Question 1:

ABC Ltd. has not appointed an auditor for its financial year as required by the Companies Act,
2013. What are the legal consequences of such non-compliance, and how can the company
rectify the situation?

ANSWER
Section 139 (6) of the Companies Act, 2013, lays down that if the Board fails to exercise its
power to appoint the first auditor within 30 days of registration of company, the Board shall
intimate such failure to the members of the company who shall within ninety days at an
extraordinary general meeting appoint such auditor and such auditor shall hold office till the
conclusion of the first annual general meeting.

- The MCA is allowed to set up an Adjudicating Officer to determine the order for penalty for
such violation under S. 454 of the Act. (company maybe me made liable to a penalty of ten
thousand rupees, and in case of continuing contravention, with a further penalty of one thousand
rupees for each day after the first during which the contravention continues, subject to a
maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer
who is in default or any other person.)
There has been precedence in similar scenarios; for example in the case of Antique Exim Pvt.
Ltd. where the MCA fined the company a sum of 3 lakhs for not appointing an internal auditor
and being in violation of S. 138.

Remedy to the situation:

In this context, the following procedure should be followed:

Convene a Board Meeting: As per Section 173 and Secretarial Standard (SS-1), organize a Board
meeting to discuss the matter. During this meeting, decide on the date, time, and location of the
extraordinary general meeting aimed at appointing the first auditor. This meeting should occur
within 90 days of the Board's notification of the failure to appoint the initial auditor.
Additionally, the Board should approve the draft notice for this meeting.

Obtain Auditor's Consent: Secure a consent letter and a certificate from the intended auditor,
confirming the following:
(a) Eligibility and non-disqualification of the individual or firm for appointment under the
Companies Act, 2013, the Chartered Accountants Act, 1949, and the associated rules and
regulations.
(b) Compliance with the appointment terms as specified in the Companies Act, 2013.
(c) Adherence to the prescribed limits within the authority of the Act.
(d) An accurate listing of any ongoing professional conduct proceedings against the auditor,
audit firm, or any of its partners, as revealed in the certificate.

Notify Members: Issue a notice of the extraordinary general meeting to all the company's
members.

Hold the Meeting: Conduct the extraordinary general meeting and pass an ordinary resolution to
formally appoint the first auditor.

Inform the Appointed Auditor: Promptly communicate the appointment to the first auditor,
providing a certified copy of the resolution adopted during the meeting.

Question 2:
XYZ Corporation's auditor has identified material misstatements in its financial statements. What
steps should the auditor take in this situation, and how should the company address the findings?
ANSWER:
If an Indian company's auditor has identified material misstatements in its financial statements,
the auditor should take the following steps in accordance with the Companies Act, 2013 and its
allied rules:
I. Reporting to the Central Government- As per sub-section (12) of section 143 of the Companies
Act, 2013, if an auditor of a company in the course of the performance of his duties as auditor,
has reason to believe that an offence of fraud involving such amount or amounts as may be
prescribed, is being or has been committed in the company by its officers or employees, the
auditor shall report the matter to the Central Government within such time and in such manner as
may be prescribed.
In this regard, Rule 13 of the Companies (Audit and Auditors) Rules, 2014 has been prescribed.
Sub-rule (1) of the said rule states that if an auditor of a company, in the course of the
performance of his duties as statutory auditor, has reason to believe that an of fence of fraud,
which involves or is expected to involve individually an amount of ` 1 crore or above, is being or
has been committed against the company by its officers or employees, the auditor shall report the
matter to the Central Government.
The manner of reporting the matter to the Central Government is as follows:
(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be,
immediately but not later than 2 days of his knowledge of the fraud, seeking their reply or
observations within 45 days;
(b) on receipt of such reply or observations, the auditor shall forward his report and the reply or
observations of the Board or the Audit Committee along with his comments (on such reply or
observations of the Board or the Audit Committee) to the Central Government within 15 days
from the date of receipt of such reply or observations;
(c) in case the auditor fails to get any reply or observations from the Board or the Audit
Committee within the stipulated period of 45 days, he shall forward his report to the Central
Government along with a note containing the details of his report that was earlier forwarded to
the Board or the Audit Committee for which he has not received any reply or observations;
(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by
Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in
confirmation of the same;
(e) the report shall be on the letter-head of the auditor containing postal address, e-mail address
and contact telephone number or mobile number and be signed by th auditor with his seal and
shall indicate his Membership Number; and
(f) the report shall be in the form of a statement as specified in Form ADT -4.

