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25-Aug-17 © ICAI, 2016 1
Definition of Auditing
Definitions: (1) Auditing
25-Aug-17 © ICAI, 2016 2
“An audit is independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.”
Definition: Auditing
25-Aug-17 © ICAI, 2016 3
“An audit is
independent examination
of financial information of any entity,
whether profit oriented or not,
and irrespective of its size or legal form,
when such an examination is conducted with a view to expressing an opinion thereon.”
Definition: Auditing
25-Aug-17 © ICAI, 2016 4
Analysis of the definition
1. Audit is Independent examination of Financial information
2. of any entity – that entity may be profit oriented or not and irrespective of its size or legal form. For example – Profit oriented – Audit of Listed company engaged in business. On the other hand, Audit of NGO- not profit oriented.
3. The objective of the audit is to express an opinion on the financial statements
Definition: Auditing …cntd.
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The person conducting this process should perform his work with knowledge of the use of the accounting statements and should take particular care to ensure that nothing contained in the statements will ordinarily mislead anybody.
Definition: Auditing …cntd.
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This he can do honestly by satisfying himself that:
(i) the accounts have been drawn up with reference to entries in the books of account;
(ii) the entries in the books of account are adequately supported by underlying papers and documents and by other evidence;
(iii) none of the entries in the books of account has been omitted in the process of compilation and nothing which is not in the books of account has found place in the statements;
Definition: Auditing …cntd.
25-Aug-17 © ICAI, 2016 7
(iv) the information conveyed by the statements is clear and unambiguous;
(v) the financial statement amounts are properly classified, described and disclosed in conformity with accounting standards; and
(vi) the statement of accounts taken as an integrated whole, present a true and fair picture of the operational results and of the assets and liabilities.
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Objectives of Audit
Objectives of Audit
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As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting an audit of financial statements, the overall objectives of the auditor are:
Objectives of Audit
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(a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and
Objectives of Audit
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(a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement
thereby enabling the auditor to express an opinion on the financial statements
Objectives of Audit …cntd.
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(b) To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s findings.
Objectives of Audit …cntd.
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The purpose of an audit is to enhance the degree of confidence.
This is achieved by the expression of an opinion by the auditor
Objectives of Audit …cntd.
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An audit conducted in accordance with SAs and relevant ethical requirements enables the auditor to form that opinion.
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Audit Evidence
Audit Evidence
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Audit evidence may be defined as the information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based.
Audit Evidence
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Audit evidence includes both information contained in the accounting records underlying the financial statements and other information.
Audit Evidence …cntd.
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Audit evidence includes:
(1) Information contained in the accounting records:
Accounting records include the records of initial accounting entries and
supporting records, such as records of electronic fund transfers;
Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 19
Point no. 1 Continued
Audit evidence includes-
invoices;
contracts;
the general and subsidiary ledgers, journal entries and other adjustments to the financial statements that are not reflected in journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations and disclosures.
Audit Evidence …cntd.
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(2) Other information that authenticates the accounting records and also supports the auditor’s rationale behind the true and fair presentation of the financial statements.
Audit Evidence …cntd.
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Other information which the auditor may use as audit evidence includes, for example-
minutes of the meetings,
written confirmations from trade receivables and trade payables,
manuals containing details of internal control etc.
Audit Evidence …cntd.
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A combination of tests of accounting records and other information is generally used by the auditor to support his opinion on the financial statements.
25-Aug-17 © ICAI, 2016 23
Sufficiency and Appropriateness of
Audit Evidence
Sufficiency and Appropriateness of Audit Evidence
25-Aug-17 © ICAI, 2016 24
Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative in nature and is primarily obtained from audit procedures performed during the course of the audit.
Sufficiency and Appropriateness of Audit Evidence
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It may, however, also include information obtained from other sources such as previous audits. In addition to other sources inside and outside the entity, the entity’s accounting records are an important source of audit evidence.
Sufficiency and Appropriateness of Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 26
As explained in SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”,
reasonable assurance is obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk to an acceptably low level. The sufficiency and appropriateness of audit evidence are interrelated.
Sufficiency and Appropriateness of Audit Evidence …cntd.
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Sufficiency of Audit Evidence: Sufficiency is the measure of the quantity of audit evidence.
Sufficiency and Appropriateness of Audit Evidence …cntd.
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The quantity of audit evidence needed is affected by the auditor’s assessment of the risks of misstatement (the higher the assessed risks, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be required). Obtaining more audit evidence, however, may not compensate for its poor quality.
Sufficiency and Appropriateness of Audit Evidence …cntd.
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Auditor’s judgment as to sufficiency may be affected by the factors such as:
(i) Materiality
(ii) Risk of material misstatement
(iii) Size and characteristics of the population.
Sufficiency and Appropriateness of Audit Evidence …cntd.
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(i) Materiality may be defined as the significance of classes of transactions, account balances and presentation and disclosures to the users of the financial statements.
Sufficiency and Appropriateness of Audit Evidence …cntd.
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Less evidence would be required in case assertions are less material to users of the financial statements. But on the other hand if assertions are more material to the users of the financial statements, more evidence would be required.
Sufficiency and Appropriateness of Audit Evidence …cntd.
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(ii) Risk of material misstatement may be defined as the risk that the financial statements are materially misstated prior to audit.
Sufficiency and Appropriateness of Audit Evidence …cntd.
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This consists of two components described as follows at the assertion level (a) Inherent risk (b) Control risk.
Less evidence would be required in case assertions that have a lower risk of material misstatement. But on the other hand if assertions have a higher risk of material misstatement, more evidence would be required.
Sufficiency and Appropriateness of Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 34
Assertion- Assertions refer to representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur.
