10.

COMPANY AUDIT & COMPANY AUDITOR

I. APPOINTMENT OF AUDITOR, ROTATION OF AUDITORS - SEC 139
-- It is applicable to all companies irrespective of liability, capital, listing and size.
-- At the AGM every Co., has to appoint individual / firm of CA’s as auditors.
Manner & procedure of appointment
Rule 3 of Companies Audit & Auditors Rules of 2014, qualification and experience of individual /
firm (qualities of auditor) considered by BOD / Audit committee due regard to professional
misconduct, BOS and AC need to form consensus, else record reasons for the disagreement and
send the own recommendation to members.
Appointment of auditor

Co’s which are required to constitute Audit committee No Audit committee in the Co.

AC has to Identify and recommend the

BOD has to identify,
name of Auditor having all qualities to BOD Appoint/recommend the auditor having
the qualities to members
If BOD agree, Appoint/ propose the name in GM to Members

If BOD disagrees, BOD has to send their own

recommendations & AC Recommendations along with
reasons for such disagreement to members Members will appoint in AGM

Members will appoint in AGM

After identification of auditor before appointment / RA, recommending to members, the proposed
auditor shall furnish
a. Written willingness to appoint as auditor &
b. Certificate that his appointment in compliance with Sec 141 (Qualification & Disq. Of Auditor)
c. Not disqualified due to Professional misconduct as per CA Regulation act 1949 &
d. Appointment is within the Ceiling limits & No pending proceedings against the auditor.

Notice of appointment should be served to ROC and to Auditor within 15 days of appointment by
Co.
Re-appointment
Retiring auditor may be re-appointed only if,
a. He is not disqualified as per Sec 141,
b. Not given his unwillingness to be re-appointed

CA KVNV Prasad – kvnvprasad1994@gmail.com 1

May not immediately, hard work definitely wins
 c. SR is not passed for appointing some other auditor / he shall not be appointed
If no appointment / re-appoint has not taken place then existing auditors is automatically re-
appointed.
Rotation of auditors
Rotation refers to changing of auditors at regular time intervals
It is applicable to a. all listed companies & b. Prescribed companies by CG
Prescribed Co.– Co. which satisfies any of the following conditions
a. Unlisted Public Co. having PUC > Rs. 10 Cr (or)
b. Private Co. having PUC > Rs. 50 Cr (or)
c. All Co.’s having borrowings from Public, banks &FI’s of Rs. > 50 Cr
Rotation concept is not applicable to ops, small Co.

Manner of Rotation
Individual as an auditor Firm of CA’s as auditor
An Audit firm can be appointed for a
Individual can be appointed for a maximum period maximum period of 10 years i.e. 2 terms
of 5 years i.e. 1 term consecutively
After 5 years there should be a cooling period of After 10 years there should be a cooling
minimum 5 years. The same individual can be re period of minimum 5 years. The same Firm
appointed after expiry of Cooling period. can be re appointed after expiry of Cooling
period.
Rules of Rotation
-- An audit firm having one or more common partners to the other audit firm whose terms has
expired also not eligible for next 5 years.(i.e. in Cooling period).
-- Firms using same brand name, trade name, network firms are also not eligible for
appointment in cooling period.
-- Incoming auditor also disqualified if outgoing auditor associated or joined with Incoming auditor.
-- If outgoing partner joined in a firm which is appointed during cooling period then such firm is
disqualified. (Vacate the office) Partners in either individual capacity or firm capacity cannot be
appointed in the cooling period.
-- Even though the term is for 5 yrs. the right of removal / resignation is not affected.
-- Members may provide strict provisions with respect to audit partners Rotation of partners.
-- Existing Co. should comply within 3 yrs from date of commencement act.
-- In case co. having Joint Auditors, follow rotation in such a way that both the joint auditors should
not retire at the same AGM.
The existing auditors are eligible to continue for higher period of
a. Transitional period of 3 yrs or b. remaining period of appointment whichever is higher.

