Module 5

Company Audit
The Indian companies act made it legally compulsory for joint stock companies to get their
accounts audited by qualified auditors. The audit of a company shall be carried out by the
Statutory Auditor appointed by the company in its annual general meeting. A Chartered
Accountant who holds a valid certificate of practice under Chartered Accountants Act, 1949
can only become an auditor of the company.

Company Auditor is an individual appointed for preparing an independent audit report of

the company. They can be either appointed by the company's Board of Directors, Shareholders,
Central Government or Comptroller and Auditor General of India (C&AG) accordingly. He is
a person who makes an independent report to a company's shareholders ('members') to show
whether the company has prepared its financial statements according to company law and other
financial reporting rules. The report must also state whether a company's accounts give a true
and fair view of its financial affairs at the end of the year.

Qualification and Disqualification of Company Auditor

Qualification and Disqualification of company auditor are regulated by the Companies Act,
2013 (Sec 141), and these provisions are pertinent for all kinds of appointments.

Qualifications

For becoming a company auditor one should have any one of the following qualifications:

1. Chartered Accountant

• As per section 226 of companies act, a person should not be qualified for appointment as
an auditor or a public or private company unless he is a chartered accountant within the
meaning of the Chartered Accountant Act,1949.

• Chartered accountancy firm where all partners are practicing in India is also qualified for
being a company’s auditors. However, any partner of the firm acting on behalf of their firm
can work as company auditor.

2. Confined State Auditor

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 • The certificate holder issued by the law entitling him to act as a company’s auditor in India
holds the right to become an auditor of a company.

Disqualifications

1. An auditor cannot be a body corporate.

2. An auditor cannot be an employee of officer of the company.
3. A person who is a partner or who is in the employment of an officer of the company cannot be
the auditor of the company.
4. A person, who is indebted to the company for an amount exceeding one thousand rupees,
cannot be the auditor of the company.
5. A person, who is a member or a director of a private company or partner in a firm which is the
managing agent or the secretaries and treasurers of the company, cannot be the auditor of the
company.
6. A person, who is a director or holder of shares of more than 5% in nominal value of the
subscribed share capital of anybody corporate which is the managing agent or the secretaries
and treasures of the company, cannot be the auditor of the company.
Appointment of Auditor [Sec. 139]

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Appointment of Auditor in Government Company

CompaniesAct,2013 defines a Government Company [Section 2 (45)], "as a company in which

not less than 51% of the paid up share capital is held by the Central or State Government or
Governments or partly by the Central government and partly by one or more State
governments."

Appointment of First Auditor [Section 139 (7)]

· The first auditor of Government Company shall be appointed by the Comptroller and
Auditor General of India within 60 days from the date of registration of the company. In case
the Comptroller and Auditor General of India do not appoint such auditor within 60 days, the
Board of Directors of the company shall appoint first auditor within next 30 days. In case of
failure of the Board to appoint the first auditor, it shall inform Members of the company who
shall appoint first auditor within 60 days at an Extraordinary General Meeting. First Auditor
shall hold office till the conclusion of the first Annual General Meeting.

Appointment of Subsequent Auditor [Section 139 (5)]

The Comptroller and Auditor General of India shall appoint subsequent auditor of Government
companies within 180 days from the commencement of the financial year and who shall hold
office till the conclusion of the Annual General Meeting.

Appointment in case of Casual Vacancy [Section 139 (8)]

Appointment of auditor due to casual vacancy in Government Company is filled by the

Comptroller and Auditor General of India within 30 days. If he fails to do so, the Board of
Directors shall fill within next 30 days.

Appointment of Auditor in Non-Government Company

Appointment of First Auditor [Section 139 (6)]

The first auditor of a company other than a Government company shall be appointed by the
Board of Directors within 30 days from the Date of Registration of the company. In case of
failure of the Board to appoint the auditor, it shall inform the members of the company. The
Members shall appoint the auditor within 90 days at an Extraordinary General Meeting.
Appointed First Auditor shall hold office till the conclusion of the first Annual General
Meeting.

