Ch-10 Company Audit

139. Appointment of auditors.

140. Removal, resignation of auditor and giving of special notice.
141. Eligibility, qualifications and disqualifications of auditors.
142. Remuneration of auditors.
143. Powers and duties of auditors and auditing standards.
144. Auditor not to render certain services.
145. Auditors to sign audit reports, etc.
146. Auditors to attend general meeting.
147. Punishment for contravention.
148. Central Government to specify audit of items of cost in respect of certain companies

Sec 139: Appointment of Auditors

Appointment of First Appointment of Subsequent

Auditor Auditor

Government Company Goverment

Other Than a Govt Co Other Than a Govt Co
defined u/s 2 (45) Company defined
[Sec 139(6)] [Sec 139(1)]
[Section 139(7)] u/s 2 (45) [Section
139(5)]

Appointment by Appointment by Appointment by

C&AG within 60 days from Appointment by
BOD within 30 days from C&AG within 180
DOR Members in AGM
DOR days from
commencement of
FY

In case of failure: Hold office from 1st AGM Hold office till
In case of failure: BOD within next 30 days till 6th AGM subject to conclusion of AGM
Members in EGM within conditions
90 days

Hold office till conclusion In case of failure:

of 1st AGM Members in EGM within
60 days

Hold office till conclusion

of 1st AGM

Notes:
• Before Appointment à Written consent of auditor & certificate that appointment is as per
prescribed conditions to be obtained by Co.
• Certificate should indicate that auditor satisfies criteria u/s 141
• Co. inform auditor of appointment & file notice of appointment with ROC within 15 days of
Meeting

CA SHUBHAM KESWANI 104

1. MD of PQR Ltd. himself wants to appoint Pappu, a practicing CA, as 1st auditor of Co. Comment on
proposed action of MD.
Section 139(6) of Companies Act, 2013 à “1st auditor or auditors of Co. shall be appointed by BOD
within 30 days from DOR of company”.
In instant case, proposed appointment of Shri Ganpati, practicing CA as 1st auditors by MD of PQR Ltd
is violation of Section 139(6) of Companies Act, 2013, which requires BOD to appoint 1st auditor of Co.
Conclusion: In view of above, MD of PQR Ltd can’t appoint first auditor of Co.

2. First auditor of Healthy Wealthy Ltd., Government Co., appointed by BOD.

In case of Govt Company, appointment of first auditor is governed by provisions of Section 139(7) of
Companies Act, 2013 which states that in case of Govt co, first auditor shall be appointed by C&AG
within 60 days from DOR of co. Hence, in case of Healthy Wealthy Ltd., being a govt co, first
auditors shall be appointed by C&AG.
Conclusion: Thus, appointment of first auditors made by BOD of Healthy Wealthy Ltd. is null and
void.

Filling of Casual Vacancy [Sec 139(8)]

i) Non Govt Co. è by BOD within 30 days
If due to resignation by auditor then Board Approval + shareholder’s approval at GM within
3 months of recommendation of Board
Auditor shall hold office upto next AGM
ii) Govt Co. è by C&AG within 30 days [Otherwise BOD within next 30 days]

Retiring auditor maybe reappointed at AGM if,

a) Not disqualified
b) Not given notice of unwillingness of reappointment
c) SR hasn’t been passed to appoint some other auditor or expressly provide that he shall not be
reappointed

Sec 139(10) à Where at any AGM, no auditor appointed or re-appointed, existing auditor shall
continue to be auditor of company.

Sec 141: Eligibility, Qualification & Disqualification

• Person shall be eligible to be Auditor only if he’s a CA
• Firm(including LLP) where majority partners practicing in India à appointed by Firm name
• Partners who are CA can act & sign on behalf of firm

Disqualifications of Auditor [Sec 141(3) read with Rule 10 of Cos.(Audit & Auditor) Rules 2014]
a) Body Corporate (BC) other than LLP
b) Officer or employee of Co.
(Officer includes Director, Mgr, KMP, Shadow Directors)
Examples:
• G, CAiP is director in A Ltd à CA G would be disqualified to be appointed as auditor of A Ltd.
• G, CAiP is director in Zed Ltd., holding company of RST Ltd. à CA. G would be disqualified to
be appointed as auditor of Zed Ltd. but would not be disqualified in case of RST Ltd.
Note: But as per Ethical Std Board public conscience should be preferred over legal provisions, so
G can’t also be auditor of RST Ltd (Discussed in Professional Ethics)

CA SHUBHAM KESWANI 105

 c) Person who is partner or employment of officer or employee of Company (4 cases
PO/PE/EO/EE)

Example:
Mr. Ajay, a CA appointed as auditor of Bharat Ltd. in the AGM of Co. held in September, 2019, which
assignment he accepted. Subsequently in Feb, 2020, he joined Mr. Bajaj, another CA, who is Manager
Finance of Bharat Ltd., as partner.
Section 141(3)(c) of the Companies Act, 2013 prescribes that any person who is a partner or in
employment of an officer or employee of the company will be disqualified to act as an auditor of a
company. Section 141(4) provides that an auditor who after his appointment, disqualified u/s Section
141(3), he shall be deemed to have vacated his office as an auditor.
In present case, Mr. Ajay, auditor of Bharat Ltd., joined as partner with Mr. Bajaj, who is Manager
Finance of Bharat Ltd. The given situation has attracted Section 141(3)(c) and he shall be deemed to
have vacated office of auditor of Bharat Ltd.

d) Person/relative/partner (PRP)-
i.Is holding security or interest in CASSH (Co/Associate/Suby/Holding/Subsy of such holding i.e.
CASSH)
• Relative may hold security in the Co. of Face value 1 Lakh
• If relative (not auditor or partner) acquires interest > 1 lakh è then corrective action to
maintain limit within 60 Days of acquisition

Definition of Relative: Members of HUF + Husband wife + Father (including step- father),
Mother (including step- mother), Son (including stepson), Son’s wife, Daughter, Daughter’s
husband, Brother (including step- brother), Sister (including step- sister)

Examples:
1. “Mr. Avi”, practicing CA, holding securities of “XYZ Ltd.” face value of ₹ 990/-. Whether Mr. Avi is
qualified for appointment as Auditor of “XYZ Ltd.”?
Mr. Avi. is not eligible for appointment as auditor of “XYZ Ltd”.

2. “Mr. PK” a practicing CA and “Mr. Qurashi”, relative of “Mr. PK”, is holding securities of “ABC Ltd.”
having face value of ₹ 99,000/-.
Mr. Qurashi (relative of Mr. PK), is having securities of ₹ 99,000 face Value in ABC Ltd., which is as
per requirements of proviso to section 141(3)(d)(i). Mr. PK will not be disqualified to be appointed as
auditor of ABC Ltd.
3. “M/s Bhavin & Co.” is Audit Firm having partners “Mr. Bala” and “Mr. Chandu”. “Mr. A” relative of
“Mr. Chandu”, is holding securities of “AMD Ltd.” having face value of ₹ 1,00,100/-. Whether “M/s
Bhavin & Co.” is qualified for being appointed as an auditor of “AMD Ltd.”?
M/s Bhavin & Co, will be disqualified for appointment as auditor of AMD Ltd as relative of Mr.
Chandu (i.e. partner of M/s Bhavin & Co.), is holding securities in AMD Ltd exceeding limit mentioned.
4. M/s Rajamohan & Co. is audit firm having partners CA. Raja and CA. Mohan. Firm has been offered
appointment as auditor of Inn Ltd. for FY 2019-20. Mr. Bee, relative of CA. Raja, is holding 8,000
shares (face value of ₹ 10 each) in Inn Ltd. having mkt value of ₹ 1,60,000. Whether M/s Rajamohan
& Co. is disqualified to be appointed as auditors of Inn Ltd.?
Mr. Bee is a relative of CA. Raja and he is holding shares of Inn Ltd. of face value of ₹ 80,000 only
(8,000 shares x 10 per share). M/s Rajamohan & Co. is not disqualified for appointment as auditors of

CA SHUBHAM KESWANI 106

Inn Ltd. as relative of CA. Raja (i.e. partner of M/s Rajamohan & Co.) is holding the securities in Inn
Ltd. which is within the limit

ii) PRP indebted to CASSH > 5L

iii) PRP given guarantee or security for indebtedness of 3rd person to CASSH > 1L

e) Person or firm has business relation with CASSH or associate Co.

