Role and Responsibilities of Chartered Accountants

Sections 139 to 148 of the Companies Act, 2013

BY SUNIL H. TALATI
M.COM., L.L.B., FCA.,
PAST PRESIDENT OF ICAI
1 27-
27-12-
12-2014
 COVERAGE
(1) Preamble
(2) Appointment of Auditors – Section 139
(a) Appointment
(b) Tenure of Office of Auditor
(c) Rotation & Manner of Rotation
(d) First Auditor
(e) Auditor of Govt. Company
(f) Casual Vacancy
(g) Retiring Auditor
(h) When no auditor appointed at AGM.
(3) Removal, Resignation of Auditor – Section 140

2
 Contd……COVERAGE
(4) Fraud by Auditor – Section 140(5)
(5) Eligibility, Qualifications and Disqualifications and Vacation of
Office of Auditor – Section 141
(6) Remuneration of Auditors – Section 142
(7) Powers and Duties of Auditors and Auditing Standards -
Sections143, 145 and 146.
a) Rights of Auditor
b) Audit Report on Accounts & FS including Branch Report
and on Accounts of Govt. Co.
c) Auditing Standards
d) Auditor as Whistle Blower
e) Auditor to attend General Meeting.
3
 Contd……COVERAGE
(8) Auditor not to render certain services – Section 144
(9) Punishment for contravention – Section 147
(10) Internal Auditor – Section 138
(11) Cost Audit and Auditor – Section 148
(12) Penalty for misconduct – by NFRA.

4
 Section 139
(A) Section 139 : Appointment of Auditors (Section 224 of
1956 Act)
(1) Appointment :
Company to appoint at 1st AGM, an individual or firm as auditor
* shall hold office from the conclusion of that meeting till the
conclusion of its 6th AGM and thereafter till the conclusion of every
6th meeting. (new)
* the manner and procedure of selection of auditors by members :
As per Rule – 3 of the Companies (Audit and Auditors) Rules, 2014
(w.e.f. 01-04-2014).
* However, appointment to be ratified by members at every AGM.
Thus, effectively, auditor is appointed every year. (new)

5
 Contd…….Section 139
* Before appointment, written consent of the auditor and a
certificate (new) to be obtained that appointment if made, shall
be in accordance with the Rules. Certificate to indicate that he /
it is qualified to be appointed as auditor as per criteria provided in
Section 141 (Rule 4). (new)
* Company to inform auditor and ROC of such appointment
within 15 days of meeting in which appointed.
* Explanation : For the purposes of this Chapter :
(i) Appointment includes re-appointment.
(ii) Firm shall include LLP incorporated under the LLP Act,
2008.

6
 Contd…….Section 139
Rule-3 : Manner and procedure for selection and
appointment
(1) Audit Committee (u/s. 177) or where Audit Committee not
required, then Board of Directors to consider qualification and
experience of the individual / firm to be appointed. Qualification
and experience should be commensurate with size and
requirements.
* Will also have regard to completed order or pending proceeding
for professional conduct before ICAI/ competent authority/
court.

7
 Contd…….Section 139
(2) Audit Committee to recommend name (Individual / Firm) to Board of
Directors. If Board agrees, it shall recommend to members in the AGM.
If Board disagrees, it shall refer back to Audit Committee for
reconsideration giving reasons. If Audit Committee decides not to
reconsider, the Board, after recording reasons of its disagreement, send
Board’s recommendations to members in the AGM.
* Where no Audit Committee, the Board to recommend name
(Individual / Firm) to members in the AGM.
(3) Auditor appointed in the AGM shall hold office from the conclusion
of that meeting till the conclusion of the 6th AGM and such meeting to
be counted as the 1st meeting.

8
 Contd…….Section 139
(4) Appointed in the AGM as per the Section by ordinary resolution and is
ratified in every AGM till the 6th AGM.
Explanation : If not ratified by members, the Board of Directors shall
appoint another auditor after following procedure laid down in the Act.

Following class of companies to constitute Audit Committee
(Section 177) (Section 291A of 1956 Act)
* All listed companies ; or
* All Public companies with paid up capital of Rs.10 crore or more ; or
* All Public companies having turnover of Rs.100 crore or more ; or
* All Public companies having outstanding Loans or borrowings
or debentures or deposits exceeding Rs.50 crore or more
existing on the date of last audited Financial Statement.

9
 Contd…….Section 139

Rule-4 : Conditions for appointment and notice to ROC.

(i) Auditor to submit a certificate that :-
(a) he/ it is eligible for appointment and is not disqualified under the
Act, CA Act, 1949 and rules/ regulations thereunder.
(b) proposed appointment is as per the term provided under the Act.
(c) it is within the limits laid down under the Act.
(d) the list of proceedings against the Individual / Firm/ Partner
pending for professional conduct is true and correct.

