AUDITING
UNIT 3
QUALIFICATION OF AN AUDITOR
• A person shall be eligible for appointment as an auditor of a
company only if he is a chartered accountant within the meaning of
the Chartered Accountants Act, 1949. [CA means a Chartered
Accountant who holds a valid Certificate of PRACTICE – Section 2(17)]
• A firm whereof majority of partners practicing in India are qualified for
appointment as aforesaid may be appointed by its firm name to be
auditor of a company
• In case of a partnership firm – Company appoints the “Firm” not the
partner in an individual capacity.
Where a firm including a limited liability partnership (LLP) is appointed as
an auditor of a company, only the partners who are chartered accountants
shall be authorized to act and sign on behalf of the firm. [Section 141(2)]
DISQUALIFICATIONS OF AUDITORS
The following persons shall not be eligible for appointment as
an auditor of a company, namely:
1) A body corporate other than a limited liability partnership (LLP)
registered under the Limited Liability Partnership Act, 2008
It means – If chartered accountants form a company (Whether
public/private – like RK Private Ltd./RK Limited) – This Company of CAs
cannot be qualified for appointment as auditor of another company.
CONT..
• 2 )An officer or employee of the company;
• Explanation
• As per Section 2(59), ‘Officer’ includes
• Any director;
• Manager;
• Key managerial personnel (KMP); or
• Any person under whose directions or instructions the BOD or any one
or more of the directors is or are accustomed to act.
CONTI…
• 3) a person who is a partner, or who is in the
employment (employee), of an officer or employee of the company;
• 4) a person who, or his relative or partner
• (i) 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;
• (ii) is indebted to the company, or its subsidiary, or its holding or
associate company or a subsidiary of such holding company, in excess
of ` 5 Lacs; OR
CONTI…
• iii) 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 ` 1 Lac;
APPOINTMENT OF AUDITORS
APPOINTMENT OF THE FIRST AUDITOR
• The first auditor of a company, other than a Government company,
shall be appointed by the Board of Directors (only by BOD) within 30
days from the date of registration (i.e., Date of Incorporation) of the
company.
• In the case of failure of the Board to appoint such auditor, it shall
inform the members of the company, who shall appoint within 90 days
at an extraordinary general meeting (EGM).
• The first auditor shall hold office from the date of appointment to till
the conclusion of the first AGM
APPOINTMENT OF SUBSEQUENT
AUDITOR/REAPPOINTMENT OF AUDITOR
• [Section 139(1) & Rules 3 and 4 of Companies (Audit and Auditors) Rules, 2014]
• (1) Every company shall, at the First AGM, appoint an individual or a firm (includes
LLP) as an auditor of the company.
• Every company means ALL the companies incorporated under the Act which includes
one-person company, Sec. 8 company, etc.;
• Ordinary resolution is sufficient to appoint an auditor.
• (2) The auditor shall hold office from the conclusion of 1st AGM till the conclusion of its
6th AGM (i.e., for 5 years); Appointment takes place only for 5 years, it means – No
company can appoint auditor for less than 5 years. The AGM, in which he is appointed
is counted as 1st AGM.
ROLE OF AUDITOR
• At the core of their profession, To ascertain the truthfulness of financial
auditors are responsible for
statements.
conducting an independent review of
To identify any discrepancies or fraud.
an organization‚’
financial statements. This ensures To provide assurance to stakeholders about the
that the information provided to financial health of the organization.
stakeholders is accurate and reliable.
Auditors can work in various sectors, including
The main reasons why auditors are
employed include: private companies, public organizations, non-
profits, and government agencies, serving as
the watchdogs of financial integrity.
POWERS OF AUDITORS
• Auditors possess a variety of powers that enable them to perform their
duties effectively. These powers can be categorized into several key
areas:
• Access to Information: Auditors have the authority to access all
necessary financial documents.
• Communication: They can communicate directly with stakeholders to
gather insights.
• Assessment: Auditors assess internal controls and operational
procedures.
RIGHTS OF A COMPANY AUDITOR
• Right to Access Books and Records: The auditor has the right to access all the
company’s books, accounts, and records, including documents, reports, and other
necessary materials.