Appointment of Subsequent Auditor's [Section 139 (1)]

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Every company shall appoint an individual or a firm as auditor of the company at the first
Annual General Meeting. The appointed auditor shall hold the office till the conclusion of sixth
Annual General Meeting and thereafter till the conclusion of every sixth meeting. The
Company shall place the matter relating to such appointment of ratification by member at every
Annual General Meeting. Before such appointment is made, the written consent of the auditor
to such appointment and also a certificate from the auditor that he is eligible for appointment
shall be obtained from the auditor. The company shall inform the appointed auditor and also
file a notice of such appointment with the Registrar within 15 days of the meeting in which the
auditor is appointed.

Appointment in case of Casual Vacancy [Section 139 (8)]

Causal vacancy arises due to death or insanity or insolvency of an auditor. If an auditor is

disqualified after his appointment, he shall vacate his office as auditor. Such vacation shall be
deemed to be a casual vacancy in the office of the auditor. Appointment of auditor's in case of
casual vacancy shall be done by the Board of Directors within a period of 30 days. If vacancy
is due to resignation of an auditor, such appointment shall also be approved by the company at
a General Meeting convened within 3 months of the recommendation of the Board. The auditor
shall hold office till the conclusion of the next Annual General Meeting.

Reappointment of a retiring auditor is not automatic. A resolution at the annual general body
meeting is required.

However, a retiring auditor shall not be reappointed,

a. When he does not qualify for reappointment.

b. When he is not interested or expressed unwillingness to accept reappointment.
c. When a resolution is passed in the AGM appointing some other auditor. Companies
(Amendment) Bill, 2003 requires a special resolution.
d. When opted not to reappoint him.
e. When resolved to appoint some other auditor and such resolution could not be proceeded
with, due to death, or disqualification of such person.
Auditor’s Remuneration

As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed in
its general meeting or in such manner as may be determined therein. However, board may fix
remuneration of the first auditor appointed by it.

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 Powers (or) Rights of an Auditor [Sec.143]

The Companies Act has conferred certain rights on auditor's so as to enable them to discharge
their duties smoothly.

1. Right to Access Books and Vouchers: Every auditor of a company has a right to access book
of accounts and vouchers of the company at all times.

2. Right to Obtain Information and Explanation: An auditor has the right to seek information
and explanation from the directors and officers of the company.

3. Right to Sign Audit Report [Sec.145]: The auditor has the right to sign the auditor’s report.
The auditor can also sign or authenticate any document which the law requires to furnish.

4. Right to receive Notices and attend General Meeting [Sec.146]: The Company must send all
notices and communications to the auditor relating to any general meeting. The auditor shall
attend the meeting either through himself or through his representative, who shall be an auditor.
5. Right to visit Branches: The auditor has the right to access all books and vouchers kept at
the head office or at any branches of the company. The company auditor can get copies of
accounts certified by the branch auditor.

6. Right to get Remuneration: The remuneration of the auditor of a company shall be fixed in
its general meeting for auditing the books of accounts of the company. The auditor can claim
remuneration from the appointing authority. At the time of winding up of the company, he can
claim remuneration as creditor of the company.

7. Right to Report to Members: The auditor has the right and duty to report to the members of
the company regarding the accounts examined by him. He is also required to give his opinion
about whether the financial statements give a true and fair picture of the state of affairs of the
company.

8. Right to seek Legal and Technical Advice: The auditor has the right to seek expert advice in
respect of legal or technical matters at the expense of the company.

9. Right to give Suggestions to the Board: The auditor has the right to suggest some
modifications in the books of accounts to the Board. The Board should comply with the
suggestions made by the company auditor. If not, the auditor should report the same to the
members. But the auditor cannot make changes in the books of accounts of his own.

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10. Right to Correct Wrong Statements: The auditor has the right to correct wrong statements
made by the directors relating to the accounts. But it should be remembered that any statement
by him to this effect will not relieve himself for any omission or incompleteness in his report.

11. Right to be Indemnified: The auditor has the right to be indemnified out of the assets of
the company against any liability incurred by him in defending himself against the civil or
criminal proceedings by the company if it is proved that the auditor has acted honestly.