(Business relation excludes services permitted under CA Act 1949 by auditor & commercial
transactions by Co. in ordinary course of business at Arm’s length price)
f) Person whose relative is Director or employed by Co. as Director or KMP
g) Full time employed OR person or partner of firm auditing > 20 companies excluding
OPC/Dormant/Small Cos./Pvt Cos. with paid up capital < 100 Cr (with no default in filing F.S. or
Annual Return)
Notes:
Ø No. of partners on date of acceptance of audit assignment shall be taken into account
Ø CA in full time employment elsewhere shall not be taken into account

Example:
“PQRST & Co.” is Audit Firm having partners “Mr. P”, “Mr. Q”, “Mr. R”, “Mr. S” and “Mr. T”, Chartered
Accountants. “Mr. P”, “Mr. Q”, “Mr. R”, “Mr. S” and “Mr. T” are holding appointment as an Auditor in 4,
5, 6, 10 and 15 Companies respectively.
(i) Provide the maximum number of Audits remaining in the name of “PQRST & Co.”
(ii) Provide the maximum number of Audits remaining in the name of individual partner i.e. “Mr. P”, “Mr.
Q”, Mr. R, Mr. S and Mr. T.
(iii) Can PQRST & Co. accept the appointment as an auditor in 80 private companies having paid-up
share capital less than ₹ 100 crore which has not committed default in filing its financial statements
under section 137 or annual return under section 92 of the Companies Act with the Registrar, 2 small
companies and 1 dormant company?
(iv) Would your answer be different, if out of those 80 private companies, 65 companies are having
paid-up share capital of ₹ 115 crore each?
(i) PQRST & Co. can hold appointment as an auditor of 60 more companies:
Total Number of Audits available to Firm = 20*5 = 100
Number of Audits already taken by all the partners in their individual capacity = 4+5+6+10+15 = 40
Remaining number of Audits available to the Firm = 60 (100-40)
(ii) (1) Mr. P can hold: 20 - 4 = 16 more audits. (2) Mr. Q can hold: 20 - 5 = 15 more audits. (3) Mr. R
can hold: 20 - 6 = 14 more audits. (4) Mr. S can hold 20-10 = 10 more audits and (5) Mr. T can hold 20-
15 = 5 more audits.
(iii) PQRST & Co. can hold appointment as auditor in all 80 private companies having paid-up share
capital less than ₹ 100 crore , 2 small companies and 1 dormant company as these are excluded from
ceiling limit.
(iv) PQRST & Co. is already having 40 co. audits and accept only 60 more audits.They can also conduct
audit of one person companies, small companies, dormant companies and private companies having paid
up share capital less than ₹ 100 crores. In given case, out of 80 private companies PQRST & Co. is being
offered, 65 cos. have paid-up share capital of ₹115 crore each.

CA SHUBHAM KESWANI 107

Therefore, PQRST & Co. can accept appointment as auditor for 2 small companies, 1 dormant company,
15 private companies having paid-up share capital less than ₹ 100 crore & 60 pvt companies having paid-
up share capital of ₹ 115 crore each in addition to above 40 company audits already held.

h) Convicted for Fraud by a Court & period of 10 yrs not elapsed from date of conviction
i) Renders service under Sec 144 to Co. or its holding or Subsidiary

Sec 144: Services not to be rendered by Auditor

(i) accounting and book- keeping services;
(ii) internal audit;
(iii) design and implementation of any financial information system;
(iv) actuarial services;
(v) investment advisory services;
(vi) investment banking services;
(vii) rendering of outsourced financial services;
(viii) management services; and
(ix) any other kind of services as may be prescribed.

Example:
1. CA. P is providing services of Design and implementation of financial information system to C Ltd.
Later on, he was also offered to be appointed as auditor of Co. for current FY. Advise.
Section 141(3)(i) of Companies Act, 2013 disqualifies person for appointment as auditor of a Co. who is
engaged as on date of appointment in consulting and specialized services as provided in section 144.
Section 144 of Companies Act, 2013 prescribes certain services not to be rendered by auditor which
includes Design and implementation of financial information system.

Therefore, CA. P is advised not to accept assignment of auditing as service he is rendering is

specifically notified in list of services not to be rendered as per sec 141(3)(i) read with sec 144 of
Companies Act, 2013.
Note: Where auditor incurs any of disqualifications after appointment, he shall vacate office and
such vacation shall be deemed to be casual vacancy u/s 139(8).

Rotation of Auditors: Sec 139(2)

Applicability:
• Listed Cos.
• Exclude OPC & Small Cos
[Defn of small co. à other than public Co. (Paid up cap <= 50L & Turnover <= 2Cr)]
• Public Cos :PSC >= 10 Cr
• Pvt ltd: PSC >= 50 Cr
• Cos. with borrowings from Financial institutions, banks or public deposits >= 50 Cr

Example:
Mishra Ltd. is a pvt ltd Co, having paid up share capital of ₹48 cr but having public borrowing from
nationalized banks and financial institutions of ₹42 cr, manner of rotation of auditor will not be
applicable.

CA SHUBHAM KESWANI 108

Cos. for which Rotation provision are applicable, shall not appoint or re-appoint-
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years.
Example:
PRTK Ltd. is listed Co. engaged in business of textiles. Co. appointed Rahul & Co. as statutory auditor
in AGM dated 29th Sep, 2018. Rahul & Co. will hold office of auditor from conclusion of this meeting
upto conclusion of sixth AGM i.e. AGM to be held in year 2023. Also, Rahul & Co. shall not be re-
appointed as auditor in PRTK Ltd. for further term of five years i.e. he cannot be appointed as auditor
upto year 2028. (Cooling Period)

Cooling period (5 years)

i. individual auditor à not be eligible for re-appointment as auditor in same Co. for 5 years from
completion of his term;
ii. audit firm à shall not be eligible for re-appointment as auditor in the same Co. for 5 years
from completion of such term.

Spl Point:
On date of appointment à no audit firm having common partner(s) to the firm whose tenure
expired in Co. in immediately preceding F.Y. à shall be appointed as Auditor of Co. for period
of 5 years ____________________________________________
Eg. M/s XYZ & Co., is audit firm having partner Mrs. X, Mr. Y and Mr. Z, whose tenure has expired
in the Co. immediately preceding FY. M/s ABZ & Co., another audit firm in which Mr. Z is a common
partner, will also be disqualified for same Co. along with M/S XYZ & Co. for period of 5 years.
Examples:
1. Meet Ltd., listed Co. appointed M/s Preet & Co., CA firm, as statutory auditor in its AGM held at end
of Sep, 2019 for 11 years. Here, appointment of M/s Preet & Co. is not valid as appointment can be
made only for one term of 5 consecutive years and then another one more term of 5 consecutive years.
It cannot be appointed for two terms in one AGM only. Further, cooling period of five years from
completion of term is reqd i.e. firm cannot be re-appointed for further 5 years after completion of
two terms of 5 consecutive years.

Notes:
• Right of Co. to remove auditor or of auditor to resign from Co. shall not be prejudiced.
• Members of a company may resolve to provide that-
(a) in audit firm appointed by it, auditing partner and his team shall be rotated at such intervals
as may be resolved by members; (Internal Rotation) or
(b) audit shall be conducted by more than one auditor. (Joint Audit)

Manner of Rotation
• Audit committee(AC) shall recommend Board name of auditor
• If no AC, then Board forward own recommendations for appointment at AGM by members
• If a partner, who is in charge of audit firm and also certifies F.S. of the Co., retires from said
firm and joins another firm of CAs, such other firm shall also be ineligible to be appointed for
a period of 5 yrs.
• a break in term for a continuous period of 5 yrs shall be considered as fulfilling requirement of
rotation

CA SHUBHAM KESWANI 109

 Sec 177 Audit Committee(AC)
Applicability:
• Listed Public Cos
• Public Cos
Ø Paidup Share Capital (PSC)>= 10 Cr or
Ø Turnover (T/o) >= 100 Cr or
Ø L/D/D(Loans/Debenture/Deposits) > 50 Cr
Radheshyam Ltd., a public Co. having PSC of 7 cr but T/o of 130 cr, reqd to constitute Audit Committee
under Sec 177 because requirement for constitution of AC arises if company falls into any of condn.

