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Section-139
Section 139(6) & (7)
APPOINTMENT OF FIRST AUDITORS
APPOINTMENT OF FIRST AUDITOR (OTHER THAN GOVT Co.) : - SEC 139(6)

By Board of Directors within 30 days

•The first auditor shall be appointed by the board of
directors within 30 days from the date of registration of
the company.

By Members within 90 days

•In the case of failure of the board to appoint such auditor,
it shall inform the members of the company, who shall
within 90 days at an extraordinary general meeting
appoint such auditor.

The first auditor shall hold office till the conclusion of First AGM.

APPOINTMENT OF FIRST AUDITOR (IN A GOVT Co.) : - SEC 139(7)

“Government Company” is a company in which not less than 51% of the paid-up share
capital is held by the Central Government or by any State Government or Governments or
partly by the Central Government and partly by one or more State Governments, and
includes a company which is a subsidiary company of such a Government company.

By CAG within 60 days

•The first auditor shall be appointed by CAG within 60 days

from the date of registration of the company.
By Board of Directors within 30 days
•In the case of failure by the CAG to appoint such auditor, the
board of directors shall appoint the auditor within 30 days.

By Members within 60 days

•In the case of failure of the board to appoint such auditor,
within 30 days it shall inform the members of the company,
who shall within 60 days at an extraordinary general meeting
appoint such auditor.

The first auditor shall hold office till the conclusion of First AGM.

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Section 139(1) & (5)

Appointment of Subsequent Auditor/Re-appointment of Auditor
Appointment of subsequent auditors in case of Non Government Companies:-
 Section 139(1) of the Companies Act, 2013 provides that every company shall, at the
first annual general meeting appoint an individual or a firm as an auditor who shall
hold office from the conclusion of that meeting till the conclusion of its sixth annual
general meeting and thereafter till the conclusion of 6th AGM.
 After the first AGM where any appointment of auditor is made at any AGM, the
auditor so appointed shall hold office till the conclusion of the 6th AGM, with the
AGM wherein such appointment has been made being considered as the first AGM.
 At every AGM (2nd, 3rd, 4th and 5th AGM), the company shall place the matter
relating to such appointment for ratification by members.
 If at any AGM the appointment of auditor is NOT RATIFIED by the members, the
Board of directors shall appoint another individual or firm as its auditor(s) after
following the procedure laid down under the Act. {Rule 3(7)}.In other words, If the
appointment is NOT RATIFIED by the members at the AGM the auditor has to
vacate the office, and such vacancy shall amount to CASUAL VACANCY. The board
shall fill such casual vacancy in accordance with Section 139(8).
The following points need to be noted in this regard-
(i) The company shall place the matter relating to such appointment of ratification
by members at every Annual General Meeting.
(ii) Before such appointment is made, the written consent of the auditor to such
appointment, and a certificate from him or it that the appointment, if made, shall
be in accordance with the conditions as may be prescribed, shall be obtained
from the auditor.
(iii) The certificate shall also indicate whether the auditor satisfies the criteria
provided in section 141.
(iv) The company shall inform the auditor concerned of his or its appointment, and
also file a notice of such appointment with the Registrar within 15 days of the
meeting in which the auditor is appointed.(In FORM ADT-1)
Appointment of subsequent auditors in case of Government Companies:- Section 139(5)
As per Section 139(5), in the case of a Government company or any other company owned
or controlled, directly or indirectly, by the Central Government, or by any State Government
or Governments, or partly by the Central Government and partly by one or more State
Governments,
 The Comptroller and Auditor-General of India shall,
 In respect of a financial year,
 Appoint an auditor duly qualified to be appointed as an auditor of companies under
this Act,
 within a period of 180 days from the commencement of the financial year,
 Who shall hold office till the conclusion of the annual general meeting.

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Section 139(2) & (4)

COMPULSORY ROTATION OF AUDITORS
Companies to which provisions for compulsory rotation of auditor’s apply:
Provisions for compulsory rotation of auditor’s as stated under section 139(2) shall apply to:
 Listed companies
 A company belonging to such class or classes of companies as may be prescribed.
Rule 5 of the companies (Audit and Auditors) Rules, 2014 provides that for the purpose of
sub-section (2) of section 139, the class of companies shall mean the following classes of
companies excluding one person companies and small companies:-
A. Every listed company
B. Every unlisted public company having Paid up share
Rs. 10 crore or more
capital
C. Every private company having Paid up share capital Rs. 50 crore or more
D. Any other Company having borrowing from FI, banks
Rs. 50 crore or more
or public deposits
Provisions as to compulsory rotation of auditors:
No listed company or a company belonging to such class or companies as may be
prescribed, shall appoint or re-appoint
a. An individual as auditor for more than ONE term of 5 consecutive years; and
b. An audit firm (including LLP) as auditor for more than TWO Terms of 5
Consecutive Years.

Cooling off period:

The cooling off period is the minimum gap between expiry of maximum tenure and
appointing the auditor again which is stipulated by law. The provisions in this regard are as
under:
 An individual auditor who has completed his term as per (a) above shall not be
eligible for re-appointment as auditor in the same company for 5 years from the
completion of his term;
 An audit firm (including LLP) which has completed its term under (b) above shall not
be eligible for re-appointment as auditor in the same company for 5 years from the
completion of such term.
Right of Removal/Resignation-( Not Affected)
The above provisions shall not prejudice the right of the company to remove an auditor or
the right of the auditor to resign from such office of the company. [section 139(2)]
The central Government may, by rules, prescribe the manner in which the companies shall
rotate their auditors. [Section 139(4)]
Provisions for rotation of audit partners
Subject to the provisions of this act, members of a company may resolve to provide that in
the audit firm appointed by it,
1. The auditing partner and his team shall be rotated at such intervals as may be
resolved by members [section 139(3) of the 2013 act] or
2. The audit shall be conducted by more than one auditor.