CA KVNV Prasad – kvnvprasad1994@gmail.com 2

May not immediately, hard work definitely wins
Government Co.
Co. in which either CG or SG, or by both together holding > 51% of Paid Up capital, Subsidiary of a
govt. Co. is also a Govt. Co.
Appointment of First Auditor

Govt. Co. Other than Govt. Co.

-- Appointment of auditor within 60 days of BOD should appoint auditor within 30
Certificate/Date of incorporation by C&AG days of Certificate/Date of incorporation.
-- If CAG fails then BOD within next 30 days -- If fails then EGM has to be conducted and
-- If BOD fails, EGM has to be conducted & members has to appoint within next 90 days.
appointment should be made by members within next 60 days.
(60 + 30 + 60) (30 + 90)
The auditor so appointed will hold the office from Date of Appoint to till the conclusion of 1st AGM.

Appointment of Subsequent Auditor

Govt. Co. Other than Govt. Co.

--By CAG within 180 days from commencement of FY -- By member in AGM either has to Re appoint
/ appoint new auditor
The auditor so appointed will hold the office from The auditor so appointed will hold the

office from 1st AGM to conclusion of Next AGM. 1st AGM to conclusion of 6th AGM.
 In every AGM his appointment should be Ratified by Members otherwise it leads to Casual

vacancy.
 Even though the term is 5 years both Right of Removal and Right of Resignation were not
affected.

Appointment of Casual Vacancy Auditor

-- Casual Vacancy: It means vacancy caused in the position of auditor due to Death,
Disqualification & Resignation of Auditor, after valid appointment.
If Members are not ratifying the appointment of existing auditor in the AGM, then it leads to casual
Vacancy-- .
Govt. Co. Other than Govt. Co.
--By CAG within 30 days if fails then BOD -- By BOD within 30 days from date of
Within next 30 days from date of such vacancy Arising casual vacancy

CA KVNV Prasad – kvnvprasad1994@gmail.com 3

May not immediately, hard work definitely wins
  If CV is because of Resignation then members approval should be taken within next 3months in
GM from the date of such appointment.
 Tenure of the casual vacancy auditor is from the date of appointment to till the conclusion of next
AGM.
 If no auditor is appointed, reappointed after expiry of term, it will not result into casual vacancy
Reappointment Vs Ratification
 Reappointment means, appointing the same auditor for next term after expiry of tenure
 It takes place after expiry of term. If auditor is not reappointed, it does not lead to casual
vacancy.
 Ratification means, Consent given by the members to continue the existing Auditor. Ratification
takes place during the tenure of the auditor. If members does not ratifies it leads to casual
vacancy.

II. SEC 140 – REMOVAL, SPECIAL NOTICE & RESIGNATION OF AUDITOR

Removal means terminating the office of auditor before expiry of his term.
Such removal should require a. Permission from CG (Previous approval) &
b. Special Resolution from members
A. Removal by BOD

-- BOD has to conduct Board Meeting and has to pass Board Resolution for removal of auditor
-- An application has to be made to CG within 30 days of passing BR, along with copy of resolution
for prior approval.
-- If CG given approval Co. shall hold EGM/AGM within 60 days from Permission / approval from
CG
& by passing SR auditor can be removed.
-- Opportunity of being heard is given to auditor before removal by passing SR.
-- If CG does not given approval then Auditor cannot be removed even by passing Unanimous
resolution

B. Removal by Members by giving Special Notice

--- Upon receipt of notice for GM to members, any member having any no of shares wants to remove
the auditor, can serve a Special notice to Co./BOD for appointing different person/ specifying not
to appoint the retiring auditor.
-- BOD has to circulate such copy to all members & including the retiring auditor and has to file
an application to CG for approval.
-- Retiring auditor has the right to make Representation about his willingness to continue. BOD has
to circulate the Representation letter to all members. If not possible read out at meeting.
-- If members pass SR, retiring auditor cannot be appointed

CA KVNV Prasad – kvnvprasad1994@gmail.com 4

May not immediately, hard work definitely wins
 cannot be removed even by passing Unanimous resolution

C. Resignation by auditor

Auditor at his own discretion may terminate or resign from auditor’s position.
 He is required to file a statement / Notice of Resignation in prescribed form by specifying the
reasons & other details in form ADT 3 to both Co & ROC within 30 days of such resignation.
 Incase of Govt. Co. copy of Notice of Resignation has to file with C&AG along with ROC and Co.
 If not complied then fine of Rs. 50,000 to 5Lakhs Rumination of Auditor which ever is less will be
imposed.