Audit committee performs important functions including:

ü making recommendation for appointment,
ü remuneration and terms of appointment of auditor of Co.,
ü reviewing and monitoring auditor’s independence and
ü performance & effectiveness of audit process,
ü examination of F.S. and auditor’s report thereon.

AC consists of directors of Co. Minimum 3 directors with independent directors forming majority.
Audit committee helps in ensuring better standards of corporate governance.

Manner & procedure for selection of Auditor [Rule 3 of CAAR, 2014]

• AC or Board shall consider Qualification & Experience along with pending proceedings relating
to professional conduct
• AC shall recommend name to Board
• If board agrees à forward to AGM
• If board disagress à refer back to AC citing reasons
• If AC doesn’t reconsider, board will record reasons of disagreement & forward own
recommendation to AGM
• Auditor will hold office till conclusion of 6th AGM

Sec 142: Auditor’s Remuneration fixed in AGM where appointed. Board may fix remuneration of 1st
auditor.
Remuneration includes fees + expense reimbursed + facility extended to him

Removal of Auditors before expiry of term [Sec 140(1)]

(BR à CG Approval 30 days à SR 60 Days)
(1) The application to CG for removal of auditor shall be made in Form ADT-2 and accompanied with
fees provided under Companies (Registration Offices and Fees) Rules, 2014.
(2) The application shall be made to CG within 30 days of Board Resolution.
(3) The Co. shall hold general meeting within 60 days of receipt of approval of CG for passing special
resolution.

It is important to note that before taking any action for removal before expiry of terms, auditor shall
be given reasonable opportunity of being heard.

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 Resignation by Auditor [Sec 140(2)]
Ø Auditor shall within 30 days from Date of Resignation file ADT-3 with Co. & ROC + C&AG (for
Govt Co.)
Ø Indicated Reasons + other relevant facts
Ø Penalty for non-compliance
§ 50k/Remuneration↓+ 500 per day max. 2L

Removal direction by Tribunal if Auditor acted in fraudulent manner [Sec 140(5)]

Ø Tribunal either suo moto or on application by CG or any person concerned
ü satisfied that Auditor has acted in fraudulent manner/abetted/colluded in fraud
ü by or in relation to Co./Directors/officers
ü it may, by order direct Co. to change its auditors.
Ø If application by CG & tribunal satisfied change in auditor reqd
ü it shall within 15 days of receipt of application
ü make order that he shall not function as Auditor & CG may appoint other auditor.
Ø Auditor against whom order passed à ineligible to be appointed as auditor of any Co. for 5
years from date of order + Liable for action u/s 447
Ø In case of firm, liability shall be of firm and every partner(s) who acted in fraudulent
manner/abetted/colluded in any fraud by, or in relation to, Co. /its director/officers.

Appointment of Auditor other than retiring Auditor who was removed [Sec 140(4)]
• Spl notice reqd for resolution at AGM for appointing auditor
o Person other than retiring auditor or
o Providing expressly that retiring auditor will not be reappointed (except where rotation timeline
completed)
• On receipt of notice à Co. shall forward to retiring auditor
• On receipt of notice if retiring auditor makes representation to Co. in writing & request notification
to members, then Co. shall
Ø In notice of meeting to members state fact that representation has been made &
Ø Send copy of representation to every member to whom notice is sent
Ø If copy of representation couldn’t be sent à then Auditor may require it to be read out at
meeting + copy to be filed with ROC
Ø If Tribunal satisfied on application of Co. or any other aggrieved person, rights conferred by
Sec 140(4) are being abused by Auditor, then, copy of representation may not be sent and
representation need not be read out at the meeting.

Right of access to books etc.

Sec 143(1) Auditor, at all times, have right of access to books of a/c and vouchers of Co, whether kept
at regd office or any other place including Branch and is entitled to require from officers such info &
explanation as he consider necessary for performance of duties as auditor.
Auditor of holding co. will have right to access records of all its subsys & associates related to
Consolidation.

Eg. While conducting audit of limited co. for year ended 31st Mar,2020, auditor wanted to refer to
Minute Books. BOD refused to show Minute Books to auditor.

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Section 143 of Companies Act, 2013 grants powers to auditor that every auditor has right of access,
at all times, to books and account including all statutory records such as minute books, fixed assets
register, etc. of Co. for conducting audit. In order to verify actions of Co. and to vouch and verify
some of transactions of Co , it is necessary for auditor to refer to decisions of shareholders and/or
directors.
Therefore, essential for auditor to refer to Minute Books. In absence of Minute Books, auditor may
not be able to vouch/verify certain transactions of Co.
Conclusion: In case directors have refused to produce Minute Books, auditor may consider extending
audit procedure and also consider modifying/ qualifying his report in appropriate manner.

Sec 146 – Right & duty to attend AGM

Ø All notices & other communication of GMs to be forwarded to auditor
Ø Auditor shall attend (unless exempted) by himself or authorised representative (qualified to be
auditor)
Ø Shall have right to be heard at such meet on any part of business which concerns him as auditor

Question of Lien? Auditor may exercise right of lien in cases of Cos BUT it is mostly impracticable
for legal and practicable constraints.
His working papers being his own property, question of lien does not arise.

Sec 143(1) Duty to enquire on Certain Matters

a) Loans & advances made on security have been properly secured & whether terms prejudicial to
interest of Co. or its members
b) Transactions merely represented by book entries prejudicial to intt of Co.
c) Where Co. not being Investment/ Banking Co. whether its assets consisting of shares,
debentures & other securities sold at price < purchase price
d) Whether Loans & Advances shown as Deposits
e) Whether personal expenses charged to Revenue a/c
f) Where shares of Co. have been allotted For cash, whether cash received & if no cash recd,
position as per books & balance sheet, correct, regular & non misleading

Notes:
Ø Auditor not reqd to report on above matters unless spl. comments to make
Ø Auditor should report only when ans. to any of matters is in adverse

Learn with Fun J

CA SHUBHAM KESWANI 112

 Sec 143(3) Duty to Report
Auditor’s report shall 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 reqd by law have been kept by the Co. 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;
(c) whether the report on accounts of branch office of the Co. audited u/s 143(8) by a person other
than the company’s auditors has been sent to him and the manner he has dealt with it in preparing
report;
(d) 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;
(e) whether, in his opinion, the financial statements comply with the accounting standards;
(f) the observations or comments of the auditors on financial transactions or matters which have any
adverse effect on the functioning of the company;
(g) whether any director is disqualified from being appointed as a director u/s 164(2)
(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other
matters connected therewith;
(i) whether the company has adequate internal financial controls with reference to financial statements
in place and the operating effectiveness of such controls;
(j) such other matters as may be prescribed.

Rule 11 of Cos. (Audit and Auditors) Rules, 2014 other matters to be included in auditor’s report
namely:-
i) whether Co. has disclosed impact, of pending litigations on its financial position in its financial
statement;
ii) whether Co. has made provision, as required under any law or accounting standards, for material
foreseeable losses, if any, on long term contracts including derivative contracts;
iii) whether there has been delay in transferring amt, to Investor Education and Protection Fund by
Co.
iv) i) Whether mgt has represented to best of knowledge & belief, other than disclosed in notes, no
funds advanced, loaned or invested by Co. in any person or entity including foreign entity with
understanding that Intermediary will lend or invest in another entity or provide guarantee or
security on behalf of Co. (Ultimate Beneficiary)
ii) Whether mgt has represented to best of knowledge & belief, other than disclosed in notes, no
funds received by Co. from any person or entity including foreign entity(Funding Parties) with
understanding that Co. will lend or invest in another entity or provide guarantee or security on
behalf of Funding Party (Ultimate Beneficiary)
iii) Auditor has found no material misstatement in above representations
v) Whether Dividend declared & paid as per Sec 123
vi) In respect of FY commencing after 1.4.22 à Co. used a/c software to maintain books of a/c having
audit trail & same operated throughout year & audit trail hasn’t been tampered & preserved by Co.
for retention.

Note: Auditors of public cos. Required to report remuneration to directors within limits u/s 197 under
the Section Report on Other Legal and Regulatory Requirements.

