Preface to Ninth Edition Firstly, I would like to thank the readers for the response given to earlier edition of the book. It gives me immense pleasure in presenting the Ninth Edition of the book “Auditing & Assurance” under New Scheme of Education and Training. The Entire syllabus has been divided in 13 chapters as per revised syllabus issued by ICAI. I hope that readers will find the content of the book user friendly and helpful in preparation of their examinations. I thank all my readers for sharing their views regarding the book and giving me valuable suggestions for improvement. I also thank Taxmann Publications (P.) Ltd. for their efforts in publishing the Ninth edition of the book. I look forward the views and suggestions from the readers which would help towards further improvement of the book. Wishing every success to the readers. PANKAJ GARG
e-mail: cacs.gargpankaj@gmail.com
I-5
Contents PAGE
Preface to Ninth Edition I-5 Chapter-wise Marks Distribution I-9 Syllabus (New Course) I-11 CHAPTER 1
Nature, Objective and Scope of Audit
1.1
CHAPTER 2
Audit Strategy, Audit Planning & Audit Programme
2.1
CHAPTER 3
Audit Documentation and Audit Evidence
3.1
CHAPTER 4
Risk Assessment and Internal Control
4.1
CHAPTER 5
Fraud and Responsibilities of the Auditor
5.1
CHAPTER 6
Audit in an Automated Environment
6.1
CHAPTER 7
Audit Sampling
7.1
CHAPTER 8
Analytical Procedures
8.1
CHAPTER 9
Audit of Items of Financial Statements
9.1
CHAPTER 10
Company Audit
10.1 I-7
I-8
CONTENTS
PAGE
CHAPTER 11
Audit Reports
11.1
CHAPTER 12
Audit of Banks
12.1
CHAPTER 13
Audit of Different Types of Entities DECEMBER 2021 EXAM SUGGESTED ANSWERS PART II (DESCRIPTIVE QUESTIONS)
13.1 P.1
10
Company Audit
C H A P T E R 10.1 - Sections dealing with provisions relating to audit of companies Sec. 139 Sec. 140 Sec. 141 Sec. 142 Sec. 143 Sec. 144 Sec. 145 Sec. 146 Sec. 147 Sec. 148
Appointment of Auditors
Removal, Resignation of auditor and giving of Special Notice Eligibility, qualification and disqualifications of auditors Remuneration of Auditors
Powers and Duties of Auditors and Auditing Standards Auditor not to render certain Services Auditor to sign Audit Reports etc.
Auditor to attend General Meetings Punishment for contravention
10.2 - Appointment of Auditors (Sec. 139) Subsequent Auditor Appointment by of Non-Govt. Com- Company pany - Sec. 139(1) Tenure of auditor
Every company shall, at the first AGM, appoint an individual or a firm as an auditor.
The auditor so appointed shall hold office from the conclusion of that meeting till the conclusion of its 6th AGM and thereafter till the conclusion of every 6th meeting.
Manner and proManner and procedure of selection of auditors by the members of cedure of selection the company at AGM has been prescribed under Rule 3 of the Comand appointment panies (Audit and Auditors) Rules, 2014. Accordingly: of Auditors (1) In case of a company that is required to constitute an Audit Committee u/s 177, the committee, and, in cases where such a committee is not required to be constituted, the Board, shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and whether such qualifications and experience are commensurate with the size and requirements of the company: While considering the appointment, the Audit Committee or the Board, as the case may be, shall have regard to any order or pending proceeding relating to professional matters of conduct against the proposed auditor before the ICAI or any competent authority or any Court.
10.1
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Central Government to specify audit of items of cost of certain companies
10.2
COMPANY AUDIT
(2) The Audit Committee or the Board, as the case may be, may call for such other information from the proposed auditor as it may deem fit.
(3) Subject to the provisions of sub-rule (1), where a company is required to constitute the Audit Committee, the committee shall recommend the name of an individual or a firm as auditor to the Board for consideration and in other cases, the Board shall consider and recommend an individual or a firm as auditor to the members in the AGM for appointment.
(4) If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the appointment of an individual or a firm as auditor to the members in the AGM.
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(5) If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the recommendation to the committee for reconsideration citing reasons for such disagreement.
Ratification by members Certificate by auditor
(6) If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider its original recommendation, the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration of the members in the AGM; and if the Board agrees with the recommendations of the Audit Committee, it shall place the matter for consideration by members in the AGM.
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Omitted
Before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor.
The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141.
Content of the Certificate - Rule 4
As per Rule 4 of the Companies (Audit and Auditors) Rules, 2014, the auditor appointed shall submit a certificate that:
(A) the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for appointment under the Act, the CA Act, 1949 and the rules or regulations made there under; (B) the proposed appointment is as per the term provided under the Act; (C) the proposed appointment is within the limits laid down by or under the authority of the Act;
(D) the list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
Intimation to Auditor
Rotation of Auditor - Sec. 139(2)
COMPANY AUDIT
10.3
The company shall inform the auditor concerned of his or its appointment, and also file a notice (Form ADT-1) of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.