Sufficiency and Appropriateness of Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 35
Assertion- Assertions refer to representations by management
that are embodied in the financial statements,
as used by the auditor to consider the different types of potential misstatements that may occur.
Sufficiency and Appropriateness of Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 36
(iii) Size of a population refers to the number of items included in the population. Less evidence would be required in case of smaller, more homogeneous population. But on the other hand in case of larger, more heterogeneous populations, more evidence would be required.
Sufficiency and Appropriateness of Audit Evidence …cntd.
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Appropriateness of Audit Evidence: Appropriateness is the measure of the quality of audit evidence.
Sufficiency and Appropriateness of Audit Evidence …cntd.
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The reliability of evidence is influenced by its source and by its nature, and is dependent on the individual circumstances under which it is obtained.
Sufficiency and Appropriateness of Audit Evidence …cntd.
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SA 330, “The Auditor’s Responses to Assessed Risks” requires the auditor to conclude whether sufficient appropriate audit evidence has been obtained.
Sufficiency and Appropriateness of Audit Evidence …cntd.
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Whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level, and thereby enable the auditor to draw reasonable conclusions on which to base the auditor’s opinion, is a matter of professional judgement.
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Sources of Audit Evidence
Sources of Audit Evidence
25-Aug-17 © ICAI, 2016 42
Some audit evidence is obtained by performing audit procedures to test the accounting records.
For example-
- through analysis and review,
- reperforming procedures followed in the financial reporting process,
- and reconciling related types and applications of the same information.
Sources of Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 43
Through the performance of such audit procedures, the auditor may determine that the accounting records are internally consistent and agree to the financial statements.
Sources of Audit Evidence …cntd.
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More assurance is ordinarily obtained from consistent audit evidence obtained from different sources or of a different nature than from items of audit evidence considered individually.
Sources of Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 45
For example, corroborating information obtained from a source independent of the entity may increase the assurance the auditor obtains from audit evidence that is generated internally.
Sources of Audit Evidence …cntd.
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Information from sources independent of the entity that the auditor may use as audit evidence may include confirmations from third parties, analysts’ reports, and comparable data about competitors.
25-Aug-17 © ICAI, 2016 47
Audit Procedures to Obtain Audit Evidence
Audit Procedures to Obtain Audit Evidence
25-Aug-17 © ICAI, 2016 48
Audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is obtained by performing:
(a) Risk assessment procedures; and
(b) Further audit procedures, which comprise:
(i) Tests of controls, when required by the SAs or when the auditor has chosen to do so; and
(ii) Substantive procedures, including tests of details and substantive analytical procedures.
Audit Procedures to Obtain Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 49
Risk assessment procedures refer to the audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assess the risks of material misstatement..
Audit Procedures to Obtain Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 50
Audit procedures to obtain audit evidence can include :
(i) Inspection
(ii) Observation
(iii) External Confirmation
(iv) Recalculation
(v) Reperformance
(vi) Analytical Procedures
(vii) Inquiry
Audit Procedures to Obtain Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 51
(i) Inspection: Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset.
Audit Procedures to Obtain Audit Evidence …cntd.
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(ii) Observation: Observation consists of looking at a process or procedure being performed by others, for example, the auditor’s observation of inventory counting by the entity’s personnel, or of the performance of control activities.
Audit Procedures to Obtain Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 53
(iii) External Confirmation: An external confirmation represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium.
Audit Procedures to Obtain Audit Evidence …cntd.
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(iv) Recalculation: Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically.
Audit Procedures to Obtain Audit Evidence …cntd.
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(v) Re-performance: Re-performance involves the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control.
Audit Procedures to Obtain Audit Evidence …cntd.
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(vi) Analytical Procedures: Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data.
Audit Procedures to Obtain Audit Evidence …cntd.
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(vii) Inquiry: Inquiry consists of seeking information of knowledgeable persons, both financial and non- financial, within the entity or outside the entity.
Audit Procedures to Obtain Audit Evidence …cntd.
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Inquiry is used extensively throughout the audit in addition to other audit procedures. Inquiries may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry process.
Audit Procedures to Obtain Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 59
At this stage, it would be pertinent to discuss further audit procedures, which comprise:
(i) Tests of controls, when required by the SAs or when the auditor has chosen to do so; and
(ii) Substantive procedures, including tests of details and substantive analytical procedures.
Audit Procedures to Obtain Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 60
Tests of controls:
Test of controls may be defined as an audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.
Audit Procedures to Obtain Audit Evidence …cntd.
25-Aug-17 © ICAI, 2016 61
Substantive Procedures:
Substantive procedure may be defined as an audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise:
(i) Tests of details (of classes of transactions, account balances, and disclosures), and
(ii) Substantive analytical procedures.
Audit Procedures to Obtain Audit Evidence …cntd.
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Audit Procedures
Risk Assessment Procedures
Other Procedures
Test of Controls Substantive Procedures
Test of Details
Test of Transactions i.e. Vouching
Test of Balances i.e. Verification
Analytical Procedures
Definition : Audit Risk
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It is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.
Definition : Audit Risk
25-Aug-17 © ICAI, 2016 64
It is the risk that the auditor expresses an inappropriate audit opinion
when the financial statements are materially misstated.
Audit risk is a function of the risks of material misstatement and detection risk.
Definition: Misstatement
25-Aug-17 © ICAI, 2016 65
It is a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud.
Definition : Misstatement
25-Aug-17 © ICAI, 2016 66
It is a difference between
a reported financial statement item and
that is required for the item
to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud.
Risk of Material Misstatement
25-Aug-17 © ICAI, 2016 67
It is the risk that the financial statements are materially misstated prior to audit. This consists of two components, described as follows at the assertion level:
(i) Inherent risk – The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.
