Definition of Auditing - Epitomesolutions.in intermediate 25-08-2… · Definition: Auditing © ICAI, 2016 25-Aug-17 4 Analysis of the definition 1. Audit is Independent examination

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Definition of Auditing

Definitions: (1) Auditing

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“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

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“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

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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.


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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;


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(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.


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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


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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;


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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.


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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.


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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.


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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.

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Sufficiency and Appropriateness of

Audit Evidence

Sufficiency and Appropriateness of Audit Evidence

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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.

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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.


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Sufficiency of Audit Evidence: Sufficiency is the measure of the quantity of audit evidence.


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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.


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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.


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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.


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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.


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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.


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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.


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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.


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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.


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(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.


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Appropriateness of Audit Evidence: Appropriateness is the measure of the quality of audit evidence.


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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.


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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.


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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

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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.

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Through the performance of such audit procedures, the auditor may determine that the accounting records are internally consistent and agree to the financial statements.


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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.


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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.


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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.

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Audit Procedures to Obtain Audit Evidence

Audit Procedures to Obtain Audit Evidence

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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.

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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..


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Audit procedures to obtain audit evidence can include :

(i) Inspection

(ii) Observation

(iii) External Confirmation

(iv) Recalculation

(v) Reperformance

(vi) Analytical Procedures

(vii) Inquiry


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(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.


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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.


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(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.


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(iv) Recalculation: Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically.


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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.


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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.


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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.


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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.


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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.


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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.


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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.


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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

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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: Misstatement

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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

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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

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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

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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.


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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.


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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.


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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

will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.


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Control Risk is a function of the effectiveness of the design,

implementation and

maintenance of Internal Control.


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Internal control can only reduce but not eliminate risk of material misstatement because of inherent limitations of internal control.


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For example –

Possibility of human error or mistakes.


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Some control risk will always exist.

Definition : Detection Risk

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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

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It is the risk that the auditor’s procedures will not detect a misstatement

Definition : Professional Judgment

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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

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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

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It is an attitude that includes a questioning mind

Definition : Reasonable Assurance

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In the context of an audit of financial statements, ‘Reasonable Assurance’ is a high, but not absolute, level of assurance.

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Qualities of an Auditor

Qualities of an Auditor

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An auditor is concerned with the reporting on financial matters of business and other institutions.

Qualities of an Auditor …cntd.

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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.


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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.


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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.


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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.


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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.


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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.


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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.


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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”.

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Inherent Limitations of Audit


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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.


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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.


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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.


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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.


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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.


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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.


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(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.


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(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.


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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.


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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.


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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

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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

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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.



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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)


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Example- 1.

Individual— Rohit Kumar Chartered Accountant appointed

as auditor of XYZ Ltd.


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Example- 2.

Proprietorship Firm of CA Rohit Kumar—Rohit Kumar & Co.

Chartered Accountants appointed as auditor of XYZ Ltd.


Example- 3. Partnership Firm of CA Rohit Kumar and CA Mohit Kumar—Rohit Mohit & Co. Chartered Accountants appointed as auditor of XYZ Ltd.

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Shall hold office From that meeting Till The Sixth AGM

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with the meeting wherein such appointment has been made being counted as the first meeting.



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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.


Note 1: Ratification by members at every AGM

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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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Note 2:

Selection of auditors as per Rule 3

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Note 3:

Before such appointment :

1. Written consent of the Auditor

+

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2. Certificate from him (re. appointment in accordance with conditions)

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Note 4:

Certificate to indicate- That the auditor satisfies the criteria of Section 141

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Section 141 is regarding disqualifications of a person to be appointed as an auditor

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Note 5:

Company to inform the Auditor 1. About his appointment +

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2.File a notice with the Registrar within 15 days ( re. appointment) in ADT-1

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Note 6:

Appointment includes re-appointment

Section 139(2): Rotation of Auditor

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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-


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(a) An individual Auditor- for more than one term of

5 years(consecutive)


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(b) Firm Auditor- for more than two term of

5 years(consecutive)


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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.


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Note 1:

Once term is completed- would not be eligible for re-

appointment for 5 years


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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(b) all private limited companies having paid up share capital of rupees twenty crore or more;

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(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.


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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


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.


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.


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



1 year 4 years 5 years

Illustration explaining rotation in case of individual 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











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.


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.


Rule 6 prescribes the manner of rotation of auditors

25-Aug-17 © ICAI, 2015 146


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 .


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.


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.


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.


151 25-Aug-17 © ICAI, 2015

“same network”

includes the firms operating or functioning under the

same brand name, trade name or common control.


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;


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.


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.


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.


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))


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.


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

164 25-Aug-17 © ICAI, 2015

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


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.


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.


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))


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.


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;


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


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))


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.


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.


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.


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.


180 25-Aug-17 © ICAI, 2015

(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.


181 25-Aug-17 © ICAI, 2015

(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.

25-Aug-17 © ICAI, 2015 182


• 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

184 25-Aug-17 © ICAI, 2015

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

185 25-Aug-17 © ICAI, 2015

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:


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;


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;


188 25-Aug-17 © ICAI, 2015

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


189 25-Aug-17 © ICAI, 2015

(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.


190 25-Aug-17 © ICAI, 2015

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.”


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.”

25-Aug-17 © ICAI, 2015 191


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.”


193 25-Aug-17 © ICAI, 2015

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.


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


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.


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.


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.


198 25-Aug-17 © ICAI, 2015

(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.


199 25-Aug-17 © ICAI, 2015

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;


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.


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.


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.


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.


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

205 25-Aug-17 © ICAI, 2015

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


• 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:


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.


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.


210 25-Aug-17 © ICAI, 2015

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

211 25-Aug-17 © ICAI, 2015

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)

212 25-Aug-17 © ICAI, 2015

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

213 25-Aug-17 © ICAI, 2015

(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.


214 25-Aug-17 © ICAI, 2015

(ii) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.


215 25-Aug-17 © ICAI, 2015

(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,-


216 25-Aug-17 © ICAI, 2015

(a) in any notice of the resolution given to members of the company, state the fact of the representation having been made; and


217 25-Aug-17 © ICAI, 2015

(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.


218 25-Aug-17 © ICAI, 2015

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.


219 25-Aug-17 © ICAI, 2015

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

© ICAI, 2016 220 25-Aug-17 25-Aug-17

mailto:[email protected]

mailto:[email protected]

Thank you

25-Aug-17 © ICAI, 2016 221

Documents

Definition of Auditing - Epitomesolutions.in intermediate 25-08-2… · Definition: Auditing © ICAI, 2016 25-Aug-17 4 Analysis of the definition 1. Audit is Independent examination