In case of Individu- al as auditor
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In case of Audit Firm as auditor
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No listed company or other prescribed companies, shall appoint or re-appoint an individual as auditor for more than one term of five consecutive years.
Cooling Off Period: An individual auditor who has completed his term shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term. No listed company or other prescribed companies, shall appoint or re-appoint an audit firm as auditor for more than two terms of five consecutive years:
Cooling Off Period: An audit firm which has completed its term, shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such term:
Other Prescribed Companies - Rule 5
Prescribed companies for the purpose of rotation means following classes of companies excluding OPC and Small Companies:
(1) all unlisted public companies having paid up share capital of rupees 10 crore or more;
(2) all private limited companies having paid up share capital of rupees 50 crore or more; (3) all companies having paid up share capital of below threshold limit mentioned in (1) and (2) above, but having public borrowings from financial institutions, banks or public deposits of rupees 50 crores or more. Note: Nothing contained in Sec. 139(2) shall prejudice the right of the company to remove an auditor or the right of the auditor to resign from such office of the company.
Every company, existing on or before the commencement of this Act which is required to comply with provisions of this sub section, shall comply with the requirements of Sec. 139(2) within a period which shall not be later than the date of First AGM of the company held within the period specified u/s 96(1), after three years from the date of commencement of this Act. Manner of Rotation of Auditors by the Companies on expiry of term - as per Rule 6 of Companies (Audit & Auditor’s) Rules, 2014
Sec. 139(4) provides that C.G. may be rules, prescribe the manner in which the companies shall rotate their auditors in pursuance of Sec. 139(2).
Accordingly, manner of rotation is prescribed under Rule 6 of Companies (Audit & Auditor’s) Rules, 2014 which provides as follows:
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It is also provided that as on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years.
10.4
COMPANY AUDIT
(1) The Audit Committee shall recommend to the Board, the name of an individual auditor or of an audit firm who may replace the incumbent auditor on expiry of the term of such incumbent. (2) Where a company is required to constitute an Audit Committee, the Board shall consider the recommendation of such committee, and in other cases, the Board shall itself consider the matter of rotation of auditors and make its recommendation for appointment of the next auditor by the members in annual general meeting. (3) For the purpose of the rotation of auditors-
(i) in case of an auditor (whether an individual or audit firm), the period for which the individual or the firm has held office as auditor prior to the commencement of the Act shall be taken into account for calculating the period of five consecutive years or ten consecutive years, as the case may be; (ii) the incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms. The term “same network” includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control. (iii) For the purpose of rotation of auditors: TAXMANN®
Rotation between partners of audit firm - Sec. 139(3)
Subsequent Auditor of Government Company - Sec. 139(5)
(A) a break in the term for a continuous period of five years shall be considered as fulfilling the requirement of rotation; (B) if a partner, who is in charge of an audit firm and also certifies the financial statements of the company, retires from the said firm and joins another firm of chartered accountants, such other firm shall also be ineligible to be appointed for a period of five years.
(4) Where a company has appointed two or more individuals or firms or a combination thereof as joint auditor, the company may follow the rotation of auditors in such a manner that both or all of the joint auditors, as the case may be, do not complete their term in the same year. Members of a company may resolve to provide that
(a) in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or (b) the audit shall be conducted by more than one auditor.
Appointment by In the case of a Government company or any other company owned CAG or controlled, directly or indirectly, by the Central Government (CG), or by any State Government (SG) or Governments, or partly by the Central Government and partly by one or more State Governments, the Comptroller and Auditor General (CAG) of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor. Time limit for appointment
Tenure of Auditor First Auditor of Non- Government
Appointment by BOD
The appointment shall be made within a period of 180 days from the commencement of the financial year.
The auditor so appointed shall hold office till the conclusion of the AGM. The first auditor of a company, other than a Government company, shall be appointed by the Board of Directors.
Company - Sec. 139(6)
Time limit for appointment Consequences of failure of BOD Tenure of Auditor
First Auditor of Government Company - Sec. 139(7)
Appointment by CAG
Time limit for appointment Consequences of failure of CAG
Tenure of Auditor Non- Government Company
Re-appointment of Auditor - Sec. 139(9)
The appointment shall be made within 30 days from the date of registration of the company. In the case of failure of the Board to appoint first auditor, it shall inform the members of the company, who shall within 90 days at an EGM shall appoint the auditor. First auditor shall hold office till the conclusion of the first AGM.
In the case of a Government company or any other company owned or controlled, directly or indirectly, by the CG, or by any SG, or SGs, or partly by the CG and partly by one or more SGs, the first auditor shall be appointed by the CAG of India. The auditor shall be appointed within 60 days from the date of registration of the company.
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In case the CAG of India does not appoint such auditor within the said period, the BOD of the company shall appoint such auditor within next 30 days;
In the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform the members of the company who shall appoint such auditor within 60 days at an EGM.
