Number of audits for which the firm would be eligible = 20*3 = 60
Number of audits already taken by all the partners
In their individual capacity = 4+6+10 = 20
Remaining number of audits available to the firm = 40

b. With reference to above provisions, an auditor can hold more appointment as auditor
(i.e. ceiling limit as per section 141(3)(g) - already holding appointments as an auditor).
Hence
i. Mr. A can hold: 20 – 4 = 16 more audits.
ii. Mr. B can hold 20 - 6 = 14 more audits and
iii. Mr. C can hold 20-10 = 10 more audits
Note - It has been assumed that the companies given in the question are not one person
companies, dormant companies, small companies and private companies having paid-up
share capital less than Rs. 100 crore.
Section 141(4) – Where a person appointed as an auditor of a company incurs any of the disqualifications
Subsequent mentioned in sub-section (3) after his appointment, he shall vacate his office as such
disqualification auditor and such vacation shall be deemed to be a casual vacancy in the office of the
of an auditor auditor.
Section 142 – First Auditor - The remuneration (including the out-of-pocket expenses) is fixed by
Remuneration of board of directors
the auditor Subsequent Auditor - The remuneration (including the out-of-pocket expenses) is fixed
in the general meeting.

However, this does not include any remuneration paid to him for any other service
rendered by him at the request of the company, like advisory services
Section 143 – Powers / Rights
Powers / Rights  Right of access to the books of account and vouchers of the company, at any
and duties of time, whether kept at the registered office of the company or at any other place
Auditors  Right to inquire12 / require from the officers of the company such information
and explanation as he may consider necessary for the performance of his duties as
Section 145 – To auditor, including the following matters:
sign the audit - Whether the loans and advances made by the company are fully secured and they
report are not prejudicial to the interest of the company
- Whether personal expenses have been charged to P&L Account
Section 146 – To - Whether the position stated in the financial statements is correct and not
attend the misleading
general meeting - Whether any assets of the company are sold below the purchase price
 In case of an audit of a holding company, the auditor may also access the records
of all the subsidiaries for consolidation purposes.
 Receive Notices and Attend General Meetings: The company auditor is
entitled to receive all notices of any general meeting and to attend such meetings either
by himself or through his authorised representative, The auditor shall also have the right
to be heard at such meeting on any part of the business which concerns him as the
auditor [Section 146].
 Right to report to the members of the company on the accounts examined by
him. The report should conclude whether the financial statements give a true and fair
view of the state of the company's affairs
 Right to Lien13 - auditor can exercise lien on books and documents placed at his
possession by the client for non-payment of fees, for work done on the books and
documents.
 In case of Government companies, the CAG has the power to conduct a test
audit / supplementary audit, in addition to the regular statutory audit

12
This is a right as well as the duty of an auditor.
13 ‘Lien’ means having the lawful possession of somebody else's property, in the event if non-payment of the dues

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 5.10

 Inspect Branch Offices and Branch Accounts: The company auditor is also
entitled to inspect the accounts of any branch office, even if a separate auditor has
already been appointed to audit the branch accounts [Section 143(8)].
 Sign the Audit Report: The company auditor also has the right to sign the
auditor’s report [Section 145].
 Have Audit Report Read at the AGM: The company auditor has the right to
have the report read before the company in the General Meeting and the same shall be
open to inspection by any member of the company [Section 145].
 Attend the Meeting of the Audit Committee: The auditors of a company shall
have a right to attend the meetings of the Audit Committee and to be heard in the
meetings when the Committee considers the auditor’s report, but shall not have the
right to vote [Section 177(7)].
 Right to be Indemnified: The auditor of a company shall also have the right to
be indemnified for any expenses incurred by him in defending himself in case the
judgement in any law suit (whether civil or criminal) against the company goes in
favour of the auditor.

Note: The above rights of a company auditor are protected by law and no clause of the
Articles of Association of a company or resolution adopted in any meeting can
supersede them.