• Right to Receive Information: They have the right to require information from the
company’s officers, such as the CEO, CFO, and other senior executives.
• Right to Obtain Explanations: The auditor can ask for explanations regarding any
financial or operational transactions that may seem unclear or suspicious.
• Right to Attend General Meetings: The auditor has the right to attend and speak
at any General Meeting of the company, particularly the Annual General Meeting
(AGM)
RIGHTS OF A COMPANY AUDITOR
• Right to Report to Shareholders: The auditor must submit a report
to the shareholders expressing an opinion on the financial statements.
This includes their assessment of the company's financial health and
compliance with legal requirements.
• Right to Conduct Audit as per Law: The auditor is entitled to carry
out the audit in line with the relevant auditing standards and legal
frameworks.
DUTIES OF A COMPANY AUDITOR
• Examine Financial Statements: The auditor must thoroughly
examine the company’s financial statements (balance sheet, income
statement, etc.) to ensure accuracy and compliance with accounting
standards
• Ensure Compliance with Laws: The auditor should check if the
company is complying with all relevant laws and regulations, including
tax and corporate law.
• Report Findings: After completing the audit, the auditor must submit
a report to the shareholders, indicating whether the financial
statements present a true and fair view of the company's financial
position.
DUTIES OF A COMPANY AUDITOR
Detect Fraud or Irregularities: The auditor has a duty to identify and report any instances of fraud,
mismanagement, or financial irregularities.
Verify Accounting Records: They must ensure that the accounting records are complete, accurate,
and reflect the transactions and financial position of the company.
Maintain Confidentiality: The auditor is required to maintain confidentiality regarding the company's
information and only disclose it as per the law.
Provide Recommendations: The auditor may provide suggestions or recommendations for
improving the company’s internal control systems and accounting practices.
Adhere to Professional Ethics: The auditor must follow ethical standards, maintain
professional skepticism, and act with integrity throughout the audit process.
DUTIES OF AUDITORS
• Auditors bear numerous responsibilities that go hand-in-hand with their
powers. Some of the primary duties include:
• Planning the Audit: They must develop an audit plan that outlines
the scope and objectives of the audit.
• Conducting the Audit: They execute the audit according to the plans,
ensuring adherence to standards and regulations.
• Reporting Findings: After the audit, auditors are required to compile
their findings into a report for stakeholders.
REMOVAL OF AUDITOR
• Legislative Background: (Sec 140) Part-1
• Provision for Removal: Allows removal of an auditor before the expiry of their term.
• Opportunity for Hearing: The auditor must be given a reasonable opportunity to be
heard.
• Resignation by Auditor: Provisions for resignation are also included.
• Special Notice for Appointing New Auditor: Required when appointing a new auditor
instead of a retiring one.
• Power of Tribunal: The tribunal can remove an auditor in cases of fraudulent activities.
• Duty to Report Fraud: Auditor, Company Secretary, or Cost Accountant must report
fraud to the Central Government if suspected
REMOVAL OF AUDITORS
• Section 140: Allows removal of an auditor before the end of their
term.
• Approval Process:
• Requires a special resolution by the company.
• Prior approval of Central Government is needed for removal.
• Who Can Be Removed:
• Auditors appointed by shareholders, board of directors, or the Comptroller
and Auditor-General of India.
REQUIREMENT OF SPECIAL NOTICE
• Removal Process:
• Section 140(1) applies to removal before the term ends.
• No specific requirement for special notice under section 140(4) for
removal.
• Shareholders' Rights:
• Shareholders can requisition a resolution for removal under section 111
and section 100.
• In this case, the process outlined in Section 140(1) must still be followed.
AUDITOR’S REPORTS
• An audit report summarizes an organization’s financial statements, internal
controls, and accounting practices to determine if the financials are accurate,
complete, and by generally accepted accounting principles (GAAP) or other
relevant accounting standards. Audit reports are conducted either by an in-
house audit committee as part of their internal control methods or by an
external auditor. An organization’s executive board can use audit reports to
identify areas of improvement or to gain clarity on what they require from
prospective investors.
CONTENTS OF AN AUDIT REPORT
•Title : The title should mention that it is an ‘Independent Auditor’s
Report’.