The first Auditor so appointed shall hold office till the conclusion of the first AGM.
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Any casual vacancy in the office of an auditor shall, be filled by the BOD within 30 days.
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Any casual vacancy shall be filled by the CAG within 30 days.
Govt. Company or Govt. owned/controlled companies
10.5
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If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the Board and he shall hold the office till the conclusion of the next AGM;
In case the CAG does not fill the vacancy within the said period, the BOD shall fill the vacancy within next 30 days.
Meaning of casual vacancy: Not defined in the Act. It may stand for a vacancy created by the auditor ceasing to act after he was validly appointed and the appointment was accepted. This may arise due to death, resignation, dissolution of firm of auditors etc.
Subject to the provisions of sub-section (1) and the rules made thereunder, a retiring auditor may be re-appointed at an AGM, if: (a) he is not disqualified for re-appointment;
(b) he has not given the company a notice in writing of his unwillingness to be re-appointed; and Consequences of failure to appoint/ re-appoint auditor in AGM - Sec. 139(10)
(c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed. Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.
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Filling of Casual Vacancy - Sec. 139(8)
COMPANY AUDIT
10.6 Recommendations of Audit Committee - Sec. 139(11)
COMPANY AUDIT
Where a company is required to constitute an Audit Committee u/s 177, all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee. Points to remember
Companies to have Audit Committee
As per Sec. 177, in addition to listed public companies, following classes of companies shall constitute an Audit Committee: (i) all public companies with a paid-up share capital of ` 10 Cr. or more; (ii) all public companies having turnover of ` 100 Cr. or more;
(iii) all public companies, having in aggregate, outstanding loans, debentures and deposits exceeding ` 50 Cr. Explanation: The paid-up share capital or turnover or outstanding loans, or borrowings or outstanding loans, debentures or deposits, as the case may be, as existing on the last date of latest audited F.S. shall be taken into account for these purposes. Key responsibilities of Audit Committee:
Audit committee performs wide functions. The recommendation for appointment of auditors is only one of the several functions performed by audit committee. Under section 177 of Companies Act, 2013, audit committee is responsible for following actions:
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(1) the recommendation for appointment, remuneration and terms of appointment of auditors of the company;
(2) review and monitor the auditor’s independence and performance, and effectiveness of audit process; (3) examination of the financial statement and the auditors’ report thereon;
(4) approval or any subsequent modification of transactions of the company with related parties; (5) scrutiny of inter-corporate loans and investments;
(6) valuation of undertakings or assets of the company, wherever it is necessary; (7) evaluation of internal financial controls and risk management systems;
(8) monitoring the end use of funds raised through public offers and related matters. Important Questions - Appointment of Auditors
Q.1
Examine the following: “Section 139(1) of the Companies Act, 2013 provides that every company shall, at the first annual general meeting appoint an auditor who shall hold office till the conclusion of its sixth annual general meeting”. [RTP-May 18]
Q.2
HINT: Refer Section 139(1) of Companies Act, 2013.
Q.3
HINT: Managing Director of PQR Ltd. should be advised not to appoint the first auditor of the company.
Managing Director of PQR Ltd. himself wants to appoint Shri Ganpati, a practicing Chartered Accountant, as first auditor of the company. Comment on the proposed action of the Managing Director. The first auditor of M/s Healthy Wealthy Ltd., a Government company, was appointed by the Board of Directors. [MTP-March 18, March 19, RTP-May 19] HINT: The appointment of first auditors made by the Board of Directors of M/s Healthy Wealthy Ltd., is null and void.
Q.4
Q.5
COMPANY AUDIT
10.7
Nick Ltd. is a subsidiary of Ajanta Ltd., whose 20% shares have been held by Central Government, 25% by Uttar Pradesh Government and 10% by Madhya Pradesh Government. Nick Ltd. appointed Mr. P as statutory auditor for the year. HINT: Appointment of ‘P’ is invalid and ‘P’ should not give acceptance to the Directors of Nick Ltd.
At the AGM of ICI Ltd., Mr. X was appointed as the statutory auditor. He, however, resigned after 3 months since he wanted to give up practice and join industry. State, how the new auditor will be appointed by ICI Ltd. and the conditions to be complied for. Or At the AGM of HDB Pvt. Ltd., Mr. R was appointed as the statutory auditor. He, however, resigned after 3 months since he wanted to purse his career in banking sector. The Board of Directors has appointed Mr. L as the statutory auditor in board meeting within 30 days. Comment on the matter. With reference to the provisions of Companies Act, 2013. [May 18 (5 Marks), RTP-Nov. 20]
Q.6
Q.8
Q.9
Due to the resignation of the existing auditor(s), the Board of directors of X Ltd appointed Mr. Hari as the auditor. Is the appointment of Hari as auditor valid?
