Provisions relating to Audit and Auditors in The Companies Act, 2013 Presentation By CA Anil Sharma

Audit and Auditors Chapter X. Sections 139 to 148. All sections are applicable w.e.f. 1.4.2014 except : Second proviso to subsection (4) and Subsection (5) of Sec.140- Removal of auditor The Companies (Audit and Auditors) Rules, 2014. ( applicable w.e.f. 1.4.2014) Monday, November 12, 2018

Section 139(6)- First Auditor’s appointment To be appointed by the BOD with in 30 days of incorporation of the company, If BOD does not appoint, shall inform the members Members shall within 90 days appoint first auditors of the company, First auditor to hold office till the conclusion of first AGM. Monday, November 12, 2018

Sec 139(1) - Auditors appointment Manner and procedure of selection prescribed in Rule 3: Audit Committee, if there or Board to take into consideration before recommending to BOD: The qualification and experience of the person proposed, Any pending disciplinary proceedings against the person, To assess whether commensurate to the size and requirement of the company BOD to recommend to AGM BOD may refer back the matter to Audit Committee to reconsider BOD may not agree to the recommendations of Audit Committee, to explain the reasons in the Board meeting. Monday, November 12, 2018

Sec 139(1) - Auditors appointment Auditors to be appointed for 5 years at a time in the AGM Provided that such appointment shall be subject to ratification in every annual general meeting till the sixth such meeting by way of passing of an ordinary resolution. Explanation to Rule 3 - For the purposes of this rule, it is hereby clarified that, if the appointment is not ratified by the members of the company, the Board of Directors shall appoint another individual or firm as its auditor or auditors after following the procedure laid down in this behalf under the Act. Monday, November 12, 2018

Sec 139(1) - Auditors appointment Rule 4- Before appointing / reappointing, company to obtain written consent of the auditor and a certificate stating that: is not disqualified for appointment under the Act, the CA Act, 1949 and the rules or regulations made thereunder; the proposed appointment is as per the term provided under the Act; the proposed appointment is within the limits laid down by or under the authority of the Act; the list of proceedings pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct. After appointment, the company to inform the auditor and to file a notice to this respect with in 15 days with Registrar in Form- ADT-1. Monday, November 12, 2018

Sec 139(2) - Auditors Rotation Listed companies and prescribed class of companies cannot have the same auditor In case of a firm, after two terms of 5 years each In case of an individual, after one term of 5 years Such outgoing audit firm cannot become auditor for a period of 5 years. The prohibition covers firms which have common partners too. Monday, November 12, 2018

Sec 139(2) - Auditors Rotation Rule 5 : the class of companies shall mean the following classes of companies excluding one person companies and small companies:- (a) all unlisted public companies having paid up share capital of rupees ten crore or more; (b) all private limited companies having paid up share capital of rupees twenty crore or more; (c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more. Monday, November 12, 2018

Sec 139(4) - Auditors Rotation Rule 6: Manner of rotation Audit Committee, where in existence, to recommend the name to be rotated in place of the present incumbent on expiry of his term other wise BOD itself The period for which he has been holding office as auditor prior to the commencement of the Act shall be taken into account to calculate the period of five consecutive years Income auditor shall not be eligible if he is associated with the outgoing auditor under the same network of audit firms or is operating under the same trade mark or brand Break in term for a continuous period of 5 years only be considered as fulfilling the requirement of eligibility 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. Monday, November 12, 2018

Sec 139(4) - Auditors Rotation Rule 6: Manner of rotation Audit Committee, where in existence, to recommend the name to be rotated in place of the present incumbent on expiry of his term other wise BOD itself The period for which he has been holding office as auditor prior to the commencement of the Act shall be taken into account to calculate the period of five consecutive years Income auditor shall not be eligible if he is associated with the outgoing auditor under the same network of audit firms or is operating under the same trade mark or brand Break in term for a continuous period of 5 years only be considered as fulfilling the requirement of eligibility 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. Such rotation will have to be effected by companies covered by this requirement within 3 years of the date of commencement of this law. Monday, November 12, 2018

Sec 140- Auditors Removal / Resignation Removal of an existing auditor within the 5 years term shall be possible only by Passing of a special resolution and Also CG approval ( Form ADT-2 to be filed) Also, the auditor will have to be heard before the approval is given for the change of auditor. In case of a resignation by the auditor, there is a need to file (with company, ROC and where applicable, CAG) within 30 days a statement in Form ADT-3 giving the reasons and other facts as may be relevant in regard to the resignation. NCLT could order for change of auditors when it is satisfied that the auditors have directly or indirectly acted in a fraudulent manner or abetted or colluded in any fraud. Monday, November 12, 2018

CASUAL VACANCY In case of a Government company:- To be filled by CAG within 30 days If not done by CAG then Board shall fill within next 30 days In case of other than Government companies:- By the Board, if caused due to resignation then approved by shareholders within three months from the recommendation of the Board is also required. If in any AGM no auditor is appointed or reappointed, the existing auditor shall continue

Sec 141-Eligibility of an auditor To be a chartered accountant or firm of chartered accountants or A LLP ‘Chartered Accountant’ has been defined In case of firm , majority of partners practicing in India should be qualified to be appointed as such. In case of LLP, only partners who are Chartered Accountant in practice shall be authorised by firm to act and sign on behalf of firm.

