AUDIT AND AUDITORS

A company auditor is a finance professional who reviews a company's financial

statements, internal processes, and transaction records. They then provide an
independent report to the company's shareholders to show whether the company
has prepared its financial statements according to company law and other financial
reporting rules. An auditor is a person authorized to review and verify
the accuracy of financial records and ensure that companies
comply with tax laws.
There are different types of auditors, including:
 Internal auditors
These auditors are hired by organizations to provide independent and objective evaluations of
financial and operational business activities. They typically work for the company they audit and
guide management on improving recording and reporting processes.
 Forensic auditors
These auditors investigate various aspects of financial fraud and submit reports to a concerned
regulatory body. They may conduct audits for both government and private institutions.
 Subsequent auditors
These auditors are appointed and their remuneration is fixed by the shareholders.
An auditor's primary objective is to protect businesses from fraud and highlight
any discrepancies in accounting methods.

Section 139 Subsection (1): Initial Appointment and Ratification

1. Mandatory Appointment:
 Every company is required to appoint an individual or a firm as an
auditor at the first annual general meeting.
 The appointed auditor will serve until the conclusion of the sixth annual
general meeting.
2. Member's Approval:
 Members of the company will decide the manner and procedure for
selecting auditors.
 The appointment must be ratified by members at every annual general
meeting.
 3. Consent and Certificate:
 Before appointment, the written consent of the auditor and a certificate
indicating compliance with prescribed conditions must be obtained.
4. Informing Registrar:
 The company must inform the appointed auditor of their selection.
 A notice of the appointment must be filed with the Registrar within
fifteen days.

Subsection (2): Limits on Appointment

1. Term Limits:
 Listed companies and those prescribed are restricted in appointing:
 An individual auditor for more than one term of five consecutive
years.
 An audit firm as an auditor for more than two terms of five
consecutive years.
2. Cooling-off Period:
 Individual auditors and audit firms have a cooling-off period before
reappointment in the same company.

Subsection (3) and (4): Member's Resolutions and Rotation

1. Member's Resolutions:
 Members may pass resolutions to:
 Rotate auditing partners and their teams at specified intervals.
 Specify that the audit should be conducted by more than one
auditor.
2. Central Government Rules:
 The Central Government can prescribe rules for the rotation of auditors.

Subsection (5) to (11): Special Cases, First Auditor, and Retiring

Auditor

1. Government Companies:
 The Comptroller and Auditor-General of India appoints auditors for
government companies within 180 days.
2. First Auditor:
 The first auditor is appointed by the Board within 30 days of
registration. If the Board fails, members appoint within 90 days.
3. Casual Vacancies:
 Vacancies in the auditor's office are filled by the Board or the
Comptroller and Auditor-General of India, depending on the case.
 4. Retiring Auditor:
 A retiring auditor may be re-appointed if not disqualified, unwillingness
is not expressed, and a special resolution is not passed against re-
appointment.
5. Continuation in Absence of Appointment:
 If no auditor is appointed at an annual general meeting, the existing
auditor continues.
6. Audit Committee's Role:
 Where an Audit Committee is required, its recommendations must be
considered for all auditor appointments.

1. Removal of Auditor Procedure (Section 140(1)):

 Requirement: Removal before the completion of the auditor's term requires a

special resolution.
 Approval: Prior approval of the Central Government is mandatory.
 Auditor's Right to be Heard: The auditor must be given a reasonable
opportunity to be heard before any action is taken.
 Central Government Approval: The Central Government's approval is
obtained in the prescribed manner.

2. Auditor's Resignation (Section 140(2) and (3)):

 Resignation Procedure:
 The resigning auditor must file a statement within 30 days of
resignation.
 The statement is filed with the company and the Registrar.
 For companies under Section 139(5), the statement is also filed with the
Comptroller and Auditor-General of India.
 Penalty for Non-compliance:
 Failure to comply with the filing requirement results in a penalty, not
less than fifty thousand rupees but which may extend to five lakh
rupees.

3. Special Notice to Auditor (Section 140(4)):

 Special Notice Requirement:

 A special notice is needed for a resolution at an annual general
meeting appointing a person other than a retiring auditor or expressly
stating that a retiring auditor shall not be re-appointed.
 Not needed if the retiring auditor has completed a consecutive tenure
of five or ten years, as specified in Section 139(2).
  Notification to Retiring Auditor:
 The company must send a copy of the resolution notice to the retiring
auditor.
 Representation by Retiring Auditor:
 If the retiring auditor makes a written representation regarding the
resolution, the company must include a statement in the notice and
send a copy of the representation to every member.