III. SEC 142 – REMUNERATION OF AUDITOR

Normally Remuneration has to be fixed by the appointing authority, which is as follows

Other than Govt. Co

Casual Vacancy Auditor

By BOD First auditor Subsequent auditor
by BOD In GM by members (in manner decided in GM)
In case of Govt. Co. Remuneration will be fixed by C&AG
Members can authorize BOD to fix remuneration. Remuneration includes fee payable & all expenses
incurred and reimbursed, but does not include remuneration for other services rendered at request of
Co.
C&AG will fix the remuneration in case of Government Co. in all the circumstances i.e. for First auditor,
Subsequent auditor and Casual vacancy auditor.

IV. SEC 144 - AUDITOR NOT TO RENDER CERTAIN SPECIFIC SERVICES APART FROM SA

Prohibited services – Auditor should not provide the following services at all, in any case (request of
BOD/AC also not allowed) such as
a. Book keeping
b. Internal audit
c. Financial services – giving loans
d. Mgt services
e. Investment advisory
f. Invest banking

CA KVNV Prasad – kvnvprasad1994@gmail.com 5

May not immediately, hard work definitely wins
 g. Design & implementation of FIS & ICS
h. Actuarial services
i. Any other services & as may be prescribed
All the above services should not be provided by auditor directly / indirectly
-- By entity in which himself/ partner/relative is having significant influence, Control, Network
firms.
-- Discontinuing the existing business within 1 year from commencement of this act.
 Auditor can render other services apart from services listed above only after approval and at the
request of BOD or AC.

V. SEC 145 – SIGNING OF AUDIT REPORT

-- Signing & certification should be done only by the person who appointed as auditor. In
respect of Individual, Individual has to sign. In respect of Firm, Any Partner who is a CA can sign
the AR with the consent of all the partners in the name of firm.
Person signing the AR should specify Firm Name & Reg. No, Membership No along with Common
seal of the form
-- Any other subordinate documents such as FS and certificates also should be signed by person so
appointed
-- Qualification, observation / comments having adverse effect on functioning, should be read
before the Co. in GM & open for inspection by any member of Co.

VI. SEC 146 - AUDITOR TO ATTEND AGM

-- It is the right of the auditor to receive Notice for GM of the Co.

-- Auditor or authorized representative, who shall also be qualified to be appointed as an auditor
shall attend GM.
-- It is the duty of the auditor to attend AGM
-- Co. may exempt auditor to attend GM in exceptional cases.
-- Auditor has to give explanations for queries raised by the members regarding AR i.e. on Auditor’s
Opinion

CA KVNV Prasad – kvnvprasad1994@gmail.com 6

May not immediately, hard work definitely wins
VII. SEC 147 - PUNISHMENT FOR NON COMPLIANCE
Punishment for non-compliance of Sec 139 to 146 – No willful mistake (No fraud)

A. On the Co. Min Rs. 25,000 to max Rs. 5,00,000

B. OID (Officer in Default) – Min 10,000 to Max 1,00,000 and / or max Imprisonment for 1Yr.
C. Auditor – Min Rs. 25,000 to
max Rs. 5,00,000 or 4 times of remuneration whichever is lower.