Filling of a Casual Vacancy

As per Section 139(8), any casual vacancy in the office of an auditor shall-

(i) In the case of a (Private) company other than a company whose accounts are subject
to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by
the Board of Directors within 30 days. If such casual vacancy is as a result of the resignation
of an auditor, such appointment shall also be approved by the company at a general meeting
convened within three months of the recommendation of the Board and he shall hold the office
till the conclusion of the next annual general meeting.

(ii) In the case of a (Government) company whose accounts are subject to audit by an
auditor appointed by the Comptroller and Auditor-General of India, be filled by the
Comptroller and Auditor-General of India within 30 days. It may be noted that in case the
Comptroller and Auditor-General of India does not fill the vacancy within the said period the
Board of Directors shall fill the vacancy within next 30 days.

Casual Vacancy by Resignation

As per section 140(2) the auditor who has resigned from the company shall file within a period
of 30 days from the date of resignation and in case of the Government company, the auditor
shall also file such statement with the Comptroller and Auditor-General of India, indicating the
reasons and other facts as may be relevant with regard to his resignation.

Auditor’s Remuneration

As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed
in its general meeting or in such manner as may be determined therein. However, board may
fix remuneration of the first auditor appointed by it. Further, the remuneration, in addition to
the fee payable to an auditor, include the expenses, if any, incurred by the auditor in connection
with the audit of the company and any facility extended to him but does not include any

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remuneration paid to him for any other service rendered by him at the request of the company.
Therefore, it has been clarified that the remuneration to Auditor shall also include any facility
provided to him.

Removal of Auditors- Removal of Auditor Before Expiry of Term: According to Section

140(1), the auditor appointed under section 139 may be removed from his office before the
expiry of his term only by a special resolution of the company, after obtaining the previous
approval of the Central Government.

⎯ The application to the Central Government for removal of auditor shall be made in
Form ADT-2 and shall be accompanied with fees as provided for this purpose under
the Companies
⎯ The application shall be made to the Central Government within 30 days of the
resolution passed by the Board.
⎯ The company shall hold the general meeting within 60 days of receipt of approval of
the Central Government for passing the special resolution.

It is important to note that before taking any action for removal before expiry of terms, the
auditor concerned shall be given a reasonable opportunity of being heard.
Duties of an Auditor
• Duty of Auditor to Inquire on certain matters
• Duty to Sign the Audit Report
• Duty to comply with Auditing Standards
• Duty to report
• Duty to report on frauds
• Duty to report on any other matter specified by Central Government
• Duties and powers of the company’s auditor with reference to the audit of the branch
and the branch auditor
• Duty to state the reason for qualification or negative report

Joint Audit

The practice of appointing Chartered Accountants as joint auditors is quite widespread in

big companies and corporations. Joint audit basically implies pooling together the resources
and expertise of more than one firm of auditors to render an expert job in a given time

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 period which may be difficult to accomplish acting individually. It essentially involves
sharing of the total work. This is by itself a great advantage.

In specific terms the advantages that flow may be the following:

(i) Sharing of expertise. (ii) Advantage of mutual consultation. (iii) Lower workload.

(iv) Better quality of performance. (v) Improved service to the client.

(vi) Displacement of the auditor of the company taken over in a take - over often obviated.

(vii) In respect of multi-national companies, the work can be spread using the
expertise of the local firms which are in a better position to deal with detailed work and the
local laws and regulations.

(viii) Lower staff development costs. (ix) Lower costs to carry out the work.

(x) A sense of healthy competition towards a better performance.

The general disadvantages may be the following:

(i)The fees being shared.

(ii)Psychological problem where firms of different standing are associated in the joint audit.

(iii)General superiority complexes of some auditors.

(iv)Problems of co-ordination of the work.

(v)Areas of work of common concern being neglected.

(vi)Uncertainty about the liability for the work done

Special Considerations in Carrying Out Audit by Joint Auditors

(i) the engagement partner and other key members of the engagement team from each of
the joint auditors should be involved in planning the audit.

(ii) the joint auditors should jointly establish an overall audit strategy which sets the scope,
timing and direction of the audit, and also guides the development of the audit plan.