4. Tribunal's Power (Section 140(5)):

 Tribunal Intervention:
 The Tribunal can intervene either suo motu or upon application by the
Central Government or any concerned person.
 This happens if the Tribunal is satisfied that the auditor has acted
fraudulently or abetted or colluded in fraud.
 Changing the Auditor:
 The Tribunal can direct the company to change its auditors.
 If the Central Government applies and the Tribunal orders a change,
the new auditor may be appointed by the Central Government.
 Disqualification Period:
 An auditor against whom a final order is passed by the Tribunal under
this section is disqualified from being appointed as an auditor for five
years.
 The disqualified auditor is also liable for action under Section 447.

Section 141

1. Eligibility for Appointment as Auditor:

 Qualification Requirement: A person eligible for appointment as an auditor

must be a chartered accountant.
 Exception for Firms: A firm can be appointed as an auditor if the majority of
its partners practicing in India are qualified chartered accountants.

2. Authorization for Auditing Firms:

 If a firm (including a limited liability partnership) is appointed as an auditor,

only the partners who are chartered accountants are authorized to act and
sign on behalf of the firm.

3. Disqualifications for Auditors:

  (a) Body Corporate: A body corporate, except for a limited liability
partnership registered under the Limited Liability Partnership Act, 2008,
cannot be appointed as an auditor.
 (b) Company Officers or Employees: Officers or employees of the company
are not eligible.
 (c) Relatives or Employees of Company Officers: Persons who are partners
or in the employment of an officer or employee of the company are
disqualified.
 (d) Financial Interests: Persons having financial interests such as holding
securities, indebtedness, or providing guarantees to the company or its
subsidiaries are disqualified. Exceptions may apply based on prescribed limits.
 (e) Business Relationship: Persons or firms having a business relationship of
a prescribed nature with the company or its subsidiaries are disqualified.
 (f) Relatives of Directors: Persons whose relatives are directors or in the
employment of the company as a director or key managerial personnel are
disqualified.
 (g) Employment and Multiple Audits: Persons in full-time employment
elsewhere or holding the position of an auditor in more than twenty
companies are disqualified.
 (h) Criminal Convictions: Persons convicted of fraud and not having ten
years elapsed from the date of conviction are disqualified.
 (i) Consulting and Specialized Services: Persons whose subsidiary or
associate company is engaged in consulting and specialized services, as
provided in section 144, are disqualified.

4. Consequences of Disqualifications:

 If an appointed auditor incurs any of the disqualifications mentioned after

appointment, they are required to vacate their office, and this vacation is
considered a casual vacancy in the auditor's office.

Section 142

1. Determining Auditor's Remuneration:

 The remuneration of the auditor of a company is to be fixed in either the

company's general meeting or in a manner as determined by the general
meeting.

2. Board's Authority for First Auditor:

  The Board of the company is given the authority to fix the remuneration of the
first auditor it appoints. This provision allows flexibility for the Board in
determining the initial auditor's remuneration.

3. Components of Auditor's Remuneration:

 The remuneration, as per subsection (1), includes:

 Audit Fee: The basic fee payable to the auditor for conducting the
audit.
 Audit-Related Expenses: This encompasses any expenses incurred by
the auditor in connection with the audit of the company.
 Facility Expenses: Any facility extended to the auditor is also included
in the remuneration.

4. Exclusions from Remuneration:

 The remuneration mentioned above does not include any fees or payments
made to the auditor for services other than those related to the audit of the
company.
 For instance, if the company requests additional services from the
auditor not directly related to the audit, the remuneration for these
services is not covered.

5. Provisions for First Auditor:

 The provision allows the Board to fix the remuneration of the first auditor
appointed. This flexibility acknowledges the unique circumstances of the initial
appointment.

6. Approval in General Meeting:

 The general meeting of the company is the primary forum for determining
and approving the auditor's remuneration. This ensures transparency and
accountability in the process.

Section 143

1. Auditor's Right of Access and Duties:

 Every auditor of a company has the right of access to the books of account
and vouchers of the company at all times, regardless of their location.
  The auditor is entitled to require information and explanations from the
company's officers deemed necessary for performing auditing duties.
 The auditor is mandated to inquire into various matters, including the proper
security of loans, transactions represented by book entries, sale of assets,
treatment of loans as deposits, charging personal expenses to revenue
account, and the correctness of the allotment of shares for cash.

2. Access to Subsidiary Records:

 The auditor of a holding company has the right of access to the records of all
its subsidiaries concerning the consolidation of financial statements.

3. Auditor's Report to Members:

 The auditor is required to make a report to the members of the company on

the examined accounts and financial statements.
 The report must comply with accounting and auditing standards and state
whether the financial statements provide a true and fair view of the company's
affairs.