(ii) Notice to ROC about appointment in Form ADT-1. (Notice of
appointment of auditor to be given by the company)

10
 Contd…….Section 139
(2) Tenure : (new)
No listed company or company of such class/ classes (Rule-5) shall
appoint/ reappoint :-
(a) individual as auditor for more than one term of 5 consecutive
years. – block of 5 years.
(b) firm as auditor for more than two terms of 5 consecutive years.
Provided : Individual/ Firm completing 5/10 years, will have cooling
period of 5 years.
Provided further : on date of appointment, no audit firm having a
common partner/s to the other audit firm, whose tenure has just
expired, shall be appointed as auditor of same company for 5 years.

11
 Contd…….Section 139

Provided also that existing company shall comply with sub-section (2)
within 3 years (i.e. up to FY 2017-18) from date of commencement of this
Act. [There is no one date of commencement of this Act. See Section 1(3)]
(TOI dated 17.04.2014)

Rule-5 : Class of Companies

Excludes OPC and small companies.(dormant company not included)
(a) all unlisted companies having paid up share capital of Rs.10 crore or
more
(b) all private limited companies having paid up share capital of Rs.20
crore or more.
(c) all companies having paid up share capital below threshold limit of (a)
and (b) above, but having public borrowings* from Financial Institutions,
Banks or public deposit of Rs.50 crores or more.
*Whether sanctioned or disbursed amount, fund/ non-fund based ?

12
 Contd…….Section 139

(3) Rotation :
Members may resolve to provide that -
(a)In case of Firm, audit partner and his team to be rotated at
such intervals as resolved by members or
(b)audit to be conducted by more than one auditor.
(4) Manner of Rotation:
Central Government, by rules, prescribe manner of rotation.
(Rule-6)

13
 Contd…….Section 139

Rule 6 : Manner of rotation of auditors on expiry of their
term :
(1) Audit Committee to recommend to Board of Directors, name of
auditor (individual/ firm ) who may replace the outgoing auditor on
expiry of the term.
(2) If Audit Committee is constituted, the Board to consider
recommendations of Audit Committee and in other cases, Board itself
recommends the next auditor to be appointed by members in AGM.

14
 Contd…….Section 139
(3) For rotation :

(a) the period for which individual / firm held office as such, prior
to commencement of the Act shall be taken into account for
calculating period of consecutive 5/10 years.

(b) incoming auditor not eligible if he/ it is associated with the
outgoing auditor or firm under the same network of audit firms.

15
 Contd…….Section 139

Explanation.1 : Same network includes firms operating/
functioning under the same brand name, trade name or common
control.

Explanation II : (a) a break in the term for continuous period of
5 years shall be considered as fulfilling the requirement of
rotation.

(b) In-charge partner of the firm who also certifies the Financial
Statements, retires from the said firm and joins another CA firm,
such other firm becomes ineligible for a period of 5 years.

16
 Contd…….Section 139

Illustration explaining rotation in case of individual auditor

Illustration 1.

Number of consecutive Maximum number Aggregate period

years for which an of consecutive years which the auditor
individual auditor has for which he may be would complete in
been functioning as appointed in the the same company
auditor in the same same company in view of column I
company [ in the first (including and II
AGM held after the transitional period)
commencement of
provisions of section
139(2)]

17
 Contd…….Section 139

I II III
5 years (or more than 3 years 8 years or more
5 years)
4 years 3 years 7 years
3 years 3 years 6 years
2 years 3 years 5 years
1 year 4 years 5 years

Note : 1. Individual auditor shall include other individuals or firms whose

name or trade mark or brand is used by such individual, if any.

2. Consecutive years shall mean all the preceding financial years for which
the individual auditor has been the auditor until there has been a break by
five years or more.

18
 Contd…….Section 139

Illustration explaining rotation in case of audit firm

Illustration 2.

Number of Maximum number of Aggregate period

consecutive years for consecutive years for which the firm would
which an audit firm which the firm may be complete in the same
has been functioning appointed in the same company in view of
as auditor in the same company (including column I and II
company [ in the first transitional period)
AGM held after the
commencement of
provisions of section
139(2)]

19
 Contd…….Section 139
I II III

10 years ( or more 3 years 13 years or more

than 10 years)
9 years 3 years 12 years
8 years 3 years 11 years
7 years 3 years 10 years
6 years 4 years 10 years
5 years 5 years 10 years
4 years 6 years 10 years
3 years 7 years 10 years
2 years 8 years 10 years
1 year 9 years 10 years

Notes 1 and 2 are same as given below Illustration 1.

20
 Contd…….Section 139

Rule-6 :(4) In case of joint auditors, the company may follow the
rotation of auditors in a manner that both or all, do not complete their
term in the same year.
___________________________________________________

If a firm is appointed for 9 years and then given break, then it is treated
as removal of auditor. Whether removed auditor can be re-appointed
after 1 year? If yes, then effectively the audit rotation is violated.

