RESPONSIBILITYOF AUDITORS UNDER

COMPANIES ACT 2013

MALLAMPALLI RU THV IK

Topics of Discussion

• Brief about Companies Act 2013

• Provisions relating to the auditors

• Practical Issues in-

• Duties & Powers of Auditors- Section 143

• Internal Financial Control u/s 143(3)

• Fraud Reporting u/s 143(12)

• Some Humour

• Conclusion

• Revolutionary changes-

• Appointment, disqualification, many othernew terms of auditor.

• The 3’S behind CA 2013 to come intoenforcement

• Satyam Computers

• Saradha Scam

• Sahara Scam

Brief About Companies Act 2013

Sec 139- App of Auditor Rotation of Auditors Cooling Period

Removal & Resignation Qualifications & Dis-Qualifications

Remuneration

Powers & Duties of Auditor- Section 143

• Right to inspect Books of accounts,Vouchers

• Seek Information from the officers &explanation

Section 143(1)-Duty to Inquire

Areas of Special Focus

1. Loans & Advances

2. Verify any Book Entries

3. Sale of Investments not lessthan Book Value.

4. Loans & Advances Shown asDeposits

5. Personal Expenses charged to revenue

6. Issue of shares for Consideration or in Kind

Report-

• whether the company has complied withthe accounting standards, auditingstandards

• Depict true & fair view of status ofaffairs of the company through itsfinancial statements.

Section 143(2)-Duty to Report

The auditor should report to the companyon following Matters:-

1. Impact on financial statement forthe information/explanations notprovided by the management.

2. Branch auditor’s report.

3. Matching of Profit & Loss Account,Balance Sheet to the Books ofaccounts maintained by thecompany.

4. Observations & comments of theauditor on the financial transactionswhich have adverse effect.

Section 143(3)-Contents of Auditors Report

1. Director’s Dis-qualification u/s164(2)

2. Adequacy & operatingeffectiveness Internal FinanceControls

3. Disclosing the impact of anypending litigation on FS.

4. Delay in transferring theamount to the InvestorEducation and Protection Fund(IEPF) by the company.

Continued…..

Internal Financial Controls

IFC Means set of policies & procedures adopted to ensure the efficient conduct of business affairs in the company

A. By Safeguard assets, prevention and detection of errors & frauds,

B. Accuracy of Accounting records, timely preparation of financial information

It is the Responsibility of the Management to design the IFC, not the auditor.

For Listed Companies, the Board of directors have the certify about the Adequacy & Operating efficiency of IFC according to Clause 49 of listing agreement

1. How to Decide whether the Financial Controls are operating efficiently??

2. Mandatory for all companies -Why ???

3. Should be amended to limit to specified list of companies only.

PRATICAL CHALLENGES

1. Auditor examines the same and gives his opinion on the about reliability of Financial control and operating effectiveness of the same.

Auditor’s Responsibility

Section 143(12)-Reporting on Fraud

• Auditor has reason to believe

• that an offence involving fraud is beingor has been committed

• against the company by an officer or theemployee of the company

• Reporting the matter immediately tothe central government if such fraudamounts to Rs. 1 Crore or above.

• The auditor should first intimate theboard of directors or the audit committeeimmediately within 2 days of knowingabout the fraud seeking their reply/observations within 45 days.

Section 143(12)-Reporting on Fraud

• On receipt on such reply or observationsof the board or the audit committee,

• Forwards the report along with the replyor observations of the board or the auditcommittee and

• Auditor’s comments on such reply orobservations to the central governmentwithin 15 days.

• In case, no reply received from the board-

• Send the audit report along with a notecontaining the details of his report thatwas earlier forwarded to the board orthe committee for which he has failed toreceive any comments or observations.

Continued….

• Only Frauds committed by theemployees/ Officers against thecompany have been covered here.

• Frauds by company against itsstakeholders have been covered inCARO 2016 where the auditor has toreport.

• Reporting Limit to Central Govt- Rs.1 Crore or above.

• SA-240 existence since long butsection 143(12) boosted that.

IN BRIEF….

Practical Challenges

1. What about the Suspected Frauds which have been reportedby the employees or whistleblowers??- Need to Report to CG

2. What about the frauds which the management feels thereisn’t any fraud being committed – Should the auditor reportalong with the comments to CG or waive it off ??

3. Frauds where the board of directors are part off- Whomshould the auditor report initially ?

4. Third Party Frauds committed by vendors or customers arenot covered ??

5. Only reports identified by the Auditors requires reporting tothe Central Government. Mostly important auditor shouldhave SAAE before he reports about the fraud- Big Flaw initself

• Any areas which the auditor feels that hasan inadequacy or negative information, heshould disclose the same in his reportstating the reasons of such reservation &negative report i.e. SA 700, 705, 706.

Section 143(4)- Qualified Report by Auditor

Nature of matter giving rise to the modification

Material but not pervasive

Material and Pervasive

Financial statements arematerially Mis-stated

Qualified opinion Adverse opinion

Inability to obtain sufficientappropriate audit evidence

Qualified opinion Disclaimer of opinion

• Govt Company auditors shall be appointed byCAG

• They may direct the auditor the manner inwhich the auditor may be conducted.