Risk of Material Misstatement
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It is the risk that the financial statements are materially misstated prior to audit.
Definitions: (4) Risk of Material Misstatement
25-Aug-17 © ICAI, 2016 69
This consists of two components
(i) Inherent risk – The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement
before consideration of any related controls.
Definitions: (4) Risk of Material Misstatement
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(i) Inherent risk – The susceptibility of an assertion about a
class of transaction,
account balance or
disclosure
to a misstatement before consideration of any related controls.
Definitions: (4) Risk of Material Misstatement
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For example—
Technological developments might make a particular product obsolete thereby causing inventory to be more susceptible to overstatement
Risk of Material Misstatement …cntd.
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(ii) Control risk – The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.
Risk of Material Misstatement …cntd.
25-Aug-17 © ICAI, 2016 73
(ii) Control risk – The risk that a misstatement that could occur in an assertion about
a class of transaction,
account balance or
disclosure
will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.
Risk of Material Misstatement …cntd.
25-Aug-17 © ICAI, 2016 74
Control Risk is a function of the effectiveness of the design,
implementation and
maintenance of Internal Control.
Risk of Material Misstatement …cntd.
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Internal control can only reduce but not eliminate risk of material misstatement because of inherent limitations of internal control.
Risk of Material Misstatement …cntd.
25-Aug-17 © ICAI, 2016 76
For example –
Possibility of human error or mistakes.
Risk of Material Misstatement …cntd.
25-Aug-17 © ICAI, 2016 77
Some control risk will always exist.
Definition : Detection Risk
25-Aug-17 © ICAI, 2016 78
It is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.
Definitions: (5) Detection Risk
25-Aug-17 © ICAI, 2016 79
It is the risk that the auditor’s procedures will not detect a misstatement
Definition : Professional Judgment
25-Aug-17 © ICAI, 2016 80
It is the application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.
Definition: Professional Skepticism
25-Aug-17 © ICAI, 2016 81
It is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.
Definition: Professional Skepticism
25-Aug-17 © ICAI, 2016 82
It is an attitude that includes a questioning mind
Definition : Reasonable Assurance
25-Aug-17 © ICAI, 2016 83
In the context of an audit of financial statements, ‘Reasonable Assurance’ is a high, but not absolute, level of assurance.
25-Aug-17 © ICAI, 2016 84
Qualities of an Auditor
Qualities of an Auditor
25-Aug-17 © ICAI, 2016 85
An auditor is concerned with the reporting on financial matters of business and other institutions.
Qualities of an Auditor …cntd.
25-Aug-17 © ICAI, 2016 86
The qualities required, according to Dicksee, are tact, caution, firmness, good temper, integrity, discretion, industry, judgement, patience, clear headedness and reliability. In short, all those personal qualities that go to make a good businessman contribute to the making of a good auditor.
Qualities of an Auditor …cntd.
25-Aug-17 © ICAI, 2016 87
In addition, he must have the shine of culture for attaining a great height. He must have the highest degree of integrity backed by adequate independence. In fact, Code of Ethics mentions integrity, objectivity and independence as one of the fundamental principles of professional ethics.
Qualities of an Auditor …cntd.
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He must have a thorough knowledge of the general principles of law which govern matters with which he is likely to be in intimate contact.
Qualities of an Auditor …cntd.
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Needless to say, where undertakings are governed by a special statute, its knowledge will be imperative; in addition, a sound knowledge of the law and practice of taxation is unavoidable.
Qualities of an Auditor …cntd.
25-Aug-17 © ICAI, 2016 90
He must pursue an intensive programme of theoretical education in subjects like financial and management accounting, general management, business and corporate laws, computers and information systems, taxation, economics, etc. Both practical training and theoretical education are equally necessary for the development of professional competence of an auditor for undertaking any kind of audit assignment.
Qualities of an Auditor …cntd.
25-Aug-17 © ICAI, 2016 91
The auditor should be equipped not only with a sufficient knowledge of the way in which business generally is conducted but also with an understanding of the special features peculiar to a particular business whose accounts are under audit. The auditor, who holds a position of trust, must have the basic human qualities apart from the technical requirement of professional training and education.
Qualities of an Auditor …cntd.
25-Aug-17 © ICAI, 2016 92
He is called upon constantly to critically review financial statements and it is obviously useless for him to attempt that task unless his own knowledge is that of an expert. An exhaustive knowledge of accounting in all its branches is the sine qua non of the practice of auditing. He must know thoroughly all accounting principles and techniques.
Qualities of an Auditor …cntd.
25-Aug-17 © ICAI, 2016 93
Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had succinctly summed up the overall view of what an auditor should be as regards the personal qualities. He said, “an auditor must be honest that is, he must not certify what he does not believe to be true and must take reasonable care and skill before he believes that what he certifies is true”.
25-Aug-17 © ICAI, 2016 94
Inherent Limitations of Audit
Inherent Limitations of Audit
25-Aug-17 © ICAI, 2016 95
As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”, the auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.
Inherent Limitations of Audit
25-Aug-17 © ICAI, 2016 96
As per SA 200,
the auditor cannot reduce audit risk to zero and cannot therefore obtain absolute assurance.
This is because there are inherent limitations of an audit
Inherent Limitations of Audit …cntd.
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The inherent limitations of an audit arise from:
(i) The Nature of Financial Reporting: The preparation of financial statements involves judgment by management in applying the requirements of the entity’s applicable financial reporting framework to the facts and circumstances of the entity.
Inherent Limitations of Audit …cntd.
25-Aug-17 © ICAI, 2016 98
In addition, many financial statement items involve subjective decisions or assessments or a degree of uncertainty, and there may be a range of acceptable interpretations or judgments that may be made.