However, the removal of auditor requires prior sanction from the
Central Government . It is not an easy process to remove an auditor
close to the end of his term. Once he is removed, it will be difficult to
justify his re-appointment.

Also an auditor would not like to be removed other than for the purpose
of audit rotation.

21
 Contd…….Section 139
(5) Govt. Company : In case of Govt. company, or companies
owned and controlled by Central Govt. or State Govt. or by both,
C&AG shall appoint auditor within 180 days from the commencement
of FY who shall hold office till the conclusion of AGM. (new)
(6) First Auditor : First auditor of the Company (other than Govt.
company) to be appointed by Board of Directors within 30 days from
registration of the company. In case of failure by the Board of Directors,
the Board to inform the members who shall within 90 days at EGM
appoint auditor who shall hold office till the conclusion of first AGM.

22
 Contd…….Section 139
(7) First Auditor of Govt. company :
Govt. company or company owned and controlled by Central
Govt. or State Govt. or by both, the first auditor to be appointed
by C&AG within 60 days from date of registration of the company.
If not so appointed, Board of Directors to appoint auditor within
next 30 days. In case of failure of Board of Directors, it shall
inform members who shall appoint within 60 days at EGM who
shall hold office till the conclusion of the first AGM. (new)

23
 Contd…….Section 139
(8) CasualVacancy (CV):

(i) Any CV in case of a company (other than Govt. company) to
be filled by Board of Directors within 30 days. But if CV is due to
resignation, such appointment to be approved by company at GM
convened within 3 months of recommendation of Board and he
shall hold office till the conclusion of next AGM.

(ii) CV in Govt. company :
Any CV in Govt. company, to be filled in by C&AG within 30
days. If not done, the Board of Directors shall fill the CV within
next 30 days. (new)

24
 Contd…….Section 139
(9) Retiring Auditor :
Retiring auditor may be re-appointed at AGM if :-
(a) he is not disqualified for re-appointment.
(b) he has not given notice to company of his unwillingness to be
reappointed
(c) Special Resolution has not been passed at that meeting
appointing some other auditor or expressly providing that he be not
reappointed.
(10) No auditor appointed at AGM :
Where at any AGM, no auditor is appointed or re-appointed, the
existing auditor shall continue.(In 1956 Act, in such a situation, Central
Government to appoint auditor. This has been dropped)

25
 Contd…….Section 139

(11) Recommendations of Audit Committee :

Where Audit Committee is constituted u/s. 177, all appointments
including filling CV shall be made after considering recommendations of
the Audit Committee. (new)

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 Section 140

(B) Section 140 : Removal, resignation of auditor and
giving of special notice (Section 225 of 1956 Act)
(1) Removal :
Auditor may be removed before expiry of his term only by a special
Resolution after obtaining previous approval of Central Government
as per Rules. (Rule-7)
Provided that before such action, auditor to be given reasonable
opportunity of being heard.

Rule-7 : Removal before expiry of term

(i) & (ii) The application to the Central Government for removal in
Form ADT-2 with fees, to be made in 30 days of the resolution passed
by the Board.

(iii) Company to hold GM within 60 days of receipt of approval of
Central Govt. for passing Special Resolution.
27
 Contd……..Section 140

(2) Resignation
Resigning auditor to file within 30 days from date of resignation, a
statement in the prescribed form (Rule-8) with company and ROC and
resigning auditor of Govt. Company to additionally file such statement
with C&AG, indicating the reasons and other facts for his resignation.
(new)
(3) Non-Compliance
If auditor does not comply, punishable with fine not less than
Rs.50,000/- up to Rs.5 lakhs.

Rule-8 : Resignation
Resigning auditor to file a statement in Form ADT-3.

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 Contd……..Section 140
(4) Special Notice

(i) Special Notice required for a resolution at AGM appointing a
person other than a retiring auditor or providing expressly that retiring
auditor not to be re-appointed, except where the retiring auditor
completed consecutive tenure of 5/10 years. (new)

(ii) Such notice to be sent to retiring auditor by the company.

(iii) If retiring auditor makes written representation to the company
(not exceeding reasonable length) and requests its notification to
members, if not received too late, the Company may send a copy of
notification to members. If a copy of notification not sent because it was
received too late or because of company’s default, the auditor may
require the same to be read at the meeting.

