Audit and Auditors: formula sheet

Key formulas

Basis and system of books

Books of account = accrual basis + double entry system (s. 128(1))

Both conditions are mandatory. Cash basis or single entry does not comply.

Place of keeping books

Registered office; or other place in India if Board decides + notice to Registrar within 7 days (s. 128(1) first proviso)

Notice must give the full address of the other place.

Electronic mode

Books may be kept in electronic mode in the prescribed manner (s. 128(1) second proviso)

The manner is prescribed in the Rules. Do not quote rule details unless sure.

Branch office compliance

Proper books at branch + periodic summarised returns to registered office = deemed compliance (s. 128(2))

Applies to branches in India or outside India.

Inspection by directors

Any director may inspect books during business hours (s. 128(3)); subsidiary inspection only by a person authorised by Board resolution

For financial information kept outside India, copies must be kept and produced, subject to prescribed conditions.

Preservation period

Books for not less than 8 financial years immediately preceding a financial year, with vouchers (s. 128(5))

If the company is less than 8 years old, keep for all preceding years. Central Government may direct a longer period if an investigation is ordered under Chapter XIV.

Penalty for default

Fine: not less than ₹50,000, up to ₹5,00,000 (s. 128(6))

Imposed on the managing director, whole-time director in charge of finance, CFO or other person charged by the Board. Imprisonment was removed w.e.f. 21-12-2020.

Normal term of auditor

Conclusion of AGM at which appointed → conclusion of sixth AGM

Section 139(1). The first appointment is made at the first AGM. The same pattern repeats every sixth meeting.

First auditor (non-Government company)

Board: within 30 days of registration. If Board fails: members at EGM within 90 days

Section 139(6). Holds office until the conclusion of the first AGM. On failure, the Board must inform the members.

First auditor (Government company)

CAG: within 60 days of registration → Board: next 30 days → members at EGM within 60 days

Section 139(7). Applies to Government companies and companies owned or controlled by the Central or State Governments. Holds office until the first AGM.

Subsequent auditor (Government company)

CAG appoints within 180 days from commencement of the financial year

Section 139(5). The auditor holds office until the conclusion of the AGM.

Casual vacancy (non-CAG company)

Board fills within 30 days. If caused by resignation: general meeting approval within 3 months of Board's recommendation

Section 139(8)(i). The auditor holds office until the next AGM.

Casual vacancy (CAG-audited company)

CAG fills within 30 days. If CAG does not, Board fills within the next 30 days

Section 139(8)(ii).

Before and after appointment

Written consent + certificate before; inform auditor + notice to Registrar within 15 days after

Section 139(1) provisos. The certificate must also say whether the auditor satisfies Section 141 criteria.

Rotation

Individual: max one term of 5 consecutive years. Firm: max two terms of 5 years. Cooling-off: 5 years

Section 139(2). Applies to listed companies and prescribed classes of companies. Studied in detail under rotation.

Re-appointment of retiring auditor

Allowed if not disqualified, has not given written notice of unwillingness, and no special resolution appoints another auditor or bars him

Section 139(9).

No auditor appointed at AGM

Existing auditor continues

Section 139(10).

Audit Committee

All appointments, including casual vacancies, only after considering the Audit Committee's recommendations

Section 139(11). Applies where the company must constitute an Audit Committee under Section 177.

Who is eligible

Chartered accountant (individual) OR firm with majority of practising partners qualified

Section 141(1). A firm is appointed by its firm name. LLPs are included as firms for this purpose.

Who signs for a firm

Only partners who are chartered accountants

Section 141(2). Non-CA partners cannot act or sign for the firm.

Body corporate

Not eligible, except an LLP registered under the LLP Act, 2008

Section 141(3)(a). A company cannot be auditor; an LLP can.

Relative's shareholding

Relative may hold security of the company with face value up to ₹1,000 (or prescribed sum)

Proviso to Section 141(3)(d)(i). The person himself or his partner holding any security or interest is disqualified. The relaxation is only for a relative.

Audit limit

Not more than 20 companies at the date of appointment or reappointment

Section 141(3)(g). Holding appointment as auditor of more than twenty companies disqualifies. Applies to a person or a partner of a firm.

Fraud conviction

Disqualified until 10 years have elapsed from the date of conviction

Section 141(3)(h). Applies to conviction by a court for an offence involving fraud.

Disqualification after appointment

Vacate office; treated as casual vacancy

Section 141(4). The vacancy is filled as per Section 139(8).

Rotation of individual auditor

Individual: maximum 1 term of 5 consecutive years; then 5-year gap

Section 139(2)(a). Applies to listed companies and prescribed classes of companies. A term runs from the conclusion of the appointing AGM till the conclusion of the sixth AGM (section 139(1)).

Rotation of audit firm

Firm: maximum 2 terms of 5 consecutive years (10 years); then 5-year gap

Section 139(2)(b). A firm includes an LLP. Re-appointment counts as appointment.