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Manner of Rotation of Auditors by the Companies on Expiry of their Term :

Rule 6 of the Companies (Audit and Auditors) Rules, 2014 prescribes the manner of
rotation of auditors on expiry of their term which is given below:
1. The Audit Committee shall recommend to the Board, the name of an individual auditor
or of an audit firm who may replace the incumbent auditor on expiry of the term of such
incumbent.
2. Where a company is required to constitute an Audit Committee, the Board shall consider
the recommendation of such committee, and in other cases, the Board shall itself
consider the matter of rotation of auditors and make its recommendation for
appointment of the next auditor by the members in annual general meeting.
3. In case of an auditor (whether an individual or audit firm), the period for which the
individual or the firm has held office as auditor prior to the commencement of the Act
shall be taken into account for calculating the period of five consecutive years or ten
consecutive years, as the case may be.
4. The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is
associated with the outgoing auditor or audit firm under the same network of audit
firms.
The term “same network” includes the firms operating or functioning, hitherto or in future,
under the same brand name, trade name or common control.
5. A break in the term for a continuous period of five years shall be considered as fulfilling
the requirement of rotation.
6. If a partner, who is in charge of an audit firm and also certifies the financial statements
of the company, retires from the said firm and joins another firm of chartered
accountants, such other firm shall also be ineligible to be appointed for a period of five
years.
Section 139(8)
Appointment of Auditor in case of CASUAL VACANCY
As per Section 139(8), any casual vacancy in the office of an auditor shall -
(i) In the case of a company other than a company whose accounts are subject to
audit by an auditor appointed by the Comptroller and Auditor-General of India,
be filled by the Board of Directors within 30 days.
If such casual vacancy is as a result of the Resignation Of An Auditor, such
appointment shall also be approved by the company at a general meeting
convened within three months of the recommendation of the Board &
He shall hold the office till the conclusion of the next annual general meeting.
(ii) In the case of a company whose accounts are subject to audit by an auditor
appointed by the Comptroller and Auditor-General of India, be filled by the
Comptroller and Auditor-General of India within 30 days.

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The term “Casual Vacancy” has not been defined under the Companies Act, 2013. It
generally means a vacancy caused by the auditor ceasing to act as such after accepting a
valid appointment. (Death, Disqualification, resignation, etc.)
Where no auditor is appointed or reappointed; it does not result in a casual vacancy.

Section 139 (9) & (10)

RE-APPOINTING OF RETIRING AUDITORS
A retiring auditor may be re-appointed at an annual general meeting, if –
a. He is not disqualified for re-appointment;
b. He has not given the company a notice in writing of his unwillingness to be re-
appointed; and
c. A special resolution has not been passed at that meeting appointing some other
auditor or providing expressly that he shall not be re-appointed. [section 139(9)]
Where at any annual general meeting, no auditor is appointed or re-appointed, the existing
auditor shall continue to be the auditor of the company. [Section 139(10)].
Ordinary resolution required for appointment at AGM
For appointment of auditor at AGM, ordinary resolution is sufficient as section 224A of the
1956 Act requiring special resolution in certain cases has been omitted by the 2013 act.
However, special resolution will be required for appointing some other auditor at the annual
general meeting in place of the retiring auditor [Section 139(9)(c)].

Section-140
REMOVAL & RESIGNATION OF AUDITOR
Removal of auditor before expiry of term
Section 140(1) of the act provides that the auditor appointed under section 139 may be
removed from his office before the expiry of his term:
 Only by a special resolution of the company
 After obtaining the previous approval of the central government in that behalf in the
prescribed manner.
 Before taking any action (i.e., removal before expiry of term), the auditor concerned
shall be given a reasonable opportunity of being heard.
Procedure for obtaining previous approval of central Govt.
Rule 7 of the companies (audit and auditors) Rules, 2014 provides as under:
1. The application to the central Government for removal of auditor shall be made in
form ADT-2 and shall be accompanied with fees as provided for this purpose under
the companies (Registration offices and fees) Rules, 2014.
2. The application shall be made to the central Government within thirty days of the
resolution passed by the board.
3. The company shall hold the general meeting within sixty days of receipt of approval
of the central Government for passing the special resolution.

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Appointment of Auditor Other Than Retiring Auditor

Section 140(4) lays down procedure to appoint an auditor other than retiring auditor who
was removed-
(1) Special notice shall be required for a resolution at an annual general meeting
appointing as auditor a person other than a retiring auditor, or providing
expressly that a retiring auditor shall not be re-appointed, except where the
retiring auditor has completed a consecutive tenure of five years or as the
case may be, ten years, as provided under sub-section (2) of section 139.
(2) On receipt of notice of such a resolution, the company shall forthwith send a copy
thereof to the retiring auditor.
Right of retiring auditor to make a representation
Where such special notice is given and the retiring auditor makes written representations
not exceeding a reasonable length to the company and requests their notification to the
members of the company, the company shall, unless the representations received are too
late for it to do so-
a. In any notice of the resolution given to the members, state the fact that
representations have been made; and
b. Send a copy of the representations to every members of the company to whom
notice of meting is sent, whether before or after the receipt of the representation by
the company. [Section 140(4)(iii)]
 If a representation is not sent to members as aforesaid because they are
received too late or because of company’s default the auditor may require
that the representation be read out at the meeting. This right is without
prejudice to his right to be heard at the meeting.
 If a copy of the representation is not sent as aforesaid, a copy of it, shall be
filed with the ROC.
Where auditor abuses his right to make a representation

