Chapter 2: Audit of Companies in India

 

  2.1 Audit of Limited Companies

 

Audit of Limited Companies involves examining the financial statements of a company to ensure they provide a true and fair view of the company's financial position and performance. In India, the audit of limited companies is governed by the Companies Act, 2013, and is conducted by qualified and independent auditors.

 

 

 

 2.2 Company Auditor

 

Qualifications and Disqualifications:

- Qualifications: As per Section 141 of the Companies Act, 2013, a person is eligible for appointment as an auditor of a company only if he is a Chartered Accountant (CA) in practice.

- Disqualifications: The following individuals or entities are disqualified from being appointed as auditors:

  - A body corporate, except LLP.

  - An officer or employee of the company.

  - A person who is a partner, or who is in the employment, of an officer or employee of the company.

  - A person who, or his relative or partner, holds any security or interest in the company.

  - A person who is indebted to the company for an amount exceeding ₹1,000 or has guaranteed the payment of such amount.

  - A person or a firm who, whether directly or indirectly, has business relationships with the company.

  - A person whose relative is a director or is in the employment of the company as a director or key managerial personnel.

  - A person who is in full-time employment elsewhere or a person or 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 20 companies.

 

 

 

 2.3 Appointment, Rotation, and Removal of Auditors

 

Appointment:

- Initial Appointment: 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 the case of a government company, the first auditor is appointed by the Comptroller and Auditor General of India within 60 days from the date of registration.

- Subsequent Appointment: Subsequent auditors are appointed by the shareholders in the annual general meeting (AGM) and hold office from the conclusion of that meeting until the conclusion of the sixth AGM.

 

Rotation:

- As per Section 139 of the Companies Act, 2013, listed companies and certain classes of companies cannot appoint or reappoint an individual as auditor for more than one term of five consecutive years and an audit firm as auditor for more than two terms of five consecutive years.

 

Removal:

- An auditor can be removed before the expiry of his term by a special resolution of the company after obtaining prior approval of the Central Government.

 

 

 

 2.4 Remuneration of Auditors

 

- Determination: The remuneration of the auditor is determined by the shareholders in a general meeting or by the Board of Directors if authorized by the shareholders.

- Components: The remuneration may include fees for audit, reimbursement of expenses incurred in connection with the audit, and fees for any other services rendered by the auditor, provided they are not prohibited services.

 

 

 

 2.5 Rights and Duties of Auditors

 

Rights:

- Access to Books and Records: Auditors have the right to access the company’s books of accounts and vouchers at all times.

- Seek Information and Explanations: They can seek any information and explanations from the company's officers as they deem necessary.

- Receive Notices of General Meetings: Auditors are entitled to receive notices and other communications relating to any general meeting and to attend such meetings.

- Report to Members: They have the right to report to the members of the company on the accounts examined by them and the financial statements prepared by the company.

 

Duties:

- Examine Financial Statements: Auditors must examine the financial statements to ensure they present a true and fair view of the company's financial position and performance.

- Compliance Verification: They must ensure that the financial statements comply with the accounting standards and other legal requirements.

- Report Irregularities: Auditors are required to report any fraud or irregularities to the Central Government if it exceeds ₹1 crore.

- Express an Opinion: They must express an opinion on the financial statements and submit their report to the shareholders.

 

 

 

 2.6 Auditor’s Report

 

Contents:

- Title: The report should be titled "Auditor’s Report."

- Addressee: The report is addressed to the shareholders of the company.

- Opinion: The auditor's opinion on whether the financial statements give a true and fair view.

- Basis for Opinion: A section that explains the basis for the auditor’s opinion.

- Emphasis of Matter: Any significant matter that the auditor wishes to emphasize without qualifying the opinion.

- Other Legal and Regulatory Requirements: Comments on other legal and regulatory requirements.

 

Types:

- Unqualified (Clean) Report: Indicates that the financial statements present a true and fair view without any reservations.

- Qualified Report: Indicates that except for certain matters, the financial statements present a true and fair view.

- Adverse Report: Indicates that the financial statements do not present a true and fair view.

- Disclaimer of Opinion: Indicates that the auditor could not form an opinion on the financial statements.

 

 

 

 2.7 Liabilities of Statutory Auditors under the Companies Act, 2013

 

Civil Liabilities:

- Negligence: Auditors can be held liable for negligence if they fail to detect errors or fraud that they reasonably should have detected.

- Misstatements: Auditors are liable for any misstatements in the financial statements if they failed to exercise due diligence.

 

Criminal Liabilities:

- Fraudulent Activities: If auditors are found guilty of fraud, they can face criminal charges, including imprisonment.

- False Reports: Issuing false reports knowingly can result in severe penalties, including imprisonment and fines.

 

Professional Misconduct:

- The ICAI can take disciplinary action against auditors for professional misconduct, which may result in suspension or cancellation of their license to practice.