CA SHUBHAM KESWANI 113

 Learn with Fun J

Sec143(4) àDuty to state reason for qualification or negative report

Sec 143(9) à Auditor’s duty to comply with SAs

Eg. AS 1 - Disclosure of Accounting Policies – In case of a Co, members should qualify their audit
reports in case:
(a) a/c policies required to be disclosed under Schedule III or any other provisions of Companies
Act, 2013, have not been disclosed, or
(b) accounts have not been prepared on accrual basis, or
(c) fundamental a/c assumption of going concern not followed and fact not disclosed in F.S., or
(d) proper disclosures regarding changes in accounting policies have not been made.

Sec 145 Duty to sign Audit Report

Ø Firm including LLP à Only Partners who are CAs à act & sign on behalf of firm
Ø Qualifications, observations or comments on financial transactions which have adverse effect
on functioning of Co.
Ø Read before in GM & open for inspection by members of Co.

Report on Frauds [Sec 143(12) read with Rule 13 of CAAR,2014]

• If auditor has reason to believe offence of fraud involving amount of 1 Cr or above committed in
Co. by its officers or employees
• Auditor shall report to CG within such time & manner as prescribed
Manner of reporting
• Report to Board or AC within 2 days seeking their reply within 45 days (ACà Audit Committee)
• On receipt of reply forward
Ø His Report
Ø Reply or observation of board or AC
Ø With his comments
• to CG within 15 days of receipt of reply
• If no reply recd. then shall forward only his report
• Send to Secretary, MCA in sealed cover by Regd post with acknowledgment due (RPAD) or by
Speed post followed by e-mail
• Report format à ADT 4
• On letter head of auditor with post address, e-mail, mobile no., & signed by auditor with Seal +
Membership no.

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If fraud < 1 Cr à report to AC or Board within 2 days specifying following:
a) Nature of fraud
b) Amount involved
c) Parties involved

Disclosure on Board Report: Nature of fraud, amount, parties involved (if remedial action not taken)
or remedial action taken (fraud < 1 Cr)
143(13) safeguards auditor from fraud reported out of Good Faith.

The provisions of reporting on Fraud also apply to Cost & Secretarial Auditor.

Penalty for non-compliance:

Listed Co: 5L
Any other Co: 1L

The auditor is also required to report under clause (xi) of para 3 of CARO, 2020 on whether any
fraud by company or any fraud on Company has been noticed or reported during year. If yes, nature
and amount involved is to be indicated.

Example: Senior Mgr on instruction of CEO entered fake invoices of credit purchases in books of a/c
aggregating to 95 L and cleared all payments to such bogus creditor. Here, auditor is required to report
fraudulent activity to Board or Audit Committee (as the case may be) within 2 days of knowledge of
fraud. Further, Co. also required to disclose in Board’s Report. Auditor need not report to CG as amount
of fraud is less than 1 cr, however, reporting under CARO, 2020 is required.

Audit of Branch Office Accounts

• Sec 128(1) à Every Co. shall keep at Regd office books of a/c & FS that give true & fair view
& as per accrual basis + double entry system of accounting
• If kept at any other place inform ROC within 7 days
• If Co. has branch office, it can keep books of Branch at that office & proper summarised
returns sent to Regd office periodically
• Sec 143(8) à Powers & duties of Co. Auditor in relation to branch audit & branch auditor
• Branch a/c can be audited by Co. auditor or any other qualified person
• If Branch is situated o/s India then Audit shall be done by Co. Auditor or by a person duly
qualified to be appointed as auditor as per the laws of that country
• Branch auditor (if different) shall share his report with Co. Auditor

SA 600, Using the Work of Other Auditor shall apply in such case:
• Right of principal auditor to visit component & examine books & records, if necessary
• Obtain SAAE that other auditor’s work adequate for him
• Ordinary procedures:
Ø Advise other auditor of use of his work
Ø Coordinate at planning stage
Ø Inform about areas requiring spl considerations
Ø Procedures for identifying inter-component transactions that require disclosure
Ø Time-table for audit completion
Ø Advise about significant a/c, auditing & reporting requirements

CA SHUBHAM KESWANI 115

 Ø Obtain representation as to compliance with them
• Might discuss audit procedures applied or obtain written summary of other auditor’s
procedures
• In form of Questionnaire/checklist
• NTE of procedures will depend on circumstances of engagement & knowledge about
competence of other auditor
• Knowledge can be enhanced through review of previous audit work

Cost Audit (Sec 148)

Sec 148 of Companies Act 2013 read with Companies (Cost Records & Audit) Rules 2014

Rule 3 – Applicability of maintenance of Cost Records => t/o of products & services >= 35 cr

Rule 5 à every Co. covered by Rule 3 maintain cost records in Form CRA-1

CARO Clause: As per Clause (vi) to Para 3 of CARO 2020, auditor has to report whether maintenance
of cost records has been specified by CG u/s 148(1) of Companies Act, 2013 and whether such accounts
and records have been so made and maintained.

Rule 4 – Cost Audit applicability

i) Regulated sectors : T/o overall >= 50 Cr & individual product/service* >= 25 Cr
ii) Non regulated sectors : t/o overall >= 100 Cr & individual product/service* >= 35 Cr
*for which cost records are maintained

Who can be a Cost Auditor? Cost Accountant appointed by Board + Cos’ auditor can’t be cost auditor

Non-Applicability
• Revenue from exports in forex > 75% of total revenue or
• Operating from SEZ
• Engaged in generation of electricity for captive consumption through captive generating plant

Rule 6 à Appoint auditor within 180 days of commencement of FY

Ø File notice of appointment with CG in form CRA-2 with fees within 30 days of BM or 180 days
of commencement of FY, earlier
Ø Cost auditor shall continue till expiry of 180 days from closure of FY or till submission of Audit
report
Ø Audit report to be submitted in form CRA-3 within ₹180 days of closure of FY & forward to
BOD
Ø Co. within 30 days of receipt of copy of report furnish to CG in Form CRA-4 in XBRL format +
explanation to every qualification or reservation
Ø In case of any default of these rules è Penalty u/s 147 for Co., officers & Cost auditor

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 Sec 147: Penalty
• Default u/s 139-146 [Company & Officer]
Ø Co: 25k – 5 Lakh
Ø Officer: 10k – 1 Lakh
• Default u/s 139, 144 & 145 [Auditor]
Ø Auditor: 25k – 5L or 4 times remuneration ↓
Ø If wilful default & intention to deceive then punishable with
v Fine 50k – 25 Lakh or 8 times remuneration ↓ + imprisonment up to 1 year
• Liable to refund remuneration & Pay for damages to Co./stat bodies/ authorities/ members/
creditors of Co. for their losses
• If auditor is firm
Ø proved that partner(s) involved in fraud à liability of concerned partners & firm (joint &
several)
Ø For criminal liability in respect of liability other than fine à partners who are involved in
fraud only liable

CA SHUBHAM KESWANI 117

 Companies Auditor’s Report Order, 2020 (CARO 2020)

Applicability:
To every Co. including foreign Co. except:
• Banking Co.
• Insurance Co.
• Sec 8 Co. (NGO)
• One Person Co. (OPC) & Small Co.
• Pvt ltd Co. (not holding/subsy of Public Co.)
Paid up Share Cap + Reserves & Surplus <= 1 Cr (B.S. Date) &
Borrowings (Bank or FI) <= 1 Cr (Any time during year) &
Revenue (including revenue from discontinued operations) <= 10 Cr as per F/S
*CARO not applicable to Consolidated financial statements

Ex. 1: ‘Educating Child’ is a Ltd Co. regd u/s 8 of Companies Act, 2013.
In given case, ‘Educating Child’ is licensed to operate under Sec 8 of Companies Act, 2013.
Therefore, CARO, 2020 shall not be applicable to ‘Educating Child’ accordingly.

Ex. 2: Ashu Pvt. Ltd. has fully paid capital and reserves of ₹50 lakh. During the year, Co. had borrowed
₹70 lakh each from a bank and a financial institution independently. It has turnover of ₹900 lakh.
In the given case of Ashu Pvt. Ltd., it has paid capital and reserves of ₹50 lakh i.e. less than 1 crore,
turnover of ₹9 crore i.e. less than ₹10 crore.
However, it has maximum outstanding borrowings of ₹1.40 crore ₹70 lakh + ₹70 lakh) collectively from
bank and financial institution.
Therefore, it fails to fulfill condition relating to borrowings. Thus, CARO, 2020 shall be applicable to
Ashu Pvt. Ltd. accordingly.