HINT: Appointment of Hari by Board of Directors will be Valid if it is made within 30 days of casual vacancy and such appointment is approved by the company at a general meeting within three months of the recommendations of the Board. At an AGM of a listed company, Mr. R a retiring auditor after completing the tenure of 5 consecutive years of his service claims that he has been reappointed automatically, as the intended resolution of which a notice had been given to appoint Mr. P, could not be proceeded with, due to Mr. P’s death. HINT: Mr. R cannot continue as auditor of the company as in case of listed company, an individual auditor cannot serve two consecutive tenures. Cooling period of 5 years is required in between two tenures.
No AGM was held for the year ended 31st March, 2021, in XYZ Ltd., Mr. X is the auditor for the previous 5 years, whether he should continue to hold office for current year or not. HINT: Mr. X shall continue to hold office till the conclusion of the AGM.
M/s Young & Co., a CA firm, and Statutory Auditors of Old Ltd., is dissolved on 01.04.2021 due to differences of opinion among the partners. The Board of Directors of Old Ltd. in its meeting on 06.04.2021 appointed another firm M/s Sharp & Co. as their new auditors for one year. HINT: In the instant case the action of the board of directors in appointing M/s Sharp & Co. to fill up the casual vacancy due to dissolution of M/s Young & Co., is correct.
However, the board of directors are not correct in giving them appointment for one year. M/s Sharp & Co. can hold office until the conclusion of next AGM only.
Q.10 ABC Pvt. Ltd. is having paid up share capital of ` 18 Cr. but having public borrowing from nationalized banks and financial institutions of ` 72 Cr. Comment whether, manner of rotation of auditor will be applicable over ABC Pvt. Ltd. [RTP-May 18] HINT: Manner of rotation of auditor will be applicable over ABC Pvt. Ltd. as public borrowings exceeds ` 50 Cr.
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Q.7
HINT: In this case the casual vacancy has been created on account of resignation. Therefore, Board of Directors will have to fill the vacancy within thirty days and such appointment shall be approved by the company at the general meeting within three months of the recommendations of the board. The new auditor so appointed shall hold office only till the conclusion of the next AGM.
10.8
COMPANY AUDIT
Q.11 Jolly Ltd., a listed company, appointed M/s Polly & Co., a Chartered Accountant firm, as the statutory auditor in its AGM held at the end of September, 2021 for 11 years. Comment whether the appointment is valid. HINT: Appointment is not valid as appointment can be made only for one term of five consecutive years and then another term of five consecutive years.
Q.12 M/s XYZ & Co., is an audit firm having partner Mrs. X, Mr. Y and Mr. Z, whose tenure has expired in the company immediately preceding the financial year. M/s ABZ & Co., another audit firm in which Mr. Z is a common partner, appointed as auditor for next five years. Comment whether the appointment is valid. HINT: Appointment is not valid.
Q.13 Discuss the following: Filling of Casual Vacancy in respect of a company Audit. [Nov. 12 (5 Marks), RTP-May 18] HINT: Refer Sec. 139(8)
Q.14 Under what circumstances the retiring auditor cannot be reappointed. HINT: Refer Sec. 139(9)
Q.15 State the manner of rotation of auditors on expiry of their term.
[Nov. 13 (6 Marks)] [May 15 (4 Marks)]
Or
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What are the provisions regarding appointment of auditors by rotation, after expiry of the term of the current auditor that a company should consider? [May 17 (5 Marks)] HINT: Refer Rule 6 of Companies (Audit & Auditors) Rules, 2014.
Q.16 Provisions regarding rotation of auditors affect only specified class of companies. Discuss. Or
Specify the class of companies to whom rotation of auditor applies, under the provisions of Companies Act, 2013. [May 17 (4 Marks)] HINT: Refer Rule 5 of CAAR, 2014 and Sec. 139(2).
Q.17 Write short note on: Provisions regarding re-appointment of a retiring auditor at the Annual General Meeting, for a company not covered under auditor rotation provisions. [May 17 (4 Marks)] Or Enumerate the circumstances under which the retiring auditor can be re-appointed. [MTP-Nov. 21] HINT: Refer Sec. 139(9) of Companies Act, 2013.
Q.18 Explain the manner and procedure of selection and appointment of auditors as per Rule 3 of Companies (Audit and Auditors) Rules, 2014. [RTP-May 19, Nov. 20] HINT: Refer Rule 3 of Companies (Audit and Auditors) Rules, 2014.
Q.19 Where a company is required to constitute an Audit Committee, all appointments of an auditor under this section shall be made after taking into account the recommendations of such committee. Explain stating also the class of companies required to constitute Audit Committee. [MTP-March 19, May 20] HINT: Refer Sec. 139(11) and Sec. 177 of Companies Act, 2013.
Q.20 Clue Ltd. is a Public unlisted company having paid-up share capital of ` 9 crores and public borrowings from the financial institutions of ` 51 crores. They appointed M/s. Pray and Co., A Chartered Accountant firm as the statutory auditor in its annual general meeting for 11 years.
10.9
COMPANY AUDIT
(a) Is the manner of rotation of auditor applicable in case of Clue Ltd.? (b) Whether the appointment of M/s. Pray and Co. is valid?