D. Auditor – If contravention is done knowingly or willfully with a intension to deceive the Co, or
Members or third parties – Max imprisonment of 1 Year
- Min fine Rs. 50,000 to
max Rs. 25,00,000 or 8 times of remuneration whichever is lower
- Refund of Remuneration to Co. and
- Payment of Damages to Co. Members, tax authorities and any other
person Members and creditors of co. who relied on the AR, for loss arising out of incorrect /
misleading info. provided in the AR.
In case of Firm as auditors, it is the Joint and Several responsibility of all the partners.
In case of criminal penalty, only the partners who actually involved in the fraud are liable.
The above penalties are equally applicable to Cost accountant and Secretarial auditor also

VIII . SEC 148 - COST AUDIT & COST RECORDS

-- As per sec 148, CG after consulting with Regulatory bodies is authorized to make rules regarding
maintain cost records and conducting of Cost audit for class of companies which are manufacturing
& providing services. Cost records includes
a. Utilization of Material b. Labour c. Other items of Cost (Expenses)
-- CG classified the co’s into Regulatory and Non Regulatory Sectors.
-- There are 6 major regulated sectors which are
a. Telecommunication services b. Generation, distribution & regulation of electricity
c. Petroleum industry d. Drugs & Pharma
e. fertilizers and f. Sugar (industrial alcohol)
Non-regulated sectors also to maintain cost records and to conduct cost audit.
TO / NW criteria for cost records & cost audit
Maintenance Regulated Sectors Non - Regulated Sectors

Cost Records GTO of products & services Rs. > 35 Cr. GTO of products & services Rs. > 35 Cr.

GTO of products & services Rs.> 50 Cr. (Or) GTO of products & services Rs. > 100 Cr.
Cost audit Individual TO of product & service Rs. > 25 (Or) TO of individual product / services Rs.
Cr. > 35 Cr.

CA KVNV Prasad – kvnvprasad1994@gmail.com 7

May not immediately, hard work definitely wins
 Above limits has to be verified in the Preceding FY for the applicability in CY.
Cost records are not required to be maintained by Micro Small and Medium enterprise. (MSME)
Cost audit will not be applicable for companies whose revenue from exports in foreign
exchange exceeds 75% of total TR.
Cost audit is not applicable for the Co’s which are operating from SEZ.
Cost Audit is not applicable to the companies generating electricity for the own consumption.
Objectives of Cost audit
To report on True & fair view of cost of production and Maintenance of cost accounting records as
per statute.
Appointment & Process of cost audit
-- Co. to appoint Cost auditor by BOD within 180 days from commencement of F.Y
-- Co. to inform the cost auditor & CG within 30 days of BM - (CRA - 2)
-- Auditor to issue AR within 180 days from closure of F.Y to BOD – (CRA - 3)
-- Co. to file Cost AR along with explanations for comments, with CG within 30 days (CRA-4)
Qualification: Cost auditor should be Cost accountant. Either Co. auditor (SA) or Internal auditor
should not be appointed as cost auditor.
Tenure: From the date of appointment to till the completion of cost audit report. Rotation of
auditors is not applicable to Cost Auditors.
Cost auditor should comply with cost auditing standards during performance of audit.
Remunarion of cost auditor is fixed by BOD on the recommendation of Audit Committee which
has to ratified by members in General meeting.
Audit as per 148 is additional to 139
Qualifications, rights & duties & penalties applicable to Company Auditor are equally applicable
Cost auditor also.

IX. SEC 141 - ELIGIBILITY, QUALIFICATION & DISQUALIFICATION & AUDITORS

Qualification &Eligibility

Individual Partnership Firm

Individual, if he is a Member of A firm is eligible for appointment only if Majority of partners
ICAI and having Certificate of practicing are qualified for appointment as Auditors.
Practice. i.e. CA with COP. Appointment shall be made in the name of Firm.
Firm include LLP (Limited Liability Partnership Firm)
Disqualifications – Sec 141 (3)
Following are not eligible for appointment as an auditor of a Co.
a. Body Corporate other than registered LLP
b. Officer / Employee’s (Part Time or Full time) of the Co.

