Statutory Audit under the Companies Act, 2013: formula sheet

Key formulas

Term of subsequent auditor

Conclusion of 1st AGM (appointment) → conclusion of 6th AGM

Section 139(1). Then till every sixth meeting. This works out to five years.

First auditor (non-Government company)

Board: within 30 days of registration → else members at EGM within 90 days

Section 139(6). Holds office till conclusion of first AGM.

First auditor (Government company)

CAG: 60 days → Board: next 30 days → members at EGM: 60 days

Section 139(7). Holds office till conclusion of first AGM.

Later auditors of Government company

CAG appoints within 180 days from start of financial year

Section 139(5). Holds office till conclusion of the AGM.

Rotation limits

Individual: max 1 term of 5 years; Firm: max 2 terms of 5 years; cooling-off: 5 years

Section 139(2). Applies to listed companies and prescribed classes.

Casual vacancy (non-CAG company)

Board within 30 days; if due to resignation, also company approval at general meeting within 3 months of Board's recommendation

Section 139(8)(i). Auditor holds office till the next AGM.

Casual vacancy (CAG-audited company)

CAG within 30 days; else Board within next 30 days

Section 139(8)(ii).

Notice to Registrar

Within 15 days of the meeting of appointment

Section 139(1). Company also informs the auditor.

Re-appointment of retiring auditor

Not disqualified AND no written unwillingness AND no special resolution for another auditor or against him

Section 139(9). All three conditions must be met.

Qualification

Individual: chartered accountant. Firm: majority of partners practising in India are qualified.

Section 141(1). A firm may be appointed by its firm name.

Who signs for a firm

Only partners who are chartered accountants

Section 141(2). Applies to firms including LLPs.

Body corporate

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

Section 141(3)(a). A company cannot be auditor.

Officer, employee and their partner or employee

Officer or employee of the company; partner or employee of such officer or employee

Section 141(3)(b) and (c).

Securities, indebtedness, guarantee

Person, his relative or partner holds security or interest, is indebted above the prescribed amount, or has given guarantee or security above the prescribed amount

Section 141(3)(d). Covers the company, its subsidiary, holding, associate and subsidiary of holding company. A relative may hold security of face value up to ₹1,000 or the prescribed sum.

Business relationship

Person or firm with business relationship of the prescribed nature, direct or indirect

Section 141(3)(e). The nature is set by the rules.

Relative as director or KMP

Person whose relative is a director or in employment as a director or KMP

Section 141(3)(f).

Number of audits

Holding appointment as auditor of more than 20 companies at the date of appointment or reappointment

Section 141(3)(g). Also covers a person in full-time employment elsewhere.

Fraud conviction

Convicted of an offence involving fraud and 10 years have not elapsed from the date of conviction

Section 141(3)(h).

Prohibited services

Directly or indirectly renders any Section 144 service to the company, its holding or subsidiary

Section 141(3)(i).

Disqualification after appointment

Auditor vacates office; treated as casual vacancy

Section 141(4).

Removal before term (S.140(1))

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

All three are needed. Approval must come before the company takes action.

Resignation filing (S.140(2))

Statement in prescribed form, filed within 30 days of resignation, with the company and the Registrar

Also with the CAG where S.139(5) applies (government companies and companies controlled by Governments). The statement gives reasons and relevant facts.

Penalty for non-filing (S.140(3))

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

Applies to the auditor, whether an individual or a firm.

Special notice (S.140(4))

Needed for an AGM resolution appointing a person other than the retiring auditor, or saying the retiring auditor shall not be reappointed

Not needed where the retiring auditor has completed a consecutive tenure of five or ten years under S.139(2). The company must forthwith send a copy to the retiring auditor, who may make a written representation.

Tribunal order to change auditor (S.140(5))

Fraud or collusion by auditor → Tribunal may direct change; if the Central Government applies, order within 15 days

The auditor is barred from appointment as auditor of any company for five years from the order and is liable under Section 447.

Remuneration (S.142)

Fixed in general meeting or as members determine; Board fixes for the first auditor

Includes fee, audit expenses and facilities; excludes pay for other services at the company's request.

Right of access (s.143(1))

Access at all times to books of account and vouchers, at the registered office or any other place + right to require information and explanation from officers

The right is wide but limited to what the auditor considers necessary for performing his duties.

