Audit of Government Companies: CA Intermediate Auditing Guide

Understand Audit of Government Companies

Key rules to remember

Definition of government company

Government holding ≥ 51% of paid-up share capital (Central, State, or both)

A subsidiary of a government company is also a government company.

Appointment of auditor (section 139(5))

C&AG appoints the auditor, a chartered accountant from the C&AG's panel, within 180 days from the commencement of the financial year

Use this for the later financial years. The auditor appointed holds office until the conclusion of the annual general meeting.

Appointment of first auditor (section 139(7))

C&AG appoints within 60 days of registration; failing that, the Board within the next 30 days; if the Board also fails, it informs the members, who appoint within 60 days at an EGM

Use this for the first financial year only, not for later years. The first auditor holds office until the conclusion of the first AGM. The Board and member fallback applies only to the first auditor.

Directions by C&AG (section 143(5))

C&AG appoints the auditor and may direct the auditor on the manner of audit; auditor submits a copy of the audit report to the C&AG

The copy of the report covers the directions issued, the action taken on them and their impact on the accounts. The C&AG may then comment on or supplement the report under section 143(6).

Supplementary audit (section 143(6)(a))

C&AG may, within 60 days of receipt of the audit report, conduct a supplementary audit and comment upon or supplement the audit report

The 60 days run from the date the C&AG receives the audit report. It is a power, not a duty: the C&AG may use it.

Comments of C&AG (section 143(6)(b))

Comments are sent by the company to every person entitled to copies of the audited financial statements and placed before the AGM at the same time and in the same manner as the audit report

Test audit is a separate C&AG power under section 143(7). It is not part of section 143(6).

How to solve Audit of Government Companies questions

1. 1Check whether the entity is a government company: government holding of 51% or more of paid-up capital, or a subsidiary of such a company.
2. 2Identify who appoints the auditor: the C&AG, not the members. Note the time limit that applies (first auditor: 60 days from registration; later years: 180 days from the start of the financial year).
3. 3State the eligibility: the auditor must be a chartered accountant, appointed by the C&AG from the panel maintained by the C&AG.
4. 4List the C&AG powers: directions on the manner of audit under section 143(5), the power to conduct a supplementary audit and comment on the report under section 143(6), and the separate test audit power under section 143(7).
5. 5Describe the reporting duty: the auditor reports under section 143 and CARO 2020 where applicable, and submits a copy of the audit report to the C&AG, covering the directions given under section 143(5) and the action taken.
6. 6Mention what happens to the C&AG comments: the company sends them to the persons entitled to the financial statements and places them before the AGM at the same time and in the same manner as the auditor's report.
7. 7Conclude with a one-line answer to the exact question asked, using the facts in the question.

Quickest way: Provision-facts-conclusion in 4 lines

Common mistakes in Audit of Government Companies

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

  Students apply the general rule for private and public companies to every company.

  Fix: Remember that the C&AG appoints the auditor of a government company. The Board and then the members step in only for the first auditor, and only if the C&AG and then the Board fail to appoint in time.

• Defining a government company as one with 50% government holding.

  The words 'half' and 'majority' blur in memory.

  Fix: Write the exact test: not less than 51% of paid-up share capital. Also add that a subsidiary of a government company counts.

• Confusing the C&AG directions with the C&AG supplementary audit.

  Both are in section 143 and both show C&AG control.

  Fix: Directions under section 143(5) come during the audit and tell the auditor how to audit. Supplementary audit and comments under section 143(6) come after the report and review it. Test audit is a separate power under section 143(7).

• Forgetting that the auditor must send a copy of the audit report to the C&AG.

  Students focus on the report going to members.

  Fix: Add one line: the auditor submits a copy of the report to the C&AG, who may then comment on or supplement it under section 143(6).

• Mixing the time limits for the first auditor and for later auditors.

  Both involve the C&AG and Board fallbacks, so the periods feel similar.

  Fix: Tag each rule: for the first auditor, the C&AG has 60 days from registration, then the Board has the next 30 days. If the Board fails, it informs the members, who appoint within 60 days at an EGM. For later years, the C&AG appoints within 180 days from the start of the financial year under section 139(5), and the auditor holds office until the conclusion of the AGM. There is no Board or member fallback.

Worked examples