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Audit and Auditors under CA,2013

Saurabh Maheshwari 
on 21 July 2014

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Hello friends, greetings of the day!!

In this article we will be discussing the various provisions of Companies Act, 2013 w.r.t Audit and Auditors…

Brief note on legal provisions governing statutory audit under CA, 2013:

The provisions of sections 138 to 148 govern statutory audit and the matters incidental to it  ,further the  same is to be read along with Companies Rules,2014(Audit and Auditors).The same has been notified by the Ministry of Corporate Affairs(MCA) vide its Notification dated 26.03.2014 to be made effective from April1,2014.

However, MCA vide its circular dated Apr.4, 2014 clarified that the financial statements, Auditor’s report and Board reports in respect of financial years commenced before Apr.1, 2014 shall continue to be governed by the provisions of Companies Act,1956.

Legal provisions w..r.t rotation of auditors under CA,2013:

Rotation of auditors simply means changing the auditor of the company after a certain period. The purpose of making auditor to rotate is quite clear that:

(i) to maintain the independence of the auditor long-lasting

(ii)to increase the scope of growth for new audit firms

(Because voluntarily no company desires to change its auditor :-))

Legal Provisions:

According to Sec 139(2) of CA, 2013 read with Rule 5 of Companies Rules, 2014(Audit and Auditors) the following class of companies shall not appoint or reappoint its an individual auditor for more than one  term of  5 consecutive years and in case of audit firm for more than 2 terms of 5 consecutive term.

Class of companies required to comply with rotation provisions:

i) Listed companies

ii) Prescribed companies

a) Public companies. having share capital Rs. 10crores or more.

b) Private companies. having share capital Rs. 20 crores or more.

c) Private/Public cos borrowings from banks, financial institutions or public deposits is Rs. 50crores or more.

Further, there should be a gap of at least 5 years for the re-appointment of individual auditor/audit firm after the completion of maximum period of 5/10 years. Such gap is commonly termed as cooling period.

For example: If the 10 yrs PQR associates have completed than there should be a gap of at least 5 years before again appointing PQR as the auditor….

Transition Period:

The existing companies before the commencement of the Act are required to comply with the rotation provisions within the period of 3 years from the date Sec 139(2) made effective. So, existing cos. to comply with Sec 139(2) w.e.f Apr1, 2017.

Other points:

1. As per Sec 139(2), a audit firm having a common partner(s) to the other audit firm whose term of 10yrs have expired shall not   be appointed as auditor of the same company for a period of 5yrs (cooling period)

2. Incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms.

Where, same network of audit firms mean the firms operating or functioning under the same brand name, trade name or under same control, presently or in future.

3. Break in a period of 5/10 years, as the case may be, shall be deemed to comply with the requirements of rotation.

[Point no. 2 and 3, from Cos Rules, 2014(Audit & Auditors)]

Qualifications of an Auditor:

a) A person who is CA within the meaning of CA Act,1949 and holding valid certificate of practice.

b) An audit firm where the majority of partners are CAs practicing in India. Firm here includes LLP incorporated under LLP Act, 2008.

(Therefore, even other professionals can be a partner in a CA firm, but the majority partners must be CAs)

Disqualifications of an Auditor [Sec 141(3)(c),(d)(i) to (iii) and Sec 141(1)(e)]

1. Interest in Auditee:

As per Sec 141(3)(d)(i), if a person  or his partner or relative is holding any security (whether or not having voting rights) in the company or its subsidiary or its holding or associate company or a subsidiary of such holding co. then such person shall be disqualified from being appointed as auditor of the company.

However, the relative of the auditor may hold securities for the face value not exceeding Rs. 1 lacs.It is clarified that if the above mentioned limit is exceeded by relative then the auditor shall take corrective steps within 60 days so as to save himself from being disqualified..

Please note-such exception only for relative and not for holding security by auditor or his partner.

2. Borrowings and Guarantees:

As per Sec 141(3)(d)(ii),that a person who or whose relative is indebted to the company or its subsidiary or holding co. or associate co. or subsidiary of such holding co. in excess of such of such amount as may be prescribed shall be disqualified from being appointed as an auditor….the prescribed limit as of today is Rs. 5 lacs.