Duties
 To inquire into all the relevant matters before issuing the report. Examples of
the matters which auditor might look at are:
 Whether loans and advances are made by the company on the basis of adequate
security or not
 Whether the transactions of the company which are represented merely by book
entries are prejudicial to the interests of the company
 Whether personal expenses have been charged to revenue account
Reporting is to be done if anything adverse is discovered in the course of audit
 To report on all the relevant matters which affects the ‘true and fair’ view
of the financial statements. Especially on the matters specified in Companies
(Auditor's Report) Order, 2020 [‘CARO, 2020’].
 To report on the adequacy of internal financial controls (IFC) of the
company.
 To state the reason for qualification or negative report – In case the auditor
issues a negative / qualified report, the report shall state the reasons there for
 To report on the branch financials after considering the report of the branch
auditor
 To sign the Audit Report [Sec. 145] – The manner of signing of audit report is
given in Section 141(2), according to which - 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 authorised to act and sign on behalf of the firm.
 To comply with Auditing Standards
 To report on any other matter specified by Central Government (in consultation
with the NFRA
 Duty to Pay Penalty – As per Section 143 (15), if any auditor, cost accountant
or company secretary in practice fails to comply with the provisions of sub-section (12)
of Section 143, he will be liable –
 in case of a listed company, to pay a penalty of five lakh rupees; and
 in case of any other company, to pay a penalty of one lakh rupees.
 Duty to Make Comments Sought by the Audit Committee – According to
Section 177(5), it is the duty of the company auditor to offer comments on internal

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 5.11

control systems, the scope of audit, including the observations of the auditors and
review of financial statement, if asked by the Audit Committee.
Other Matters to The auditor’s report shall also include their views and comments on the following
be Included in matters, namely:
Auditors Report a) whether the company has disclosed the impact, if any, of pending litigations on
(Rule 1114) its financial position in its financial statement;
b) whether the company has made provision, as required under any law or
accounting standards, for material foreseeable losses, if any, on long term
contracts including derivative contracts;
c) whether there has been any delay in transferring amounts, required to be
transferred, to the Investor Education and Protection Fund by the company.
d) whether the company has an adequate internal financial control system and there
exists operating effectiveness
Reporting of The provisions of Companies Act 2013 regarding reporting of frauds by a company
Frauds by auditor are as follows:
Auditor (Section
143(12) readwith A. In case the auditor has sufficient reason to believe that an offence involving fraud
Rule 1315) (which involves or is expected to involve an amount of rupees one crore or above), is
being or has been committed against the company by officers or employees of the
company, he shall report the matter to the Central Government immediately but not later
than sixty days of his knowledge and after following the procedure indicated herein
below.
1. auditor shall forward his report to the Board or the Audit Committee, as the
case may be, immediately (within 2 days) after he comes to knowledge of the
fraud, seeking their reply or observations within forty-five days;
2. on receipt of such reply or observations, the auditor shall forward his report
and the reply or observations of the Board or the Audit Committee along with
his comments (on such reply or observations of the Board or the Audit
Committee) to the Central Government within fifteen days of receipt of such
reply or observations;
3. in case the auditor fails to get any reply or observations from the Board or the
Audit Committee within the stipulated period of forty-five days, he shall
forward his report to the Central Government along with a note containing the
details of his report that was earlier forwarded to the Board or the Audit
Committee for which he failed to receive any reply or observations within the
stipulated time.
4. The report shall be sent to the Secretary, Ministry of Corporate Affairs in a
sealed cover by Registered Post with Acknowledgement Due or by Speed post
followed by an e-mail in confirmation of the same.
5. The report shall be on the letter-head of the auditor containing postal address,
e-mail address and contact number and be signed by the auditor with his seal
and shall indicate his Membership Number.
6. The report shall be in the form of a statement as specified in Form ADT-4.
Nikkhil ₲upta
B. In case of a fraud involving lesser than rupees one crore, the auditor shall report the
matter to Audit Committee constituted under section 177 or to the Board immediately
but not later than two days of his knowledge of the fraud and he shall report the matter
specifying the following:
a. Nature of Fraud with description;
b. Approximate amount involved; and
c. Parties involved.