II. Reporting to the Audit Committee or Board -

Sub-section (12) of section 143 of the Companies Act, 2013 further prescribes that in case of a
fraud involving lesser than the specified amount [i.e. less than ` 1 crore], the auditor shall report
the matter to the audit committee constituted under section 177 or to the Board in other cases
within such time and in such manner as may be prescribed.

In this regard, sub-rule (3) of Rule 13 of the Companies (Audit and Auditors) Rules, 2014
states that in case of a fraud involving lesser than the amount specified in sub-rule (1) [i.e.
less than ` 1 crore], the auditor shall report the matter to Audit Committee constituted
under section 177 or to the Board immediately but not later than 2 days of his knowledge
of the fraud and he shall report the matter specifying the following:
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.

III. Disclosure in the Board's Report: Sub-section (12) of section 143 of the Companies Act,
2013 furthermore prescribes that the companies, whose auditors have reported frauds under this
sub-section (12) to the audit committee or the Board, but not reported to the Central
Government, shall disclose the details about such frauds in the Board's report in such manner as
may be prescribed.

In this regard, sub-rule (4) of Rule 13 of the Companies (Audit and Auditors) Rules, 2014 states
that the auditor is also required to disclose in the Board’s Report the following details of each of
the fraud reported to the Audit Committee or the Board under sub-rule (3) during the year:
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.

If the auditor identifies material misstatements in the financial statements, the company should
address the findings by taking the following steps:
Correct the misstatements: The company should correct the misstatements identified by the
auditor and ensure that the financial statements are accurate and complete.
Implement internal financial controls: The company should implement internal financial controls
to prevent future misstatements and ensure that the financial statements are accurate and
complete
Cooperate with the auditor: The company should cooperate with the auditor and provide any
additional information or documentation that the auditor requests
Disclose the findings: The company should disclose the findings of the auditor in its financial
statements and annual report.

Question 3:
LMN Ltd. has received a qualified audit report from its auditor. Explain the implications of a
qualified audit report and the steps the company should take to address it.

ANSWER:
The company’s auditor gives a qualified opinion in the audit report if it is found that the
company’s financial statements are presented fairly, except in specific areas. It is just one notch
below an Unqualified Opinion (i.e., a Clean opinion). It is issued in those cases where the
Auditor feels that the financial statement is not prepared following the rules laid down under
GAAP/IFRS (Generally Accepted Accounting Principles/International Financial Reporting
Standards), whichever is applicable
Qualified Report: If after conducting the audit, the-auditor is not fully satisfied about the
accuracy of the Balance Sheet and the Profit and Loss Account of the company, he should write
in his report the various points which make the accounts of the organization inaccurate. This
writing by the auditor is a qualification in itself, and the report which contains such qualifications
is known as Qualified Report. The auditor issues a qualified report in the
following cases:

1. When the examination of books of accounts is not possible according to

the generally accepted principles of the auditing, e.g,,

(a) The client has put restrictions on the scope of audit as restriction on the examination of
accounts of debtors, restrictions on verification of stock, restrictions on reaching the far away
branch of the company where most of assets are maintained, etc.
(b) Reasons beyond the control of both difficulty in tallying the amount rec verification of stock
in the absence of proper record.
(c) When the internal control system is so inadequate that a satisfactory audit is not possible in a
specified period.

(d) When financial statements are not principles, e.g., unfair valuation o etc. in such situations,
the auditor
If they fail to do so, the auditor must give a qualified report

2. When the accounting principles have not been followed on a consistent basis, e.g., making
changes in the method of depreciation
3. When the financial statement does not show true financial position of the organization,
4. Other reasons:
(a) Inadequate Provision of depreciation on fixed assets.
(b) Inadequate reserves for bad and doubtful debts,
(c) Unsatisfactory valuation of assets,
(d) Not providing information and clarifica
(e) Violation of provisions of Companies Act provisions

Director's Reply in Board Report on Qualification by the Auditor.