(iii) before the commencement of the audit, the joint auditors should discuss and develop a
joint audit plan. In developing the joint audit plan, the joint auditors should:

(1) identify division of audit areas and common audit areas;

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(2) ascertain the reporting objectives of the engagement;

(3) consider and communicate among all joint auditors the factors that are significant

in directing the engagement team’s efforts;

(4) consider the results of preliminary engagement activities, or similar engagements

performed earlier.

(5) ascertain the nature, timing and extent of resources necessary to accomplish the
engagement.

(iv) each of the joint auditors should consider and assess the risks of material misstatement
and communicate to other joint auditors.

(v) the joint auditors should discuss and document the nature, timing, and the extent of the
audit procedures for (I) common and (II) specific allotted areas of audit to be performed.

(vi) the joint auditors should obtain common engagement letter and common management
representation letter.

(vii) the work allocation document should be signed by all the joint auditors and
communicated to those charged with governance.

It further states that, in respect of audit work divided among the joint auditors, each joint
auditor shall be responsible only for the work allocated to such joint auditor including
proper execution of the audit procedures. On the other hand, all the joint auditors shall be
jointly and severally responsible for:

(i) the audit work which is not divided among the joint auditors and is carried out by all
joint auditors;

(ii) decisions taken by all the joint auditors under audit planning in respect of common audit
areas;

(iii) matters which are brought to the notice of the joint auditors by any one of them and
there is an agreement among the joint auditors on such matters;

(iv) examining that the financial statements of the entity comply with the requirements of
the relevant statutes;

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 (v) presentation and disclosure of the financial statements as required by the applicable
financial reporting framework;

(vi) ensuring that the audit report complies with the requirements of the relevant statutes,
applicable Standards on Auditing and other relevant pronouncements issued by ICAI.

Audit of Branch Office Accounts

Where a company has a branch office, the accounts of that office shall be audited either by the

auditor appointed for the company (herein referred to as the company's auditor) under this Act or

by any other person qualified for appointment as an auditor of the company under this Act, or

where the branch office is situated in a country outside India, the accounts of the branch office

shall be audited either by the company's auditor or by an accountant or by any other person duly

qualified to act as an auditor of the accounts of the branch office in accordance with the laws of

that country and the duties and powers of the company' s auditor with reference to the audit of the

branch and the branch auditor, if any, shall be such as may be prescribed: It may be noted that the

branch auditor shall prepare a report on the accounts of the branch examined by him and send it to

the auditor of the company who shall deal with it in his report in such manner as he considers

necessary.

Auditor’s Lien
It refers to the right of the auditor to withhold certain documents & papers unless certain documents
due to him are cleared. Auditor has no lien on the books of accounts audited by him but if he has
worked as accountant also for which he is not paid he can exercise his right of lien. The auditor has
lien over audit working papers as they belong to him regarding the correspondence between the
auditor & his clients, he can exercise the right of lien.

Audit Report

Audit report is the final stage of audit process. The results of the audit are communicated through
audit report. Audit report is the written opinion of an auditor regarding company’s financial
statements. Audit report is a document prepared by an auditor to certify the financial position and
accounting records of a firm.

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According to Cambridge Business English Dictionary, Audit report is defined as a formal
document that states an auditor’s judgment of a company’s accounts.

Under Sec. 143(3), auditor of a company must report to its members.

(a) The accounts examined by him;

(b) Balance Sheet, Profit and Loss Account, and Cash Flow statement, which are laid in general
meeting of a company during his tenure of office; and

(c) The document declared to be attached to the Balance Sheet and Profit and Loss Account.

Contents of Audit Report (Form of Audit Report)

1. Title of the report:- The title of audit report should help the reader to identify the report. It
should disclose the name of the client. The title distinguishes the audit report from other reports.

2. Name of the Addressee

3. Introductory Paragraph:- The introductory paragraph should specify that it is the auditor’s
opinion on financial statements audited by him. The period covered by financial statements
should be stated with exact dates.

4. Scope: - This part should include the matter-of-fact relating to the manner in which audit
examination was made. The examination should be as per the relevant law. The auditor should
not curtail or limit any examination task.

5. Opinion:- The auditor’s opinion on the books of account and financial statements examined
by him is based on the information and free from bias.