CA KVNV Prasad – kvnvprasad1994@gmail.com 8

May not immediately, hard work definitely wins
 c. Partner / Officer / Ee’s of Officers / Ee of the Co.
d. Auditor himself / his Partners / his Relative holding any Security in Co., H Co, S Co, A Co, & Co
Sub.
Exception: Relative can hold security of Face value Rs. 1,000 or Prescribed amount (i.e.1 Lakh)
whichever is higher. i.e. Relative can hold security of Face value up to Rs. 1,00,000.
The above limit is Per relative in aggregate of all securities and only in Company to
which he wanted to be appointed as auditor. Relative can hold security in other companies
irrespective of value
If relative holding is within the limit at the time of appointment and exceeds the limit subsequently
then Auditor has to take corrective actions to maintain within the limit, within 60 days.
e. Auditor himself / his relative / his partner indebtness to Co., H Co, S Co, A Co, Co Sub for an
amount exceeding Rs. 5,00,000. (even in ordinary course of business, disqualified,
f. Auditor himself / his relative / his partner giving Guarantee to Co., H Co, S Co, A Co, Co Sub
for an amount exceeding Rs. 1,00,000.
g. Auditor himself / his relative/ his partner having Business Relation with Co., H Co, S Co,
A Co, Co Sub & Subsidary of A.Co.
Exception: Professional services which are permitted under Co’s act 2013 & as per CA regulation act
1949 taken place at Arm’s length price
Transactions which are in Ordinary course of Business (OCB) such as Telecom services, airlines,
hospital etc
h. Relative is a Director of Co (or) EE (or) KMP of the Co.
i. Person having full time employment elsewhere cannot be appointed as auditor in any Co.
j. Person having part-time employment, disqualified to be appointed as auditor only in the co.
in which he is in Part time employment.
k. Holding, appointment as auditor in 20 Co.’s, cannot accept further.
In calculating the Ceiling limit of 20 Co.’s following should not be considered
a. OPC, b. Small Co., c. Pvt Co. having PUC < 100 Cr and d. Dormant Co.
In case of Firm each partner is eligible up to 20 Co’s both in capacities of Individual and Partner
l. Person convicted by court of an offence involving Fraud and imprisoned for any period,
disqualified for a period of 10 Years from the date of conviction. (from completion of
imprisonment)
m. Any person directly or indirectly through Associate or Network firm is engaged in providing
Specified services provided in Sec 144 of The Co’s act 2013 to Co., holding and subsidiary Co.

If any Disquisition attracted after appointment, then he has to vacate the office. Such vacancy is
deemed as Casual vacancy and BOD / C&AG as the case may be has to fill the vacancy.

Relative: All the members of HUF are treated as Relatives to each other

CA KVNV Prasad – kvnvprasad1994@gmail.com 9

May not immediately, hard work definitely wins
 In respect of a Person Relative includes,
a. Father, Mother including Step Mother and Step Father.
b. Brother, Sister including Step brother and Step sister.
c. Wife, Daughter and her spouse, Son including Step son and his spouse.
Brother’s Spouse, Sister’s husband and Step daughter are not covered in the above definition.

X. SEC 143 - RIGHTS AND DUTIES OF AUDITOR

Rights – Sec 143 (1)

a. Right to inspect all the BOA, kept at RO/any other place such as Books, registers, invoices,
Agreements etc. & BOA relating to subsidiaries & associates in respect of consolidation (CFS).
b. Right to make Enquiry and to obtain information’s & explanations from officer / employee / any
other person of the Co.
c. Right to receive Notice of GM and Attending AGM
d. Right of Lien i.e. withholding the possession of BOA for non payment of Audit Fee.

Duties

Sec 143 (1) - Matters of enquiry - Optional Reporting

Responsibility of Auditor in respect of the matters specified U/s 143(1) is Optional Reporting i.e.
auditor is required to make a comment only if there is a negative/adverse comment on the Co. i.e.
Negative assurance.
The maters are as fallows.
1. Whether all Secured L&A made by the Co. during the year are properly secured or not.
Whether Terms & conditions are prejudicial to interest of the Co or not.
 Auditor is required to comment only on All secured loans made during the year
irrespective of their outstanding position as on BS date, Amount of loan and period of
loan.
 A loan is said to be Properly secure when the Reliasable Value of security is more than
amount of Loan.

2. Transactions merely by book entries are prejudicial to interest of Co. Ex. Depreciation,
provisions. (No evidence other than entry in books) – Conclusive evidence is not possible.

3. Other than investment and banking Co. having major assets as investments (securities) &
selling price is less than purchase price, auditor has to obtain the reasons.