Inherent Limitations of Audit …cntd.
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(ii) The Nature of Audit Procedures: There are practical and legal limitations on the auditor’s ability to obtain audit evidence.
Inherent Limitations of Audit …cntd.
25-Aug-17 © ICAI, 2016 100
For example:
1. Fraud may involve sophisticated and carefully organised schemes designed to conceal it. Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement that involves, for example, collusion to falsify documentation which may cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither trained as nor expected to be an expert in the authentication of documents.
Inherent Limitations of Audit …cntd.
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2. An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given specific legal powers, such as the power of search, which may be necessary for such an investigation.
Inherent Limitations of Audit …cntd.
25-Aug-17 © ICAI, 2016 102
(iii) Timeliness of Financial Reporting and the Balance between Benefit and Cost: The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive. Appropriate planning assists in making sufficient time and resources available for the conduct of the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between the reliability of information and its cost.
Inherent Limitations of Audit …cntd.
25-Aug-17 © ICAI, 2016 103
(iii) Timeliness of Financial Reporting and the Balance between Benefit and Cost:
the relevance of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between the reliability of information and its cost.
Inherent Limitations of Audit …cntd.
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(iv) Other Matters that Affect the Limitations of an Audit: In the case of certain assertions or subject matters, the potential effects of the limitations on the auditor’s ability to detect material misstatements are particularly significant.
Inherent Limitations of Audit …cntd.
25-Aug-17 © ICAI, 2016 105
Such assertions or subject matters include:
- Fraud, particularly fraud involving senior management or collusion.
- The existence and completeness of related party relationships and transactions.
- The occurrence of non-compliance with laws and regulations.
- Future events or conditions that may cause an entity to cease to continue as a going concern.
Inherent Limitations of Audit …cntd.
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Because of the limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with SAs.
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Section 139 of the Companies Act, 2013
• Appointment of Auditors
Section 139(1): Appointment of subsequent auditors in case of Non-Government Companies
108 25-Aug-17 © ICAI, 2015
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 every
sixth meeting.
Section 139(1): Appointment of subsequent auditors in case of
Non-Government Companies
109 25-Aug-17 © ICAI, 2015
Every company means here that no distinction among
various companies has been made in this section.
i.e each and every company has to appoint its auditors
For example – no distinction would be made – public
ltd company, private ltd company, OPC, small
company etc. in application of sec 139.
Section 139(1): Appointment of subsequent auditors in case of
Non-Government Companies
110 25-Aug-17 © ICAI, 2015
Every company shall.
Shall indicates that it would be mandatory for every company to appoint its auditors.
You must remember that ‘ may’ is discretionary and ‘shall’ is mandatory.
Section 139(1): Every Company to appoint Auditors
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Every Company
Shall
At First AGM
Appoint an Auditor(individual or firm)
Section 139(1): Every Company to appoint Auditors
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Example- 1.
Individual— Rohit Kumar Chartered Accountant appointed
as auditor of XYZ Ltd.
Section 139(1): Every Company to appoint Auditors
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Example- 2.
Proprietorship Firm of CA Rohit Kumar—Rohit Kumar & Co.
Chartered Accountants appointed as auditor of XYZ Ltd.
Section 139(1): Every Company to appoint Auditors
Example- 3. Partnership Firm of CA Rohit Kumar and CA Mohit Kumar—Rohit Mohit & Co. Chartered Accountants appointed as auditor of XYZ Ltd.
25-Aug-17 © ICAI, 2015 114
Section 139(1): Every Company to appoint Auditors
Shall hold office From that meeting Till The Sixth AGM
25-Aug-17 © ICAI, 2015 115
Section 139(1): Appointment of subsequent auditors in case of
Non-Government Companies
116 25-Aug-17 © ICAI, 2015
with the meeting wherein such appointment has been made being counted as the first meeting.
Section 139(1): Appointment of subsequent auditors in case of
Non-Government Companies
117 25-Aug-17 © ICAI, 2015
For example –
If appointment is made on 12-09-2015 for the financial year 2015-
16, this meeting would be taken as the first meeting.
10-09-2016 - second meeting
11-09-2017- third meeting
12-09-2018- fourth meeting
11-09-2019- fifth meeting
10-09-2020- sixth meeting
Auditor appointed on 12-09-2015 would hold office till the
conclusion of sixth meeting i.e. for 5 years.
Section 139(1): Every Company to appoint Auditors
Note 1: Ratification by members at every AGM
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Section 139(1): Every Company to appoint Auditors
Here the term “RATIFICATION” means CONFIRMATION that the auditor appointed earlier would continue in his office.
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Section 139(1): Appointment of subsequent auditors in case of Non-Government Companies
If the appointment is not ratified by the members of the company,
Ans-
the Board of Directors shall appoint another individual or firm as its auditor.
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Section 139(1): Every Company to appoint Auditors
Note 2:
Selection of auditors as per Rule 3
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Section 139(1): Every Company to appoint Auditors
Note 3:
Before such appointment :
1. Written consent of the Auditor
+
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Section 139(1): Every Company to appoint Auditors
2. Certificate from him (re. appointment in accordance with conditions)
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Section 139(1): Every Company to appoint Auditors
Note 4:
Certificate to indicate- That the auditor satisfies the criteria of Section 141
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Section 139(1): Every Company to appoint Auditors
Section 141 is regarding disqualifications of a person to be appointed as an auditor
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Section 139(1): Every Company to appoint Auditors
Note 5:
Company to inform the Auditor 1. About his appointment +
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Section 139(1): Every Company to appoint Auditors
2.File a notice with the Registrar within 15 days ( re. appointment) in ADT-1
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Section 139(1): Every Company to appoint Auditors
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Note 6:
Appointment includes re-appointment
Section 139(2): Rotation of Auditor
129 25-Aug-17 © ICAI, 2015
No listed company or a company belonging to such
class or classes of companies as prescribed under
rules, shall appoint or re-appoint-
(a) an individual as auditor for more than one term of 5
consecutive years; and
(b) an audit firm as auditor for more than two terms of 5
consecutive years.