Para 3: Clauses (i) to (xxi)

(i) (Proper records of PPE/Intangibles + Physical verification + Title deeds + Revaluation + Benami)

(a) (A) whether Co. is maintaining proper records showing full particulars, including quantitative details
and situation of Property, Plant and Equipment;
(B) whether company is maintaining proper records showing full particulars of intangible assets;
(b) whether these PPE have been physically verified by management at reasonable intervals; whether
any material discrepancies were noticed on such verification and if so, whether same have been
properly dealt in books of a/c;
(c) whether title deeds of all immovable properties (other than properties where company is lessee
and lease agreements are duly executed in favour of lessee) disclosed in F.S. are held in name of
company, if not, provide details thereof in format below:-

Description Gross Held in Whether Period held- Reason for not

of property carrying name of promoter,director indicate being held in
value or their relative or range,where name of Co.*
employee appropriate
Indicate any
dispute

CA SHUBHAM KESWANI 118

(d) whether company has revalued its PPE (including Right of Use assets) or intangible assets or both
during the year and, if so, whether revaluation is based on valuation by Registered Valuer; specify
amount of change, if change is 10% or more in aggregate of net carrying value of each class of PPE or
intangible assets;
(e) whether any proceedings initiated or pending against company for holding any benami property
under Benami Transactions (Prohibition) Act, 1988 and rules made thereunder, if so, whether Co. has
appropriately disclosed details in its F.S.;

(ii) [Inventory à Physical verification + Working capital loans]

(a) whether physical verification of inventory has been conducted at reasonable intervals by mgt and
whether, in opinion of auditor, coverage and procedure of verification by mgt is appropriate; whether
any discrepancies of 10% or more in aggregate for each class of inventory were noticed and if so,
whether they have been properly dealt with in books of a/c;

(b) whether during any point of time of year, company has been sanctioned working capital limits in
excess of 5 cr, in aggregate, from banks or financial institutions on basis of security of current assets;
whether quarterly returns or statements filed by company with such banks or financial institutions are
in agreement with books of a/c of Company, if not, give details;

The Co. has dispensed with practice of taking inventory of their inventories at year-end as in their
opinion exercise is redundant, time consuming and intrusion to normal functioning of operations. Explain
reporting requirement under CARO, 2020.
Reporting for Physical Verification of Inventory:
Clause (ii) of Para 3 of CARO, 2020, requires auditor to report
[Reporting requirement discussed above]
In given case, above requirement of physical verification of inventory by mgt hasn’t taken place and
therefore auditor should point out the same under CARO, 2020.
He may consider impact on F.S. and report accordingly

Loans, Investments, Guarantee & Securities (LIGS)

(iii) whether during year Co. has made investments in, provided any guarantee or security or granted
any loans or advances in nature of loans, secured or unsecured, companies, firms, LLPs or any other
parties, if so,-
(a) whether during year Co. has provided loans or provided advances in nature of loans, or stood
guarantee, or provided security to any other entity [not applicable to companies whose principal
business is to give loans], if so, indicate-
(A) aggregate amt during year, and balance o/s at BS date w.r.t. such loans or advances and
guarantees or security to subsidiaries, joint ventures and associates;
(B) Agg. amt during year, and balance outstanding at BS date w.r.t such LAGS to parties other
than subsidiaries, joint ventures and associates;
(b) whether investments made, guarantees provided, security given and T&Cs of grant of all loans and
advances in nature of loans and guarantees provided are not prejudicial to the company’s interest;
(c) in respect of loans and advances in nature of loans, whether schedule of repayment of principal and
payment of interest has been stipulated and whether repayments or receipts are regular;
(d) if amount is overdue, state total amount overdue for more than 90 days, and whether reasonable
steps have been taken by company for recovery of principal and interest;

CA SHUBHAM KESWANI 119

(e) whether any loan or advance in the nature of loan granted which has fallen due during the year, has
been renewed or extended or fresh loans granted to settle the overdues of existing loans given to the
same parties, if so, specify the aggregate amount of such dues renewed or extended or settled by
fresh loans and percentage of aggregate to total loans or advances in the nature of loans granted
during year [not applicable to companies whose principal business is to give loans];
(f) whether company has granted any loans or advances in the nature of loans either repayable on
demand or without specifying any terms or period of repayment, if so, specify the aggregate amount,
percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters,
related parties as defined in Sec 2(76) of Companies Act, 2013;

Sec 185 & 186

(iv) in respect of loans, investments, guarantees, and security (LIGS), whether provisions of sections
185 and 186 of the Companies Act have been complied with, if not, provide the details thereof;

Deposits
(v) in respect of deposits accepted by the company or amounts which are deemed to be deposits,
whether directives issued by RBI and provisions of Sec 73 to 76 or any other relevant provisions of
Companies Act and the rules made thereunder, where applicable, have been complied with, if not, the
nature of such contraventions be stated; if an order has been passed by Company Law Board or NCLT
or RBI or any court or any other tribunal, whether the same has been complied with or not;

Cost records
(vi) whether maintenance of cost records has been specified by CG under section 148(1) of Companies
Act and whether such accounts and records have been so made and maintained;

Statutory dues
(vii) (a) whether Co. is regular in depositing undisputed statutory dues including GST, PF, ESI, income-
tax, sales-tax, service tax, customs duty, excise duty, VAT, cess & any other stat dues to appropriate
authorities and if not, extent of arrears of o/s statutory dues as on last day of financial year
concerned for a period of more than 6 months from date they became payable, shall be indicated;
(b) where statutory dues referred to in sub-clause (a) have not been deposited on account of any
dispute, then amounts involved and forum where dispute is pending shall be mentioned (a mere
representation to the concerned Department shall not be treated as a dispute);

Income Disclosure
(viii) whether any transactions not recorded in the books of account have been surrendered or
disclosed as income during year in the tax assessments under Income Tax Act, 1961, if so, whether
the previously unrecorded income has been properly recorded in the books of account during the year;

Repayment of loans
(ix) (a) whether Co. has defaulted in repayment of loans or other borrowings or in payment of interest
thereon to any lender, if yes, the period and the amount of default to be reported as per the format
below:-
Nature of Name of Amt not paid Whether No. of days Remarks,
borrowing, lender on due date principal or delay or if any
including debt interest unpaid
securities

CA SHUBHAM KESWANI 120

*lender wise details in case of default to Bank, financial institutions & Govt
(b) whether company is a declared wilful defaulter by any bank or financial institution or other lender;
(c) whether term loans were applied for purpose for which loans were obtained; if not, amount of loan
so diverted and purpose for which it is used may be reported;
(d) whether funds raised on short term basis have been utilised for long term purposes, if yes, nature
and amount to be indicated;
(e) whether Co. has taken any funds from any entity or person on account of or to meet obligations of
its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions
and the amount in each case;
(f) whether company has raised loans during the year on the pledge of securities held in its subsidiaries,
joint ventures or associate companies, if so, give details thereof and also report if company has
defaulted in repayment of such loans raised;

IPO/ FPO Reporting:

(x) (a) whether moneys raised by way of initial public offer or further public offer(including debt
instruments) during the year were applied for purposes for which those are raised, if not, the details
together with delays or default and subsequent rectification, if any, as may be applicable, be reported;

Preferential Allotment/Private placement

(b) whether Co. has made any preferential allotment or private placement of shares or convertible
debentures (fully, partially or optionally convertible) during year and if so, whether the requirements
of section 42 and section 62 of the Companies Act, 2013 have been complied with and funds raised
have been used for purposes for which the funds were raised, if not, provide details in respect of
amount involved and nature of non-compliance;

Fraud
(xi) (a) whether any fraud by the company or any fraud on the company has been noticed or reported
during the year, if yes, nature and amount involved is to be indicated;
(b) whether any report under Sec 143(12) of Companies Act has been filed by the auditors in Form
ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central
Government;
(c) whether the auditor has considered whistle-blower complaints, if any, received during the year by
company;

Nidhi Company
(xii) (a) whether Nidhi Company has complied with the Net Owned Funds to Deposits in ratio of 1:20
to meet out liability;
(b) whether the Nidhi Company is maintaining 10% unencumbered term deposits to meet out the
liability;
(c) whether there has been any default in payment of interest on deposits or repayment thereof for
any period and if so, the details thereof;