14
Companies (Audit & Auditors) Rules, 2014
15
Companies (Audit & Auditors) Rules, 2014

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 5.12

Common points for both A and B above:

 The provision of this rule shall also apply to a cost auditor and a secretarial auditor
during the performance of his duties under section 148 and section 204
respectively.
 The following details of the fraud shall be disclosed in the Board’s Report:
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
Provisions related to fraud are equally applicable to the cost auditor as well as the
secretarial auditor.
Test Your Case Study: X Ltd. restrains its company auditor from visiting another branch at different
Knowledge location and having access to the inventory records maintained at that branch because the
branch is already audited by another auditor and the report has been received.
Analysis: It may be noted that the company auditor has right to visit the branch, even if
the branch accounts are audited by another auditor, if he considers it necessary to do so
for the performance of his duties as auditor.
Conclusion: In the given case the auditor has the right to access the branch of X Ltd.
Liabilities of the STATUTORY LIABILITIES
Company I. Under Companies Act, 2013 (Civil Liabilities)
Auditor Types of default Liability
Misstatement in the Where a person has subscribed for securities of a company on
Prospectus (Section the basis of a misleading prospectus (certified by the auditor),
35) the auditor shall be held liable for any loss incurred by the
person.
Misfeasance16 A company auditor may be charged with misfeasance at the
(Section 340) time of liquidation of the company, if it is found that he -

 has misapplied, or retained, or become liable or

accountable for, any money or property of the
company; or

 has been guilty of any misfeasance or breach of trust in

relation to the company.
II. Under Companies Act, 2013 (Criminal Liabilities)
Types of default Liability
Misstatement in the The auditor shall be held liable under Section 447 as under:
Prospectus - Involving fraud of an amount of equal to or more than
ten lakh rupees or one per cent of the turnover of the
company – imprisonment for 6 months to 10 years and
fine of upto three times the amount involved in the
fraud.
- Involving fraud of an amount of less than ten lakh
rupees or one per cent of the turnover of the company –
imprisonment upto 5 years and fine of upto Rs. 50
Lakhs.
- Moreover, where the fraud in question involves public
interest, the term of imprisonment shall not be less than
three years
Punishment for Non- The auditor shall be held liable under Section 147 as under:
compliance with

16
Misfeasance implies breach of trust or negligence in the performance of duties.

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Sections 139, 144 and - For unknowing / unwilful default - Fine Rs.25,000 to
145 Rs.5,00,000 or four times the remuneration of the
auditor, whichever is less.
- For knowing or willful17 default - Imprisonment for a
term of 1 year and with fine Rs. 50,000 to Rs. 25,00,000
or eight times the remuneration of the auditor,
whichever is less.
- Further convicted auditor shall be liable to refund the
remuneration received by him from the company and
pay for damages to the company, statutory bodies or
authorities etc. for loss arising out of incorrect or
misleading statements of particulars made in his audit
report.
- If it is proved that the partners of the audit firm have
acted in a fraudulent manner, the partners concerned of
the audit firm as well as the firm itself shall be liable for
fine jointly and severally.
Refusal or Failure to Produce Documents before an
inspector (Section 217): Imprisonment upto six months and
fine Rs. 25,000 to Rs. 100,000. Additionally a further fine which
may extend to two thousand rupees for every day after the first
during which the failure or refusal continues.

Fraud in Relation to a Company in Winding-up (Section

336): Imprisonment of 3 years upto 5 years and with fine Rs.
100,000 upto Rs. 300,000.

Punishment for False Statement in a certificate, financial

statement, prospectus etc (Section 448): Liable under Section
447 as stated earlier.
Punishment for giving false evidence upon any examination
on oath (Section 449): Imprisonment for 3 years upto 7 years
and with fine which may extend to ten lakh rupees.
III. Under Other Acts
Act Liability
Income Tax Act, 1961 Where the auditor makes a false, statement or declaration
relating to any income chargeable to tax, the auditor shall be
punished under Section 278
Chartered Schedule I and II of the Act contains cases where a Chartered
Accountants Act, 1949 Accountant shall be held guilty of professional misconduct
under Section 22 of the Act.
Life Insurance Act, As per Section 104 of the Act, if an auditor makes any false
1956 statement in any return, report or other such forms to be issued
under this Act, he shall be sentenced to imprisonment or fine or
both.
Banking Regulation As per Section 46 of the Act, if an auditor in any return, balance
Act, 1949 sheet, or other document wilfully makes a false statement, , he
shall be held liable.
CONTRACTUAL LIABILITIES
 If any of the terms of the contract (letter of engagement between auditor and auditee)
is contravened, the auditor may be held liable under the Indian Contract Act, 1872.