29
 Contd……..Section 140

Provided, if such representation not sent to members, copy

thereof to be filed with ROC. (new)
Provided further that if Tribunal is satisfied on application made
by company or by any aggrieved person that the rights are abused
by the auditor, then, copy of representation may not be sent or
read out at the meeting.(This proviso not notified)

30
 Contd……..Section 140
(5) Fraud by Auditor (This sub-section not notified)
Subject to any action under the Act or any other law, Tribunal either suo
mottu or on application by the Central Govt. or by any person concerned,
is satisfied that the auditor has directly or indirectly acted fraudulently or
abetted or colluded in any fraud in relation to the company or its directors
or officers, it may order to change auditors. (new)
Provided that on application made by Central Government, Tribunal is
satisfied that auditor should be changed, it shall within 15 days of receipt of
application, make order that he shall not function as auditor and the
Central Govt. may appoint another auditor.
Provided further that auditor (individual/ firm) against whom final order
passed by the Tribunal, be not eligible to be appointed as auditor of any
company, for 5 years from the date of order and auditor liable for action
u/s. 447. (new)

31
 Contd……..Section 140

Section 447 : Any person guilty of fraud, punishable with imprisonment
which shall not be less than 6 months which may extend to 10 years and
also liable to fine which shall not be less than the amount involved in fraud
which may extend up to 3 times the amount of fraud.
Provided that where fraud involves public interest, term of imprisonment,
not less than 3 years
Explanation-1 : In case of firm, the liability shall be of the firm and
partner/s who acted in a fraudulent manner or abetted or colluded in any
fraud. (Rule-9) (new)
Explanation-2 : For this Chapter, auditor includes firm of auditors. (new)

Rule-9 : Liability to devolve on concerned partners only
In case of criminal liability of any firm, the liability other than fine, shall
devolve only on concerned partner/s who acted in fraudulent manner or
abetted or colluded in any fraud.

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 Section 141

(C) Section 141 : Eligibility, Qualifications, and
Disqualifications of Auditors

(Sections 224(1B) and 226 of 1956 Act)
(1) Eligibility :
A person eligible only if he is a CA.
Provided that a Firm, where majority of partners, practising in
India are CA may be appointed in the firm name as auditor of a
company. (new)

33
 Contd…….Section 141
(2) LLP :
Where a firm including LLP is appointed as auditor, only CA partners
are authorised to act and sign on behalf of the firm.

(3) Non-eligibility :
Following persons not eligible: (to secure independence )
(a) a body corporate other than LLP registered under the LLP Act,
2008.
(b) officer or employee of the company.
(c) a person who is a partner, or in the employment of an officer or
employee of the company.

34
 Contd…….Non-
Contd…….Non- eligibility - Section 141

(d) a person who by himself or his relative or partner –

i) is holding any security of or interest in the company or
its subsidiary, or its Holding or Associate Company or a subsidiary of
such Holding Company. (new)
Provided that the relative may hold security or interest of face value up
to Rs.1000/- or such sum as may be prescribed [face value not
exceeding Rs.1 lakh – Rule 10(1)]. However, if due to further
acquisition by relative, threshold limit exceeded, then corrective action
to bring back to the limit to be taken by auditor within 60 days.
If company not having share capital or securities, then also condition of
Rule 10(1) will be applicable.

35
 Contd…….Non-
Contd…….Non-eligibility - Section 141

(ii) is indebted to the company, or its subsidiary, or its Holding
or Associate Company or a subsidiary of such Holding Company in
excess of such amount as may be prescribed (Rule 10(2): Rs.5
lakhs)

(iii) has given a guarantee or security for indebtedness of any
third party to the company or its subsidiary or its holding or
associate company or a subsidiary of such holding company for
such amount as may be prescribed (Rule- 10(3): Rs. 1 lakh)

36
 Contd…….Non-
Contd…….Non-eligibility - Section 141

(e) a person or firm having business relationship with the company
or its Subsidiary Company or its Holding Company or Associate
Company or subsidiary of such Holding Company or Associate
Company of such nature as may be prescribed.[Rule 10(4)]

* Business relationship means any transaction entered into for

commercial purpose subject to exceptions e.g. permitted
professional services rendered by auditors or transactions in the
ordinary course of business at arm’s length like sale of products or
services to the auditor as customers, in the ordinary course of
business. (new) (whether business relationship prior to appointment
not specified)

37
 Contd…….Non-
Contd…….Non-eligibility - Section 141

(f) a person whose relative is a director or in the employment
of the company as a director or Key Managerial Personnel. (new)

(g) * a person who is in full time employment elsewhere
* or a person or partner of a firm, at the date of
appointment holding appointment of more than 20 companies.

(h) a person convicted by court for offence involving fraud and
period of 10 years not elapsed from the date of conviction. (new)

(i) any person whose subsidiary or associate company or any
other entity is engaged on the date of appointment in consulting
and specialised services as provided in Section 144. (new)

38
 Contd…….Section 141
(4) Vacation of Office
Any person appointed as auditor incurs any of the above
disqualifications, after appointment, shall vacate his office of auditor
which shall be deemed as CasualVacancy in the office of auditor.

39
 Section 142

(D) Section 142 : Remuneration of auditors (Section 224
of 1956 Act)

(1) Remuneration to be fixed in GM or as may be determined

therein. Board of Directors may fix remuneration of the first
auditor appointed by it.

(2) Remuneration in addition to fees, include expenses in
connection with audit but does not include any remuneration paid
for any other services rendered.

