I.

Audit:-
1. Historical Development
2. Basics
a. Nature
b. Definitions
c. AAS
d. Basic Principles governing Auditor’s responsibilities (SA
200)
e. Scope of Audit
3. Types of Audits
a. Joint Audit
b. Special Audit
c. Cost Audit
d. Branch Audit
e. Internal Audit
f. Efficiency Audit
g. Propriety Audit
h. Voucher Audit
i. Audit of Share Capital
j. Share Transfer Audit
k. Audit of Debentures
l. Audit of Dividends
m. Compliance Audit
n. Pre-Post Audit
o. Information Systems Audit
4. Audit of various Entities
a. Sole Trader
b. Firm
c. Company
i. CARO
d. Government
e. Local Bodies
f. NGO
g. Charitable Institutions
h. Educational Institutions
i. Hospitals
j. Club
k. Cinema
 l. Hotel
m. HP & leasing Companies
5. Audit of various types of transactions

II. Auditor-
1. qualification,
2. disqualification,
3. first auditor
4. appointment,
5. re-appointment,
6. Casual Vacancy,
7. removal,
8. rights,
9. duties,
10. liabilities,
11. penalty,
12. legal provisions concerning earlier points
13. behavioral Standards as per Standards on auditing

III. Conduct of audit-

1. Audit Plan
a. Audit Technique and practices
b. Quality Control of Audit work
c. Risk
d. Delegation of work
e. Audit program
f. Joint Audit
g. Branch Audit
h. Auditing standard relating to above
2. Execution of Audit
a. Materiality
b. Evidence
c. Verification
d. Vouching
e. Statutes governing accounts and various provisions
regarding accounts.
f. Audit notes and audit working papers (Auditor’s Lien)
g. Auditing standard relating to above
 3. Reporting Opinion
a. CARO (also covered in types of audit – company)
b. Qualified
c. Adverse
d. Auditing standard relating to above

I. Audit

Historical Development

Basics
A. Nature
Nature of Audit –
 II. The Auditor
A person cannot be both statutory auditor and Liquidator (or internal
auditor). Basically ICAI recommended that statement of accounts to be filed
u/s 551 of Companies Act, 1956 shall be audited by ca other than ca who is
liquidator.

If an auditor discovered some fact after giving opinion on financial statement

and if such discovery results in need to qualify his previous opinion then, he
can attend general meeting

Qualification of Company Auditor

Sec 226(1) – practicing CA within meaning of CA act 1949

Sec 226(1) – a firm, if all partners are CA within meaning of CA act 1949

Sec 226(2) – transitional provision not in force today.

Sec 233B – Auditor to cost audit records maintained u/s 209(1)(d),

practicing CWA within meaning of CWA act 1959

Sec 233B – Auditor to cost audit records maintained u/s 209(1)(d), a firm, if
all partners are practicing CWA within meaning of CWA act 1959

Disqualification of Company Auditor

Sec 226(3)(a) – a body corporate

Sec 226(3)(b) – an officer or employee of company

Sec 226(3)(c) – person who is either partner or employee of an officer or

employee of company
Of Company
Employe
  Officer e
Partner  Y  Y
Employe
e  Y  Y
If any of the above combination exists the person is disqualified from
being an auditor of company.

Sec 226(3)(d) – person who is indebted to company for more than RS. 1000
or given guarantee or provided any security in connection with indebtedness
of any third person for more than Rs. 1000

Sec 226(3)(e) – a person holding any security of that company (security

means instrument which carries voting rights)

Imp Points:-
1. If after his appointment, auditor becomes subject to any of the
disqualification mentioned above. He shall be deemed to have vacated
his office immediately
2.
 First Auditor

 First Auditors of company can be appointed by board [Sec 224(5)

empowers board to appoint first auditor] within one month from the
date of incorporation.
 Auditor so appointed by board shall hold office till conclusion of first
AGM
 Company may remove all or some of the first auditors and appoint
another in place of them on nomination by any member; minimum 14
days notice should be given to the members.
 If board fails to appoint auditors in one month then company in first
AGM can appoint first auditors.
 Appointment of first auditors through Memo of Assoc or Articles is not
valid appointment.
 Central Government approval is not required for the removal of first
auditor appointed by directors .
 First auditor need not be sent intimation by the company. But this
does not mean that notice of appointment need not be sent. Such
notice can be sent in ordinary course of business within reasonable
time (Limit of 7 days is not applicable here).
 First auditor is not required to inform registrar.