4. Contents of Auditor's Report:

 The auditor's report is mandated to state various matters, including the

information and explanations obtained during the audit, compliance with
proper accounting standards, observations on financial transactions affecting
the company adversely, director disqualification, internal financial control
systems, and any other matters prescribed.

5. Reasons for Negative Answers:

 If any of the matters required in the audit report are answered negatively or
with a qualification, the report must state the reasons.

6. Government Company Audit:

 In the case of a Government company, the Comptroller and Auditor-General

of India appoint the auditor and direct the manner of audit. The auditor
submits a copy of the audit report to the Comptroller and Auditor-General of
India.

7. Supplementary Audit and Comments:

  The Comptroller and Auditor-General of India has the right to conduct a
supplementary audit and comment on the audit report in the case of a
Government company.

8. Test Audit by Comptroller and Auditor-General:

 The Comptroller and Auditor-General of India may cause a test audit to be

conducted in certain cases, applying the provisions of section 19A of the
Comptroller and Auditor-General's Act, 1971.

9. Branch Office Audit:

 If a company has a branch office, the accounts of that office can be audited by
the company's auditor or any other qualified auditor. The branch auditor's
report is submitted to the company's auditor.

10. Compliance with Auditing Standards:

 Every auditor is required to comply with auditing standards.

11. Prescription of Auditing Standards:

 The Central Government may prescribe auditing standards in consultation

with the National Financial Reporting Authority, based on recommendations
from the Institute of Chartered Accountants of India.

12. Inclusion of Additional Statements:

 The Central Government, in consultation with the National Financial Reporting

Authority, may direct the inclusion of additional statements in the auditor's
report for specific classes or descriptions of companies.

13. Reporting of Fraud:

 The auditor, if believing that an offence involving fraud against the company
by its officers or employees is being or has been committed, is obligated to
immediately report it to the Central Government.

14. Protection for Reporting:

 Reporting the matter referred to in sub-section (12) is not a contravention if

done in good faith.
15. Application to Cost Accountants and Company Secretaries:

 The provisions of this section also apply mutatis mutandis to cost accountants
conducting cost audits and company secretaries conducting secretarial audits.

16. Penalty for Non-Compliance:

 Non-compliance with the reporting requirements may result in a fine ranging

from one lakh rupees to twenty-five lakh rupees for auditors, cost
accountants, or company secretaries.

Section 144 Auditor not to render certain services.

1. Restrictions on Services:

 An auditor appointed under this Act is permitted to provide only those

services approved by the Board of Directors or the audit committee. However,
there are specific services that the auditor is explicitly restricted from
providing directly or indirectly to the company, its holding company, or
subsidiary company.

2. Prohibited Services:

The auditor is prohibited from rendering the following services:

 (a) Accounting and Bookkeeping Services: Services related to accounting

and bookkeeping are not allowed.
 (b) Internal Audit: Internal audit services are prohibited.
 (c) Financial Information System Design and Implementation: Services
involving the design and implementation of any financial information system
are restricted.
 (d) Actuarial Services: The auditor is barred from providing actuarial services.
 (e) Investment Advisory Services: Providing investment advisory services is
not allowed.
 (f) Investment Banking Services: The auditor is restricted from rendering
investment banking services.
 (g) Outsourced Financial Services: Services involving the outsourcing of
financial functions are prohibited.
 (h) Management Services: The auditor is not allowed to provide
management services.
 (i) Other Prescribed Services: Any other kind of services as may be
prescribed by regulations is also prohibited.
3. Transitional Provision:

 The provisions allow auditors or audit firms that were providing non-audit
services before the commencement of this Act to comply with these
restrictions before the closure of the first financial year after the
commencement of the Act.

4. Definition of "Directly or Indirectly":

 The term "directly or indirectly" is explained to include the rendering of

services by the auditor:
 (i) In the case of an individual auditor, either by the individual, their
relative, or any person connected or associated with the individual, or
through any other entity in which the individual has significant
influence or control.
 (ii) In the case of an auditor being a firm, either by the firm, any of its
partners, or through its parent, subsidiary, or associate entity, or
through any other entity in which the firm or any partner of the firm
has significant influence or control.

5. Compliance Requirement:

 The auditor or audit firm, if previously engaged in providing any non-audit

services, must comply with these restrictions within the stipulated timeframe.

Section 145. Auditor to sign audit reports, etc.

1. Auditor's Responsibilities:

 The person appointed as an auditor of the company is entrusted with specific

duties related to signing various documents, with a primary focus on the
auditor's report.