Section 139(2): Rotation of Auditors
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No listed Company or a prescribed company shall
appoint or reappoint-
Section 139(2): Rotation of Auditors
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(a) An individual Auditor- for more than one term of
5 years(consecutive)
Section 139(2): Rotation of Auditors
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(b) Firm Auditor- for more than two term of
5 years(consecutive)
Section 139(2): Rotation of Auditor
133 25-Aug-17 © ICAI, 2015
Provided that -
(i) an individual auditor who has completed his term
under clause (a) shall not be eligible for re-appointment
as auditor in the same company for 5 years from the
completion of his term;
(ii) an audit firm which has completed its term under
clause (b), shall not be eligible for re-appointment as
auditor in the same company for 5 years from the
completion of such term.
Section 139(2): Rotation of Auditors
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Note 1:
Once term is completed- would not be eligible for re-
appointment for 5 years
Section 139(2): Rotation of Auditor
Note 2:
The class of companies shall mean the following classes of companies:
(a) all unlisted public companies having paid up share capital of rupees ten crore or more;
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Section 139(2): Rotation of Auditor
(b) all private limited companies having paid up share capital of rupees twenty crore or more;
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Section 139(2): Rotation of Auditor
137 25-Aug-17 © ICAI, 2015
(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.
Section 139(2): Rotation of Auditor
138 25-Aug-17 © ICAI, 2015
Class of Companies for Rotation of Auditor
↓
including Listed Companies
+
excluding OPC (One Person Company) and Small Companies
All unlisted public companies having
paid up share capital ` 10 crore
All private limited companies having
paid up share capital ` 20 crore
All companies having paid up share capital of below threshold
limit mentioned,
but
having public borrowings from financial institutions, banks or
public deposits ` 50 crore
Section 139(2): Rotation of Auditors
25-Aug-17 © ICAI, 2015 139
Note 3:
Firm having common partner to the other audit firm whose tenure has expired shall
not be eligible for appointment.
Section 139(2): Rotation of Auditors
25-Aug-17 © ICAI, 2015 140
For example:
CA. X is a common partner in firm M/s ABC & Co. and M/s XYZ & Co.
If M/s ABC & Co. has completed its tenure as an auditor in MWF Ltd. then M/s XYZ & Co. shall not be eligible to be appointed as an auditor in MWF
Ltd. for 5 years.
Section 139(2): Rotation of Auditors
25-Aug-17 © ICAI, 2015 141
Note 4:
Every company shall comply with these requirements within three years from the
date of commencement of this Act.
Section 139(4): Manner of Rotation of Auditor
142 25-Aug-17 © ICAI, 2015
Number of consecutive years for
which an individual auditor has
been functioning as auditor in the
same company [in the first AGM
held after the commencement of
provisions of section 139(2)]
Maximum number of
consecutive years for
which he may be
appointed in the same
company (including
transitional period)
Aggregate period
which the auditor
would complete in the
same company in view
of column I and II
I II III 5 Years (or more than 5 years) 3 years 8 years or more
4 years 3 years 7 years
3 years 3 years 6 years
2 years 3 years 5 years
1 year 4 years 5 years
Illustration explaining rotation in case of individual auditor
Section 139(4): Manner of Rotation of Auditor
143 25-Aug-17 © ICAI, 2015
Illustration explaining rotation in case of audit firm
Number of consecutive years for
which an audit firm has been
functioning as auditor in the same
company [in the first AGM held
after the commencement of
provisions of section 139(2)]
Maximum number of
consecutive years for
which the firm may be
appointed in the same
company (including
transitional period)
Aggregate period which
the firm would complete
in the same company in
view of column I and II
I II III 10 Years (or more than 10years) 3 years 13 years or more
9 years 3 years 12 years
8 years 3 years 11 years
7 years 3 years 10 years
6 year 4 years 10 years
5 years 5 years 10 years
4 years 6 years 10 years
3 year 7 years 10 years
2 years 8 years 10 years
1 years 9 years 10 years
Section 139(2): Rotation of Auditor
144 25-Aug-17 © ICAI, 2015
Note 5:
Right of the company to remove an auditor
or
the right of the auditor to resign
shall not be prejudiced.
Section 139(3): Rotation of Auditor
145 25-Aug-17 © ICAI, 2015
Members of a company may resolve that-
(a) the auditing partner and his team shall be rotated;
or
(b) the audit conducted by more than one auditor.
Section 139(4): Manner of Rotation of Auditor
Rule 6 prescribes the manner of rotation of auditors
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Section 139(4): Manner of Rotation of Auditor
147 25-Aug-17 © ICAI, 2015
Note 1:
The Audit Committee shall recommend to the Board, the name of the audit firm on expiry of the term .
Section 139(4): Manner of Rotation of Auditor
148 25-Aug-17 © ICAI, 2015
Note 2:
The Board shall consider the recommendation of Audit
committee (where required),
and in other cases, the Board shall itself consider the
matter of rotation of auditors and recommend the next
auditor.
Section 139(4): Manner of Rotation of Auditor
149 25-Aug-17 © ICAI, 2015
Note 3:
For the purpose of the rotation of auditors-
the period prior to the commencement of the Act
shall be
considered for calculating the period of five
consecutive years or ten consecutive years.