[Nov. 20 (4 Marks)]
HINT: Refer Rule 5 of CAAR, 2014 and Sec. 139(2).
Q.21 Discuss the Provisions regarding appointment of Auditors (i) First auditor of a Government company and a Non-Government company. (ii) Subsequent auditor of a Government company and a Non- Government company.
[RTP - May 21, MTP-Oct. 21]
HINT: Refer Sec. 139(1), Sec. 139(5), Sec. 139(6) and Sec. 139(7).
Q.22 The recommendation for appointment of auditors is only one of the several functions performed by audit committee. Discuss at least four other key responsibilities of Audit Committee in accordance with Section 177 of the Companies Act, 2013. [July 21 (4 Marks)] HINT: Refer Sec. 177 of Companies Act, 2013.
10.3 - Removal, Resignation of Auditor and Giving of Special Notice (Sec. 140) Removal before ex- piry of term - Sec. 140(1)
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The auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company and after obtaining the previous approval of the Central Government by making an application in Form ADT-2 and shall be accompanied with the prescribed fees.
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Filing of Statement in case of resignation - Sec. 140(2)
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application shall be made to the Central Government within 30 days of the resolution passed by the Board. The Company shall hold the general meeting within 60 days of receipt of approval of the Central Government for passing the special resolution.
Before taking any action for removal of auditor before the expiry of his term, the auditor concerned shall be given a reasonable opportunity of being heard.
The auditor who has resigned from the company shall file within a period of 30 days from the date of resignation, a statement in the Form ADT-3 with the company and the Registrar. In case of Govt. companies or Govt. owned/controlled companies, the auditor shall also file such statement with the CAG, indicating the reasons and other facts as may be relevant with regard to his resignation.
Consequences of non-compliance Sec. 140(3)
If the auditor does not comply with the provisions of Sec. 140(2), he or it shall be liable to a penalty of ` 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of ` 500 for each day after the first during which such failure continues, subject to a maximum of ` 2 lakh*. *As amended by Companies (Amendment) Act, 2020.
Procedure of ReRequirement of moval - Sec. 140(4) Special Notice
Special notice shall be required for following resolutions at an AGM:
u u
appointing as auditor a person other than a retiring auditor, or
providing expressly that a retiring auditor shall not be reappointed, except where the retiring auditor has completed a consecutive tenure of five years or ten years as the case may be, as provided u/s 139(2).
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10.10 Sending copy of notice Sending representation received from auditor
COMPANY AUDIT
On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor. Where notice is given of such a resolution and the retiring auditor makes with respect thereto representation in writing to the company (not exceeding a reasonable length) and requests its notification to members of the company, the company shall, unless the representation is received by it too late for it to do so,-
(a) in any notice of the resolution given to members of the company, state the fact of the representation having been made; and
Consequences of not sending the Representation
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Restricting the auditor’s right of representation
Directions for change of auditors - Sec. 140(5)
Who may issue directions When directions may be issued Circumstances in which directions may be issued Appointment of Auditor by C.G. - proviso to Sec. 140(5)
Disqualifying the auditor for further appointment
(b) send a copy of the representation to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representation by the company,
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If a copy of the representation is not sent as required because it was received too late or because of the company’s default, the auditor may (without prejudice to his right to be heard orally) require that the representation shall be read out at the meeting. a copy of representation is not sent as required, a copy thereof shall be filed with the Registrar
Company or any other aggrieved person may apply to Tribunal for not sending or reading the representation, if this right is being abused by the auditor. If the Tribunal is satisfied, then, the copy of the representation may not be sent and the representation need not be read out at the meeting.
Tribunal
(i) suo motu by Tribunal or
(ii) on an application made to Tribunal by the C.G. or by any person concerned.
If Tribunal is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors. If the application is made by the C.G. and the Tribunal is satisfied that any change of the auditor is required,
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it shall within 15 days of receipt of such application, make an order that he shall not function as an auditor
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the C.G. may appoint another auditor in his place.
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AND
an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of 5 years from the date of passing of the order AND
the auditor shall also be liable for action under section 447.
COMPANY AUDIT
10.11
Important Questions - Removal of Auditor Q.23 Why Central Government permission is required, when the auditor is to be removed before expiry of their term, but the same is not needed when the auditors are changed after expiry of their term. HINT: Refer Section 140
Q.24 PQR Company Ltd. removed their first auditor by passing a resolution in the meeting of the Board of Directors for his removal without obtaining prior approval from the Central Government. Offer your comments in this regard. [Nov. 10 (4 Marks)] HINT: Removal of Auditor is Invalid as Special Resolution has not been passed and approval of Central Govt. not obtained.
Q.25 Comment on the following: Removal of auditor before expiry of term.
[Nov. 11 (6 Marks)]
Or Discuss about the provisions for removal of auditor before expiry of term.