17
With the intention to deceive the company or its shareholders or creditors or tax authorities,

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 5.14

 In case of absence of any written contract, the auditor is expected to conduct

complete audit. Hence, if in such a circumstance, he conducts only partial audit and
any error or fraud is discovered later on, he shall be held liable.
 Moreover, an auditor shall also be held liable if he discloses any secret information
of the client to any third party (also known as ‘Insider Trading’)
 In the case Wilde and Others vs. Cape and Dalgeish (1897) also, it was held that if
the client suffers any loss due to the auditor not complying with the contract, the
auditor will have to compensate the client for such loss.
Audit Committee Constitution of an Audit committee is mandatory for the following companies:
(Section 177) (a) Every listed Company;
(b) All public companies with a paid up share capital Rs 10 Crore or more;
(c) All Public Companies having turnover of Rs 100 Crore or more;
(d) All Public Companies having in aggregate, outstanding Loans, or borrowings and
debentures or deposits exceeding Rs. 50 Crore or more.
Constitution of An Audit committee shall have minimum 3 Directors majority of them should be
Audit committee Independent Director. Majority of the member of the Audit Committee able to read &
understand the financial statement.
Functions of - Appointment and fixation of the remuneration of Auditor.
Audit Committee - Examination of the Financial Statement.
- Scrutiny of Inter Corporate Loans and Investment,
- Valuation of the Assets of the Company,
- Evaluation of the internal financial control and risk management system of the entity.
- Evaluation of the use of the funds rose through public offers.
- Evaluation of any related party transaction.
Powers of the - to call for comments / observations of the Auditor about Internal Control Systems and
Audit Committee other matters.
- to review the Financial Statement before they are submitted to the Board.
- to discuss any issues with the Statutory & Internal Auditor and the Management of
the Company in relation to matter contained in the Financial Statement.
- Power to investigate into any matter under the purview of Audit Committee.
- Auditors of the company and key managerial personnel shall have a right to be heard
into the meeting.
- Composition of Audit Committee is to be disclosed in Board’s Report.
- In case recommendation of the Audit Committee is not accepted by the Board, the
Board shall disclose in Board’s report along with reasons.

Important Questions – Provisions related to audit under the Companies Act

Q.1 Enumerate the duties the Company Auditor [Dec 15 (4 Marks)]

Q.2 Statutory Auditor can be appointed as the Internal Auditor of the same Company for the same
period. Comment [Dec 2008, June 2013 (2 marks)]

As per section 144, Statutory Auditor cannot be appointed as the Internal Auditor for the same company
for the same period. This is because of self-review threat, that the auditor will not be independent.

Q.3 Audit Committee is only a luxury for the Company. So you agree? [Dec 2008 (2 marks)]

Audit Committee is not a luxury. It serves as a communication channel among various departments and
has to interact with the management, internal auditor, statutory auditor and the public.

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 5.15

Q.4 Statutory Auditor of the company is legally bound to attend the AGM of the Company. State the
correct position [June 2009 (2 marks)]

Section 146 of the Companies Act, 2013 states that the auditor shall be entitled to attend and be heard in
an AGM. Whether he exercises his right or not, is up to him.

Q.5 M/s SS Associates, Chartered Accountants who were appointed as Auditor by the members in AGM
refuses to accept the appointment. In such cases CG only can appoint another Auditor. [Dec 2009
(2 marks)]

When the appointed auditor refuses to take up the assignment, the company should take recourse to Section
139 and hold an extra ordinary general meeting for appointment of auditor, as the Board has no powers to
appoint auditor in place of the resigned auditor. The refusal of auditor will tantamount to assuming that
he has resigned.

Q.6 Auditor is not liable in case of honorary (free of cost) audit. [June 2010 (2 marks)]

The Auditor has to conduct and conclude his audit as per the provisions of the Companies Act, 2013. The
quantum of fees does not decide the scope or liability of the audit. Hence it doesn’t matter whether the
auditor has charged fees for the audit or not, his liability remains as it is.