40
 Section 143

(E) Section 143 : Powers and Duties of Auditors and
Auditing Standards (Sections 227, 228 and 619 of 1956 Act)

(1) Rights of Auditor
Every auditor shall always have right of access to the Books of Account
and Vouchers, kept at Registered Office or any other place and shall be
entitled to such information/ explanations as he may consider necessary
for performance of his duties. He shall inquire into following matters:
(same as Section 227 (1A) of 1956 Act)
a) Whether Loans and Advances made on the basis of security, have
been properly secured and their terms are not prejudicial to the interest
of the company/ members.

41
 Contd…….Section 143
b) Whether transactions represented merely by book entries are
prejudicial to the interest of the company.
c) Company (other than investment/ banking company) whether
shares, debentures or other securities sold at a price less than their
purchase price.
d) whether Loans and Advances made, have been shown as deposits.
e) whether personal expenses charged to revenue A/c.
f) where shares allotted for cash, whether cash has actually been
received. If not, whether position as stated in the accounts and Balance
Sheet is correct, regular and not misleading.
Provided that auditor of Holding Company shall have right of access to
records of all its subsidiaries so far as it relates to Consolidated Financial
Statements. (new)
42
 Contd…….Section 143

(2) Audit Report on Accounts and Financial
Statements.
* Auditor shall make report to members on Accounts examined
and on Financial Statements to be laid in General Meeting.
* report shall state, after taking into account the provisions of the
Act, Accounting Standards, Auditing Standards and other matters
required to be included under the Act/ Rules/ any Order and to
the best of his information and knowledge, the Accounts and
Financial Statements give a true and fair view of the state of affairs
of the company as at Balance Sheet date and profit/ loss and cash
flow for the year and such other matters as prescribed.

43
 Contd…….Section 143

3) Auditor’s Report shall also state :

a) Whether he sought and obtained all information/ explanations

which to the best of his knowledge and belief, necessary for purposes of
his audit. If not, details thereof and effect on Financial Statements.
b) Whether in his opinion, proper Books of Account as required by
law have been kept by the company so far as appears from his
examination and proper returns for his audit have been received from
branches not visited by him.
c) whether branch audit report has been sent to him when audited
by another auditor and the manner in which he has dealt with in his
report.

44
 Contd…….Section 143
d) whether Balance Sheet and Profit & Loss A/c in agreement with
Books of Account and returns.
e) whether in his opinion, Financial Statements comply with
Accounting Standards.
f) observations/ comments on Financial Statements or matters
which have adverse effect on the functioning of the company.
g) whether any director is disqualified from being appointed as per
Section 164(2).
h) any qualification, reservation or adverse remark relating to
maintenance of accounts and other related matters. (new)
i) whether company has adequate internal financial controls system
in place and operating effectiveness of such controls. (new)
j) such other matters as prescribed. (Rule-11) (new)

45
 Contd…….Section 143

The term “Internal Financial Controls” means the policies and
procedures adopted by the company for ensuring the orderly and
efficient conduct of its business, including adherence to company’s
policies, the safeguarding of its assets, the prevention and
detection of frauds and errors, the accuracy and completeness of
the accounting records, and the timely preparation of reliable
financial information.

46
 Contd…….Section 143

Rule-11 : Other matters to be included in auditors report (Refer
Section 143(3)(j)

Auditor’s report to also include following matters :
a) whether the company has disclosed impact of pending litigations on
its financial position in its Financial Statements.
b) whether the company has made provision, as required under any law
or AS for material foreseeable losses on long term contracts including
derivative contracts.
c) whether there is any delay in transferring amounts to Investor
Education and Protection Fund.

(4) Negative Remark or Qualification
Where any of the above matters answered in negative or with qualification,
report shall state the reasons therefor. (new)
* (Now, no requirement in thick type or in italics any adverse comments)

47
 Contd…….Section 143

ICAI’s 5 Announcements dated 7.2.2014 in respect of
Auditor’s Report
(i) Manner of Reporting on Section 227(3)(bb) of the Companies Act,
1956 (Report on the Accounts of Branch Office)
“bb. The report on the accounts of the branch offices audited under
section 228 by a person other than the company’s auditor has been
forwarded to us as required by clause (c) of sub-section (3) of section
228 and have been dealt with in preparing our report in the manner
considered necessary by us.” (to be inserted under the paragraph
“Report on Other Legal and Regulatory Requirements” )

48
 Contd…….Section 143
(ii) Reference to the Accounting Standards Applicable to the
Companies in the Auditor’s Report and Limited Review Reports and
various Engagement Standards
“Management’s Responsibility for the Financial Statements
Management is ………………… cash flows of the Company in
accordance with the Accounting Standards notified under the
Companies Act, 1956 (“the Act”) read with the General Circular
15/2013 dated 13th September 2013 of the Ministry of Corporate
Affairs in respect of section 133 of the Companies Act, 2013. This
responsibility …………………. fraud or error”.
“Report on Other Legal and Regulatory Requirements
2. As required by Section 227(3) of the Act, we report that :
(a) ………………........