4. Whether L&A made by the Co. shown as deposits. It will be a deposit only if, placing money is
for safe keeping with the person who customarily accepts the same as deposits (Banks).

CA KVNV Prasad – kvnvprasad1994@gmail.com 10

May not immediately, hard work definitely wins
 5. Whether Personal expenses have been charged to Revenue account i.e. claimed as Business
Expenditure. It is allowed only if such payment is made as per letter of appointment and the same is
industry practice.

6. If Shares are issued for consideration of cash, whether cash properly received, accounted &
utilized for the same purpose for which funds raised or not.

Sec 143(2) - Duty to issue Audit report regarding True and Fair view of FS - AR Chapter.

Sec 143(3) - Report on Principle Assertions

Responsibility of Auditor in respect of the matters specified U/s 143(3) is Compulsory Reporting i.e.
auditor is required to make a comment on all the matters irrespective of his level of assurance.

 Report U/S 143(3) is a combination of both statement of facts and opinions.

Matters are as follows,

1. Whether information and explanation sought by the auditor is provided by the Mgt or not.
2. Branch audit report is provided or not.
3. FS are in compliance with BOA or not.
4. Whether any director disqualified U/s 164 or not.
5. All the pending litigations are disclosed in the FS or not.
6. All amounts required to be transferred to IEPF are properly done within time or not.
1. Whether in his opinion proper BOA of Co and Branch are maintained or not
2. Whether in his opinion FS are complied with all AS, Laws & giving info. required by the act or not.
3. Comments on matters having adverse effect on functioning of Co.
4. Qualification, adverse remark on maintenance of BOA.
5. Opinion on Adequacy and operating effectiveness of Internal financial controls (IFC)
6. All pending litigations are properly disclosed and necessary provisions has made or not.

Private company need not have Internal Financial controls

(i) which is a one person company or a small company; or
(ii) which has turnover less than rupees fifty crores as per latest audited financial statement or
(iii) which has aggregate borrowings from banks or financial institutions or anybody corporate
at any point of time during the financial year less than rupees twenty five crore.

Sec 143(4) - Duty to state the Reason for issue of Modified Opinion - Auditor has to provide the reasons
for issuing Qualified or negative report regarding True and Fiar view in the Audi Report

Govt. Co. Special provisions – Sec 143 (5) to 143 (7)

As per Powers and Duties of C&AG provided in C&AG Act 1971,
 C&AG is responsible for conducting the audit of Govt. Co.’s.
 In case of Govt. Co. C&AG should appoint the first auditor within 60 days of DOI, Subsequent
Auditor within 180 days from the beginning of FY and Casual vacancy auditor within 30 days.
 Remuneration also to be fixed by C&AG.
 C&AG can give guidelines to auditor in respect of
- Material Areas to be focused,

CA KVNV Prasad – kvnvprasad1994@gmail.com 11

May not immediately, hard work definitely wins
 - Audit procedures to be performed and
- Audit evidence to be obtained.
 Auditor shall forward a copy of AR to C&AG along with BOD
 C&AG within 60 days upon receipt of AR, may order for either
a. Supplementary audit: C&AG can appoint another person to conduct supplementary audit i.e.
conducting audit again. It is Additional in nature.
b. Supplementing the audit report: C&AG after obtaining further info. from the auditor, may
comment on the audit report. BOD has to circulate both Supplemented AR and explanations for those
comments to all members.
c. Test audit: C&AG may order test audit i.e. selecting few areas on sampling basis of audit to be
verified by other auditor.

Sec 143(8) Branch audit – Co. having Branches in India or Outside India, branch books also should be
audited

 The accounts of Branch in India shall be audited by either (a) Co. auditor or (b) Other person
who is qualified to be appointed as an auditor.
 The branch outside India can be audited by either a. Co. auditor or (b) a person who is
qualified to be appointed as auditor as per laws of the country in which branch is situated.