 If the Tribunal is satisfied on an application either of the company or of any other

aggrieved person that the rights conferred by this sub-section are being abused by
the auditor, then, the copy of the representation may not be sent and the
representation need not be read out at the meeting. [second Proviso to section
140(4)]
Tribunal may direct the company to change its auditors
Sub-section (5) of section 140 of the 2013 act deals with tribunal’s powers to Direct
Company’s change of auditors. These are as under:
 The tribunal, may, by order, direct the company to change its auditors if it is
satisfied that the auditor of a company has:
 Acted in a fraudulent manner or
 Abetted or colluded in any fraud by, or in relation to, the company or its directors or
officers
 The tribunal may so direct either suo motu or on an application made to it by the
central government or by any person concerned
 If the application is made by the central government and the tribunal is satisfied
that any change of the auditor is required, it shall within 15 days of receipt of such

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application, make an order that he shall not function as an auditor and the central
government may appoint another auditor in his place.
 Such auditor (who has been removed by tribunal as above) shall also be liable for
action under section 447 of the 2013 act.
 In case of a firm, the liability shall be of the firm and that of every partner or
partners who acted in a fraudulent manner or abetted or colluded in any fraud by or
in relation to the company or its directors or officers.

Auditors against whom an order passed by tribunal under this section [section 140(5)]
An auditor (whether individual or firm) against final order has been passed by tribunal under
section 140 shall not be eligible to be appointed auditor of any company for 5 years from
the date of passing of the order – second proviso to section 140(5)

RESIGNATION OF AUDITOR
Sub-section (2) of section 140 provides that where auditor resigns from the company, his
duties are as under:
 The auditor who has resigned from the company shall file within 30 days of
resignation a statement in form ADT-3 with the company as well as with the ROC
indicating reasons and other facts as may be relevant with regard to his resignation.
 In case of companies referred to in sub-section(5) of section 139 [ companies owned
or controlled, directly or indirectly, by the central government, or by any state
government or governments, or partly by the central government and partly by one
or more state governments] the auditor shall also file such statement with the
Comptroller and Auditor-General of India, indicating the reasons and other facts as
may be relevant with regard to his resignation. In case of failure the auditor shall be
punishable with fine which shall not be less than fifty thousand rupees but which
may extend to five lakh rupees as per section 140(3).

Punishment for not complying with above provisions

If auditor does not file such statement as above, he shall be punishable with a fine not less
than Rs. 50,000 or the remuneration of the auditor, whichever is less but which
may extend to Rs, 5,00,000 [section 140(3)].

Section-141
QUALIFICATIONS & DISQUALIFICATIONS OF AUDITOR
QUALIFICATIONS OF AUDITORS:
Section 141(1) of the 2013 act provides as under
 A person shall be eligible for appointment as an auditor of a company only if he is a
charted accountant (i.e. CA in practice)
 A firm of chartered accountants may be appointed by its firm name to be auditor of
a company if majority of its partners practising in India are qualified for appointment
as aforesaid

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CHARTERED ACCOUNTANT:
The expression chartered accountant is defined in section 2(17) of the 2013 act to mean a
chartered accountant who:
 Satisfies the requirements of section 2(1)(b) of the chartered accountants act, 1949;
and
 Holds a valid certificate of practice under section 6 of that act.

DISQUALIFICATIONS OF AUDITORS:
Section 141(3) of the 2013 act deals with the disqualification of auditors. Section 141(3)
provides that none of the following persons shall be eligible for appointment as an auditor
of a company, namely:-
a. A body corporate other a limited liability partnership (LLP)
b. An officer or employee of the company
According to Section 2(59) of the Companies Act, 2013, the term “Officer” includes:
(i) Director
(ii) Manager
(iii) Key Managerial personnel
(iv) Shadow Directors
c. Partner or employee of the person in (b) above
This sub-section disqualifies the below mentioned persons from being appointed as auditor of a
company :
(i) partner of an officer of the company;
(ii) employee of an officer of the company;
(iii) partner of an employee of the company;
(iv) employee of an employee of the company.
d. A person who, or his relative or partner-
 Is holding any security of or interest in
- The company, or
- Its subsidiary, or
- Of its holding company, or
- Associate company, or
- A subsidiary of such holding company;
[A relative of an auditor may hold securities in company of face value not exceeding Rs. 1,00,000]

 Is indebted to
- The company, or
- Its subsidiary, or
- Its holding company, or
- Associate company, or
- A subsidiary of such holding company
In excess of such amounts as may be prescribed (limit prescribed is 5,00,000)
 Has given a guarantee or provided any security in connection with the
indebtedness of any third person to
- The company, or
- Its subsidiary, or
- Its holding company, or
- Associate company, or
- A subsidiary of such holding company,

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For such amounts as may be prescribed (limit prescribed is 1,00,000)

In the event of acquiring any security or interest by a relative, above the threshold prescribed, the corrective
action to maintain the limits as specified above shall be taken by the auditor within 60 days of such
acquisition or interest.

