Audit of Government Companies under the Companies Act (CA Final Audit)

Understand Audit of Government Companies under Companies Act

Key rules to remember

Government company (Section 2(45))

Government holding ≥ 51% of paid-up share capital (Central, State, or both together); subsidiary of a government company is also a government company

The test is not less than 51%; a holding of exactly 50% does not qualify. Holdings of Central and State Governments can be added together.

Subsequent auditor (Section 139(5))

Appointed by the CAG within 180 days from the commencement of the financial year; holds office till the conclusion of the AGM

Applies to government companies and other companies owned or controlled by Central or State Governments. Members do not appoint.

First auditor of a government company (Section 139(7))

CAG within 60 days from the date of registration → if CAG fails, Board within the next 30 days → if Board fails, members at an EGM within 60 days

The Board and members act only as fallbacks. The CAG has the first right.

CAG directions (Section 143(5))

CAG directs the manner of audit → auditor complies and reports on the directions → copy of audit report goes to the CAG

The auditor reports on these directions in the report on other legal and regulatory requirements.

Supplementary audit and comments (Section 143(6))

Within 60 days from receipt of the audit report, the CAG may conduct a supplementary audit and comment upon or supplement the audit report

The Act gives the CAG this right within 60 days from receipt of the audit report. The company sends the comments to every person entitled to the financial statements and places them before the AGM at the same time and in the same manner as the audit report. The Act does not state a consequence for comments made after the 60 days, so do not invent one.

Test audit (Section 143(7))

CAG may, if he considers it necessary, order a test audit of the company's accounts by order

Section 19A of the CAG's (Duties, Powers and Conditions of Service) Act, 1971 applies to the report of such test audit.

How to solve Audit of Government Companies under Companies Act questions

1. 1Check whether the company is a government company. Add Central and State holdings. Check for 51% or more, or whether it is a subsidiary of a government company.
2. 2Identify the stage: first auditor or subsequent auditor. First auditor falls under Section 139(7). Subsequent auditor falls under Section 139(5).
3. 3State who appoints and the time limit. For subsequent auditors it is the CAG within 180 days from the start of the financial year. For the first auditor, apply the 60-day, 30-day and 60-day chain.
4. 4If the question is about the audit itself, state that the CAG may give directions under Section 143(5). The auditor must comply and report on them and send a copy of the report to the CAG.
5. 5If the question is about CAG's review, state Section 143(6): within 60 days from receipt of the audit report, the CAG may order a supplementary audit and comment upon or supplement the report. Add that the company sends the comments to every person entitled to the financial statements and places them before the AGM.
6. 6Mention test audit under Section 143(7) if the CAG orders a test audit.
7. 7Apply the facts of the case to the rule. Say who acted correctly or wrongly. If comments come after 60 days, say they fall outside the 60-day period in Section 143(6). Do not state a consequence that the Act does not give.
8. 8Close with a one-line conclusion that answers the exact question asked.

Quickest way: Who, when, what after: the three-question check

Common mistakes in Audit of Government Companies under Companies Act

• Saying the members appoint the auditor of a government company at the AGM.

  Students carry over the rule for ordinary companies under Section 139(1).

  Fix: For government companies, the CAG appoints under Section 139(5). Members or the Board come in only as fallbacks for the first auditor under Section 139(7).

• Treating a company with exactly 50% government holding as a government company.

  Students remember 'half' instead of the actual threshold.

  Fix: The threshold is not less than 51% of paid-up capital. Add Central and State holdings before testing.

• Missing that a subsidiary of a government company is also a government company.

  Students look only at the direct shareholding by the government.

  Fix: Section 2(45) includes subsidiaries of government companies. The CAG appoints the auditor for them too.

• Mixing up the 180-day, 60-day and 30-day periods.

  Several time limits appear in Sections 139 and 143 and they look similar.

  Fix: Learn them by stage. Subsequent auditor: 180 days from start of the year. First auditor: 60 days from registration, then 30 days for the Board, then 60 days for members. CAG supplementary audit and comments: 60 days from receipt of the audit report.

• Writing that CAG comments change or replace the statutory auditor's report.

  The words 'comment upon or supplement' are read as 'override'.

  Fix: The CAG comments on or supplements the report. The auditor's report stays the auditor's own. The comments are placed before the AGM along with it.

• Confusing supplementary audit with test audit.

  Both are CAG powers and both come after the statutory audit.

  Fix: Supplementary audit is under Section 143(6) and ties to commenting on the audit report. Test audit is under Section 143(7) and is ordered by the CAG when he considers it necessary.

• Writing that CAG comments received after 60 days are invalid or can simply be ignored.

  Students treat the 60-day period as a hard bar that wipes out the comments.

  Fix: Say that the comments fall outside the 60-day period in Section 143(6). Do not claim they are void, open to challenge or ignorable, because the Act does not state a consequence.

Worked examples