Section 139(4): Manner of Rotation of Auditor
150 25-Aug-17 © ICAI, 2015
Note 4:
For the purpose of the rotation of auditors-
the incoming auditor shall not be eligible
if
associated with the outgoing auditor
under the same network of audit firms.
Section 139(4): Manner of Rotation of Auditor
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“same network”
includes the firms operating or functioning under the
same brand name, trade name or common control.
Section 139(4): Manner of Rotation of Auditor
152 25-Aug-17 © ICAI, 2015
Note 5:
For the purpose of rotation of auditors,-
(a) a break in the term for 5 continuous years shall fulfill the
requirement of rotation;
Section 139(4): Manner of Rotation of Auditor
153 25-Aug-17 © ICAI, 2015
For example, if CA. X has completed his
tenure of 5 years in 2015-16.
Now, he will have to break for 5 continuous years from 2016-17 to
2020-21.
Section 139(4): Manner of Rotation of Auditor
154 25-Aug-17 © ICAI, 2015
(b) if a partner, who is in charge of an audit firm and also certifies the financial statements of the company, retires from the 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(4): Manner of Rotation of Auditor
155 25-Aug-17 © ICAI, 2015
For example,
CA. X is a partner and in-charge of M/s XYZ & Co. He also
certifies the financial statement of the company.
M/s XYZ & Co. has completed its tenure in MWF Ltd. as auditor.
Now, CA. X retires from M/s XYZ & Co. and joins M/s ABC & Co.
Here, M/s ABC & co. shall also be disqualified to be appointed as
an auditor of MWF Ltd.
Section 139(5): Appointment of subsequent auditors in case of Government Companies
156 25-Aug-17 © ICAI, 2015
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 AGM.
Section 139(5): Appointment of subsequent auditors in case of Government Companies
157 25-Aug-17 © ICAI, 2015
In the case of a Government company,
the Comptroller and Auditor-General of India shall,
appoint an auditor
within a period of 180 days from the commencement of the
financial year,
who shall hold office till the conclusion of the AGM.
Section 139(6): Appointment of First Auditors in the case of a company, other than a Government Company
158 25-Aug-17 © ICAI, 2015
The first auditor of a company, other than a Government
company,
shall be appointed by the Board of Directors
within 30 days from the date of registration of the company.
Section 139(6): Appointment of First Auditors in the case of a company, other than a Government Company
159 25-Aug-17 © ICAI, 2015
In the case of failure of the Board to appoint the auditor, it shall
inform the members of the company.
The members of the company shall within 90 days at an
extraordinary general meeting appoint the auditor.
Appointed auditor shall hold office till the conclusion of the first
AGM.
Section 139(7): Appointment of First Auditors in the case of Government Company
160 25-Aug-17 © ICAI, 2015
In the case of a Government company,
the first auditor shall be appointed by the Comptroller and Auditor-General of India
within 60 days from the date of registration of the company.
Section 139(7): Appointment of First Auditors in the case of Government Company
161 25-Aug-17 © ICAI, 2015
For example,
The first auditor of Health and Wealth Ltd., a Government company, was appointed by the Board of Directors.
Is the appointment valid?
(Note: Students may also refer Q. No. 8(a) of the Practice Manual (Edition: July, 2015))
Section 139(7): Appointment of First Auditors in the case of Government Company
162 25-Aug-17 © ICAI, 2015
No.
In the case of a Government Company, the appointment of first auditor is governed by the provisions of section 139(7) of the Companies Act, 2013 which states that the first auditor shall be appointed by the C&AG of India within 60 days from the date of registration of the company.
Section 139(7): Appointment of First Auditors in the case of Government Company
163 25-Aug-17 © ICAI, 2015
In case the Comptroller and Auditor-General of India does not appoint such
auditor within the above said period,
the Board of Directors of the company shall appoint such auditor within the
next 30 days.
Further, in the case of failure of the Board to appoint such auditor within next
30 days, it shall inform the members of the company
who shall appoint such auditor within 60 days at an extraordinary general
meeting. Auditors shall hold office till the conclusion of the first annual
general meeting.
Section 139(8): Filling of a Casual Vacancy
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Filling of casual vacancy {u/s 139 (8)}
Other Companies
To be filled by BOD within 30 days
In case of resignation, appointment by BOD should be
approved by Co. at AGM
Govt. Companies
To be filled by C&AG within 30 days
In case of failure, BOD shall fill within 30 days
Section 139(8): Filling of a Casual Vacancy
165 25-Aug-17 © ICAI, 2015
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 Government
company
be filled by the Board of Directors within 30 days.
Section 139(8): Filling of a Casual Vacancy
166 25-Aug-17 © ICAI, 2015
If such casual vacancy is due to 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 and he shall hold the office till the conclusion of the next annual general meeting.
Section 139(8): Filling of a Casual Vacancy
167 25-Aug-17 © ICAI, 2015
For example, Due to the resignation of the existing auditor, the Board of directors of X Ltd. appointed CA. Hari as the auditor. Is the appointment of CA. Hari as auditor valid?
(Note: Students may also refer Q. No. 5(a) of the Practice Manual
(Edition: July, 2015))
Section 139(8): Filling of a Casual Vacancy
168 25-Aug-17 © ICAI, 2015
No. Any casual vacancy in the office of an auditor shall
be filled by the BOD 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 3 months of the
recommendation of the Board.
Section 139(8): Filling of a Casual Vacancy
169 25-Aug-17 © ICAI, 2015
(ii) In the case of a Government company,
be filled by the Comptroller and Auditor-General of
India within 30 days.
It may be noted that in case the Comptroller and
Auditor-General of India does not fill the vacancy within
the said period the Board of Directors shall fill the
vacancy within next 30 days.