Appointment of an Auditor
As per Sec 224(1):-

1. Shareholders are empowered to appoint an auditor.

2. Every company irrespective of its nature or type has to appoint an
auditor
3. Resolution must be passed at each AGM to appoint an auditor
4. Tenure of appointment is from conclusion of one AGM to conclusion of
next AGM.
Communication Regarding appointment of an auditor:-

1. Before appointment, Co shall obtain from auditor certificate to the

effect that, the appointment, if made, will be within the ceiling limits
specified u/s 224(1B)
2. The company has to intimate concerned auditor within 7 days of his
appointment in an AGM.
3. The auditor upon receipt of intimation is required to send written
communication to Registrar of companies within 30 days of receipt of
intimation.
4. Auditor’s communication regarding acceptance or refusal should be in
writing and in Form 23B as prescribed by the act.

Above process of communication restricted to appointment in AGM only.

Other aspects:-

1. An auditor once appointed may be reappointed or new auditor may be

appointed in his place.
2. It’s obligatory on part of company to annually make such
appointments.

Appointment by Special Resolution:

Following class of company should pass “Special Resolution” to appoint an
Auditor. If company fails to pass such resolution, then it shall be deemed as
no auditors are appointed. [Sec 226 (4A) ]

In case of companies in which not less than 25% of subscribed share capital
is held by singly or in combination by-

1. Central Govt
2. State Govt
3. Public Financial Institution
4. Any financial or other institution in which state govt holds 51% or
more.
5. Nationalized Bank
6. Insurance company carrying general insurance business.

For Determining 25% effective date is date of AGM. There may be difference
in holding as on date of notice and on date of meeting. If on date of notice
holding is less than 25% but subsequently before date of meeting it
becomes 25% or more, then it is ADVISABLE to company to adjourn
meeting.
Appointment by Central Government:
If company fails to appoint or reappoint the auditor in an AGM, it should
inform Central Government about its failure within 7 days.

On receipt of such Central Govt may appoint a person to fill vacancy in the
office of auditor.

Appointment of Auditor of Govt Companies & certain other Companies:

Auditor of govt co shall be appointed or reappointed by central govt on
advice of CAG (comptroller and Auditor General of India) Sec 619,
notwithstanding provisions contained in Sec 224,233

Same provision should apply to companies in which center or state govt

holds singly or jointly not less than 51% of paid up capital.

Appointment in case of company in voluntary liquidation:

If winding up proceedings continues for more than one year then it is left to
members or creditors, to decide whether or not to appoint auditor to audit
liquidators account.

IMPORTANT POINTS:-
1. Shareholders by passing resolution may empower board to appoint
auditor in certain circumstances e.g. If the person who is intimated
to be appointed as joint auditor refuses then board may appoint
joint auditor. BUT please note that RESOLUTION CANNOT
OVERRIDE COMPANIES ACT. As per companies act board can
appoint first auditor or they can fill vacancy in auditor’s office
caused by reasons other than resignation of auditor. Hence in our
example though the resolution is permitting board to appoint joint
auditor; board cannot appoint such auditor because as per
companies Act it is beyond power of board.

2. Appointment of an auditor is an item of ordinary business to be

transacted at the meeting.

3. If special resolution (whenever mandatory) is not passed (i.e. co

fails or omits to pass) then, it shall be deemed that no auditor is
appointed.
 4. Sec 224(1B) Restriction on Appointment – 20 Company Audits per
person of which maximum 10 can be of companies having paid up
capital 25 lakhs or more subject to following provisions –
a. If a CA working individually or proprietary concern: 20 Co
audits
b. If partnership firm: per partner 20 Co Audits
c. If CA is partner in various firm: 20 Co Audits on his account
in all firms put together
d. If CA is partner in a firm & practices individually too: 20 Co
Audits in his individual capacity and in all firm taken together

Re-appointment of Auditor

1. Retiring auditor cannot be re-appointed automatically; that is even for

reappointment resolution to be passed.
2. While re-appointing retiring auditor company has to confirm-
a. Auditor does not suffer from any disqualification as per Sec 226
b. Resolution expressly stating that retiring partner shall not be re-
appointed, is not passed
c. Resolution for Appointment of any person as auditor other than
retiring partner, is not passed
d. Limit as mentioned in Sec 224 1B is not violated
e. Retiring auditor has not, in writing, expressed his unwillingness
to get reappointed.
3. The appointment or reappointment of auditors at the annual general
meeting is one of the items of ordinary business to be transacted at
such a meeting.