[Nov. 15 (6 Marks)]
Or The auditor CA Z appointed under section 139 was removed from his office before the expiry of his term by an ordinary resolution of the company. Comment explaining clearly the procedure of removal of auditor before expiry of term. [MTP-Oct. 18] Or
HINT: Refer Section 140
Q.26 As one of the Joint auditors of X Ltd. a non-listed company not covered u/s 139(2) for the immediately preceding five financial years, you have been considered for re-appointment by the members in the AGM as the sole auditor, while the said Joint auditors are not re-appointed. Comment. [Nov. 16 (6 Marks)] HINT: Ensure compliance of Sec. 140(4)
Q.27 CA. Donald was appointed as the auditor of PS Ltd. at the remuneration of ` 30,000. However, after 4 months of continuing his services, he could not continue to hold his office of the auditor as his wife got a government job at a distant place and he needs to shift along with her to the new place. Thus, he resigned from the company and did not perform his responsibilities relating to filing of statement to the company and the registrar indicating the reasons and other facts as may be relevant with regard to his resignation. How much fine may he be punishable with under section 140(3) for non-compliance of section 140(2) of the Companies Act, 2013? [RTP-May 19, MTP-Oct. 19] HINT: Refer Sec. 140(3)
Q.28 CA Raj, an auditor was removed by PQR Ltd. before the expiry of his term. Discuss the procedure to be taken by PQR Ltd. to appoint an auditor other than retiring auditor under Sec. 140(4) of the Companies Act, 2013. [Jan. 21 (4 Marks)] HINT: Refer Sec. 140(4)
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Board of Directors of “XYZ Ltd.” found the auditors of the Company acted in a fraudulent manner, and decided to remove the auditors in board’s meeting. Comment on the action of Board of Directors and describe correct procedure to be followed for removal of auditors before expiry of their term. [May 19 (4 Marks), MTP - March 21]
10.12
COMPANY AUDIT
10.4 - Eligibility, Qualifications and Disqualifications of Auditors (Sec. 141) Eligibility to be appointed as auditor - Sec. 141(1) & (2)
Disqualifications Sec. 141(3)
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A person shall be eligible for appointment as an auditor of a company only if he is a CA.
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Where a firm including a LLP is appointed as an auditor of a company, only the partners who are CA shall be authorised to act and sign on behalf of the firm.
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A firm whereof majority of partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company.
The following persons shall not be eligible for appointment as an auditor of a company, namely: (a) a body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008; (b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of the company; (d) a person who, or his relative or partner
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(i) is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company: Provided that the relative may hold security or interest in the company of face value not exceeding ` 1,00,000:
Provided further that in the event of acquiring and security or interest by a relative above the threshold limit, the corrective action to maintain the limits as specified above shall be taken by the auditor within 60 days of such acquisition or interest.
(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ` Five Lacs; or (iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ` One Lac;
(e) a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed; Business Relationship: According to the Companies (Audit and Auditors) Rules, 2014, the term “business relationship” shall be construed as any transaction entered into for a commercial purpose, except:
u commercial
transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or the regulations made under those Acts;
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commercial transactions which are in the ordinary course of business of the company at arm’s length price - like sale of products or services to the auditor, as customer, in the ordinary course of business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses.
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(f) a person whose relative is a director or is in the employment of the company as a director or key managerial personnel;
(g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty (20) Companies, other than one-person company, dormant companies, small companies and private companies having paid up capital less than 100 Crores, which has not committed default in filing its financial statements u/s 137 or annual return u/s 92 of Companies Act with the Registrar; Note: In the case of firm of auditors, it has been further provided that specified number of companies shall be construed as the number of companies specified for every partner of the firm who is not in full time employment elsewhere.
(h) a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction; (i) a person, who directly or indirectly, renders any service referred to in sec. 144 to the company or its holding company or its subsidiary company. Point to remember
Subsequent Dis- Where a person appointed as an auditor of a company incurs any of the disqualifications qualification - Sec. mentioned u/s 141(3) after his appointment, he shall vacate his office as such auditor and 141(4) such vacation shall be deemed to be a casual vacancy in the office of the auditor. Important Questions - Qualifications & Disqualifications of Auditor (Sec. 141)
Q.29 “Mr. A”, a practicing Chartered Accountant, is holding securities of “XYZ Ltd.” having face value of ` 900. Whether Mr. A is qualified for appointment as an Auditor of “XYZ Ltd.”? Would your answer will be changed if the securities are being hold by relative of Mr. A. HINT: Mr. A is holding security of ` 900 in the XYZ Ltd., therefore he is not eligible for appointment as an Auditor of “XYZ Ltd”. However, in the second case, Mr. A is eligible, as relative may hold securities of face value upto ` 1 Lac.
Q.30 “Mr. P” is a practicing Chartered Accountant and “Mr. Q”, the relative of “Mr. P”, is holding securities of “ABC Ltd.” having face value of ` 90,000. Whether “Mr. P” is Qualified from being appointed as an Auditor of “ABC Ltd.”?