2. Signing of Auditor's Report:

 The auditor is obligated to sign the auditor's report. This report is a critical
document that provides an independent assessment of the company's
financial statements.

3. Certification of Other Documents:

  In addition to the auditor's report, the auditor is also required to sign or
certify any other document of the company in accordance with the provisions
of sub-section (2) of section 141.

4. Reference to Section 141(2):

 The signing or certification of documents is to be done in accordance with the

provisions specified in sub-section (2) of section 141. Section 141 likely
contains details about the eligibility, qualifications, and disqualifications of
auditors.

5. Qualifications, Observations, or Comments:

 The auditor's report may include qualifications, observations, or comments on

financial transactions or matters that have any adverse effect on the
functioning of the company.
 These qualifications, observations, or comments are significant indicators of
the auditor's independent evaluation and scrutiny of the company's financial
affairs.

6. Presentation to General Meeting:

 The qualifications, observations, or comments mentioned in the auditor's

report must be read before the company in its general meeting.
 This emphasizes transparency and ensures that shareholders are informed
about any concerns or issues raised by the auditor.

7. Inspection by Members:

 The qualifications, observations, or comments mentioned in the auditor's

report are open to inspection by any member of the company.
 This provision grants members the right to scrutinize and understand the
auditor's findings and concerns, contributing to accountability and
transparency.

Section 146. Auditors to attend general meeting.

1. Communication to Auditors:

 All notices and other communications related to any general meeting of the
company are required to be forwarded to the auditor of the company.
2. Mandatory Attendance of Auditors:

 The auditor is mandated to attend the general meeting, unless otherwise

exempted by the company.

3. Modes of Attendance:

 The auditor has the option to attend the general meeting either by himself or
through his authorized representative.

4. Qualification of Representative:

 The authorized representative attending the general meeting on behalf of the

auditor must also be qualified to be an auditor. This ensures that the
individual representing the auditor possesses the necessary qualifications to
understand and address audit-related matters.

5. Right to be Heard:

 The auditor, whether attending in person or through an authorized

representative, has the right to be heard at the general meeting.
 This right extends to any part of the business discussed during the meeting
that concerns the auditor in their capacity as the auditor of the company.

6. Ensuring Auditor's Involvement:

 The provision emphasizes the active involvement of auditors in the

proceedings of the general meeting, providing them with an opportunity to
express their views and insights on matters relevant to their role as auditors.

7. Exemption by the Company:

 The auditor may be exempted from attending the general meeting if the
company decides to do so. The circumstances under which an exemption may
be granted are not specified in the provided text.
Section 147

1. Punishment for Company:

 If any provisions of sections 139 to 146 (inclusive) are contravened, the

company is subject to punishment.
 The punishment for the company includes a fine ranging from not less than
twenty-five thousand rupees to a maximum of five lakh rupees.

2. Punishment for Officers of the Company:

 Every officer of the company who is in default, meaning responsible for the
contravention, can face punishment.
 The punishment for officers includes imprisonment for a term that may extend
to one year or a fine ranging from not less than ten thousand rupees to a
maximum of one lakh rupees, or both.

3. Punishment for Auditor's Contravention:

 If an auditor of a company contravenes provisions in sections 139, 143, 144, or

145, the auditor is subject to punishment.
 The punishment for auditors includes a fine ranging from not less than
twenty-five thousand rupees to a maximum of five lakh rupees.

4. Enhanced Punishment for Knowingly or Wilfully

Contravening:

 If an auditor knowingly or wilfully contravenes the specified provisions with

the intention to deceive the company, its shareholders, creditors, or tax
authorities, the auditor faces enhanced punishment.
 The enhanced punishment includes imprisonment for a term that may extend
to one year and a fine ranging from not less than one lakh rupees to a
maximum of twenty-five lakh rupees.

5. Liabilities in Case of Auditor's Conviction:

 If an auditor is convicted under the specified provisions, the auditor is liable

to:
 (i) Refund the remuneration received to the company.
 (ii) Pay for damages to the company, statutory bodies, authorities, or
any other persons for losses arising out of incorrect or misleading
statements in the audit report.
6. Responsibility for Damages:

 The Central Government has the authority to specify statutory bodies,

authorities, or officers responsible for ensuring prompt payment of damages.
 After payment of damages, a report must be filed with the Central
Government.

7. Liability of Audit Firm Partners:

 In the case of an audit firm conducting the audit, if it is proved that the
partner or partners of the audit firm acted fraudulently or abetted or colluded
in any fraud related to the company, its directors, or officers, they are jointly
and severally liable.
 The liability includes civil or criminal consequences as provided in the Act or
any other law for the time being in force.