Matters of inquiry (s.143(1)(a) to (f))

(a) secured loans and advances; (b) book-entry transactions; (c) sale of securities below cost; (d) loans shown as deposits; (e) personal expenses charged to revenue; (f) shares allotted for cash

Remember as: Loans secured, Book entries, Cheap sale of securities, Deposits, Expenses personal, Cash on allotment. Item (c) applies where the company is not an investment or banking company.

Holding company proviso

Auditor of a holding company has right of access to records of all its subsidiaries and associate companies, so far as it relates to consolidation

Access is limited to the consolidation purpose.

Core report (s.143(2))

Report to members on accounts examined and financial statements: true and fair view of state of affairs, profit or loss and cash flow

Prepared after considering the Act, accounting and auditing standards and matters required in the report.

Additional report matters (s.143(3)(a) to (j))

Information obtained; proper books; branch reports; agreement with books; accounting standards; adverse observations; director disqualification; qualifications on accounts; internal financial controls; other prescribed matters

If any matter is answered in the negative or with a qualification, the report must state the reasons (s.143(4)).

Branch audit (s.143(8))

Branch accounts audited by company's auditor or another qualified person appointed under section 139; branch auditor sends report to company's auditor, who deals with it as he considers necessary

For a branch outside India, an accountant or person qualified under that country's laws may audit.

Auditing standards (s.143(9))

Every auditor shall comply with the auditing standards

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

Fraud reporting (s.143(12))

Reason to believe offence involving fraud against the company by officers or employees: report immediately to Central Government, within the time and manner prescribed

If the fraud involves less than the specified amount, report to the audit committee (s.177) or to the Board in other cases. Company must disclose such unreported-to-Government frauds in the Board's report.

Good faith protection (s.143(13))

No duty of the auditor is regarded as contravened by reason of reporting under (12) if done in good faith

Protects the auditor from breach of confidentiality claims.

Penalty for non-reporting (s.143(15))

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

Applies to an auditor, cost accountant or company secretary in practice who does not comply with sub-section (12).

Basis of opinion

Nature of issue (misstatement or scope limitation) × Effect (material, or material and pervasive)

This pair decides the opinion type.

Misstatement, material not pervasive

Qualified opinion: 'except for'

Report the effect of the matter.

Misstatement, material and pervasive

Adverse opinion

Statements do not give a true and fair view.

Scope limitation, material not pervasive

Qualified opinion: 'except for the possible effects'

Auditor could not obtain sufficient evidence on one area.

Scope limitation, material and pervasive

Disclaimer of opinion

Auditor cannot express an opinion at all.

Negative answers

Section 143(4): reasons must be stated

Any matter in the report answered in the negative or with a qualification needs reasons.

Fraud reporting

Section 143(12): report to Central Government as prescribed

For frauds below the specified amount, report to the audit committee or Board.

Branch audit - who can audit (section 143(8))

Branch auditor = company's auditor OR other person qualified and appointed under section 139

For a branch outside India, the company's auditor or an accountant or other person duly qualified under that country's laws.

Branch auditor's report (proviso to section 143(8))

Branch auditor → report → company's auditor → deals with it as he considers necessary

The branch auditor does not report to members on the branch. The company's auditor does, in the main report.

Main report must mention branch report (section 143(3)(c))

State whether the branch auditor's report was sent and how it was dealt with

Applies where a branch is audited by a person other than the company's auditor.

Returns from branches not visited (section 143(3)(b))

State whether proper returns adequate for audit were received from branches not visited

Part of the report on proper books of account.

Cost audit and section 143 (section 143(14)(a))

Section 143 applies mutatis mutandis to the cost accountant conducting cost audit under section 148

Applicability thresholds come from the rules under section 148, not from section 143.

Fraud reporting duty (section 143(12) and (15))

Penalty for non-compliance: ₹5,00,000 (listed company); ₹1,00,000 (any other company)

Applies to an auditor, cost accountant or company secretary in practice.

Fine on company and officers, section 147(1)

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

Applies when any of sections 139 to 146 is contravened. Imprisonment for officers was omitted with effect from 21-12-2020, so only fine applies.

Fine on auditor, section 147(2)

₹25,000 to ₹5,00,000 or 4 × remuneration, whichever is less

Applies if the auditor contravenes section 139, 143, 144 or 145. The upper limit is the lower of the two amounts.

Knowing or willful contravention, proviso to section 147(2)

Imprisonment up to 1 year and fine of ₹50,000 to ₹25,00,000 or 8 × remuneration, whichever is less

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

Consequences of conviction, section 147(3)

Refund remuneration received + pay damages

Damages are payable to the company, statutory bodies or authorities, or to members or creditors, for loss from incorrect or misleading statements in the audit report.