Related Parties
(xiii) whether all transactions with related parties are in compliance with sections 177 and 188 of
Companies Act where applicable and the details have been disclosed in the financial statements, etc.,
as required by the applicable accounting standards;

CA SHUBHAM KESWANI 121

Internal Audit
(xiv) (a) whether the company has internal audit system commensurate with the size and nature of its
business;
(b) whether reports of Internal Auditors for the period under audit were considered by the statutory
auditor;

Non cash transactions

(xv) whether the Co. has entered into any non-cash transactions with directors or persons connected
with him and if so, whether provisions of Sec 192 of Companies Act have been complied with;

RBI
(xvi) (a) whether company is required to be registered under section 45-IA of Reserve Bank of India
Act, 1934 (2 of 1934) and if so, whether the registration has been obtained;
(b) whether company has conducted any Non-Banking Financial or Housing Finance activities without a
valid Certificate of Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of
India Act, 1934;
(c) whether company is a Core Investment Company (CIC) as defined in the regulations made by the
Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in case the company
is exempted or unregistered CIC, whether it continues to fulfil such criteria;
(d) whether Group has more than 1 CIC as part of Group, if yes, indicate no. of CICs part of Group;

Cash Losses
(xvii) whether company has incurred cash losses in financial year and in immediately preceding financial
year, if so, state the amount of cash losses;

Resignation by Statutory Auditors

(xviii) whether there has been any resignation of statutory auditors during year, if so, whether auditor
has taken into consideration the issues, objections or concerns raised by the outgoing auditors;

Going Concern
(xix) on basis of financial ratios, ageing and expected dates of realisation of financial assets and
payment of financial liabilities, other information accompanying the financial statements, auditor’s
knowledge of Board of Directors and management plans, whether auditor is of the opinion that no
material uncertainty exists as on date of the audit report that Co. is capable of meeting its liabilities
existing at date of balance sheet as and when they fall due within a period of 1 year from B.S. Date;

CSR Reporting
(xx) (a) whether, in respect of other than ongoing projects, Co. has transferred unspent amount to a
Fund specified in Schedule VII to the Companies Act within a period of 6 months of the expiry of FY
in compliance with second proviso to section 135(5) of the said Act;
(b) whether any amount remaining unspent under section 135(5) of the Companies Act, pursuant to any
ongoing project, has been transferred to special a/c in compliance with section 135(6) of the said Act;

Qualifications in CFS
(xxi) whether there have been any qualifications or adverse remarks by respective auditors in the
CARO reports of companies included in the consolidated financial statements, if yes, indicate details
of companies and paragraph numbers of CARO report containing qualifications or adverse remarks.

CA SHUBHAM KESWANI 122

 CARO Clauses Summary
Fixed Assets
Ø Proper Records
Ø Physical Verification
Ø Title Deeds
Ø Revaluation [Regd valuer + Amt of change à 10% or more]
i Ø Proceedings under Benami Act à Holding Benami Property
Inventory
Ø Physical verification
ii Ø Working capital Loan > 5 Cr (banks/FI) + qtr returns & statements
LIGS
Ø Loans during the year à SJAs & Others
Ø Investment/Guarantee/Security à T&Cs not prejudicial
Ø Loans à schedule of repayment stipulated + Regular
Ø Amt overdue for more than 90 days & steps taken
Ø Loans/advance à fallen due during the year à extended/renewed/fresh loan
granted [Amt & %age to total loans]
Ø Loan/advance à Repayable on demand/without specifying terms or period of
iii repayment à amt/%age/amt lent to Promoters & RPs
iv LIGS compliance with Sec 185 & 186, if not then report non compliance
Deposits à compliance with RBI Directives & Sec 73-76 of Companies Act,2013 à if
v not then order by CLB/NCLT & whether complied with the order
vi Cost Records à maintenance reqd by CG? à Yes à Whether maintained?
Stat Dues
Ø Undisputed deposited timely à if not overdue > 6 months as on B.S. Date
vii Ø Disputed à Amt &. Forum where dispute pending [appeal not dispute]
Unrecorded income à disclosed/surrendered to IT Dept à whether recorded in
viii Books?
Repayment of Loans
Ø Default in repayment à period & amt of default à lender wise details to be given
Ø Co. declared wilful defaulter by Bank/FI?
Ø Term loan applied for the purpose they were raised? à No à Amt & Purpose
Ø Short term loan used for long term? à Yes à Amt & Nature
Ø Taken loan for SAJV à Yes à Nature & Amt
ix Ø Raised long basis of securities of SAJV à Yes à Details & default?
a) IPO/FPO à funds utilised for purpose à if not, details & subsequent rectification
b) Pvt Placement & preferential allotment à compliance with Sec 42 & 62 à
x utilisation
Fraud
Ø By/against the Co. à Noticed/reported à Yes à Nature & Amt
Ø Fraud reported u/s 143(12) to CG in form ADT-4?
xi Ø Considered whistle blower complaints?
Nidhi Co.
Ø Net owned funds to deposit ratio of 1:20
Ø At least 10% unencumbered deposits
xii Ø Any default in repayment?
xiii RPT à check compliance with Sec 177 & 188 + disclosure in F.S. as per a/c std

CA SHUBHAM KESWANI 123

xiv Internal Audit à Internal audit system + internal auditor report
xv Non cash transn à director/connected persons à sec 192
RBI
Ø Registration u/s 45-IA reqd? à yes à obtained?
Ø Co. conducted non-banking financial or housing finance activity w/o Registration?
Ø Co. à CIC à fulfils the criteria or if Co. exempted from CIC registration à
fulfils criteria?
xvi Ø Group has more than one CICs à yes à indicate the no.
xvii Cash Losses à during the year & preceding year à yes à indicate cash loss
xviii Resignation by Auditor à considered issues raised by outgoing auditor
xix No material uncertainty à co. pay liabilities for next 12 months
CSR
Ø Ongoing project à trfr to spl a/c?
xx Ø Other à unspent amt within 6 months of expiry of FY?
Qualifications/Adverse remarks by Auditors of Cos included in CFS? à Yes à Details
xxi of Cos & para nos.

CA SHUBHAM KESWANI 124

 SA 299, “Joint Audit of F.S.”

Advantages:
(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 auditor of Co. taken over in a take - over often obviated.
(vii) In respect of MNCs, work can be spread using the expertise of local firms which are in a better
position to deal with detailed work and 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.

Disadvantages:
(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.

• Audit Planning: EP & other key members of engg team from each of joint auditors should be
involved in Audit Planning.
• Audit Strategy: Joint auditors should jointly establish overall audit strategy which sets scope,
timing and direction of audit, and also guides development of audit plan.
• Before the commencement of audit, joint auditors should discuss and develop a joint audit plan.
In developing the joint audit plan, the joint auditors should:
(a) identify division of audit areas and common audit areas;
(b) ascertain the reporting objectives of the engagement;
(c) consider and communicate among all joint auditors the factors that are significant
(d) in directing the engagement team’s efforts;
(e) consider the results of preliminary engagement activities, or similar engagements performed
earlier.
(f) ascertain the nature, timing and extent of resources necessary to accomplish the
engagement.
• RoMM: Each of joint auditors should consider and assess RoMM and communicate to other joint
auditors.
• Joint auditors should discuss and document NTE of audit procedures for
(I) common and (II) specific allotted areas of audit to be performed.
• Joint auditors should obtain common engagement letter and common management representation
letter.
• Work allocation document should be signed by all joint auditors and communicated to TCWG.
• It further states that, in respect of audit work divided among joint auditors, each joint auditor
shall be responsible only for work allocated to such joint auditor including proper execution of
audit procedures.

CA SHUBHAM KESWANI 125

On the other hand, all the joint auditors shall be jointly and severally responsible for:
(i) audit work which isn’t divided among joint auditors and is carried out by all joint auditors;
(ii) decisions taken by all joint auditors under audit planning in respect of common audit areas;
(iii) matters which are brought to notice of joint auditors by any one of them and there is agreement
among joint auditors on such matters;
(iv) examining that F.S. of entity comply with requirements of relevant statutes;
(v) presentation and disclosure of F.S. as required by the applicable FRF;
(vi) ensuring that audit report complies with requirements of relevant statutes, applicable SA and
other relevant pronouncements issued by ICAI.