Common partner rule

As on the date of appointment, no audit firm having a common partner with the other audit firm whose tenure in the company expired immediately preceding the financial year can be appointed as auditor of that company for 5 years

Further proviso to section 139(2). Because it sits within section 139(2), it applies only to listed companies and the prescribed classes of companies. It is tied to the date of appointment and applies where the other firm's tenure in the company expired immediately preceding the financial year.

Removal of auditor before term ends

Special resolution + previous approval of Central Government + opportunity of being heard

Section 140(1). Ordinary resolution is not enough.

Resignation of auditor

File statement (Form ADT-3) with company and Registrar within 30 days of resignation

Section 140(2). Also file with CAG for companies under section 139(5).

Penalty for not filing the resignation statement

Lower of ₹50,000 or auditor's remuneration; plus ₹500 per day after the first day for continuing failure; maximum ₹2,00,000

Section 140(3): default attracts the lower of ₹50,000 or the auditor's remuneration; continuing failure adds ₹500 per day after the first day, subject to a maximum of ₹2,00,000.

Special notice

Needed to appoint a person other than the retiring auditor, or to say the retiring auditor will not be re-appointed

Section 140(4). Not needed where the retiring auditor has completed five years or ten years as per section 139(2).

Tribunal order on fraud

Auditor acting fraudulently: Tribunal can direct change; auditor ineligible for 5 years

Section 140(5). Central Government application: Tribunal decides within 15 days.

Who fixes remuneration (Section 142(1))

General meeting (or in the manner it decides); first auditor: Board may fix

The Board fixes pay only for the first auditor appointed by it.

What remuneration includes (Section 142(2))

Fee + expenses incurred for the audit + facilities extended; excludes pay for other services at company's request

Other services are paid separately and are not part of audit remuneration.

Right of access (Section 143(1))

Access at all times to books and vouchers, at any place; may require information and explanation

For a holding company, access to subsidiaries' and associates' records only for consolidation.

Audit report (Section 143(2))

Report to members: true and fair view of state of affairs, profit or loss and cash flow

Must consider the Act, accounting and auditing standards and prescribed matters.

Negative or qualified answer (Section 143(4))

Report must state the reasons

Applies to any matter required to be in the report.

Auditing standards (Section 143(9))

Every auditor shall comply with the auditing standards

Until notified, standards specified by ICAI are deemed to be the auditing standards (Section 143(10)).

Fraud reporting (Section 143(12))

Fraud by officers or employees: report to Central Government; if the fraud involves less than the specified amount (₹1 crore under the rules): audit committee or Board

Report immediately, within the prescribed time and manner. The specified amount is set by rules, not by the Act. Good-faith reporting is not a breach of duty (Section 143(13)).

Penalty for non-reporting (Section 143(15))

Listed company: ₹5,00,000; any other company: ₹1,00,000

Applies to an auditor, cost accountant or company secretary in practice who does not comply with Section 143(12), whichever reporting route applies.

Branch audit (Section 143(8))

Branch auditor reports to company's auditor, who deals with it as he considers necessary

Company's auditor states how he dealt with it (Section 143(3)(c)).

Section 144: prohibited services

Accounting and book keeping | internal audit | design and implementation of financial information system | actuarial | investment advisory | investment banking | outsourced financial services | management services | any other prescribed service

Nine heads in total, (a) to (i). Other services are allowed only if approved by the Board or audit committee, as the case may be.

Reach of Section 144

Ban applies to services to the company, its holding company or its subsidiary company, directly or indirectly

Indirect includes services through relatives, partners, parent, subsidiary or associate entities, or entities the auditor controls or influences or whose name or brand is used.

Section 146: general meetings

Notices go to the auditor | auditor attends personally or through an authorised representative qualified to be an auditor | right to be heard on business concerning him as auditor

Attendance is not required if the company exempts the auditor.

Section 147(1): company and officers in default

Company: fine ₹25,000 to ₹5,00,000 | Officer in default: fine ₹10,000 to ₹1,00,000

Applies to contravention of any of sections 139 to 146. No imprisonment now applies to the officer under this sub-section.

Section 147(2): auditor, ordinary contravention

Fine of ₹25,000 to ₹5,00,000 or four times the remuneration of the auditor, whichever is less

Applies to contravention of section 139, 143, 144 or 145.

Section 147(2) proviso: knowing or willful contravention

Imprisonment up to 1 year and fine of ₹50,000 to ₹25,00,000 or eight times the remuneration, whichever is less

Requires intention to deceive the company, its shareholders, creditors or tax authorities.

Section 147(3): consequences of conviction

Refund remuneration to the company + pay damages for loss from incorrect or misleading statements in the audit report

Damages are payable to the company, statutory bodies or authorities, or members or creditors of the company.

Section 147(5): audit firm

Partner acted fraudulently or abetted or colluded in fraud: liability of the partner and the firm jointly and severally

For criminal liability other than fine, only the concerned partner or partners are liable.

Cost audit: direction and scope (s.148(1)-(2))

Cost records (s.148(1)) → cost audit (s.148(2)) only if net worth or turnover meets the prescribed limit

Both steps are by Central Government order, for prescribed classes of companies. The thresholds are in the Rules, not in the section.