HINT: In the present case, Mr. Q (relative of Mr. P), is having securities of ` 90,000 face value in the ABC Ltd., which is within the limits prescribed under section 141(3)(d)(i). Therefore, Mr. P will not be disqualified to be appointed as an auditor of ABC Ltd.
Q.31 “BC & Co.” is an Audit Firm having partners “Mr. B” and “Mr. C”, and “Mr. A” the relative of “Mr. C”, is holding securities of “MWF Ltd.” having face value of ` 1,01,000. Whether “BC & Co.” is qualified from being appointed as an Auditor of “MWF Ltd.”?
Would your answer will be changed if Mr. A hold 5000 shares (face value of ` 10 each) in MWF Ltd. Having market value of ` 1,50,000. HINT: In the instant case BC & Co, will be disqualified for appointment as an auditor of MWF Ltd as the relative of Mr. C i.e. partner of BC & Co., is holding the securities in MWF Ltd which is exceeding the limit mentioned under section 141(3)(d)(i).
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Meaning of Relative: The term “relative”, as defined under the Companies Act, 2013, means anyone who is related to another as members of a HUF; husband and wife; Father (including step-father), Mother (including stepmother), Son (including step-son), Son’s wife, Daughter, Daughter’s husband, Brother (including step-brother), Sister (including step-sister).
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Q.32
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However, in the second case, BC & Co. is eligible to be appointed as auditor, as relative may hold securities of face value upto ` 1 Lac. M/s. ABC & Co. is an audit firm, having patterns CA. A, CA. B and CA. C. The firm has been offered the appointment as an auditor of XYZ Ltd. for the financial year 2021-22. Mr. D, the relative of CA. A, is holding 25,000 shares (face value of Rs. 10 each) in XYZ Ltd. having market value of Rs. 90,000. Are M/s. ABC & Co. qualified to be appointed as auditors of XYZ Ltd. [May 18 (4 Marks), MTP-May 20 RTP-Nov. 20] HINT: ABC & Co, will be disqualified for appointment as an auditor of XYZ Ltd as the relative of Mr. C i.e. partner of BC & Co., is holding the securities in XYZ Ltd. of face value of Rs. 2,50,000 which is exceeding the limit mentioned in proviso to section 141(3)(d)(i).
Q.33 A, a chartered accountant has been appointed as auditor of Laxman Ltd. in the AGM of the company held in Sep. 2021, which assignment he accepted. Subsequently in January, 2022 he joined B, another chartered accountant, who is the Manager Finance of Laxman Ltd., as partner. [RTP-May 19] HINT: In the present case, A, an auditor of M/s Laxman Ltd., joined as partner with B, who is Manager Finance of M/s Laxman Limited, will be disqualified by Sec. 141(3)(c) and, therefore, he shall be deemed to have vacated office of the auditor of M/s Laxman Limited.
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Q.34 An auditor purchased goods worth ` 501,500 on credit from a company being audited by him. The company allowed him one month’s credit, which it normally allowed to all known customers.
HINT: In instant case, auditor has become indebted to the company and consequently he has deemed to have vacated his office.
Q.35 Ram and Hanuman Associates, Chartered Accountants in practice have been appointed as Statutory Auditor of Krishna Ltd. for the accounting year 2021-2022. Mr. Hanuman holds 100 equity shares of Shiva Ltd., a subsidiary company of Krishna Ltd. HINT: The firm, M/s Ram and Hanuman Associates would be disqualified to be appointed as statutory auditor of Krishna Ltd., which is the holding company of Shiva Ltd., because one of the partner Mr. Hanuman is holding equity shares of its subsidiary.
Q.36 Mr. Amar, a Chartered Accountant, bought a car financed at ` 7,00,000 by Chaudhary Finance Ltd., which is a holding company of Charan Ltd. and Das Ltd. He has been the statutory auditor of Das Ltd. and continues to be even after taking the loan. HINT: Mr. Amar should vacate his office immediately and Das Ltd must have to appoint any other CA as an auditor of the company.
Q.37 Praveen, a member of the ICAI, does not hold a Certificate of practice. Is his appointment as an auditor valid? HINT: Mr. Praveen does not hold a certificate of practice and hence cannot be appointed as an auditor of a company.
Q.38 ‘B’ owes ` 5,01,000 to ‘C’ Ltd., of which he is an auditor. Is his appointment valid? Will it make any difference, if the advance is taken for meeting-out travelling expenses? HINT: B’s appointment is not valid and he is disqualified as the amount of debt exceeds ` 5,00,000.
Q.39 Mr. Aditya, a practising chartered accountant is appointed as a “Tax Consultant” of ABC Ltd., in which his father Mr. Singhvi is the Managing Director. HINT: Mr. Aditya can be appointed a tax consultant irrespective that his father is the managing director of the company.
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Q.40 CA. P is providing the services of investment banking to C Ltd. Later on, he was also offered to be appointed as an auditor of the company for the current financial year. Advise. [RTP-May 18] HINT: CA. P is advised not to accept the appointment as auditor as he is already rendering the services which an auditor of a company cannot render as per Sec. 144 of the Companies Act, 2013.