If an AGM is not held then existing auditor shall continue to be auditor of co

as the tenure of auditor appointed by shareholders is till conclusion of next
general meeting. However students should note that, this is NOT re-
appointment (You cannot re-appoint person whose tenure is yet to be
finished)
 Casual vacancy

1. Vacancy in auditor’s office other than by way of resignation of an

auditor is casual vacancy and may be filled by board till conclusion of
next AGM
2. If Vacancy in auditor’s office is due to resignation of an auditor then it
shall be filled only by company in general meeting
3. The expression casual vacancy is not defined in the act.

Removal of an Auditor

1. Auditor may be removed before expiry of his term by company in

general meeting with prior approval of Central Government (this
provision is not applicable for removal of first auditor appointed by
board).This provision ensures independence of an auditor.

2. Procedure for removal:-

a. Special notice 14 days for resolution to be moved by member to

company [Sec 225(1)]
b. Special notice 14 days for resolution to be moved by company to
retiring auditor [Sec 225(2)]
c. Representation by auditor with a request to notify to members
d. Company shall in any notice to be given to the members for
meeting state the fact that representation has been made and
sent a copy of representation to every member to whom notice is
sent
e. If copy of representation is not sent, the auditor may require that
the representation to be read out at meeting.
f. However the above right of representation is hedged by provision
that if central govt is satisfied on application made by company or
aggrieved person that the right is being abused, the central
government may order representation may not be circulated or
read out; also that the cost on such application [Sec 225(3)]

3. Foregoing provisions are equally applicable to a resolution to remove

first auditor except a special notice u/s 225(1).
 Imp points for students
 If a newly appointed auditor fails to communicate with previous
auditor in writing, it is a breach of professional etiquette.
 Failure to communicate may , if proved may result in the person
declared unfit to continue to be a member of institute.
 Ca should also confirm that provisions of Sec 224 & 225 are complied
with before accepting appointment. Failure to do this will evoke a
disciplinary action.

Rights of Auditor
1. Right of Access to books of accounts [Sec 227(1)]
2. Right to require information and explanation from officers [Sec 227(1)]
3. Right to attend general meeting [Sec 231]
4. Report to members
5. Receive all notices to any general meeting
6. Right to visit Branch and inspect books of branch [Sec 228]
7. Right to take advice. (London & General Bank, 1895)
8. Right of Lien on Working Papers. (Chantrey Martin & Co Vs Martin
1953)
9. Right to receive remuneration. If auditor is removed within year, he is
entitled to full year’s remuneration. (Homer Vs Quilter 1908)
10. Right to sign audit report [Sec 229]
11. Right to be indemnified [Sec 633]
12. If auditor’s advice to amend faulty P&L or BS, not followed by
directors, he can report it by way of qualified report.