The following points may be noted in this regard

a. The limit of ` 1,00,000 would be applicable where the securities are held by the relative of an
auditor and not where the securities are held by an auditor himself or his partner. In case of an
auditor or his partner, securities of even small value shall be a disqualification.
b. Grace period of 60 days for corrective action shall apply only in respect of securities held by
relatives. This would not apply to auditor or his partner.
c. Limit of ` 1,00,000 and grace period of 60 days would be applicable where securities are held in the
company only.

Relative means:
Rule 4 of the Companies (Specification of
Section 2(77) of the Companies Act, 2013
Definitions Details) Rules, 2014
a. members of a Hindu Undivided Family; a. Father (including step- father),
b. husband and wife; or b. Mother (including step-mother),
c. one person is related to the other in c. Son (including step- son),
such manner as may be prescribed. d. Son‘s wife,
e. Daughter,
f. Daughter‘s husband,
g. Brother (including step- brother),
h. Sister (including step- sister).
e. A person or a firm who, whether directly or indirectly, has business relationship of
such nature as may be prescribed with
- The company, or
- Its subsidiary, or
- Its holding company, or
- Associate company, or
- A subsidiary of such holding company,
- A subsidiary of such associate company.
For the purpose of clause (e) above, the term “business relationship” shall be construed
as any transaction entered into for a commercial purpose, except -
(i) commercial transactions which are in the nature of professional services
permitted to be rendered by an auditor or audit firm under the Act and the
Chartered Accountants Act, 1949 and the rules or the regulations made under
those Acts;
(ii) commercial transactions which are in the ordinary course of business of the
company at arm’s length price - like sale of products or services to the auditor,
as customer, in the ordinary course of business, by companies engaged in the
business of telecommunications, airlines, hospitals, hotels and such other
similar businesses.

f. A person whose relative

- Is a director or
- Is in the employment of the company as a director or key managerial
personnel.

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g. A person who is in full time employment elsewhere

or
A person or a partner of a firm holding appointment as its auditor, if such person or
partner is at the date of such appointment or re-appointment holding appointment as
auditor of more than 20 companies.
It would appear that the branch audits are not to be included while calculating the
specified number of companies. (other than one person companies, small companies,
dormant companies and private companies having paid-up capital less than one
hundred crore rupees)
h. A person who has been convicted by a court of an offence involving fraud and a period
of 10 years has not elapsed from the date of such conviction.

i. Any person who, directly or indirectly, renders any service

referred to in section 144 to the company or its holding
company or its subsidiary company.
Disqualification of Auditor – Additional Considerations:
Indebtedness:
If an auditor purchases on credit goods of a company of a value exceeding Rs. 5 Lakh, he
shall be indebted to the Company and consequently he shall vacate the office of auditor
held by him. It is immaterial that the credit period allowed to the auditor is in the ordinary
course of business.
If the auditor receives fees from the company on a progressive basis, even though the audit
has not been completed, he cannot be said to be indebted to the company, and therefore,
he shall not vacate the office of auditor held by him.

Ceiling on Tax Audit Assignments:

The specified number of tax audit assignments that an auditor, as an individual or as a
partner of a firm, can accept is 60 numbers.
ICAI has notified that a chartered accountant in practice shall be deemed to be guilty of
professional misconduct, if he accepts in a financial year, more than the specified number of
tax audit assignments u/s 44AB.
Section-142
REMUNERATION OF AUDITORS
Fixing remuneration of auditors
The provisions for remuneration are as under:
 The remuneration of the auditor of a company shall be fixed in its general meeting or
in such manner as may be determined therein. [section 142(I)]
 The board may fix the remuneration of the first auditor appointed by it.
Definition of ‘remuneration’
The remuneration shall, in addition to the fee payable to an auditor
 Include the expenses, if any, incurred by the auditor in connection with the audit of
the company and any facility extended to him;
 But does not include any remuneration paid to him for any other service rendered by
him at the request of the company. [section 142(2)]

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Section-143
POWERS & DUTIES OF AUDITORS
Section-143(1)
Rights & Duties of the auditor of a company:
Section 143(1) provides that every auditor of a company shall have the following rights/
powers:

(a) Right of access to books, etc.–Section 143(1) of the Act provides that the auditor of a
company, at all times, shall have a right of access to the books of account and vouchers of
the company, whether kept at the registered office of the company or at any other place
and he is entitled to require from the officers of the company such information and
explanation as he may consider necessary for the performance of his duties as auditor.

Provided that the auditor of a company which is a holding company shall also have the right
of access to the records of all its subsidiaries & Associates in so far as it relates
to the consolidation of its financial statements.

(b) Right to obtain information and explanation from officers - This right of the auditor to
obtain from the officers of the company such information and explanations as he may think
necessary for the performance of his duties as auditor is a wide and important power.

(c) Right to receive notices and to attend general meeting – The auditors of a company are
entitled to attend any general meeting of the company (the right is not restricted to those at
which the accounts audited by them are to be discussed); also to receive all the notices and
other communications relating to the general meetings, which members are entitled to
receive and to be heard at any general meeting in any part of the business of the meeting
which concerns them as auditors.