•Addressee: Should mention clearly as to whom the report is being given to.
For example Members mention that it is the Management’s responsibility to
Prepare the Financial Statements. f the company, Board of Directors
•Auditor’s Responsibility: Mention that the responsibility of the
Auditor is to express an unbiased opinion on the financial statements
and issue an audit report.
•Opinion: Should mention the overall impression obtained from the
audit of financial statements. For example, Modified Opinion,
Unmodified Opinion.
CONTENTS OF AN AUDIT REPORT
• Basis of the Opinion: State the basis on which the opinion
as reported has been achieved. Facts of the basis should be
mentioned.
• Other Reporting Responsibility: If any other reporting
responsibility exists, the same should be mentioned. For
example Report
•(auditor)
Signature of theon Legal orThe
Auditor: Regulatory requirements.
engagement partner
•signed. shall sign the audit report.
Place of Signature: The city in which the audit report is
•signed.
Date of Audit Report: Date on which the audit report is
TYPES OF AUDIT REPORTS
There are four types of audit
opinions: unqualified,
qualified, adverse, and
disclaimer of opinion.
Each type reflects a different
level of assurance and has
distinct implications for the
audited entity.
UNQUALIFIED OPINION– UNQUALIFIED
REPORT
• An unqualified opinion is considered a clean report. This is the type of
report that auditors give most often. It is also the type of report that
most companies expect to receive.
• An unqualified opinion doesn’t have any adverse comments, and it
doesn’t include any disclaimers about any clauses or the audit process.
• This report indicates that the auditors are satisfied with the company’s
financial reporting. The auditor believes the company’s operations
comply with governance principles and applicable laws. The company,
the auditors, the investors and the public perceive such a report to be
free from material misstatements.
• Unmodified opinion: An unmodified opinion is the same as an
unqualified opinion, but the difference comes down to context. Clean
audit reports for publicly listed companies have an unqualified opinion,
while those same reports for private companies are considered
unmodified.
QUALIFIED OPINION – QUALIFIED REPORT
• A qualified opinion results in a qualified report.
• It typically indicates that the auditor isn’t confident about any specific
process or transaction, which prevents them from issuing an
unqualified or clean report. Investors don’t find qualified opinions
acceptable, as they project a negative opinion about a company’s
financial status.
• Auditors write up a qualified opinion in much the same way as an
unqualified opinion, except that they state the reasons they’re unable
to present an unqualified opinion.
CONT…
• An auditor will give a qualified opinion and report if they can’t
confidently clear the organization's financial statements or financial
reporting practices.
• A common reason for auditors issuing a qualified opinion is that the
company didn’t present its records with GAAP.
DISCLAIMER OF OPINION – DISCLAIMER
REPORT
• A disclaimer of opinion results in a disclaimer report. When an auditor
issues a disclaimer of opinion report, it means that they are distancing
themselves from providing any opinion at all related to the financial
statements.
• The general consensus is that a disclaimer of opinion constitutes a very
harsh stance. As a result, it creates an adverse image of the company.
CONTI…
• Some of the reasons that auditors may issue a disclaimer of opinion are
because they felt like the company limited their ability to conduct a
thorough audit or they couldn’t get satisfactory explanations for their
questions.
• They may not have been able to decipher the correct nature of some
transactions or to secure enough evidence to support good financial
reporting.
• Auditors who aren’t allowed an opportunity to observe operational
procedures or to review particular procedures may feel like they’re not
able to express a definite opinion, so they feel a disclaimer is necessary
and in order.
ADVERSE OPINION – ADVERSE AUDIT REPORT
• The final type of audit opinion is an adverse opinion. An auditor’s adverse opinion is
a big red flag. An adverse audit report usually indicates that financial reports
contain gross misstatements and have the potential for fraud.
• Auditors who aren’t at all satisfied with the financial statements or who discover a
high level of material misstatements or irregularities know that this creates a
situation in which investors and the government will mistrust the company’s
financial reports.
• Adverse opinions send out a high alert that the company’s records haven’t been
prepared according to GAAP. Financial institutions and investors take this opinion
seriously and will reject doing any kind of business with the company.
Thank you