Duties of an auditor
(A) Duties to shareholders:-
a. Report about true and fair state of affairs of company [Sec
227(2)]
b. Ensure Bs and PL gives required info [Sec 227(2)]
c. State in report that he has obtained all the necessary info [Sec
227(3)]
 d. State whether co has maintained all required books of accounts
[Sec 227(3)]
e. Report whether BS and PL agrees with books [Sec 227(3)]
f. Report whether BS and PL comply with accounting standards or
not.
g. State whether he has received audit report of branch accounts
audited by other auditor and how he dealt with it in preparing his
report [Sec 227(3)]
h. State reasons behind qualifying his report [Sec 227(4)]
i. As per Sec 227(1A) auditor shall state in his report-
i. Loans and advances given by company against security are
properly secured and term of the same are not prejudicial
to interest of company or its members.
ii. Transactions representing mere book entries are not
against the interest of company
iii. Securities sold by company (other than investment co or
banking co) at price less than purchase price
iv. Loans made by company haven’t shown as deposits
v. Personal expenses are not debited to revenue account.
j. Sec 227(4A)
(B) Duties towards company
a. Prospectus [Sec 56] – Auditor has to certify profits, losses,
assets, liabilities, dividend paid disclosed in prospectus.
b. Statutory report [Sec 165] – Auditor has to certify statutory
report which is to be presented in statutory meeting.
c. Public Deposits [Sec 58AA] – Auditor has to reply whether
company has complied requirements of RBI in relation to public
deposits or not.
d. Signature [Sec 229] – auditor should sign the audit report
prepared by him.
e. Insolvency [Sec 488(2)] – Auditor should make report on co PL
accompanied with declaration on solvency.
(C) Duties towards Government
a. CARO 2003
b. Investigation – it’s a duty of co auditor to assist investigator
appointed by CG u/s 237 to investigate matters regarding affairs
of company
(D) Duties towards General Public
 a. Auditor must bear interest of general public in mind as his office
is of public confidence and faith.
b. Auditor must see that his report does not fail to disclose material
information.
c. While certifying prospectus auditor should confirm that it does
not contain any misleading info which may cause general public
to subscribe to co share issue and may suffer financial loss in
future. (Hadley Byrney & Co LTD Vs Hiller & partners)

Imp Points:-
1. If an auditor continues to hold auditor’s office (say for the period of 3
years) as there was no AGM then he can audit books for the period he
was in office (i.e. 3 years books can be audited by him) provided all of
them are laid in an AGM (say AGM conducted in 4th year) [As per Sec
227(2) ]

Liabilities of Auditor
In past Auditor auditors were held liable only to their principles but now days
they are held liable for third parties too.

(A) Liability for Negligence - Negligence means carelessness, failure

to maintain standard degree of skill and care while conducting
audit. Whenever auditor is found guilty of negligence he is held
liable to compensate the loss sustained by others, may be
appointing co or third party like Bank etc.

(E) Liability under Companies Act, 1956 –

▪ Sec 62: auditor is liable for certifying misleading prospectus and
he has to compensate damages suffered by persons
▪ Sec 233: Auditor is liable for signing false report or any other
document u/s 227 & u/s 229.
▪ Sec 539: Falsification of books
▪ Sec 628: if in any report, return or any document required under
companies act, a false statement is made and knowing it to be
false, auditor certifies the same as true then he shall be
punishable for a term which may extend to 2 years and shall
also be liable for fine.
(B) Liability for Misfeasance [Sec 543] - Misfeasance means
breach of trust or duty and auditor is liable to equivalent damages
suffered by company to third party.

(C) Liability under Indian Penal Code – Auditor is liable for frauds,
furnishing false information under IPC:
▪ Sec 177 for furnishing false information
▪ Sec 188 & Sec 199 False statement on oath or false declaration
▪ Sec 193 for giving false evidence in judicial proceedings
▪ Se 197 for signing any document knowing it to be false

(D) Liability under Chartered Account Act, 1949 And Cost &
Works Accountants Act, 1959 – For professional misconduct
council may either:
▪ Withdraw the certificate of practice, or
▪ Remove name from members register, or
▪ Forward the case to High Court.

(F) Liability under Income-Tax Act, 1969 –

▪ Sec 288: If an auditor or any person has been convicted of
offence connected with any I-tax proceedings or on whom
penalty is imposed as per I-tax act, shall be disqualified to act as
a representative of an assessee for a certain period.
▪ Sec 278: If an auditor or person who certifies or induces other to
make & deliver to the I-tax dept false accounts, reports,
certificates etc. he shall suffer from rigorous imprisonment and/
or fine.
▪ Rule 12A: same as above

(G) Liability to Third Party –

▪ Generally, it appears that there is no privity of contract between
auditor and third parties. He cannot be held liable as he is never
appointed by third parties, he has nothing to do with third
parties (Le Lievre & Dennes Vs Gould, 1893)
▪ No doubt that there is privity of contract, the third party can
hold auditor liable for any fraud.
▪ Auditor has morale responsibility towards third parties.
▪ If any person relying on any statement, takes any decision &
suffers any loss due because such statement was false, the
auditor shall be responsible to them.
▪ If auditor has certified misleading prospectus then he shall be
liable for those who has subscribed to shares of company on
basis of such misleading prospectus even though there is no
privity of contract between them.