Q.7 The Articles of Association of ABC Ltd. provides that the Fixed deposit receipts should not be shown
to the statutory auditors. Accordingly, the Manager (Accounts) refuses to show it to the Auditor.
Analyse the legality. [June 2010 (2 marks)

The Auditor has to conduct and conclude his audit as per the provisions of the Companies Act, 2013. As
per the provisions of Section 143, auditor has the right to access the books and records thereon. If this
right is restricted, the auditor shall report it in the Auditor’s Report.

Q.8 The auditor demanded the notice for AGM but the Director of the Company refused. State the
legality [Dec 2010 (2 marks)]

Q.9 At the AGM, a resolution was passed by all the Shareholders restricting some of the powers of a
Auditor. State the validity of the Resolution. [Dec 2012 (2 marks)]

Certain specific rights & power have been conferred by the Companies Act, 2013 on the Auditor which
cannot be restricted or curtailed by the shareholders of the company. Hence any such resolution even if
passed by entire body of shareholders is ultra-vires (beyond law) and, therefore, not valid.

Q.10 A practicing cost accountant is appointed by the shareholders in general meeting as the Auditor of
a private limited company. Is the appointment valid? [June 2013, June 2014 (2 marks)]

Only a practicing Chartered Accountant is qualified for appointment as the Auditor of a Company, even
if the company is a private limited company. Hence, this appointment is not valid.

Q.11 Sec. 177 of Companies Act 1956 lays down the Auditor’s duty as a member of Audit Committee.
Comment. [June 2013 (2 marks)]

This statement is false. Auditor is not a member of Audit Committee. He has no right to vote. However
he shall attend and participate at the meetings of the Audit Committee.

Q.12 What are the disqualifications for appointment of Statutory Auditor of a Company? [Dec 2013, June
2015, June 2017 (4 marks)]

Q.13 Discuss the scope of audit committee in public limited company. [June 2016 (8 marks)]

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 5.16

Q.14 What are the services that an Auditor cannot render under section 144 of the Companies Act, 2013.
[June 2017, Dec 2019 (5-6 marks)]

Q.15 Discuss the provisions under Section 139(7) relating to the appointment of the first auditor in a
Government Company. How can an auditor, duly appointed by a company, be removed before
expiry of his term? [Dec 2017 (7 marks)]
Or
How can an auditor, who is appointed under section 139 of the Companies Act, 2013, be removed
from his office before the expiry of his term. [June 2019 (4 marks)]

Q.16 Discuss the duty of an auditor to report certain matters in the audit report u/s 143(3). [Dec 2017 (5
marks)]

Duty Regarding Inclusion of Certain Matters in the Audit Report: As per Section 143(3), the company
auditor, in his audit report, shall clearly state –
 Whether he has sought and obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the
effect of such information on the financial statements.
 Whether, in his opinion, proper books of account as required by law have been kept by the company
and proper returns adequate for the purposes of his audit have been received from branches not visited
by him.
 Whether the report on the accounts of any branch office of the company audited by a person other
than the company's auditor has been sent to him and the manner in which he has dealt with it in
preparing his report.
 Whether the company's balance sheet and profit and loss account dealt with in the report are in
agreement with the books of account and returns.
 Whether, in his opinion, the financial statements comply with the accounting standards.
 The observations or comments of the auditors on financial transactions or matters which have any
adverse effect on the functioning of the company.
 Whether any director is disqualified from being appointed as a director under sub-section (2) of section
164.
 Any qualification, reservation or adverse remark relating to the maintenance of accounts and other
matters connected therewith.
 Whether the company has adequate internal financial controls system in place and the operating
effectiveness of such controls.

Q.17 Discuss the provisions of Companies Act, 2013 as regards reporting of frauds by Company Auditor.
[June 2018 (6 marks)]

 The provisions of Companies Act 2013 regarding reporting of frauds by a company auditor are as
follows: For the purpose of sub-section (12) of section 143, in case the auditor has sufficient 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 report the matter to the Central Government
immediately but not later than sixty days of his knowledge and after following the procedure indicated
herein below.
1. auditor shall forward his report to the Board or the Audit Committee, as the case may be,
immediately after he comes to knowledge of the fraud, seeking their reply or observations within
forty-five days;
2. on receipt of such reply or observations the auditor shall forward his report and the reply or
observations of the Board or the Audit Committee along with his comments (on such reply or