 Branch Auditor is required to form an Opinion only with respect to Branch operations, where
as Principal auditor on Company as a whole.
 Principal Auditor can give guidelines to branch auditor in respect of
- Material Areas to be focused,
- Audit procedures to be performed and
- Audit evidence to be obtained.
 Branch Audit report should be submitted to Principal auditor, further Co. auditor shall deal in
the manner as necessary.
 The qualifications, duties, rights and reporting responsibilities are same as of Co. auditor.

Sec 143(9) Compliance of Standards on Auditing. - Auditor has to comply with all applicable Auditing
standards during performance of audit.

Sec 143(10) Notification of Standards on Auditing by CG. – CG may notify the Standards on Auditing in
the Official gazette upon recommendation by ICAI which are further examined and recommended by
NFRA. National Financial Reporting Authority.

Sec 143(11) Co. auditors report order – CARO - 2016.

Sec 143(12) to 143(15) - Reporting of Fraud to Central Government/Members.

If auditor of a Co. has reasons to believe that an offense of fraud being committed on/by the Co. by
officials or outsiders, he shall report to either CG or members in the prescribed manner.

A. Amount involved in Fraud is Rs. > 1Cr.

CA KVNV Prasad – kvnvprasad1994@gmail.com 12

May not immediately, hard work definitely wins
Step 1: Auditor shall report such fraud to audit committee or BOD immediately but not later than
2 days of his knowledge of fraud in the form of a report specifying nature, amount, persons involved
in fraud.

Step 2: Auditor shall seek the reply and explanations within 45 days from BOD / AC. BOD are obliged
to disclose the nature, amount, persons involved and remedial actions taken on fraud in BOD report.

Step 3: If auditor receives the information and explanation within 45 days, auditor shall within 15
days of such reply forward to CG the Report of Fraud and explanations from BOD / AC.

Step 4: If not received reply within 45 days, auditor shall forward a. audit report &b. a statement that
fraud already communicated to BOD and there is no reply, within 15 days from expiry of 45 days.

The report shall forward to Secretary of MCA in a sealed cover posted through RPAD (Registered post
ack. Due), report should print on Letterhead of auditor specifying Firm name, contact details, address,
E-mail & membership number.

B. Amount involved in Fraud is within Rs. 1 Cr ( < 1Cr )

Step 1: Auditor shall report such fraud to audit committee or BOD immediately but not later than
2 days of his knowledge of fraud in the form of a report specifying nature, amount, persons involved
in fraud.

Step 2: Auditor shall seek the reply and explanations. BOD are obliged to disclose the same and
remedial actions taken on fraud in BOD report.

Step 3:If BOD not disclosing in BR, auditor has to disclose and Modify the Audit report.

 If auditor makes any default liable for fine min of Rs. 1L and max of Rs. 25L.
 The auditor shall not be held guilty if action takes in good faith. The above provisions applicable
to cost auditor and CS also

CA KVNV Prasad – kvnvprasad1994@gmail.com 13

May not immediately, hard work definitely wins
THE AUDITOR’S LIEN RIGHT
Any person having lawful possession of other’s property on which he has worked, may retain the
possession of such property for non-payment of his dues, even though he is not the legal owner. This
right is called Lien Right.

Auditor can exercise lien right on BOA for non-payment of fee provided,
a. BOA must relate to client who owes the money (for whom he rendered services)
b. Documents must be received from proper authority In case of a company they must be received
from the authority of the Board of Directors. Auditor should not obtain from Unauthorized or illegal
sources.
c. The auditor can retain the documents only if he has done some work on the documents assigned
to him and the fee is unpaid.
 The auditor should allow the management to inspect the books and take copies whenever required.
 The auditor cannot retain such books, which are statutorily required to be maintained by company
like minutes book, share transfer register and Register of Members etc.
 As per Sec 128 of Co.’s act 2013, every co. has to maintain its BOA at its RO.

From the above it can be clarified that Auditor exercising the Right of lien in respect of BOA of a Co. is
practically not advisable, even though he is unpaid. He can take Legal actions against the Co.

Lien on Audit Working Papers: Lien is exercised in respect of client’s property. His working papers
being his own property, the question of lien on them does not arise.

CA KVNV Prasad – kvnvprasad1994@gmail.com 14

May not immediately, hard work definitely wins