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CMA Intermediate · Corporate Accounting and Auditing

Statutory Audit under the Companies Act, 2013: Chapter Guide

Statutory audit is the independent audit every company must get under the Companies Act, 2013. To solve questions, work in sequence: check who can be appointed, whether the person is eligible, how the auditor leaves, what powers and duties apply, what the report says, and what penalty follows. Quote the rule, then apply it to the facts.

What this chapter covers

This chapter covers the life cycle of a company's statutory auditor. It starts with appointment and eligibility. It then moves to removal, resignation and pay, followed by powers, duties and rights. It ends with the audit report, CARO 2020, special audits and the consequences when the auditor fails in the job.

Most questions are rule-based. You are given a situation, such as a director's relative holding shares or an auditor resigning mid-term, and asked whether it is allowed and what the procedure is. So the chapter rewards precise recall of conditions, time limits and who approves what.

It connects to the rest of the paper in two ways. Corporate accounting gives you the financial statements that the auditor reports on, in Schedule III format. Other auditing chapters, such as internal audit, audit planning and evidence, and standards on auditing, explain how the audit is done. This chapter explains who may do it and what the law demands of them.

This chapter is worth the effort because it suits both parts of the paper. In Section A, a single sharp fact, such as a disqualification, a time limit or a reporting threshold, is enough to pick the right option, and there is no negative marking. In the written section, answers follow a fixed pattern of rule, application and conclusion, so well-prepared students earn full step marks. The content is mostly learnable, with little calculation, so steady revision pays off quickly, which helps if you study alongside work or college.

Statutory Audit under the Companies Act, 2013: topics in the order to study them

  1. 1Appointment of Auditors under Companies Act 2013Start here because everything else depends on how an auditor is appointed: first auditor, subsequent auditors, term, rotation and casual vacancy.
  2. 2Qualifications and Disqualifications of AuditorsNext, learn who is eligible, because many appointment questions are decided by a disqualification.
  3. 3Removal, Resignation and Remuneration of AuditorsAfter appointment and eligibility, study how an auditor leaves and how pay is fixed, which are procedure-heavy and need exact forms and approvals.
  4. 4Powers, Duties and Rights of AuditorsNow that you know who the auditor is, learn what the auditor can demand and must do, including the duty to report fraud.
  5. 5Audit Report and CARO 2020The report is the main output of the audit, so it comes after you know the powers and duties that shape its content.
  6. 6Joint Auditors, Branch Audit and Cost AuditThese are special situations that build on the basic appointment and reporting rules, so learn them once the core is clear.
  7. 7Penalties and Liabilities of AuditorsFinish with consequences, which are easier to remember once you know every duty an auditor can breach.

How to prepare Statutory Audit under the Companies Act, 2013

Treat this chapter as a set of rules with conditions. Your aim is to recall the rule quickly and apply it to a short fact situation.

  1. Read the chapter once in the study order above, without memorising. Your aim is to see how appointment, eligibility, exit, powers, reporting and penalties link together.
  2. Make one-page rule sheets for appointment, disqualifications, removal and resignation, and fraud reporting. Write each rule with its time limit, who approves and which form or authority is involved.
  3. Check every number and section reference against the current Companies Act, 2013 and the Rules. Do not rely on memory of old notes, as amendments have changed some provisions.
  4. Practise fact-based questions in a fixed format: state the rule, apply it to the facts, then conclude clearly as allowed, not allowed or liable.
  5. For the audit report, learn the structure and the four types of opinion: unqualified, qualified, adverse and disclaimer. Then learn the purpose of CARO 2020 and which companies it covers. Do not try to memorise all its clauses word for word.
  6. Solve past MCQs on this chapter and note which facts they test. Then revise your rule sheets and attempt a few written questions under timed conditions.

Common mistakes in Statutory Audit under the Companies Act, 2013

  • Mixing up who appoints and who approves removal.

    Fix: Keep a table in your notes for each case: first auditor, regular appointment, casual vacancy and removal. Write the appointing body and any approval needed against each.

  • Treating disqualifications as a loose list and missing the conditions.

    Fix: Learn each disqualification with its condition. In an answer, test every fact in the question against that condition before concluding.

  • Writing a general essay on fraud reporting instead of the exact steps.

    Fix: Give the split by amount, the authority to report to and the time limits, and mention the disclosure in the Board's report. Check each against the current Act and Rules.

  • Confusing the types of audit opinion.

    Fix: Link each to its cause. A qualified opinion is for material but not pervasive issues, an adverse opinion is for pervasive misstatement, and a disclaimer is for inability to obtain evidence.

  • Assuming CARO 2020 applies to every company.

    Fix: Note the categories of companies that are excluded and the limits for private companies. Confirm them from the current order before the exam.

  • Mentioning section numbers from memory and getting them wrong.

    Fix: Quote a section only when you are sure. Otherwise, state the rule clearly in words, because the rule earns the marks.

Last-day revision: Statutory Audit under the Companies Act, 2013

  • 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.

Statutory Audit under the Companies Act, 2013 practice questions

Statutory Audit under the Companies Act, 2013 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Statutory Audit under the Companies Act, 2013: frequently asked questions

Can a cost accountant be a statutory auditor of a company?

No. Under the Companies Act, 2013, only a chartered accountant holding a certificate of practice, or a firm of chartered accountants, can be appointed as statutory auditor. A cost accountant in practice can act as cost auditor under the cost audit provisions.

How long is the term of a statutory auditor?

Members appoint the auditor at an AGM for a term of five years. Listed companies and prescribed classes face limits on consecutive terms, and a cooling-off period applies after that. Check the current rules for the exact classes covered.

Is this chapter more theory or more practical?

It is mostly theory, with rule-based case questions. You will rarely need calculations, so accuracy of conditions, time limits and authorities matters more than speed of working.

How should I prepare CARO 2020 for the exam?

Learn its purpose, the companies it covers and the exemptions, and understand the main subject areas it asks the auditor to report on. You do not need to reproduce every clause word for word.

Is there negative marking in the MCQs on this chapter?

No. Neither the question papers nor the ICMAI prospectus provide for negative marking, so attempt every MCQ and eliminate wrong options using the rule conditions.