(d) Right to report to the members of the company on the accounts examined by him –
The auditor shall make a report to the members of the company on the accounts examined
by him and on every financial statements which are required by or under this Act to be laid
before the company in general meeting and the report shall after taking into account the
provisions of this Act, the accounting and auditing standards and matters which are
required to be included in the audit report under the provisions of this Act or any rules
made there under or under any order made under this section and to the best of his
information and knowledge, the said accounts, financial statements give a true and fair view
of the state of the company’s aff airs as at the end of its financial year and profit or loss and
cash flow for the year and such other matters as may be prescribed.
Right to Lien – In terms of the general principles of law, any person having the lawful
possession of somebody else’s property, on which he has worked, may retain the property
for non-payment of his dues on account of the work done on the property. On this premise,
auditor can exercise lien on books and documents placed at his possession by the client for
non payment of fees, for work done on the books and documents.

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DUTY OF AUDITOR TO INQUIRE INTO SPECIFIED MATTERS- Section 143(1)

Every auditor shall inquire into the following matters:
(i) Loans and advances made on the basis of security- whether loans and advances
made by the company on the basis of security have been properly secured and
whether the terms on which they have been made are not prejudicial to the
interests of the company or its members. [section 143(1)(a)]
(ii) Transactions represented merely by book entries – whether such transactions are
not prejudicial to the interests of the company. [section 143(1)(b)]
(iii) Sale of investments-where the company is not a banking company or an investment
company, whether no much of assets of the company consist of investment in
shares, debentures, and other securities have been sold by the company at a price
which is less than the price at which they were purchased by the company.
(iv) Loans and advances shown as deposits – whether any loans and advances made by
the company have been shown as deposits.
(v) Personal expenses – whether any personal expenses have been charged to revenue
account.
(vi) Shares shown as allotted for cash- where any shares have been shown in the books
and documents of the company as allotted for cash, Whether cash has actually been
received and If not, whether the position as stated in the account books and the
balance sheet is regular, correct and not misleading.

Section-143(2)
Auditors report to members on accounts-

Sub-section (2) of section 143 provides as under:

 The auditor shall make a report to the members of the company
 On the accounts examined by him and
 On every financial statement which are required by or under this act to be laid before
the company in general meeting.
 The auditor’s report shall slate whether:
A) After taking into account:
(i) Provisions of this act
(ii) The accounting and auditing standards and
(iii) Matters which are required to be included in the audit report
under the provisions of this act or any rules made there under
or under any order made by the central government under
section 143(11) and
B) To the best of his information and knowledge,

Sub-section (11) of section 143 provides that the central government may, in consultation
with the national financial reporting authority, by general or special order, direct, in respect
of such class or description of companies, as may be specified in the order, that the
auditor’s report shall also include a statement on such matters as may be specified therein.

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Section-143(3)
Report on Assertions in auditor’s report
Section 143(3) of the 2013 act requires that the auditor’s report shall also state –
(a) whether he has sought and obtained all the information and explanations which to
the best of his knowledge and belief were necessary for the purpose of his audit
and if not, the details thereof and the effect of such information on the financial
statements;
(b) whether, in his opinion, proper books of account as required by law have been
kept by the company so far as appears from his examination of those books and
proper returns adequate for the purposes of his audit have been received from
branches not visited by him;
(c) whether the report on the accounts of any branch office of the company audited
under sub-section (8) by a person other than the company‘s auditors has been sent
to him under the proviso to that sub-section and the manner in which he has dealt
with it in preparing his report;
(d) whether the company‘s balance sheet and profit and loss account dealt with in the
report are in agreement with the books of account and returns;
(e) whether, in his opinion, the financial statements comply with the accounting
standards;
(f) The observations or comments of the auditors on financial transactions or matters
which have any adverse effect on the functioning of the company;
(g) Whether any director is disqualified from being appointed as a director under sub-
section (2) of the section 164;
(h) Any qualification, reservation or adverse remark relating to the maintenance of
accounts and other matters connected therewith;
internal financial controls with
(i) Whether the company has adequate
reference to financial statements in place and the operating
effectiveness of such controls;
(j) Such other matters as may be prescribed. Rule 11 of the Companies (Audit and
Auditors)
Rules, 2014 prescribes the other matters to be included in auditor‘s report. The auditor‘s
report shall also include their views and comments on the following matters, namely:-
(i) whether the company has disclosed the impact, if any, of pending litigations on its
financial position in its financial statement;
(ii) Whether the company has made provision, as required under any law or
accounting standards, for material foreseeable losses, if any, on long term
contracts including derivative contracts;
(iii) Whether there has been any delay in transferring amounts, required to be
transferred, to the Investor Education and Protection Fund by the company.

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iv. Whether the company had provided requisite disclosures in its financial statements as
to holdings as well as dealings in Specified Bank Notes during the period from 8th
November, 2016 to 30th December, 2016 and if so, whether these are in accordance
with the books of accounts maintained by the company.

Section-143(4)
Duty to state the reason for qualification or negative report
As per sub-section (4) of section 143, where any of the matters required to be included in
the audit report is answered in the negative or with a qualification, the report shall state the
reasons there for.

Section-143(5),(6),(7)

Section 143(8)
BRANCH AUDIT
Audit of accounts of a branch office
Sub-section (8) of section 143 provides that the accounts of a branch office of a company
shall be audited:
 By the auditor appointed for the company (“the company’s auditor”) under this act,
or
 By any other person qualified for appointment as an auditor of the company under
this act and appointed as such under section 139, or

Where the branch office is situated in a country outside India:

(i) Either by the company’s auditor, or
(ii) By an accountant or by other person duly qualified to act as an auditor of the
accounts of the branch office in accordance with the laws of that country.