Similarly as per Sec 141(3)(d)(iii), any person who or whose relative or partner has given a guarantee or provided any security in connection with any indebtedness of any third person to the company or its subsidiary or holding or associate co or a subsidiary of such holding co., in excess of Rs. 1 lacs shall be disqualified from being appointed as the auditor of the company.

3. Business Relationship:

As per Sec 141(3)(e), a person or firm , who, whether directly or indirectly , has a business relationship with  the company or its subsidiary or holding or associate co or a subsidiary of such holding co shall be disqualified to act as auditor of the company.

The term “Business Relationship” has been defined as any transaction entered into for a commercial purpose except-

(i) commercial transactions which are in the nature of professional services permitted to be rendered by the auditor under the CA Act,1949

(ii) commercial transactions which are in the ordinary course of business of the company at arm length’s price-like sale of products or services to the auditor as  customer(here means end user) , in the ordinary course of business , by cos engaged in the business of telecommunications, airlines, hospitals , hotels and such other businesses.

For Instance.-M/s A&co(audit firm). purchasing accounting software from ABC softcom Ltd (auditee) and M/s A&co reselling the same in the market…..so M/s  A&co attract disqualification for having business relationship.

However, if M/s A&co uses software for its own use only then no disqualification under the above clause.

4. Other disqualifications:[Sec 141(3)(c)]-

As per Sec 141(3)(c), the following persons are not qualified to be appointed as auditor of a company:

1. A body corporate other than LLP registered under LLP Act,2008.

2. An officer or employee of the company

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

4. A person who has been convicted by a court of an offence involving fraud and a period of 10 yrs has not elapsed from the date of such conviction.

Ceiling Limit on audit assignments:

As per Sec 141(3)(g),An individual or a partner of a firm shall not be eligible to act as statutory auditor of more than 20 companies …companies means private and  public companies both.

Further, revised ICAI guidelines regarding the ceiling limits have been also reduced the limit from 30 to 20 to align the same with the provisions of Sec 141(3)(g).

Vacation of the office by an auditor:

As per Sec 141(4), if a person appointed as a auditor of a company attracts any disqualification after holding the office of the auditor, then on such attraction he shall be deemed to have vacated his office and such vacation will be deemed as casual vacancy.

Auditor not to render certain services (Sec144)

A person appointed as statutory auditor or/and the audit firm shall not render directly or indirectly the following services to the company or its subsidiary or holding co.

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

The term indirectly shall cover the cases where the services are being rendered through the relative of the auditor or through his partner or through any entity or person in which the individual auditor or audit firm has significant influence or control or whose trade name, brand name is used by the individual auditor or firm or by any of its partners

Transition period:

The auditor or audit firm performing prohibited services before the commencement of the Act are required to comply the provisions of Sec 144  before the closure of the first financial year after the date of such provision become effective i.e. before Apr.1,2015(in case FY is Apr-March).

Reporting of frauds by the auditor [Sec 143(12)]-

If an auditor of a company in the course of the performance of his duties as auditor

- has reason to believe that an offence involving fraud is being or has been committed against the company

- by the officers or employees of the company  

- he shall immediately report the matter within 60 days of his becoming so aware to the Central Government following the procedure mentioned in the Companies Rules,2014(Audit and Auditors).

Procedure mentioned in Companies Rules for reporting fraud by the Auditor:

1. Auditor shall forward his report on fraud/suspected fraud   to the Board or the Audit committee (if co has), within 45 days of his becoming aware of the fraud….The report is forwarded to sought the reply or observations of the BOD or Audit committee on the same.

2. On receipt of such reply or observations the auditor shall forward his report along with the reply or observations of the BOD/Audit committee on the same to the Central Govt. within 15 days of receipt of reply/observations from BOD/Audit committee.

3. In case the BOD/Audit committee fails to reply/make observations on the report forwarded by the auditor within the 45 days, then the auditor shall proceed to forward his report to Central Govt along with a note containing that the report was forwarded to the BOD/Audit committee and no reply/observations received on the same.

4. The report shall be sent to the Secretary, MCA by speed post or registered post with acknowledgement due followed by an e-mail in confirmation of the same.

5. The report shall be on the letter head of the auditor duly signed by him and also containing his postal address, e-mail address, Membership No.Further, the   report shall be in the form of statement as specified in the form ADT-4.

With this we finish the Article here …

Any sort of queries, comments, suggestions are most welcomed.

With Warm Regards

Saurabh Maheshwari

(e)saurabhchokhra92@gmail.com


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