• Report the impact on financial statements inaccount of directions followed by the auditorsas the per CAG.

CAG Supplementary AuditConduct a supplementary audit by authorizingpersons within 60 days of receipt of Auditreport.

Such copy should also been placed in the AGM.

Test Audit May be Conducted if CAG Feels tobe conducted by auditor who holds office tillAGM

Government Company Auditor

1. How practical is that within 60 daysthe Supplementary audit will beconducted & will be submittedbefore AGM – Time frame is notpossible.

2. Test Audit- Practical Sense may notbe possible

3. Why Auditor’s should be heldresponsible in case of Govt Audits-CAG has appointed and always theright to conduct the Supplementaryaudit??- Shouldn't they be heldequally liable upto some extent.

PRATICAL CHALLLENGES

Company-

Punishable with fine (Rs. 25,000 to Rs.5,00,000).

Officer in charge-

Punishable with imprisonment maximum for 1year or with fine (Rs.10,000 to Rs. 1,00,000).

Auditor-

Punishable with fine (Rs. 25,000 to Rs.5,00,000).

Wilful Contravention by the auditor-

Imprisonment for a term which may extend toone year and with fine (Rs. 1,00,000 to Rs.25,00,000).

Section 147-Punishment for Contravention

PRATICAL CHALLENGES

1. Potential unlimited liability onauditor may result in adverseimpact on auditing profession

2. Unlimited liability to the firm for anact of a partner.

3. Firm should ideally have been heldliable only when there is systemicfailure in firm's process and hencethis seems a disproportionatepunishment for an individual act.

1. Money raised from public(IPO/Right’s issue) Debt instrumentslike loans have been utilized for thesaid purpose

2. Frauds committed by the employeesagainst the company or by companyhas been reported or noted.

3. Compliance to Related partytransactions under section 177 & 188has been followed.

4. Any Non-Cash transactions enteredby company with the directors andcompliance to section 192

CARO 2016

Section 143(9)- Compliance of AS

• Compliance of Accounting Standards(AS) & Standards on Auditing (SA)-Mandatory

• Any deviation should be explainedwith reasons as to why auditor optedshould be made clear.

• Reference to Guidance notes & othermaterials released by ICAI.

• Services which the auditor are not entitled toprovide. Services which an auditor cannotprovide:-

1. Accounting and Book keeping services

2. Internal audit

3. Design and implementation of any financialinformation system

4. Actuarial services

5. Investment advisory services & Investmentbanking services

6. Rendering of outsourced financial services

7. Management services any other kind ofservices as may be prescribed

Section 144: Other Services by Auditor

1. This results in restricting the ability of an audit firm toprovide most non-audit services !!! However by beingindependent even the auditor can provide manyother services to client or their holdings companies

2. How many companies can't we see where the auditor does A-Z Services like accounting, auditing, tax filing, pay roll,Investment advisory.

3. However, since the board approval is required here- Can theManagement be held liable if they appoint the auditor forproviding prohibited services ??

4. Amendment to be made so that section is applicable forspecified list of companies only.

“LAST”

PRATICAL CHALLENGES-

Company has Branch in India

1. Audited shall be performedby Company Auditor

2. Any other qualified Personu/s 139 of act.

Section 143(8)- Branch Audit

Company has Branch outside India

1. Audited shall be performed anAccountant.

2. Any other personqualified who is qualifiedto perform such audit

Such branch auditor shouldprepare a report on the books ofaccounts of the branch audited byhim & send a copy of such auditreport to the company auditor.

Section 143(10)- National Financial Reporting Authority

• NFRA is regulatory authority for auditing,accounting and financial reporting, to advice onmatters related to Auditing Standards in additionto Accounting Standards and also to act as aregulatory body for accountancy profession

Section 143(11)- Reporting in Auditor’s Report

• The Central Government may inconsultation with the NFRA direct that theaudit report in case of specific class ofcompanies shall include a statement onsuch matters as may be specified therein.

• However, auditor will not considered as guilty of professional misconduct if he does his duty In good faith.

• However, the duty of confidentiality will not be effected in case auditor reports such matters to central govtin good faith as per second schedule of the Chartered Accountants Act, 1949.

Section 143(13)- Reporting in Good Faith

The provisions of Section 143 shall beequally applicable to-

• Company Secretary in practiceconducting secretarial audit u/ 204

(or)• Cost Accountant performing cost

audit u/s 148.

• Section 148 governing Cost Auditmentions about the same.

Section 143(14)- Applicability to CS & CMA

• The qualifications, observations or commenton functioning of the company in the auditor’sreport shall be read before the generalmeeting

Section 145-Auditor to Attend AGM

• Notices and communications related to AGMshall be forwarded to the auditor.

• The auditor shall attend AGM either himselfor through representative & have the right tobe heard at the meeting.

Section 145-Auditor to Sign report