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Duties and powers of branch auditor

The following provisions may be noted:
 The duties and powers of the company’s auditor with reference to the audit of the
branch and the branch auditor, if any, shall be such as may be prescribed.
 The branch auditor shall prepare a report on the accounts of the branch examined
by him and send it to the auditor of the company who shall deal with it in his report
in such manner as he considers necessary.

Whether Copy of branch audit report could be sent to board of directors:

There is no administrative objection to a copy of the branch audit report being sent to the
board of directors simultaneously with the direct transmission of the original branch audit
report to the statutory auditor.

Section-143(9),(10)
Auditor obliged to comply with the Auditing Standards

The provisions of sub- sections (9) and (10) of section 143 of the 2013 act provide as under:
 Every auditor (whether auditor of company/ branch auditor shall comply with the
auditing standards.
 The central government may prescribe the standards of auditing or any addendum
thereto, as recommended by ICAI, in consulting with and after examination of
remunerations made by the NFRA.
 Until any auditing standards are notified any standard or standards of auditing specified
by the institute of chartered accountants of India shall be deemed to be the auditing
standards.
 Thus, while the 1956 act accorded statutory recognition to accounting standards only,
the 2013 act accords statutory recognition to auditing standards also.

Section-143(12)
REPORTING OF FRAUDS TO CENTRAL GOVT.

Reporting of Frauds involving Rs. 1 Crore or more by an Auditor

In case the auditor has sufficient reason to believe that an offence involving fraud, is being
or has been committed against the company by officers or employees of the company, he
shall report the matter to the Central Government.
As per Rule 13, any fraud which involves or is expected to involve individually an amount of
Rs. 1 Crore or above is required to be reported to the Central Government.
1. Draft Report to BOD/ audit committee:
Auditor shall forward his report to the Board of the Audit committee, as the case may
be, immediately but not later than 2 days after he comes to knowledge of the fraud,
seeking their reply or observations within forty-five days.
2. Report to central Govt. after considering reply/observation of BOD/ audit committee:

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The auditor shall forward his report and the reply or observations of the board or the
audit committee along with his comments to the Central Government within fifteen
days of receipt of such reply or observations;
3. If no reply within 45 days:
In case the auditor fails to get any reply or observations from the board or the audit
committee within the stipulated period of forty-five days, he shall forward his report
to the central government along with a note containing the details of his report that
was earlier forwarded to the board or the audit committee for which he failed to
receive any reply or observations.
4. The report shall be sent to the Secretary, ministry Of Corporate Affairs in a sealed
cover by registered post with acknowledgement due or by speed post.
5. After the report is sent, an Emails shall be sent to the Secretary, Ministry of Corporate
Affairs in confirmation of the report sent.
6. The report shall be on the letter head of the auditor containing postal address, Email
address and Contact number.
7. The report shall be signed by the auditor with his seal and shall indicate his
membership number.
8. The report shall be in the form of a statement as specified in Form ADT-4

Reporting of Frauds involving less than Rs. 1 Crore by an Auditor Section-143(12)

In case of a fraud involving lesser than Rs. 1 Crore, the auditor shall report the matter to :
1. the audit committee constituted under section 177 or ,
2. to be board, in case the company is not required to constitute an Audit Committee.

As per Rule 13, the manner of reporting is as below:

The Auditor shall report such fraud to the Audit Committee or to the Board, immediately
but not later than 2 days of his knowledge of the Fraud.
The auditor shall specify the following:
1. Nature of the fraud with description
2. Approximate amount involved and
3. Parties involved.
The Board’s report shall disclose the following:
1. Nature of the fraud with description
2. Approximate amount involved and
3. Parties involved.
4. Remedial Actions taken.

No Liability of Auditor Section-143(13)

n auditor shall not be deemed to be guilty for breach of any of his duties by reason of his
reporting any matter to the Central Government if such reporting is done in goof faith.

Provisions applicable to other Auditors Section-143(14)

The provision of this rule shall also apply, mutatis mutandis, to a cost accountant and a
secretarial auditor during the performance of his duties under section 148 and section 204
respectively.

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Punishment for Non Compliance – Section 143(15)

Minimum Fine – Rs. 1 Lakh
Maximum Fine – Rs. 25 Lakh

Section-144
AUDITOR NOT TO RENDER CERTAIN SERVICES
Services which auditor should not provide to the auditee company:
Section 144 of the act provides that an auditor appointed under this act shall not directly or
indirectly provide any of the following “other services” (i.e. services other than statutory
audit under the 2013 act) to auditee- company or its holding company or 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;
f) Investment banking services;
g) Rendering of outsourced financial services;
h) Management services; and
i) Any other kind of services as may be prescribed.

Services other than the above may be provided by the auditor to the company only if the
services are approved by the board of directors or the audit committee, as the case may be.
It may be noted that an auditor or audit firm who or which has been performing any non
audit services on or before the commencement of this Act shall comply with the provisions
of this section before the closure of the first financial year after the date of such
commencement.
Further, in case of auditor being an individual, either himself or through his relative or any
other person connected or associated with such individual or through any other entity,
whatsoever, in which such individual has significant influence or control, or whose name or
trade mark or brand is used by such individual; and in case of auditor being a firm, either
itself or through any of its partners or through its parent, subsidiary or associate entity or
through any other entity, whatsoever, in which the firm or any partner of the firm has
significant influence or control, or whose name or trade mark or brand is used by the firm or
any of its partners.
4) Where a person appointed as an auditor of a company incurs any of the disqualifications
mentioned in sub-section (3) after his appointment, he shall vacate his office as such auditor
and such vacation shall be deemed to be a casual vacancy in the office of the auditor.