Section 139(9): Re-appointment
170 25-Aug-17 © ICAI, 2015
A retiring auditor may be re-appointed
at an annual general meeting, if-
(a) he is not disqualified for re-appointment;
Section 139(9): Re-appointment
171 25-Aug-17 © ICAI, 2015
(b) he has not given the
company a notice in writing
of his unwillingness to be re-appointed;
and
Section 139(9): Re-appointment
172 25-Aug-17 © ICAI, 2015
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(10): No auditor appointed
173 25-Aug-17 © ICAI, 2015
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(11): Appointment of Auditor in case of Audit Committee
174 25-Aug-17 © ICAI, 2015
Where a company is required to constitute an Audit Committee under section 177, all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee.
Section 139(1), (5), (6) and (7) at a glance
175 25-Aug-17 © ICAI, 2015
Explain the following:
(a) Appointment of First Auditor of a Non-Government Company.
(b) Appointment of First Auditor of a Government Company.
(c) Appointment of Subsequent Auditor of a Non-Government Company.
(d) Appointment of Subsequent Auditor of a Government Company.
(Note: Students may also refer Q. No. 46 of the Practice Manual (Edition: July, 2015))
Section 139(1), (5), (6) and (7) at a glance
176 25-Aug-17 © ICAI, 2015
Appointment of Auditors: Section 139 of the Companies Act, 2013 contains provisions regarding appointment of Auditors. Provisions related to appointment of auditors may be grouped under two broad headings-
I Appointment of First Auditors.
II Appointment of Subsequent Auditors.
Section 139(1), (5), (6) and (7) at a glance
177 25-Aug-17 © ICAI, 2015
(a) Appointment of First Auditor of a Non-Government Company:
As per Section 139(6) of the Companies Act, 2013, the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within 30 days from the date of registration of the company.
In the case of failure of the Board to appoint the auditor, it shall inform the members of the company.
The members of the company shall within 90 days at an extraordinary general meeting appoint the auditor. Appointed auditor shall hold office till the conclusion of the first annual general meeting.
Section 139(1), (5), (6) and (7) at a glance
178 25-Aug-17 © ICAI, 2015
(b) Appointment of First Auditor of a Government Company:
Section 139(7) of the Companies Act, 2013 provides that 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 first auditor shall be appointed by the Comptroller and Auditor-General of India within 60 days from the date of registration of the company.
Section 139(1), (5), (6) and (7) at a glance
179 25-Aug-17 © ICAI, 2015
In case the Comptroller and Auditor-General of India does not appoint such auditor within the above said period, the Board of Directors of the company shall appoint such auditor within the next 30 days. Further, in the case of failure of the Board to appoint such auditor within next 30 days, it shall inform the members of the company who shall appoint such auditor within 60 days at an extraordinary general meeting. Auditors shall hold office till the conclusion of the first annual general meeting.
Section 139(1), (5), (6) and (7) at a glance
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(c) Appointment of Subsequent Auditor of a Non-Government Company:
As per section 139(1) of the Companies Act, 2013, 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 every sixth meeting.
Section 139(1), (5), (6) and (7) at a glance
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(d) Appointment of Subsequent Auditor of a Government Company:
As per Section 139(5) of the Companies Act, 2013, 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 141 of the Companies Act, 2013
• Eligibility, Qualifications and Disqualifications of Auditors
Section 141(1): Eligibility /Qualification for Appointment as Auditor
183 25-Aug-17 © ICAI, 2015
A person shall be eligible for appointment as an
auditor of a company only if he is a chartered
accountant.
It may be noted that a firm whereof majority of
partners practising in India are qualified for
appointment as aforesaid may be appointed by
its firm name to be auditor of a company.
Section 141(2): Authorisation to Act and Sign
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Where a firm including a limited liability
partnership is appointed as an auditor of a
company, only the partners who are chartered
accountants shall be authorised to act and sign
on behalf of the firm.
Section 141(3): Disqualifications of Auditors
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Under sub-section (3) of section 141 along with Rule 10 of the Companies (Audit and Auditors) Rule, 2014, the following persons shall not be eligible for appointment as an auditor of a company, namely:
Section 141(3): Disqualifications of Auditors
186 25-Aug-17 © ICAI, 2015
(a) a body corporate other than a limited liability partnership registered
under the Limited Liability Partnership Act, 2008;
(b) an officer or employee of the company;
Section 141(3): Disqualifications of Auditors
187 25-Aug-17 © ICAI, 2015
(c) a person who is a partner, or who is in the employment, of an officer or employee of the company;
Section 141(3): Disqualifications of Auditors
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Following persons are disqualified 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
Section 141(3): Disqualifications of Auditors
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(d) a person who, or his relative or partner -
(i) is holding any security of or interest in the
company or its subsidiary, or of its holding or
associate company or a subsidiary of such
holding company.
However, the relative may hold security or
interest in the company of face value not
exceeding Rs. 1 lakh.
Section 141(3): Disqualifications of Auditors
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1. For example,
“Mr. A”, a practicing Chartered Accountant, is holding
securities of “XYZ Ltd.” having face value of Rs. 900/-.
Here, Mr. A is disqualified for appointment as an Auditor
of “XYZ Ltd.”
Section 141(3): Disqualifications of Auditors
2. For example,
“Mr. P” is a practicing Chartered Accountant and “Mr. Q”, the relative of “Mr. P”, is holding securities of “ABC Ltd.” having face value of Rs. 90,000/-.
Here, Mr. P is not disqualified for appointment as an Auditor of “ABC Ltd.”
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Section 141(3): Disqualifications of Auditors
192 25-Aug-17 © ICAI, 2015
3. For example,
“BC & Co.” is an Audit Firm having partners “Mr. B” and “Mr.