49
 Contd…….Section 143
(d) In our opinion, the Balance Sheet, the Statement of Profit and Loss,
and the Cash Flow Statement comply with the Accounting Standards
notified under the Companies Act, 1956 read with the General Circular
15/2013 dated 13 September 2013 of the Ministry of Corporate Affairs
in respect of section 133 of the Companies Act, 2013.
………………
(f) …………………..”
(iii) Amendment to the “Auditor’s Responsibility” Paragraph Included
in the Independent Auditor’s Report
Following line to be inserted in the Auditor’s Responsibility Paragraph at
appropriate place.
“but not for the purpose of expressing an opinion on the effectiveness of
the entity’s internal control.”

50
 Contd…….Section 143

(iv) Use of the Term “Profit and Loss Account” or “Statement of Profit
and Loss” in the Statutory Audit Reports of Companies
In the Independent Auditor’s Report of a Company, the auditors may
choose to use the term “Profit and Loss Account” or “Statement of Profit
and Loss”.

(v) Manner of Reporting in Respect of Such Clauses of the
Companies (Auditor’s Report) Order, 2003 which are not applicable to
the Auditee Company
The Auditor may aggregate/ club the fact of non applicability of
different clauses of CARO, 2003 and report as under:-
“Matters specified in clauses……....[relevant clause number of the
clause/s not applicable] of paragraph 4 of the CARO 2003 do not apply
to the Company”
51
 Contd…….Section 143

(5) Auditor of Government Company
Government Company auditor to be appointed by C&AG who
shall direct the manner in which Accounts to be audited. He shall
submit his audit report to C&AG which will include directions
issued by C&AG, the action taken thereon and its impact on
Accounts and Financial Statements. (new)

52
 Contd…….Section 143

(6) C&AG’s right to supplementary audit

C&AG, within 60 days from receipt of audit report have right to :-
a) conduct supplementary audit of Financial Statements by
authorised persons.
b) comment upon or supplement such audit report.
Provided that any comments of C&AG upon the audit report to be
sent to every person entitled to audited Financial Statements and
also be placed before AGM at the same time and in the same
manner as the audit report.

53
 Contd…….Section 143

(7) Test audit by C&AG.
If C&AG considers necessary, by an order, cause test audit of Accounts
and provisions of Section 19A of the C&AG’s (Duties, Powers and
Conditions of Service) Act, 1971 shall apply to the report of such test
audit. (new)

(8) Audit of Branch Office
Accounts of Branch Office to be audited either by Company’s auditor
or any other qualified person appointed u/s. 139. In case of foreign
branch, its Accounts to be audited either by company’s auditor or by any
other qualified person/ accountant in accordance with laws of that
country and duties and powers of company’s auditor shall be such as may
be prescribed.

54
 Contd…….Section 143

Rule-12 : Duties and Powers of auditor with reference to
branch audit and branch auditor

(1) For the purposes of Section 143(8), duties and powers of
company’s auditor and Branch Auditor shall be as contained in
Section 143(1) to (4). Branch auditor will submit the report to
company’s auditor.

(2) Provisions regarding reporting fraud as per Section 143(12)
extend to branch auditor.

(9) Auditing Standards(new)
Every auditor to comply with Auditing Standards.

55
 Contd…….Section 143

(10) Auditing Standards to be notified by Central
Government(new)
Central Government may prescribe Auditing Standards or any
addendum thereto, as recommended by ICAI in consultation with and
after examination of the recommendations made by NFRA.
Provided that until Auditing Standards are notified, such Standards
specified by ICAI shall be deemed to be Auditing Standards.

56
 Contd…….Section 143

Definition : Section 2(7) – “Auditing Standards”

“Auditing Standards” means the standards of auditing or any addendum
thereto for companies or class of companies referred to in sub-section
(10) of section 143.

The Standards on Auditing (SA) formulated by ICAI are in sync with

International Standards on Auditing (ISA) with minor differences. The
SA to be recommended by NFRA may also need to be on the lines of
best international practices.

57
 Contd…….Section 143

(11) Auditor’s report to include a Statement on specified
matters
Central Government in consultation with NFRA, in case of such companies
as specified in the general or special order, may direct that auditor’s report
shall also include a statement on such matters as specified therein.