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Section-145
Signing of audit reports
Section 145 of the 2013 act makes the following provisions signing of audit report are as
under:-
 Only the person appointed as an auditor of the company shall sign the auditor’s
report or sign or certify any other document of the company in accordance with
the provisions of section 141(2)
 If a firm including a LLP is appointed as an auditor of a company, only the partners
who are chartered accountants in practice shall be authorised to act and sign on
behalf of the firm. [section 141(2)]

Reading out auditor’s report in general meeting and inspection of the same by members
The qualifications, observations or comments on financial transactions or matters, which
have any adverse effect on the functioning of the company mentioned in the auditor’s
report shall be read before the company in general meeting and shall be open to inspection
by any member of the company.

Section-146
Auditors to attend AGM
Notices of general meetings to be forwarded to the auditors of the company
The first limb of section 146 of the 2013 act provides that all notices of, and other
communications relating to, any general meeting shall be forwarded to the auditor’s of
the company. The forwarding of notices and other communications is required irrespective
of whether the agenda for the meeting contains any item related to accounts or audit or
auditors.

Auditor’s duty to attend general meeting and right to be heard at general meeting
The first limb of section 146 of the 2013 act deals with auditor’s attendance at general
meetings and auditor’s right to be heard at general meetings. The second limb of section
146 provides as under:
a) The auditor shall, unless otherwise exempted by the company, attend any general
meeting
i) By himself, or
ii) Through his authorised representative who is qualified to be an
auditor.
b) The auditor shall have right to be heard at such meeting on any part of the business
which concerns him as the auditor.
c) The Company may exempt an auditor from attending the GM.

Section 146 makes auditor’s attendance at general meetings compulsory either by himself
or authorised representative qualified to be an auditor. Such attendance is compulsory
whether or any matter related to accounts or audit or auditors is scheduled in the agenda of
the general meeting.

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Section-147
Punishment for contravention:
Punishment for contravention of Sec 139 to 146 for Company

Penalty – Company Penalty – Officer in default

Fine Rs. 25,000 to RS. 5 Lakh Rs. 10,000 to Rs.1 Lakh
Imprisonment - One year
- BOTH

Punishment for contravention of sections 139, 143, 144 and 145 by Auditor
Penalty – Auditor Penalty – Auditor*
Rs. 25,000 to RS. Rs. 50,000 to RS.25
5 Lakh Lakh
or four times the or eight times the
Fine
remuneration of remuneration of the
the auditor, auditor, whichever is
whichever is less less
Imprisonment - 1 year

*If an auditor has contravened such provisions knowingly or willfully with the INTENTION
TO DECEIVE the company or its shareholders or creditors or tax authorities.
Where an auditor has been convicted under sub-section (2), he shall be liable to:-
(i) refund the remuneration received by him to the company;
(ii) and pay for damages to the company statutory bodies or authorities or to
any members or creditors of the company for loss arising out
of incorrect or misleading statements of particulars made in his audit
report.

The Central Government shall, by notification, specify any statutory body or authority of an
officer for ensuring prompt payment of damages to the company or the persons under
clause (ii) of sub-section (3) and such body, authority or officer shall after payment of
damages the such company or persons file a report with the Central Government in respect
of making such damages in such manner as may be specified in the said notification.

Where, in case of audit of a company being conducted by an audit firm, it is proved that the
partner or partners of the audit firm has or have acted in a fraudulent manner or abetted
or colluded in an fraud by, or in relation to or by, the company or its directors or officers,
the liability, whether civil criminal as provided in this Act or in any other law for the time
being in force, for such act shall be the partner or partners concerned of the audit firm and
of the firm jointly and severally.

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SECTION 148
COST AUDIT
Order by Central Government for maintenance of Cost Records
Further, the Central Government may, by order, in respect of such class of companies
engaged in the production of such goods or providing such services as may be prescribed,
direct that particulars relating to the utilisation of material or labour or to other items of
cost as may be prescribed shall also be included in the books of account kept by that class of
companies.
Rule 3 of the Companies (cost records and audit) Rules, 2014- As amended on 31st
December 2014
Applicability for Maintenance of Cost Records: Rule 3 of the Companies (Cost Records and
Audit) Rules, 2014 provides the classes of companies, engaged in the production of goods or
providing services, having an overall turnover from all its products and services of ` 35 crore
or more during the immediately preceding financial year, required to include cost records in
their books of account.
These companies include Foreign Companies defined in sub-section (42) of section 2 of the
Act, but exclude a company classified as a Micro enterprise or a Small enterprise including
as per the turnover criteria provided under Micro, Small and Medium Enterprises
Development Act, 2006.
The said rule has divided the list of companies into (A) Regulated sectors and (B) Non
regulated sectors.
1. The ministry has introduced 6 major regulated sectors which are Telecommunication
Services, Generation, distribution and regulation of Electricity, Petroleum industry,
Drugs and pharmaceuticals, Fertilizers, and Sugar (Industrial Alcohol).
2. Besides the regulated sectors, the ministry has also named a number of non-
regulated sectors that should be included in the purview of the new audit rules. The
major industries in the non-regulated sector are arms and ammunitions, Turbo Jets,
steel, Aeronautics, and Coffee and Tea, etc.
Maintenance of Cost Records: As per Rule 5 of the Companies (Cost Records and Audit)
Rules, 2014, every company under these rules including all units and branches thereof, shall,
in respect of each of its financial year, is required to maintain cost records in Form CRA-1.