Q.41 Mr. Y was appointed as an auditor of PQR Ltd. for the year ended 31.3.2022 at the AGM held on 16.08.2021. Mr. Y has been indebted to the company for sum of ` 5,10,000 as on 01.04.2021, the opening date of accounting year which has been subject to his audit. However, Mr. Y having come to know that he might be appointed as auditor, he repaid the amount on 10.8.2021. One of the shareholders, complains that the appointment of Mr. Y as an auditor was invalid because he incurred disqualification u/s 141 of the Companies Act, 2013. Comment.
[May 10 (6 Marks)]
HINT: The appointment of Mr. Y as an auditor is valid as the relevant date for determining whether a person is disqualified or not is the date of appointment.
Q.42 Comment on the following: Sri & Company, a firm of Chartered Accountants was appointed as statutory auditors of Aaradhana Company Ltd., Aaradhana Company Ltd. holds 51% shares in Sarang Company Ltd. Mr. Sri, one of the partners of Sri & Company, owed ` 1,500 as on the date of appointment to Sarang Company Ltd. for goods purchased in normal course of business. [Nov. 10 (5 Marks)]
Q.43 M/s RM & Co. is an audit firm having partners CA. R and CA. M. The firm has been offered the appointment as an auditor of Enn Ltd. for the Financial Year 2021-22. Mr. Bee, the relative of CA. R, is holding 5,000 shares (face value of `10 each) in Enn Ltd. having market value of `1,50,000. One of the shareholders, complains that the appointment of RM & Co. as an auditor is invalid because it incurred disqualification u/s 141 of the Companies Act, 2013. Analyse and advise. [MTP-March 18, RTP-May 18] HINT: M/s RM & Co. is not disqualified for appointment as auditors, as the relative of CA. R (i.e. partner of M/s RM & Co.) is holding the securities in Enn Ltd. within the prescribed limit.
Q.44 RGS & Co. a firm of Chartered Accountants has three partners, namely, R, G & S. The firm is allotted the audit of BY Ltd. R, partner in the firm subsequently holds 100 shares in BY Ltd. Comment. [MTP-Oct. 18] HINT: Applying the provisions of Sec. 141(3) and 141(4), it can be concluded that firm shall vacate its office as auditor and such vacation shall be treated as casual vacancy.
Q.45 “CA. NM who is rendering management consultancy service to LA Ltd. wants to accept offer letter for appointment as an auditor of the LA Ltd. for the next financial year.” Discuss with reference to the provision of the Companies Act, 2013. [Nov. 18 (5 Marks), MTP-April 21]
HINT: As per Sec. 141(3)(i) of Companies Act, 2013, CA NM is not qualified to be appointed as auditor as he is rendering the services prescribed u/s 144.
Q.46 Under the provisions of Section 141(3) of Companies Act, 2013 along with relevant rules, a person or a firm who has “business relationship” with a company is not eligible to be appointed as an auditor of that company. In this context, discuss meaning of term “business relationship”. [RTP-Nov. 21] HINT: As per Sec. 141(3) of Companies Act, 2013.
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HINT: Mr. Sri is not disqualified to be appointed as auditor of the company as he is indebted to the company for an amount not exceeding ` 5,00,000, consequently, Sri & Co., is not disqualified to be appointed as an auditor of Aaradhana Company Ltd.
Auditing & Assurance AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO PAGE NO. BINDING TYPE
: PANKA J GARG : TAXMANN : JANUARY 2022 : 9TH EDITION : 9789393656827 : 460 : PAPERBACK
Rs. 1095 | USD 48
Description This book is prepared exclusively for the Intermediate Level of Chartered Accountancy Examination requirement. It covers the entire revised syllabus as per ICAI under the New Scheme of Education and Training. The Present Publication is the 9 th Edition & Updated till 31 st October 2021 for CA-Inter | New Syllabus, authored by Pankaj Garg, with the following noteworthy features: u [Tabular Presentation] of the subject matter u [Simple & Concise Language] for easy understanding u [Topic-wise Questions] Coverage of question on every topic for easy understanding u [890+ Question & Case Studies] including 350+ objective questions with hints for self practice
n Detailed answers provided in the 9 th Edition of Taxmann’s CRACKER cum Exam Guide for Auditing & Assurance for CA-Intermediate | New Syllabus
u [Graphical Chapter-wise Marks Distribution] for past exams for each Chapter u Coverage of this book includes:
n All Past Exam Question till the December 2021 CA-Inter Exam with suggested answers for Part II (Descriptive Questions)
n All Questions from RTPs and MTPs of ICAI
u [Points to Remember] Bulleted’ points to remember’ are given with various topics u [Student-Oriented Book] The authors have developed this book, keeping in mind the following factors:
n Interaction of the authors with their students, with specific emphasis on difficulties faced by students in the examinations
n Shaped by the authors’ experience of teaching the subject matter at different levels
n Reaction and responses of students have also been incorporated at different places in the book
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