6. Signature: The signature part should include the manual signature of the auditor.

8. Date of the Report

As per Sec. 143 of the Companies Act, the auditor’s report shall also state—

a. 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;

b. whether, in his opinion, proper books of account as required by law have been kept by the
company so far as appears from his examination of those books and proper returns adequate
for the purposes of his audit have been received from branches not visited by him;

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 c. 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;

d. whether, in his opinion, the financial statements comply with the Accounting Standards;

The importance of an audit report

Audit report provides credibility to the financial statements of businesses as auditors are
independent and unbiased.

Compliance with law requirements as the appointment of an auditor and obtaining an audit report is
a requirement for all companies above a standard threshold.

It helps in highlighting matters which are material and should be brought to the notice of all
stakeholders.

The report is important to the banks and other financial institutes that lend money based on
assessing the creditworthiness of the individual or business.

The report is of importance to the trade creditors. The creditors assess the financial stability of the
business before initiating transactions on credit.

The report is of importance to the management. The management solely relies on lower levels of
the management and staff to prepare and present financial statements; the auditor's reports and
highlights any fraud or error that is being carried out within the organization.

The report is of use to the Government. The Government relies on the independent auditors report
for taxation purpose.

Types of Audit Report

The audit report may be of the following types:

1. Clean or Unqualified Report

Clean or Unqualified report will be given by the auditor if the auditor is satisfied that the accounts,
Balance Sheet, Profit and Loss Account and Cash Flow statement do represent a true and fair view
and they are prepared in conformity with the accounting principles and statutory requirements.

2. Qualified Report

In qualified report the auditor believes that overall financial statements are not fairly stated. The
reasons for giving Qualified Report are be as follows:

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i. The books of accounts, Profit and Loss Account and the Balance Sheet do not represent the
true and fair view of the state of affairs and results of the operations, due to lack of conformity with
the accounting principles and statutory requirements,

ii. The auditor is not able to verify the value and existence of certain assets,

iii. The information requested by the auditor is not furnished,

iv. Proper books of account are not maintained as required by law,

v. Part of audit examination done by other auditors.

3. Adverse or Negative Report

When there is sufficient basis for the auditor to form an opinion that the whole accounts and
financial statements, do not present a true and fair view of the financial condition and results of
operation, the adverse or negative opinion will be given. The adverse or negative report will be
given on the following grounds:

When the auditor is not satisfied with the truth and fairness of financial statements,

Non conformity with the Generally Accepted Accounting Principles,

Mistakes, discrepancies and material misstatement in the financial statements,

Omission of a material disclosure.

4. Disclaimer Report

The auditor may disclaim or refuse opinion on the accounts, Profit and Loss Account and the
Balance Sheet, when he does not have sufficient information to base his opinion. In the scope and
opinion paragraph, the auditor should give disclaimer information. This may happen on the
following grounds:

The auditor has not been able to obtain sufficient information to form his opinion,

The audit examination is not adequate to form an opinion,

There are some material un-determined item in audit examination.

5. A piecemeal opinion

A piecemeal opinion is a report issued by an outside auditor expressing a view limited to only
specific l i n e items within a company’s financial statements.
Auditors p r o v i d e a piecemeal opinion in a situation where complete information is not

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available.
A statutory audit is a legally required review of the accuracy of a company's or government's
financial statements and records. The term statutory denotes that the audit is required by statute.
Statutory reporting is the act of reporting financial information to a government agency.

Modifications to the Opinion in the Independent Auditor’s Report

“Forming an Opinion and Reporting on Financial Statements”, the auditor concludes that a
modification to the auditor’s opinion on the financial statements is necessary. When the auditor
expresses a qualified or adverse opinion, the auditor shall amend the description of the auditor's
responsibility to state that the auditor believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor's modified audit opinion.

Circumstances When a Modification to the Auditor’s Opinion is Required

The auditor shall modify the opinion in the auditor’s report when:

(a) The auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements as a whole are free from material misstatement.

Types of Modified Opinions

qualified opinion, adverse opinion, disclaimer of opinion (Refer Previous Notes).

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