Applicability of Cost Audit: Rule 4 of the Companies (Cost Records and Audit) Rules, 2014
states the provisions related to the applicability of cost audit depending on the turnover of
the company as follows-

Regulatory Non- Regulatory

Cost Audit 1. Gross Turnover of 1. Gross Turnover of Companies
Companies covering covering products & Services
products & Services of of Rs.100 Cr. Or More
Rs.50 Cr. Or More 2. Turnover of individual
2. Turnover of individual products/Services covered for
products/Services covered maintenance of Cost Records

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for maintenance of Cost –Rs. 35 Cr. Or More

Records –Rs. 25 Cr. Or
More

Cost Audit Rules not to apply in certain cases:

The requirement for cost audit under these rules shall not be applicable to a company which
is covered under rule 3, and,
1. whose revenue from exports, in foreign exchange, exceeds seventy five per
cent of its total revenue; or
2. Which is operating from a Special Economic Zone.

If the Central Government is of the opinion, that it is necessary to do so, it may, by order,
direct that the audit of cost records of class of companies, which are covered under sub-
section (1) and which have a net worth of such amount as may be prescribed or a turnover
of such amount as may be prescribed, shall be conducted in the manner specified in the
order.

Rule 6 of the Companies (cost records and audit) Rules

1. Rule 6 of the Companies (cost records and audit) Rules, 2014 requires the companies
prescribed under the said Rules to APPOINT AN AUDITOR within 180 days of the
commencement of every financial year.
2. Every referred company shall inform the cost auditor concerned of his or its
appointment as such and file a notice of such appointment with the Central
Government within a period of 30 days of the Board meeting in which such
appointment is made or within a period of 180 days of the commencement of the
financial year, whichever is earlier, through electronic mode, in Form CRA-2, along
with the fee as specified in Companies (Registration Offices and Fees) Rules, 2014.
3. The cost auditor appointed as such shall continue in such capacity till the expiry of
180 days from the closure of the financial year or till he submits the cost audit
report, for the financial year for which he has been appointed.
The cost auditor shall submit the cost audit report along with his or its reservations or
qualifications or observations or suggestions, if any, in Form CRA-3. He shall forward his
report to the Board of Directors of the company within a period of 180 days from the
closure of the financial year to which the report relates and the Board of Directors shall
consider and examine such report particularly any reservation or qualification contained
therein.

WHO CAN BE COST AUDITOR: The audit shall be conducted by a Cost Accountant
who shall be appointed by the Board of such remuneration as may be determined by the
members in such manner as may be prescribed.
NO PERSON APPOINTED UNDER SECTION 139 AS AN AUDITOR OF THE COMPANY SHALL
BE APPOINTED FOR CONDUCTING THE AUDIT OF COST RECORDS.
It may also be noted that the auditor conducting the cost audit shall comply with the cost
auditing standards.

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Appointment and Remuneration of Cost Auditor: As per rule 14 of the Companies (Audit
and Auditors) Rules, 2014,
(a) in the case of companies which are required to constitute an audit committee-
(1) the Board shall appoint an individual, who is a cost accountant, or a firm of cost
accountants in practice, as cost auditor on the recommendations of the Audit
committee, which shall also recommend remuneration for such cost auditor;
(2) the remuneration recommended by the Audit Committee under (i) shall be
considered and approved by the Board of Directors and ratified subsequently by the
shareholders;
(b) in the case of other companies which are not required to constitute an audit committee,
the Board shall appoint an individual who is a cost accountant or a firm of cost accountants
in practice as cost auditor and the remuneration of such cost auditor shall be ratified by
shareholders subsequently.
Casual vacancy in office of cost Auditor: Any casual vacancy in the office of Cost Auditor,
whether due to resignation, death or removal, shall be filled by the Board of Directors
within 30 days of occurrence of such vacancy and company shall inform the Central
Government in Form CRA-2 within 30 days of such appointment of cost Auditor.
Qualification, disqualification, rights, duties and obligations of Cost Auditor: As applicable
to auditors under this Chapter shall, so far as may be applicable, apply to a cost auditor..
Submission of Cost Audit Report:
(i) To the Board of Directors of the Company- The cost auditor shall submit the cost audit
report along with his reservations or qualifications or observations or suggestions, if any, in
Form CRA-3. He shall forward his report to the Board of Directors of the company within a
period of 180 days from the closure of the financial year to which the report relates and the
Board of Directors shall consider and examine such report particularly any reservation or
qualification contained therein.
(ii) To the Central Government- The company shall within 30 days from the date of receipt
of a copy of the cost audit report prepared furnish the Central Government with such report
along with full information and explanation on every reservation or qualification contained
therein in Form CRA-4 along with fees specified in the Companies (Registration Offices and
Fees) Rules, 2014. If, after considering the cost audit report and the, information and
explanation furnished by the company as above, the Central Government is of the opinion,
that any further information or explanation is necessary, it may call for such further
information and explanation and the company shall furnish the same within such time as
may be specified by that Government.

Duty to Report on Fraud: Same as in Provisions of section 143(12) of the

Companies Act, 2013
Penal Provisions in Case of Default: If any default is made in complying with the provisions
of this section,
a. the company and every officer of the company who is in default shall be punishable in
the manner as provided in sub-section (1) of section 147;
b. the cost auditor of the company who is in default shall be punishable in the manner as
provided in sub-sections (2) to (4) of section 147.

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