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 5.17

observations of the Board or the Audit Committee) to the Central Government within fifteen
days of receipt of such reply or observations;
3. in case the auditor fails to get any reply or observations from the Board or the Audit Committee
within the stipulated period of forty-five days, he shall forward his report to the Central
Government along with a note containing the details of his report that was earlier forwarded to
the Board or the Audit Committee for which he failed to receive any reply or observations within
the stipulated time.
 The report shall be sent to the Secretary, Ministry of Corporate Affairs fin a sealed cover by
Registered Post with Acknowledgement Due or by Speed post followed by an e-mail in confirmation
of the same.
 The report shall be on the letter-head of the auditor containing postal address, e-mail address and
contact number and be signed by the auditor with his seal and shall indicate his Membership Number.
 The report shall be in the form of a statement as specified in Form ADT-4.
 The provision of this rule shall also, mutatis mutandis, to a cost auditor and a secretarial auditor during
the performance of his duties under section 148 and section 204 respectively.

Q.18 Discuss about the manner in which rotation of Auditors may be done by the company on expiry of
their term. [June 2018 (6 marks)]

Q.19 Discuss the rights of an auditor according to the Companies Act, 2013 [June 2019 (8 marks)]

Q.20 Discuss the functions and power of the Audit Committee. [Dec 2018 (6 marks)]

Q.21 Discuss the procedure for appointment for first Auditor of the Company and his tenure [Dec 2018
(6 marks)]

Q.22 Discuss the provisions relating to ‘Punishment for Contravention’ under section 147 of the
Companies Act 2013. [Dec 2019 (6 marks)]

Q.23 M/S ABC & Co. is an audit firm having partners A, B and C. All of them are qualified Chartered
Accountants. The firm has been offered the appointment as a company auditor of X Ltd. for the
financial year 2020-21. Mr. P, a relative of Mr. A, is holding is holding 6,000 shares (face value of
Rs. 10 each) in X Ltd. having market value of Rs. 1,75,000. As a legal expert, advise ABC & Co. as
to whether the offer is acceptable or not.

As per section 141(3)(d)(i), a person shall not be eligible for appointment as an auditor of a company, who,
or his relative or partner is holding any security of or interest in the company or its subsidiary, or of its
holding or associate company or a subsidiary of such holding company. However, as per proviso to this
section, the relative of the person may hold the securities or interest in the company of face value not
exceeding of Rs. 1,00,000.
In the given case, M/s ABC & Co. is an audit firm having partners A, B and C all of whom are qualified
Chartered Accountants.
Mr. P is a relative of Mr. A and he is holding shares of X Ltd. of face value of Rs. 60,000 only (6,000
shares x Rs. 10 per share).
Therefore, M/s ABC & Co. is not disqualified for appointment as an auditor of X Ltd. as the relative of
Mr. A (i.e., a partner of M/s ABC & Co.) is holding the securities in X Ltd. which is within the limit
mentioned in proviso to section 141(3)(d)(i) of the Companies Act, 2013

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 5.18

Key points to remember

Appointment of First auditor – Government company

auditors (Section  Appointed by CAG within 60 days from date of registration of company
139)  In case CAG doesn’t appoint the auditor within 60 days, the Board of Directors
must appoint the auditor within next 30 days.
 In case the Board also doesn’t appoint the first auditor, it should be appointed
by the members within 60 days in an EGM

First auditor – Company other than a Government company

 Appointed by Board of Directors within 30 days of the registration of the
company
 In case the board fails to appoint the first auditor, it should be appointed by the
Members within 90 days in an EGM

Subsequent auditor – Government Company

 In case of Government company, CAG should appoint an auditor within 180
days from commencement of the financial year

Subsequent auditor – Company other than a Government company

 Every company appoints an auditor at the first AGM till the conclusion of sixth
AGM.
 Auditor can be an individual or a partnership firm
 No listed company can re-appoint an individual auditor or a firm for more than
five consecutive years or ten consecutive years respectively (Rotation of
auditor)
 An auditor who has completed the prescribed term of five or ten consecutive
years, should not be re-appointed as auditor for the next five consecutive years
(Cooling off period)

Casual Vacancy  In case of Government Company, CV is filled by CAG within 30 days