(12) Auditor having reason to believe about the offence
involving fraud. (Auditor as a Whistle Blower) (new)
Notwithstanding anything contained in this section, if an auditor, while
performing his duties has reason to believe that an offence involving
fraud has been committed against company by officers or employees, he
shall immediately report the matter to Central Government within such
time and in such manner as may be prescribed. (Rule-13)

58
 Contd…….Section 143

Rule-13 : Reporting frauds by auditor

(1) For Section 143(12), if the auditor has sufficient reason to believe
that an offence involving fraud is committed against the company by
officers/ employees, he shall report the matter to Central Government
within 60 days of his knowledge after following the procedure :
(i) auditor to forward his report to Board of Directors or Audit
Committee (as the case may be) immediately upon his knowledge of
fraud for their reply or observations within 45 days.
(ii) on receipt of reply/ observations, he shall forward his report
with reply of Board of Directors / Audit Committee along with his
comments to Central Government within 15 days from receipt of reply
/ observations.

59
 Contd…….Section 143
(iii) If no reply received within 45 days from Board of Directors or
Audit Committee, he shall forward his report to Central Government
along with his note containing details of his report to Board of
Directors/ Audit Committee.

(2) The report to be forwarded to Ministry of Corporate Affairs by
Registered AD or Speed Post followed by email.

(3) Report on the letterhead, signed and sealed and Membership No.
Also his address, email and contact No. on letterhead.

(4) The report shall be in the form of Statement in Form ADT-4.

(5) This rule shall also apply mutatis mutandis, to cost auditor and a
secretarial auditor.

60
 Contd…….Section 143

(13) Good faith
No duty shall be regarded as having been contravened by reason of his
reporting in good faith.

(14) Mutatis Mutandis(new)
The provisions of this Section shall mutatis mutandis apply to:-
* cost accountant conducting cost audit u/s. 148
* company secretary conducting secretarial audit u/s. 204.

(15) Punishment
If auditor, cost accountant or company secretary do not comply with
provisions of sub-section (12), he shall be punishable with fine not less
than Rs.1 lakh but up to Rs.25 lakhs.

61
 Section 144

(F) Section 144 : Auditor not to render certain services
(new)
As per the Act, an Auditor of a Company may provide the Company
with such other services as are approved by the Board of Directors or
Audit Committee but shall not indulge in providing the following
services, whether directly or indirectly to Company, its Holding
Company and Subsidiary Company.
(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;

62
 Contd…….Section 144
(f) Investment banking services;
(g) Rendering of outsourced financial services; and
(h) Management services.
(Consultancy in tax matters and company law matters are not
restricted)
A transitional period has been provided to Auditors to comply
with the requirement of this section. Accordingly auditors or the
audit firms providing non-audit services before the
commencement of the new Act shall have to comply with these
provisions before the closure of the first financial year after the
commencement of this Act.

63
 Contd…….Section 144

Explanation : “ Directly or indirectly” shall include services :

(i) In case of individual, either himself, through his relative or
any other person connected/ associated with him or through any
entity in which he has significant influence or control or whose
name or trademark or brand is used by such individual.

(ii) In case of firm, either itself or through any of its partners or
through its parent, subsidiary or associate entity or other entity in
which the firm or any partner has significant influence or control
or whose name or trade name or brand is used by the firm or any
of its partners.

64
 Section 145

G) Section 145 : Auditor to sign audit report
(Sections 229, 230 of 1956 Act)

Auditor to sign auditor’s report and sign/ certify any other

documents of the company and the qualifications/ observations/
comments which have adverse effect on the functioning of the
company mentioned in the auditor’s report shall be read in
General Meeting and shall be open for inspection by members.

65
 Section 146

(H) Section 146 : Auditors to attend General Meeting
(Section 231 of 1956 Act)

All notices of GM to be forwarded to the auditor who shall,

unless exempted by the company, attend by himself/ his
authorised representative (should also be qualified to be an
auditor) any GM and has right to be heard on items which
concern him as auditor.
(Now, unqualified Auditor’s Report need not be read out at the
AGM unlike 1956 Act).

66
 Section 147

(I) Section 147 : Punishment for contravention
(Sections 232, 233 of 1956 Act)

(1) For contravention of provisions of Section 139 to 146
* Company punishable with fine of not less than Rs.25,000/- up
to Rs.5 lakhs.
* Every officer who is in default, punishable with imprisonment
up to 1 year or with fine not less than Rs.10,000/- up to Rs.1 lakh or
with both.

(2) If auditor contravenes Section 139 (Appointment of auditors),
Section 143 (powers and duties of auditors), Section 144 (not to render
certain services), and Section 145(to sign audit report),

67
 Contd…….Section 147
* auditor punishable with fine not less than Rs.25,000/- up to
Rs.5 lakhs.
* provided such provisions are contravened knowingly or wilfully
with the intention to deceive the company/ shareholders/ creditors or
tax authorities, punishable with imprisonment of 1 year and with fine
not less than Rs.1 lakhs – up to Rs.25 lakhs.

(3) When auditor convicted under (2) above, he shall –
(i) refund the remuneration received to the company;
(ii) pay for damages to the company, statutory bodies or authorities or
to any person for loss due to misleading and incorrect statements of
particulars in audit report.