Matters relevant for Others: In case a joint auditor comes across matters which are relevant to areas
of responsibility of other joint auditors and deserve their attention, or require disclosure or discussion
with, or application of judgment by other joint auditors, said joint auditor shall communicate the same
to all other joint auditors in writing prior to completion of audit.

Reporting
ü It may be noted that the joint auditors are required to issue common audit report.
ü However, where joint auditors are in disagreement, they shall express their opinion in a separate
audit report.
ü In such circumstances, audit report(s) issued by joint auditor(s) shall make a reference to each
other’s audit report(s).

CA SHUBHAM KESWANI 126

 Ch-11 Audit Reports
SA 700: Forming an Opinion &
Reporting on the Financial Statements
• Form & content of Audit Report
• Consistency & comparability

To form an Opinion à Conclude* à Reasonable Assurance à F.S. as whole are free from M.M.
(fraud/error)

*SAAE + Uncorrected misstatements are material + Evaluations

Qualitative Aspects of Entity’s Accounting Practices

1. Management makes a no. of judgements about amts and disclosures in F.S.
2. SA 260 (Revised) contains a discussion of the qualitative aspects of accounting practices.
3. In considering qualitative aspects of entity’s accounting practices, auditor may become aware of
possible bias in management’s judgements.

The auditor may conclude that lack of neutrality together with uncorrected misstatements causes
the F.S. to be materially misstated.

Indicators of a lack of neutrality include following:

(i) The selective correction of misstatements brought to mgt’s attention during audit.
Example: Correcting misstatements with the effect of increasing reported earnings, but not
correcting misstatements that have effect of decreasing reported earnings.
(ii) Possible mgt bias in making of a/c estimates.

4. SA 540 addresses possible management bias in making accounting estimates.

Indicators of possible mgt bias don’t constitute misstatements for purposes of drawing conclusions on
reasonableness of individual a/c estimates. They may, however, affect auditor’s evaluation of whether
F.S. as a whole are free from material misstatement.

Specific Evaluations by Auditor

(a) F.S. adequately disclose Significant a/c policies selected & applied
(b) A/C Policies selected & applied are consistent with FRF & appropriate
(c) a/c estimates made by mgt are reasonable
(d) F.S. provide adequate disclosures

(e) Info presented (relevant, (e) Terminology used in F.S. is

reliable, comparable & appropriate
understandable)

If F.S. are as per Fair Presentation Framework,

a) Overall Presentation, Structure & Content of F.S.
b) Whether F.S. including notes à achieve fair presentation

CA SHUBHAM KESWANI 127

 Forms of Opinion

Unmodified opinion Modified Opinion

F.S. in all material respects F.S. not free from MM. (whether
prepared as per FRF evidence obtained or not) [SA 705]

Elements of Audit Report

• Title [Indpendent Auditor’s Report]
• Addressee [ To members of Co.]
• Auditor’s Opinion
Ø Identify entity whose F.S. have been audited;
Ø State that F.S. have been audited;
Ø Identify title of each statement comprising the F.S.;
Ø Refer to the notes, including summary of significant accounting policies; and
Ø Specify the date of, or period covered by, each F.S.

• Basis for Opinion

Ø States that audit was conducted in accordance with SA;
Ø Refer to the section of A/R that describes auditor’s responsibilities under SAs;
Ø Includes a statement that auditor is independent of entity
Ø States whether auditor believes that audit evidence is SAAE.

• Going Concern [SA 570]

• SA 701: Key Audit Matters

Matters à Auditor’s Professional Judgment à MOST SIGNIFICANCE in Audit of F.S.

But from where are they selected? From matters communicated with TCWG

Purpose of KAM?
• Enhance communicative value of A/R
• Provide add. Info to assist users to understand matters à MOST Significance in auditor’s PJ
• Also understand entity

Determining KAM
• Areas of higher assessed ROMM or Significant Risk as per SA 315
• Significant Auditor Judgment relating to areas in F.S. involving significant mgt judgment
• Effect on Audit of Significant events or transn that occurred during the period

Communicating KAM not a Substitute for:-

ü Disclosures in F.S.
ü Modified opinion as per SA 705
ü Reporting as per SA 570 à Material Uncertainty…..
ü Separate Opinion on Individual matters

CA SHUBHAM KESWANI 128

What to do if no KAM to communicate?
Key Audit Matters
[Except for the matter described in Basis for Qualified (Adverse) Opinion section or MURG section,]
We have determined that there are no [other] KAM to communicate in our report.

• Location of description of auditor’s responsibilities for audit of F.S.

Within Body As appendix to A/R Reference to website

• Signature of Auditor
ü Signed by auditor(EP) in his own name + firm name
ü Membership no. + FRN + UDIN

• Place of Sign à Location

• Date of Auditor’s Report
ü Not earlier than date auditor obtained SAAE/ F.S. prepared/ Mgt asserted they have
taken responsibility of F.S.

SA 705: MODIFICATIONS TO THE OPINION IN INDEPENDENT AUDITOR’S REPORT

Nature of matter Material but not pervasive Material & Pervasive

F.S. à M.M. Qualified Adverse
SAAE Qualified Disclaimer

Pervasive effects on the financial statements are those that, in the auditor’s judgement:
(i) Are not confined to specific elements, accounts or items of F.S.;
(ii) If so confined, represent or could represent a substantial proportion of F.S.; or
(iii) In relation to disclosures, are fundamental to users’ understanding of F.S..

What if Mgt imposed limitation à SAAE à What will Auditor do?

• If likely to result in Q/D opinion à request mgt to remove limitation
• If mgt refuses à communicate TCWG & determine whether AAP possible
• If still can’t obtain SAAE:-
ü Misstatement is material but not pervasive à Qualified opinion
ü Misstatement is material & pervasive
i. Withdraw from engg
ii. Not practicable to withdraw à Disclaim opinion
• Before withdrawal communicate to TCWG

CA SHUBHAM KESWANI 129

 Form and Content of the Auditor’s Report When the Opinion is Modified
Auditor’s Opinion
When auditor modifies audit opinion, auditor shall use the heading “Qualified Opinion,” “Adverse
Opinion,” or “Disclaimer of Opinion,” as appropriate, for Opinion section.

Qualified Opinion: When the auditor expresses qualified opinion due to material misstatement in F.S,
auditor shall state that, in auditor’s opinion, except for effects of matter(s) described in Basis for
Qualified Opinion section:

(1) When reporting in accordance with fair presentation framework, accompanying F.S. present fairly,
in all material respects (or give a true and fair view of) […] in accordance with [applicable FRF]; or

(2) When reporting in accordance with compliance framework, accompanying F.S. have been prepared,
in all material respects, in accordance with [applicable FRF].

When modification arises from inability to obtain SAAE, auditor shall use corresponding phrase
“except for possible effects of matter(s) ...” for modified opinion.

Adverse Opinion
When auditor expresses an adverse opinion, auditor shall state that, in auditor’s opinion, because of
significance of the matter(s) described in Basis for Adverse Opinion section,

(a) When reporting in accordance with a fair presentation framework, accompanying F.S. do not
present fairly (or give a true and fair view of) […] in accordance with [the applicable FRF]; or

(b) When reporting in accordance with a compliance framework, accompanying F.S. have not been
prepared, in all material respects, in accordance with [the applicable FRF].

Disclaimer of Opinion
When auditor disclaims an opinion due to inability to obtain SAAE, auditor shall:
(a) State that auditor does not express an opinion on accompanying F.S.;
(b) State that, because of significance of matter(s) described in Basis for Disclaimer of Opinion
section, auditor has not been able to obtain SAAE to provide a basis for an audit opinion on F.S.; and
(c) Amend the statement required by SA 700, which indicates that F.S. have been audited, to state
that auditor was engaged to audit F.S.

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 SA 706: Emphasis of Matter Paragraph & Other Matter Paragraph
in the Independent Auditor’s Report

Emphasis of matter para:-

• It is a para included in A/R
• that refers to a matter appropriately presented or disclosed in F.S.
• that, in auditor’s judgement,
• is of such importance that it is fundamental to users’ understanding of F.S.