According to Section 215 the annual accounts must be first signed by the Directors and then by
the Auditors. As per Section 217 of the Companies Act, 1956 the Board's Report should contain
necessary clause giving explanations to the qualifications in the Audit Report. In lieu of this the
board's report can be signed after the audit report is signed.
Pursuant of section 217 of the Companies Act, the directors of the company have to give reply
for the qualifications mentioned in the audit report as per section 227 of the companies act by the
statutory auditors.
In accordance with Section 217(3) of the Companies Act, the Board of Directors shall bond to
give fullest information and explanations in its report in an addendum to that report on every
reservation, qualification or adverse remark contained in the auditors report.
As per Secretarial Standard 10 issued by the Institlite of Company Secretaries of India, New
Delhi, the board's report should contain the information and explanations on every reservation,
qualification or adverse remarks contained in the auditors' report.
The report should also specify any point in auditors report on the annual financial statements on
which a difference of opinion has arisen.
QUESTION 4:
PQR Corporation is a listed company, and its auditor has detected instances of related party
transactions that were not disclosed in its financial statements. Explain the implications of
undisclosed related party transactions and the actions the company should take.

Parties are also considered to be related if they are subjected to common control or common
significant influence. In other words, related party transaction is a transfer of resources or
obligations between related parties, regardless of whether a price is charged. Section 188 of the
Companies Act, 2013, deals with the transactions that take place between related parties. This
was introduced to create transparency and accountability between the parties to the transaction.
This is applicable to both public and private limited companies. It is necessary to contemplate all
the aspects before a party decides to enter into a related party transaction.
Disclosures that are necessary for related party transactions (audit)
Disclosure required to be done to the audit committee
It is not necessary to make any kind of disclosure for the related party transactions. But Section
177(6) of the Companies Act, 2013, states that the audit committee shall have full access to all
the details and particulars present in the company’s records. They can also obtain professional
advice from external sources to ensure proper and fair decision-making.
Disclosure required to be made by the interested directors
Any director who is interested in the related party transactions, directly or indirectly, in the
contract that has already been entered into or will be entered into, should disclose the nature of
the deal at the board’s meeting where such an arrangement or contract is discussed.
Penalties for non-compliance under Section 188(5) of Companies Act, 2013
If a director or an employee of a company enters into a contract that is contrary to or in violation
of the provisions of this Section, then he shall be liable to the following punishments In the
matter of a listed company, he shall be punishable with a fine of twenty-five lakh rupees; and In
the matter of any other company, he shall be punishable with a fine of five lakh rupees.

QUESTION 5:
DEF Ltd. is a subsidiary of GHI Ltd., and both companies have their own auditors. The auditors
have identified discrepancies in the consolidated financial statements of the group. How should
this situation be addressed, and what role do the auditors play in this scenario?
ANSWER
The auditors of DEF Ltd., the subsidiary, have the responsibility of conducting a thorough
investigation into the financial discrepancies found in DEF Ltd.'s records. Their discoveries need
to be documented and reported to DEF Ltd.'s management, board of directors, and audit
committee. If these discrepancies are significant, the auditor may need to consider issuing a
qualified or adverse opinion in DEF Ltd.'s standalone financial statements, in line with Section
143 of the Companies Act, 2013.
On the other hand, the auditor of GHI Ltd., the parent company, is also tasked with a
comprehensive examination, especially in regard to the consolidated financial statements. They
should take into account the information provided by DEF Ltd.'s auditor. Similarly, their
findings should be recorded and reported to GHI Ltd.'s management, board of directors, and
audit committee. If substantial discrepancies are discovered, the auditor should contemplate
issuing qualified or adverse opinions in both GHI Ltd.'s standalone and consolidated financial
statements.

Dealing with this situation involves several key steps. First and foremost, there must be clear
communication between the auditors of DEF Ltd. and GHI Ltd. to share findings and maintain
consistency in assessing the discrepancies. Both auditors need to transparently communicate
their discoveries to the respective companies' managements and audit committees.

Subsequently, the management of DEF Ltd. and GHI Ltd. should initiate thorough
investigations, delving into internal records, transactions, and processes to identify the root
causes of the discrepancies. Timely corrective actions, including potential restatements of
financial statements, should be put in place. These corrections should be properly disclosed in
the financial statements of both DEF Ltd. and GHI Ltd., in compliance with accounting
standards and the Companies Act, 2013.

In cases where the discrepancies are substantial, regulatory authorities such as the Ministry of
Corporate Affairs (MCA) should be informed, as mandated by legal obligations. Additionally,
both companies should enhance their internal control systems and accounting practices to
prevent similar discrepancies in the future. It is imperative to adhere to Section 143 of the
Companies Act, 2013, and other relevant laws, underscoring the importance of meticulous
documentation of all actions taken.