Sec 141- Auditors disqualifications Enhanced disqualifications If the person holds any security or interest in the Company, subsidiary, holding, associate or co-subsidiary. If a relative holds any security in the Company, subsidiary, holding, associate or co-subsidiary in excess of Rs. 1 Lakh , However, the corrective action to maintain the limits shall be taken by the auditor within sixty days of such acquisition or interest. (Rule 10). Indebtedness of the person or his relative or partner in excess of Rs. 5 Lakhs or has guaranteed or provided security for a third party to the Company, subsidiary, holding, associate or co-subsidiary for an amount in excess of Rs. 1 Lakh (Rule 10). Monday, November 12, 2018

Sec 141- Auditors disqualifications New disqualifications Having direct or indirect business relationship with the Company, subsidiary, holding, associate or co-subsidiary 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. Relative is a director or is employed as a director or KMP in the company. A person convicted of fraud and 10 years not having elapsed from such conviction. Monday, November 12, 2018

Sec 141(3)(g)-Cap on number of audits Provides a cap of twenty companies per partner. Earlier Act provided for limits only covering public companies. No such reference in the Section. Monday, November 12, 2018

Section -143-Duties of an auditor Subsection (1) – Enquiries to be made. Sub section (2) – to make a report to the members.

Section -143-Duties of an auditor Sub section (3) – Auditors Report to state the following other matters (Rule 11): (a) whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement; (b) 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; (c) whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company.

Sec 143(12)- Reporting of Frauds by Auditors If 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 immediately but not later than sixty days of his knowledge and after following the procedure given in Rule 13. The report shall be sent to the Secretary, MCA in a sealed cover by Registered Post with A/D or by Speed post followed by an e-mail in confirmation of the same. Provision also apply to a cost auditor and a secretarial auditor during the performance of his duties under section 148 and section 204 respectively. Monday, November 12, 2018

Procedure for reporting fraud by auditors Rule 13- Report to be submitted in Form ADT-4 (i) auditor shall forward his report to the Board / the Audit Committee, immediately after he comes to knowledge of the fraud, seeking their reply or observations within forty-five days; (ii) on receipt of such reply or observations the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply) to the Central Government within fifteen days of receipt of such reply or observations; (iii) 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. Monday, November 12, 2018

Sec 144- Auditors – Prohibited services Auditors can provide only such services as are approved by the AC / Board, but cannot provide the following either directly or indirectly to the company, its holding and subsidiaries: Accounting and Book Keeping services Internal audit Design and implementation of any financial information system Actuarial services Investment advisory services Investment banking services Rendering of outsourced financial services Management services Any other kind of services as may be prescribed Monday, November 12, 2018

Sec 144- Auditors – Prohibited services In case of an audit firm, this prohibition extends to The audit firm All its partners Its parent, subsidiary and associate entity and 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 Any auditor or firm already providing any non- audit services shall comply with the provisions before closure of the first financial year after the date of such commencement. Monday, November 12, 2018

Auditors - Penalties Contravention of law Relating to appointment, rotation, powers and duties, prohibited services or signing of audit report –Min Rs.25,000 to Max Rs. 5 Lakhs If done willfully with an intention to deceive – imprisonment up to 1 year and penalty of Rs. I Lakh to Rs. 25 Lakhs. Also to refund the audit fee to the Company Pay damages to those who have lost on account of such incorrect / misleading statements or particulars in his audit report Monday, November 12, 2018

Auditors - Penalties Prosecution by NFRA (on suo moto or reference based investigation) Penalty Min Rs.1 Lakh to 5 times the fees received, for individuals Min Rs.10 Lakh to 10 times the fees received, for firms Debar from practice Member / firm for a min 6 months to 10 years period Monday, November 12, 2018

Auditors - Penalties Class action suit by members / depositors in case of improper or misleading statements in the audit report or fraudulent, unlawful or wrongful act Liability against the firm and each partner who was involved In case of proof of fraud / abetting to fraud, then the liability will be joint and several for the auditor, his partners and firm Monday, November 12, 2018

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