C”, and “Mr. A” the relative of “Mr. C”, is holding
securities of “MWF Ltd.” having face value of Rs.
1,01,000/-.
Here, “BC & Co.” is disqualified from being appointed as an
Auditor of “MWF Ltd.”
Section 141(3): Disqualifications of Auditors
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Provided that the condition of rupees one lakh shall, be
also applicable in the case of a company not having
share capital or other securities.
Provided further that 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
sixty days of such acquisition/ interest.
Section 141(3): Disqualifications of Auditors
25-Aug-17 © ICAI, 2015 194
(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of Rs. 5 lakh; or
Section 141(3): Disqualifications of Auditors
25-Aug-17 © ICAI, 2015 195
A person shall be disqualified to be appointed as
auditor if he or his relative or his partner is indebted in
excess of Rs. 5 Lakhs to :
(i) the company; or
(ii) its subsidiary; or
(iii) its holding company; or
(iv) its associate company; or
(v) a subsidiary of such holding company.
Section 141(3): Disqualifications of Auditors
25-Aug-17 © ICAI, 2015 196
(iii) 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 or Associate Company or a Subsidiary of such Holding Company, in excess of Rs. 1 lakh.
Section 141(3): Disqualifications of Auditors
25-Aug-17 © ICAI, 2015 197
A person shall be disqualified to be appointed as auditor if he or
his relative or his partner has given a guarantee or provided any
security in connection with the indebtedness of any third person
in excess of Rs. 1 lakh to :
(i) the company; or
(ii) its subsidiary; or
(iii) its holding company; or
(iv) its associate company; or
(v) a subsidiary of such holding company.
Section 141(3): Disqualifications of Auditors
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(e) a person or a firm who, whether directly or indirectly has business relationship with the Company, or its Subsidiary, or its Holding or Associate Company or Subsidiary of such holding company or associate company, of such nature as may be prescribed.
Section 141(3): Disqualifications of Auditors
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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;
Section 141(3): Disqualifications of Auditors
200 25-Aug-17 © ICAI, 2015
(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.
Section 141(3): Disqualifications of Auditors
201 25-Aug-17 © ICAI, 2015
(f) a person whose relative is a Director or is in the employment of the Company as a director or key Managerial Personnel.
Section 141(3): Disqualifications of Auditors
202 25-Aug-17 © ICAI, 2015
(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
reappointment holding appointment as auditor of
more than twenty companies other than one
person companies, dormant companies, small
companies and private companies having paid-up
share capital less than Rs. 100 crore.
Section 141(3): Disqualifications of Auditors
203 25-Aug-17 © ICAI, 2015
(h) a person who has been convicted by a Court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.
Section 141(3): Disqualifications of Auditors
204 25-Aug-17 © ICAI, 2015
(i) any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialized services as provided in section 144.
Section 141(4): Auditor to Vacate Office
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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.
25-Aug-17 © ICAI, 2015 206
Section 140 of the Companies Act, 2013
• Removal, Resignation of Auditor and Giving of Special Notice
Section 140(1): Removal of Auditor before Expiry of Term
207 25-Aug-17 © ICAI, 2015
According to Section 140(1), 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 as
per Rule 7 of CAAR, 2014:
Section 140(1): Removal of Auditor before Expiry of Term
208 25-Aug-17 © ICAI, 2015
(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.
Section 140(1): Removal of Auditor before Expiry of Term
209 25-Aug-17 © ICAI, 2015
(2) The application shall be made to the Central Government within 30 days of the resolution passed by the Board.
(3) The company shall hold the general meeting within 60 days of receipt of approval of the Central Government for passing the special resolution.
Section 140(1): Removal of Auditor before Expiry of Term
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It is important to note that before taking any action for removal before expiry of terms, the auditor concerned shall be given a reasonable opportunity of being heard.
Section 140(2): Resignation by Auditor
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As per section 140(2), the auditor who has resigned from
the company shall file within a period of 30 days from the
date of resignation, a statement in the prescribed Form
ADT–3 with the company and the Registrar, and in case of
the companies referred to in section 139(5) i.e. Government
company, 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.
Section 140(3): Non-compliance of sub-section (2)
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In case the auditor does not comply with sub-section (2), he or it shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.
Section 140(4): Special Notice- Appointment of Auditor other than retiring Auditor
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(i) 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.
Section 140(4): Special Notice- Appointment of Auditor other than retiring Auditor
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(ii) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.
Section 140(4): Special Notice- Appointment of Auditor other than retiring Auditor
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(iii) Where notice is given of such a resolution and the
retiring auditor makes with respect thereto
representation in writing to the company (not
exceeding a reasonable length) and requests its
notification to members of the company, the company
shall, unless the representation is received by it too
late for it to do so,-
Section 140(4): Special Notice- Appointment of Auditor other than retiring Auditor
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(a) in any notice of the resolution given to members of the company, state the fact of the representation having been made; and
Section 140(4): Special Notice- Appointment of Auditor other than retiring Auditor
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(b) send a copy of the representation to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representation by the company.
Section 140(4): Special Notice- Appointment of Auditor other than retiring Auditor
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If a copy of the representation is not sent as aforesaid because it was received too late or because of the company's default, the auditor may (without prejudice to his right to be heard orally) require that the representation shall be read out at the meeting.
Section 140(4): Special Notice- Appointment of Auditor other than retiring Auditor
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if a copy of representation is not sent as aforesaid, a copy thereof shall be filed with the Registrar.
Email..
• For queries, students may get in touch with the board of studies at the following email id’s- • [email protected] • [email protected]
• Students may also contact at the under mentioned number for their queries-
0120-3045925
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Thank you
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