68
 Contd…….Section 147

(5) In case of audit firm, if it is proved that the partner/s of the firm
acted in a fraudulent manner or abetted or colluded in any fraud, in
relation to the company, or directors or officers, then partner or
concerned partners of the audit firm and the firm shall be jointly and
severally liable, whether civil or criminal as per this Act or any other law.

69
 Section 132 – NFRA – Penalty for Misconduct
(This Section not notified)

NFRA is in a way Indian version of the US Public Company Accounting
Oversight Board. (UPCAO)

This Section corresponds to section 210A of the Companies Act, 1956
and seeks to provide that the Central Government may by notification
constitute the National Financial Reporting Authority to provide for
matters relating to accounting and auditing standards.

The following role of National Financial Reporting Authority has been
prescribed under the Section.
i) make recommendations to the Central Government on the
formulation and laying down of accounting and auditing policies and
standards for adoption by Companies or class of Companies or their
Auditors, as the case may be;

70
 Contd……. Section 132
ii) monitor and enforce the compliance with accounting
standards and auditing standards recommended by it in such
manner as may be prescribed;
iii) oversee the quality of service of the professionals associated
with ensuring compliance with such standards, and suggest
measures required for improvement in quality of services and such
other related matters as may be prescribed; and
iv) perform such other functions as may be prescribed.

71
 Contd……. Section 132

The NFRA will also have the power to investigate, either suo moto or on
a reference made to it by the Central Government, for such class of
Bodies corporate or persons in such manner as may be prescribed into
the matters of professional or other misconduct committed by any
member or firm of Chartered Accountants.

Penalty for Professional Misconduct
In case NFRA on investigation finds any professional or any other
misconduct then it has the power to impose penalty on the professional
of not less than one lakh rupees in case of an Individual and ten lakh
rupees in case of a firm and to debar him/ it from the professional
practice for a period of 6 months or such higher period not exceeding
10 years as may be prescribed.

72
 Section 138 -Internal Auditor
Prescribed companies to appoint internal auditor to conduct internal audit
of functions and activities by CA or Cost accountant or other professional as
decided by Board. Manner of conducting internal audit to be prescribed by
Central Government. (Rule-13 of The Companies (Accounts)
Rules, 2014)

Rule-13 : Companies required to appoint Internal Auditor

(1)(a) every listed company
(b) every unlisted company having : (during preceding FY)
(i) paid up capital of Rs.50 crores or more or
(ii) turnover of Rs.200 crores or more or
(iii) outstanding Loans or borrowings from Banks/ Financial
Institutions exceeding Rs.100 crores, or
(iv) Outstanding deposits of Rs.25 crores or more .

73
 Section 138 -Internal Auditor
(c) every private company having :- (during preceding FY)
(i) turnover of Rs.200 crores or more ; or
(ii) outstanding loans or borrowings from Banks/ Financial
Institute exceeding Rs.100 crore or more .
Provided existing company covered under above criteria shall comply
within 6 months of commencement of this section
Explanation : (i) Internal auditor may or may not be employee of the
co.
(ii) Chartered Accountant shall mean a Chartered
Accountant whether in practice or not.

(2) Audit Committee or Board, in consultation with internal auditor
formulate the scope, functioning, periodicity and methodology for
conducting the internal audit.
74
 Section 148

(J) Section 148: Central Government to specify audit
of items of cost in respect of certain companies (Section
233B of 1956 Act)
This Section corresponds to section 233B of the Companies Act,
1956 and seeks to empower the Central Government after
consultation with regulatory body to direct class of companies
engaged in production of such goods or providing such services as
may be prescribed to include in the books of account particulars
relating to utilisation of material or labour or to such other items
of cost.

75
 Contd…..Section 148
The Central Government may direct the audit of cost records of the
company by Cost Accountant in practice appointed by Board and on
such remuneration as determined by the members.(Rule-14) The
auditor conducting the cost audit shall comply with the cost auditing
standards. The section further provides that the qualifications,
disqualifications, rights, duties and obligations as apply to auditor shall
also be applicable to cost auditor as well. The Central Government may
call for further information and explanation if necessary after
considering cost audit report. The section further defines cost auditing
standards. The section also provides penalty for the company, every
officer of the company, cost auditor of the company who is in default, if
any default is made in compliance with the provision.

76
 Contd…
Contd…..Section
..Section 148

Rule-14 : Remuneration of Cost Auditor [Section 148(3)]

(a) (i) When Audit Committee is constituted, Board will appoint Cost
accountant in practice or a firm, on recommendations of the Audit
Committee who will also recommend remuneration.
(ii) Remuneration recommended by Audit Committee, shall be
considered and approved by Board of Directors and subsequently
ratified by shareholders.

(b) When no Audit Committee constituted, Board of Directors will do
all things as mentioned above and subsequently ratified by shareholders.

77
 THANK YOU

Sunil H. Talati

78