(CV)  In case of any other company, CV is filled by Board of Directors within 30
days Nikkhil ₲upta

Removal /  Removal - The auditor may be removed before the end of his term, by:
resignation of  passing a special resolution and
auditor  obtaining the previous approval of Central government
 Removal – The auditor may be removed (or not re-appointed) after the end of
his term, by:
 Special notice issued by the shareholders intending to appoint an auditor
other than the retiring auditor
 Retiring Auditor to make a representation in writing
 Special resolution be passed
 Not applicable to Section 139(2) – rotation cases
 Resignation - When the auditor resigns from the company, he should, within
30 days from the resignation, file a statement with the company and the
Registrar, indicating the reasons of resignation

Eligibility /  An auditor can be a Chartered Accountant or a firm (including LLP) of

qualifications of Chartered Accountants

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 5.19

auditor (Section  In case of a firm, only the partners who are Chartered Accountants shall be
141) authorized to act and sign on behalf of the firm

Disqualifications  Body corporate

of auditor (Section  Officer / employee of the company or partner / employee of such officer /
141) employee
 Who holds any security or interest in the company (a relative can holD security
upto FV of INR 100,000)
 Who is indebted to the company in excess of INR 500,000
 Who has given any guarantee / security in connected with indebtedness of the
company in excess of INR 100,000
 Who has a business relationship with the company
 Who is in full time employment elsewhere
 Who has been convicted by a court for any fraud and 10 years have not lapsed
from such a conviction
 Who is engaged in consulting and specialized services under section 144 (like
book-keeping, actuarial services, managerial services, design and
implementation of financial information system)

Remuneration of  Should be fixed in the general meeting

auditors (Section  Should be fixed by the Board for the first auditor
142)  Remunerations includes the expenses, if any, incurred by the auditor

Powers /rights of  Right to access books of accounts and the supporting documents of the
an auditor company as well as its subsidiaries
(Section 143)  Ask such information and explanation, from the officers of the company, as is
required for audit
 Inquire into the critical matters like:
 Whether the loans and advances made by the company are fully secured and
they are not prejudicial to the interest of the company
 Whether personnel expenses have been charged to P&L Account
 Whether the position stated in the financial statements is correct and not
misleading
 Whether any assets of the company are sold below the purchase price
 To give qualification on the matters he deems fit, in the auditor’s report
 In case of Government companies, the CAG has the power to conduct a test
audit / supplementary audit, in addition to the regular statutory audit
 To attend the AGM and address the members, either himself or through an
authorized representative

Duties of an  To make report to the members of the company on the basis of the accounts
auditor (Section examined by him
143)  In case of Government company, to furnish the report to the CAG
 To comply with the auditing standards
 To give a true and fair view of the company’s affairs
 To give the reasons for every qualification given in the auditor’s report
 To inform the board of directors or the audit committee, and subsequently to
the central government, in case of a fraud, within the prescribed timelines

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 5.20

 To disclose the impact of pending litigation, if any

 To ensure that the company has made provision for foreseeable losses
 To ensure that the company has duly deposited the statutory obligations like
TDS, Provident fund etc on a timely manner

Punishment for For the contravention of any of the above provisions, following punishments should
contravention follow:
(Section 147) For the default of the Company – Fine of INR 25,000 – INR 500,000
For the default of the Auditor:
 For unknowing defaults - fine of INR 25,000 to INR 500,000;
 For knowing / willful defaults - fine of INR 100,000 to INR 2,500,000, and
imprisonment for 0-1 year – Imprisonment of upto one year

Where the auditor is convicted, he/she shall also be required to - a) refund the
remuneration received by him to the company and b) pay damages, if any.
Audit Committee Constitution of Audit committee is mandatory for:
(Section 177) (i) Every listed Company; and
(ii) All public companies having:-
 a paid up share capital Rs 10 Crore or more;
 turnover of Rs 100 Crore or more;
 outstanding Loans, or borrowings and debentures or deposits aggregating to
Rs 50 Crore or more.

An Audit committee shall have minimum 3 Directors majority of them should be

Independent Director.
Functions of audit  Appointment and fixation of the remuneration of the Auditor
committee  Examination of the Financial Statement.
 Scrutiny of Inter Corporate Loans and Investment,
 Valuation of the Assets of the Company,
 Evaluation of the internal financial control and risk management system of the
entity.
 Evaluation of the use of the funds rose through public offers.
 Evaluation of any related party transaction.