Cost auditor: who and how appointed (s.148(3))

Cost accountant appointed by the Board; remuneration determined by members in the prescribed manner

The company's section 139 statutory auditor cannot be appointed as cost auditor. The cost auditor must follow cost auditing standards.

Cost audit report (s.148(3) proviso, (6))

Report goes to the Board; company sends it to the Central Government within 30 days of receiving it, with full information and explanation on every reservation or qualification

The Central Government may call for more information, to be given within the time it specifies (s.148(7)).

Cost audit vs statutory audit (s.148(4))

Cost audit is in addition to the audit under section 143

Rights, duties and obligations of auditors apply to the cost auditor so far as applicable (s.148(5)).

Secretarial audit (s.204(1)-(3))

Listed company + prescribed classes → secretarial audit report by company secretary in practice, annexed to the Board's report under s.134(3)

The Board must explain in full every qualification, observation or remark in its report (s.204(3)). The company must give all assistance and facilities (s.204(2)).

Secretarial audit penalty (s.204(4))

Company, every officer in default, or the company secretary in practice in default: penalty of ₹2,00,000

The section says "liable to a penalty of two lakh rupees".

Internal audit (s.138)

Prescribed classes of companies → internal auditor (CA, cost accountant or other professional decided by the Board) audits functions and activities of the company

Manner and intervals of audit and reporting to the Board are prescribed by the Central Government by rules.

Fines for cost audit default (s.148(8))

Company and officers in default: as per s.147(1). Cost auditor in default: as per s.147(2) to (4)

Quote the s.147 link only; do not state amounts unless your study material gives them.

Quick revision

• A statutory audit is in addition to any cost audit: section 148(4) says the cost audit is in addition to the audit under section 143.
• The cost auditor is a cost accountant appointed by the Board, with remuneration determined by the members in the prescribed manner.
• The person appointed as auditor under section 139 cannot be appointed to audit cost records.
• The cost audit report goes to the Board of Directors; the company sends it to the Central Government within thirty days of receiving a copy.
• Cost auditors must follow the cost auditing standards issued by the Institute of Cost Accountants of India.
• Appointment and rotation both follow the same pattern: learn who appoints, for how long, and what happens at the end of the term.
• Removal before the term ends needs a special resolution and the Central Government's prior approval, and the auditor must get a chance to be heard.
• Resignation is not just a letter: the auditor must also file the prescribed statement with the company and the Registrar.
• An auditor who is disqualified at the time of appointment cannot be appointed; one who becomes disqualified later must vacate office.
• Prohibited non-audit services protect independence; check any service against the list in section 144.
• Default in cost audit provisions is punishable under section 147: company and officers under sub-section (1), the cost auditor under sub-sections (2) to (4).
• In written answers, always write provision, facts, conclusion.

Common mistakes

• Treating books of account and financial statements as the same thing. Fix: Remember the flow: books are the records of transactions, financial statements are the year-end summary prepared from them.
• Saying books may be kept only at the registered office. Fix: The Board may decide on another place in India, but must file a notice with the Registrar within seven days giving the full address.
• Saying members appoint the first auditor in every case. Fix: The Board appoints the first auditor first. Members step in only if the Board fails, at an EGM within 90 days.
• Mixing up the time limits 30, 60, 90 and 180 days. Fix: Tie each number to its sub-section: 30 days Board (first auditor), 60 days CAG (first auditor), 90 days members' EGM, 180 days CAG (subsequent auditor).
• Saying a body corporate can never be an auditor. Fix: Remember: a body corporate is disqualified except an LLP registered under the LLP Act, 2008.
• Allowing the auditor himself to hold shares worth up to ₹1,000. Fix: The ₹1,000 face value relaxation is only for a relative. The auditor or his partner holding any security or interest is disqualified.
• Applying rotation to every company Fix: Section 139(2) applies to listed companies and prescribed classes only. Check this first.
• Writing that a firm gets one five-year term, or that an individual gets two Fix: Individual: one term. Firm: two terms. Think 'firm = two' because a firm has partners.
• Saying the Board always fixes the auditor's remuneration. Fix: Remember: general meeting (or manner it decides) is the rule. The Board fixes pay only for the first auditor it appoints.
• Including fees for other services in audit remuneration. Fix: Section 142(2) includes the fee, audit expenses and facilities, but excludes pay for other services rendered at the company's request.

Exam tips

• Memorise the numbers: 7 days, 8 financial years, ₹50,000 and ₹5,00,000. MCQs test these directly.
• In case studies, check who is liable for default: the managing director, whole-time director in charge of finance, CFO or another person charged by the Board.
• Use the words 'accrual basis', 'double entry system' and 'true and fair view' in your answer. Examiners look for them.
• Do not mention imprisonment under section 128(6). It was omitted w.e.f. 21-12-2020.
• Link books of account to audit in one line: the auditor reports on financial statements prepared from books that must meet section 128.
• Start every written answer by naming the sub-section rule and its time limit. Examiners award marks for the provision first.
• Always check whether the company is a Government company before you answer. Many case-based questions hide this in one line.
• For casual vacancy questions, check the cause. Resignation is the trigger for the extra general meeting approval.