When the auditor includes an EOM para in auditor’s report, auditor shall:
(a) Include the paragraph within a separate section of A/R with appropriate heading that includes
the term “Emphasis of Matter”;
(b) Include in para a clear reference to matter being emphasized and to where relevant disclosures
that fully describe the matter can be found in F.S. The para shall refer only to info presented or
disclosed in F.S; and
(c) Indicate that auditor’s opinion is not modified in respect of matter emphasized.

Some eg of circumstances where auditor may consider it necessary to include an EOM para:
• An uncertainty relating to future outcome of exceptional litigation or regulatory action.
• A significant subsequent event that occurs between the date of F.S. and date of A/R.
• Early application (where permitted) of a new a/c std that has a material effect on F.S.
• A major catastrophe that has had, or continues to have, a significant effect on entity’s financial
position.

Learn with Fun J

An Emphasis of Matter paragraph is not a substitute for:

(a) A modified opinion in accordance with SA 705 when required by circumstances of a specific audit
engagement;
(b) Disclosures in F.S. that applicable FRF requires mgt to make, or that are otherwise necessary to
achieve fair presentation; or
(c) Reporting in accordance with SA 570 (Revised) when a material uncertainty….

Other Matter Paragraphs (OM Para)

If auditor considers it necessary to communicate a matter other than those that are presented or
disclosed in F.S. that, in auditor’s judgement, is relevant to users’ understanding of audit, auditor’s
responsibilities or auditor’s report, the auditor shall include an OM para in A/R , provided:
(a) This is not prohibited by law or regulation; and
(b) When SA 701 applies, matter has not been determined to be a KAM

When auditor decides to include EOM/OM para à Communicate with TCWG

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 SA 710 Comparative Information- Corresponding figures & Comparative F.S.

Comparative Information:
• The amounts and disclosures included in F.S.
• in respect of one or more prior periods in accordance with the applicable FRF.

Audit Procedures
Basic Procedures:
Auditor shall evaluate whether:
(a) Comparative information agrees with amounts and other disclosures presented in prior period; and
(b) A/c policies reflected in comparative info are consistent with current period or, if there have been
changes in a/c policies, whether changes have been properly accounted,presented and disclosed.
Amounts & disclosures included in F.S. in respect of one or more prior periods as per applicable FRF.

Material Misstatement:
If auditor becomes aware of possible material misstatement in comparative info while performing
current period audit, auditor shall perform such additional audit procedures to obtain SAAE to
determine whether material misstatement exists.
If auditor audited prior period’s F.S., auditor shall also follow requirements of SA 560.

Written Representations:
ü As per SA 580, auditor shall request WR for all periods referred to in auditor’s opinion.
ü Auditor shall also obtain a specific WR regarding any prior period item that is separately disclosed
in current year’s statement of P&L.

Corresponding Figures
Comparative information where amts & other disclosures for prior period are included as an integral
part of current period F.S. and are intended to be read only in relation to amounts and other
disclosures relating to current period (referred to as “current period figures”).
Level of detail presented in corresponding amts and disclosures is dictated primarily by its relevance
to current period figures.

Reporting:-
When corresponding figures are presented, auditor’s opinion shall not refer to corresponding figures
except in following circumstances:
1. If auditor’s report on prior period, as previously issued, included a modified opinion and matter which
gave rise to modification is unresolved, auditor shall modify auditor’s opinion on the current period’s
F.S.

In the Basis for Modification para in A/R, auditor shall either:

(a) Refer to both current period’s figures and corresponding figures in description of matter giving
rise to modification when the effects or possible effects of the matter on current period’s figures
are material; or
(b) In other cases, explain that audit opinion has been modified because of effects or possible effects
of unresolved matter on the comparability of current period’s figures and corresponding figures.

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2. If auditor obtains audit evidence that a material misstatement exists in prior period F.S. on which
an unmodified opinion has been previously issued, auditor shall verify whether misstatement has been
resolved and, if not, auditor shall express qualified opinion or adverse opinion in auditor’s report on
current period F.S.

3. Prior Period Financial Statements Not Audited- If prior period F.S. à not audited, auditor shall
state in OM para that corresponding figures are unaudited.
Such a statement does not relieve auditor to obtain SAAE that opening balances don’t contain
misstatements that materially affect current period’s F.S.

Summary:
[1st 2 cases à prior period F.S. audited but MM there (detected/ undetected)
Last case à PPFS à not audited]

Comparative Financial Statements

Comparative info where amounts and other disclosures for prior period are included for comparison
with F.S. of current period but, if audited, are referred to in auditor’sopinion.
The level of info included in comparative F.S. is comparable with that of F.S. of current period.

Auditor’s opinion- to refer each period:

When comparative F.S. are presented, auditor’s opinion shall refer to each period for which F.S. are
presented and on which an audit opinion is expressed.
When reporting on PPFS in connection with the current period’s audit, if auditor’s opinion on such PPFS
differs from opinion auditor previously expressed, auditor shall disclose substantive reasons for
different opinion in OM para as per SA 706.

The essential audit reporting differences between approaches are:

(a) Corresponding figures à auditor’s opinion refers to current period only; whereas
(b) Comparative F.S., auditor’s opinion refers to each period for which F.S. are presented.

Prior Period Financial Statements Audited by a Predecessor Auditor

If F.S. of prior period were audited by predecessor auditor, in addition to expressing an opinion on the
current period’s F.S., auditor shall state in an Other Matter paragraph:
(a) That the F.S. of prior period were audited by a predecessor auditor;
(b) The type of opinion expressed by predecessor auditor and if it was modified, reasons therefor &
(c) The date of that report, unless predecessor auditor’s report on prior period’s F.S. is revised with
the F.S.
• If auditor concludes that a material misstatement exists that affects prior period F.S. on which
predecessor auditor had previously reported without modification, auditor shall communicate à
management and TCWG & request that predecessor auditor be informed.
• If prior period F.S. are amended, and predecessor auditor agrees to issue new auditor’s report on
amended F.S. of prior period, auditor shall report only on current period.

Prior Period F.S. Not Audited

If prior period F.S. were not audited, auditor shall state in OM paragraph that comparative F.S. are
unaudited. Such statement doesn’t relieve auditor of requirement to obtain SAAE that opening
balances don’t contain misstatements that materially affect current period’s F.S.

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 CONCEPT OF TRUE AND FAIR
The concept of true and fair is a fundamental concept in auditing.

SA 700 “Forming an Opinion and Reporting on F.S”, requires auditor to form an opinion on F.S. based
on evaluation of conclusions drawn from audit evidence obtained; and express clearly that opinion
through a written report that also describes the basis for the opinion.

Auditor is required to express his opinion on F.S. that, accompanying F.S. present fairly, in all material
respects, (or give a true and fair view of) the financial position of the Company as at December 31,
20X1, and (of) its financial performance and its cash flows for the year then ended in accordance with
Accounting Standards.

What constitutes a ‘true and fair’ view is matter of auditor’s judgement in particular circumstances.
[May-18]
In more specific terms, to ensure true and fair view, an auditor has to see:
(i) that assets are neither undervalued or overvalued, according to applicable a/c principles,
(ii) no material asset is omitted;
(iii) the charge, if any, on assets are disclosed;
(iv) material liabilities should not be omitted;
(v) p&l account and balance sheet discloses all the matters required to be disclosed;
(vi) a/c policies have been followed consistently; and
(vii) all unusual, exceptional or non-recurring items have been disclosed separately.

Q. While auditing books of a/cs of Completely Balanced Ltd for FY 2020-21, auditor observed that
following transactions were not recorded in F.S, even though they were recorded in books of a/cs:
(a) The Equipment H amounting for Rs. 40,000.
(b) Trade Receivable of Rs. 29,000 and Trade Payable of Rs. 22,000.
(c) Repair and Maintenance Expenses of Rs. 56,000.
(d) Other Incomes of Rs. 94,000.
Every amount mentioned above was material in nature. Comment on the true and fair view as depicted
by the financial statements of the above mentioned company

SOLUTION
According to auditor, F.S. of Completely Balanced Limited for the financial year 2020-21 do not
present a true and fair view because certain material transactions relating to liabilities, incomes,
assets and expenses were not recorded in F.S. Actual position as depicted in the books of accounts of
Completely Balanced Limited for the financial year 2020-21, that same position was not presented in
the F.S. of above mentioned Co.

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