Powers of audit  to call for comments of the Auditor about Internal Control Systems and its
committee other observations.
 to review the Financial Statement and Audit report, before submission to the
Board
 to discuss any issues with the Statutory & Internal Auditor and the Board of
the Company

Diagrammatic presentation of key provisions of the Company Audit

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 5.21

Appointment of the FIRST

auditor

Government Company [Sec.

Other Companies [Sec. 139(6)]
139(7)]

Appointed by the Comptroller Appointed by the Board of

and General Of India ('CAG') Directors ('BOD') within 30 Days
within 60 Days of registration of of the registration of the
the Company Company

If the BOD doesn't appoint the

auditors, the Members /
If the CAG doesn't appoint the
Shareholders should appoint the
auditors, the BOD should appoint
auditor within next 90 Days in an
the auditor within next 30 Days
Extra-ordinary General Meeting
('EGM')

If the BOD also doesn't appoint

the auditors then the Members /
Shareholders should appoint the
auditor within next 60 Days in an
EGM

Note: The tenure of the first auditor is till the conclusion of the first Annual General Meeting (‘AGM’) only.

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

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 5.22

Appointment of the SUBSEQUENT

auditor

Government Company Other Companies

Appointed by the CAG within 180 Days Appointed at the AGM and holds the
of commencement of the financial office of the auditor till the conclusion
year ('FY') of the 6th AGM (Rotation of Auditors)

Auditor should give the following

certificates to the Company:
- He / she is eligible to be appointed as
an auditor
- He / she satisfies the requirements
u/s 141.

After serving a term of 5 or 10 years,

the same auditor should not be re-
appointed* for next 5 years (Cooling
off period)

*The network firms of the same auditor also cannot be re-appointed. Network firms means - CA Firms under
same brand / common control. Nikkhil ₲upta

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

YouTube Channel – CA CS CMA Nikkhil Gupta; Website - www.cacscmanikkhilgupta.com
 5.23

Reappointment of the existing auditors: The existing auditors may be re-appointed if following conditions
are satisfied:
1) The existing auditor is not disqualified from being re-appointed
2) The existing auditor is not unwilling to be re-appointed
3) Any other auditor has not been already appointed

Note 1: In case the appointment of a new auditor or re-appointment of the existing auditor does not take place,
the existing auditor is automatically re-appointed and continues the office of the auditor.
Note 2: Audit committee should be consulted before re-appointing the existing auditor.

Appointment of the auditor in case of Casual Vacancy (‘CV’)

For a Government Company, CAG should fill the CV within 30 Days. For companies other than the
Government company:

Other Company

When CV arises due When CV arises for any

resignation of the auditor other reason

CV should be filled by BOD

withing 30 Days and
CV should be filled by BOD
should be approved by the
withing 30 Days
members in the general
meeting within 3 months
Note 1: Audit committee should be consulted before filling the casual vacancy.

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 5.24

Duty of an auditor with respect to Fraud

Auditor should report Fraud to the Board of Directors / Audit Committe

immediately and ask for a response within 45 Days

Board / Audit Committee gives Board / Audit Committee does

a response not gives a response

Auditor should furnish such Auditor should furnish his

response (alongwith the comments (alongwith the
auditor's comments) to the observation that the Board did
Central Government within 15 not respond) to the Central
Days Government within 15 Days

In any case, the auditor should report the fraud to the Central Government within maximum 60 days, on his
letterhead, in the prescribed Form ADT – 4.

Punishment for contravention of provisions related to audit (Section 147 of the Companies Act, 2013)

Contravention by: Fine (INR) Imprisonment

The Company 25,000 to 500,000 Not Applicable, since a
company cannot be jailed
Officer of the 10,000 to 100,000 Upto 1 Year
Company
Auditor (Unknowing 25,000 to 500,000 No imprisonment
contravention)
Auditor (Knowing 100,000 to 2,500,000 Upto 1 Year
contravention)
Nikkhil ₲upta

Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

YouTube Channel – CA CS CMA Nikkhil Gupta; Website - www.cacscmanikkhilgupta.com