AUDITOR AND AUDITOR’S REPORT: DUTIES, POWER, PENALTIES.

(UPDATE: on 30^th August 2013: Companies Bill, 2012became the Companies Act, 2013 (Act 18 of 2013). )

In my last blog post auditor under companies Act, 2013: from appointment to removal, I discussed auditor his appointment, remuneration resignation and removal along with other incidental matters. In this post I will discuss power, duties and penalties related to auditors and audit report.

POWER AND DUTIES OF AUDITORS AND ACCOUNTING STANDARD (Section 143):

Every auditor has certain duties to perform and has power to perform these duties.

Right to access (Sub – Section 1):

Every auditor of a company shall have right to access at all time to book of accounts and vouchers of the company. The Auditor shall be entitled to require from officers of the company such information and explanation as he may consider necessary for performance of his duties.

There is an inclusive list of matter for which auditor shall seek information and explanation. This list helps auditor to take special care on serious issues. The list includes issues related to:

(a)   Proper security for Loan and advances,

(b)  Transaction by book entries

(c)   Sale of assets in securities in loss

(d)  Loan and advances made shown as deposits,

(e)  Personal expenses charged to revenue account

(f)    Case received for share allotted for cash

The auditor of holding company also has same rights.

Auditor’s Report (Sub – Sections 2, 3 and 4) :

The auditor shall make a report to the members of the company on accounts examined by him on every financial statements and report financial statement give a true and fair view of the state of the company’s affairs at the end of its financial year and profit or loss and cash flow for the year and such other matters.

The auditor report shall also state:

(a)   Whether he has sought and obtained all the necessary information and explanations,

(b)  Whether proper books of account have been kept,

(c)   Whether the report from branch auditor was sent to him and the manner he dealt with it,

(d)  Whether company’s balance sheet and profit and loss account are in agreement with books of accounts and returns,

(e)  Whether financial statements comply with accounting standards,

(f)    The observations or comments on financial transactions or matters which have any adverse effect

(g)  Whether any directors is disqualified from being appointed as director under section 164(2),

(h)  Any qualification, reservation or adverse remark

(i)    Whether company has effective internal control system and operative effectiveness, and

(j)    Such other matters.

The report shall state the reason for answers in negative and with qualification.

Audit report of Government Company (Sub – Section 5, 6 and 7):

The audit report of auditors of government shall submit a copy of the audit report to the Comptroller and Auditor – General of India which among other things include the directions issued by the Comptroller and Auditor – General of India, the action taken thereon and its impact on the accounts and financial statement of the company.

The Comptroller and Audit – General of India shall within sixty days of receipt of the report have right to (a) conduct a supplementary audit and (b) comment upon or supplement such audit report.

The Comptroller and Audit – General of India may cause test audit to be conducted of the accounts of such company.

Branch Audit (Sub – section 8):

Where a company has a branch office, the accounts of that office shall be audited either by the auditor appointed for the company (herein referred to as the company’s auditor), or by any other person qualified for appointment as an auditor of the company, or where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company’s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country.

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.

Account Standards (Sub – Section 9, 10 and 11):

Every auditor shall comply with the auditing standards. The Central Government shall notify these standards in consultation with National Financial reporting Authority. The government may also notify that auditors’ report shall include a statement on such matters as notified.

Fraud Reporting (Sub – Section 12, 13, 14 and 15):

if an auditor of a company, in the course of the performance of his duties as auditor, has 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 immediately report the matter to the Central Government within such time and in such manner as may be prescribed.

No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter if it is done in good faith.

The provisions of this section shall mutatis mutandis apply to—

(a) the cost accountant in practice conducting cost audit under section 148; or

(b) the company secretary in practice conducting secretarial audit under section 204.

AUDITOR TO SIGN AUDIT REPORTS (SECTION 145):

The auditor of the company shall sign the auditor’s report or sign or certify any other document of the company and 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.

AUDITOR IN GENERAL MEETING (Section 146):

All notices of, and other communications relating to, any general meeting shall be forwarded to the auditor of the company, and the auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorised representative, who shall also be qualified to be an auditor, any general meeting and shall have right to be heard at such meeting on any part of the business which concerns him as the auditor.

PUNISHMENT FOR CONTRAVENTIONS (Section 147):

If an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

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; and

(ii)           pay for damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.

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 any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally.

Please note blog post is not a professional advice but general information about the subject covered here.