Audit firm, section 147(5)

Fraud by partner(s) → liability of the partner(s) and the firm, jointly and severally

For criminal liability other than fine, only the partner(s) who acted fraudulently, abetted or colluded are liable.

Cost auditor, section 148(8)(b)

Cost auditor in default → punishable as per section 147(2) to (4)

The company and its officers in default are punished as per section 147(1).

Quick revision

• The first auditor is appointed by the Board within 30 days of incorporation. If the Board fails, it must inform members, who appoint the first auditor at an extraordinary general meeting within 90 days.
• Subsequent auditors are appointed by members at the AGM for a term of five years.
• For listed companies and prescribed classes, an individual can be auditor for one term and a firm for two terms, followed by a cooling-off period of five years.
• A body corporate other than an LLP, an officer or employee of the company, and a person convicted of fraud in the preceding ten years are disqualified from being auditor.
• Only a chartered accountant holding a certificate of practice, or a firm of chartered accountants, can be a statutory auditor.
• Removal before the term ends needs the Central Government's prior approval first, and then a special resolution of members. The auditor must be given a reasonable opportunity of being heard.
• A resigning auditor must file a statement giving reasons, in Form ADT-3, with the company and the Registrar within 30 days of resigning. In a government company, the statement must also go to the Comptroller and Auditor-General.
• The auditor has a right of access to books and vouchers at all times and can require information and explanations from officers.
• Fraud by officers or employees must be reported to the Central Government if it is ₹1 crore or more, and to the Audit Committee or Board if it is below that.
• The audit report must state whether the accounts give a true and fair view, and it must cover internal financial controls over financial reporting.
• CARO 2020 requires a report on specified matters, and it does not apply to every company, so check the exemptions.
• An auditor who knowingly or wilfully acts with intent to deceive faces imprisonment and a heavier fine, and may also be liable to refund remuneration and pay damages.

Common mistakes

• Saying members appoint the first auditor at the first AGM. Fix: The Board appoints the first auditor within 30 days of registration. Members appoint the auditor at the first AGM, who then serves till the sixth AGM.
• Confusing the time limits of 30, 60, 90 and 180 days. Fix: Link each period to its authority: Board 30, CAG first auditor 60, members at EGM 90, CAG later auditor 180 from the start of the financial year.
• Saying a company can be appointed auditor if it has CA directors. Fix: A body corporate is barred except an LLP. A partnership firm is allowed if the majority of practising partners are qualified.
• Treating any shareholding by a relative as a disqualification. Fix: A relative may hold security of the company of face value up to ₹1,000 or the prescribed sum. The auditor's or partner's own holding has no such exception in the proviso.
• Saying an ordinary resolution is enough to remove an auditor mid-term. Fix: Removal before expiry of the term needs a special resolution and previous Central Government approval.
• Taking Central Government approval after the resolution. Fix: The section says previous approval. Approval comes first, and the auditor must be heard before action is taken.
• Saying the auditor can access books only at the registered office. Fix: Write that access is at all times, to books and vouchers kept at the registered office or any other place.
• Treating the six matters in s.143(1) as report contents. Fix: Remember (1)(a) to (f) are matters the auditor inquires into. The report contents are in (2) and (3).
• Treating Emphasis of Matter as a qualification. Fix: Remember that an Emphasis of Matter paragraph leaves the opinion unmodified.
• Choosing adverse opinion for a scope limitation. Fix: Adverse is for misstatements. A pervasive lack of evidence leads to a disclaimer.

Exam tips

• For MCQs, memorise the number pairs: 30, 60, 90, 180 days, fifteen days for Registrar notice, five years and two terms.
• In descriptive answers, always state the company type first, because the appointing authority changes for Government companies.
• Quote section numbers (139(6), 139(8), 139(2)) along with the rule in plain words.
• Case-style questions often hide a failure by the Board. Follow the chain: Board, then members at EGM.
• Use short headings in written answers: Appointing authority, Time limit, Term, Conditions. This earns step marks.
• Write the section and clause number with each reason, for example Section 141(3)(d)(i). It earns step marks.
• In MCQs, look for the trap: LLP versus company, relative's ₹1,000 limit, twenty audits, ten years from conviction.
• Always name whose interest it is: the person, relative or partner, and which company in the group.