Discussing the practical issues faced by the auditor during the course of Financial reporting, Disclosure & course of audit.

1. RESPONSIBILITYOF
AUDITORS UNDER
COMPANIES ACT 2013
MALLAMPALLI RUTHVIK

2. 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

3. • Revolutionary changes-
• Appointment, disqualification, many other
new terms of auditor.
• The 3’S behind CA 2013 to come into
enforcement
• Satyam Computers
• Saradha Scam
• Sahara Scam
Brief About Companies Act 2013

4. Sec 139- App of Auditor Rotation of Auditors Cooling Period
Removal & Resignation Qualifications &
Dis-Qualifications
Remuneration

5. Powers & Duties of Auditor- Section 143

6. • 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 less
than BookValue.
4. Loans & Advances Shown as
Deposits
5. Personal Expenses charged
to revenue
6. Issue of shares for
Consideration or in Kind

7. Report-
• whether the company has complied with
the accounting standards, auditing
standards
• Depict true & fair view of status of
affairs of the company through its
financial statements.
Section 143(2)-Duty to Report

8. The auditor should report to the company
on following Matters:-
1. Impact on financial statement for
the information/explanations not
provided by the management.
2. Branch auditor’s report.
3. Matching of Profit & Loss Account,
Balance Sheet to the Books of
accounts maintained by the
company.
4. Observations & comments of the
auditor on the financial transactions
which have adverse effect.
Section 143(3)-Contents of Auditors
Report

9. 1. Director’s Dis-qualification u/s
164(2)
2. Adequacy & operating
effectiveness Internal Finance
Controls
3. Disclosing the impact of any
pending litigation on FS.
4. Delay in transferring the
amount to the Investor
Education and Protection Fund
(IEPF) by the company.
Continued…..

10. 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

11. 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

12. Section 143(12)-Reporting on Fraud

13. • Auditor has reason to believe
• that an offence involving fraud is being
or has been committed
• against the company by an officer or the
employee of the company
• Reporting the matter immediately to
the central government if such fraud
amounts to Rs. 1 Crore or above.
• The auditor should first intimate the
board of directors or the audit committee
immediately within 2 days of knowing
about the fraud seeking their reply/
observations within 45 days.
Section 143(12)-Reporting on Fraud

14. • On receipt on such reply or observations
of the board or the audit committee,
• Forwards the report along with the reply
or observations of the board or the audit
committee and
• Auditor’s comments on such reply or
observations to the central government
within 15 days.
• In case, no reply received from the board-
• Send the audit report along with a note
containing the details of his report that
was earlier forwarded to the board or
the committee for which he has failed to
receive any comments or observations.
Continued….

15. • Only Frauds committed by the
employees/ Officers against the
company have been covered here.
• Frauds by company against its
stakeholders have been covered in
CARO 2016 where the auditor has to
report.
• Reporting Limit to Central Govt- Rs.
1 Crore or above.
• SA-240 existence since long but
section 143(12) boosted that.
IN BRIEF….

16. Practical Challenges
1. What about the Suspected Frauds which have been reported
by the employees or whistleblowers??- Need to Report to CG
2. What about the frauds which the management feels there
isn’t any fraud being committed – Should the auditor report
along with the comments to CG or waive it off ??
3. Frauds where the board of directors are part off- Whom
should the auditor report initially ?
4. Third Party Frauds committed by vendors or customers are
not covered ??
5. Only reports identified by the Auditors requires reporting to
the Central Government. Mostly important auditor should
have SAAE before he reports about the fraud- Big Flaw in
itself

17. • Any areas which the auditor feels that has
an inadequacy or negative information, he
should disclose the same in his report
stating 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 are
materially Mis-stated
Qualified opinion Adverse opinion
Inability to obtain sufficient
appropriate audit evidence
Qualified opinion Disclaimer of
opinion

18. • Govt Company auditors shall be appointed by
CAG
• They may direct the auditor the manner in
which the auditor may be conducted.
• Report the impact on financial statements in
account of directions followed by the auditors
as the per CAG.
CAG Supplementary Audit
Conduct a supplementary audit by authorizing
persons within 60 days of receipt of Audit
report.
Such copy should also been placed in the AGM.
Test Audit May be Conducted if CAG Feels to
be conducted by auditor who holds office till
AGM
Government Company Auditor

19. 1. How practical is that within 60 days
the Supplementary audit will be
conducted & will be submitted
before AGM – Time frame is not
possible.
2. Test Audit- Practical Sense may not
be possible
3. Why Auditor’s should be held
responsible in case of Govt Audits-
CAG has appointed and always the
right to conduct the Supplementary
audit??- Shouldn't they be held
equally liable upto some extent.
PRATICAL CHALLLENGES

20. Company-
Punishable with fine (Rs. 25,000 to Rs.
5,00,000).
Officer in charge-
Punishable with imprisonment maximum for 1
year 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 to
one year and with fine (Rs. 1,00,000 to Rs.
25,00,000).
Section 147-Punishment for Contravention

21. PRATICAL CHALLENGES
1. Potential unlimited liability on
auditor may result in adverse
impact on auditing profession
2. Unlimited liability to the firm for an
act of a partner.
3. Firm should ideally have been held
liable only when there is systemic
failure in firm's process and hence
this seems a disproportionate
punishment for an individual act.

22. 1. Money raised from public
(IPO/Right’s issue) Debt instruments
like loans have been utilized for the
said purpose
2. Frauds committed by the employees
against the company or by company
has been reported or noted.
3. Compliance to Related party
transactions under section 177 & 188
has been followed.
4. Any Non-Cash transactions entered
by company with the directors and
compliance to section 192
CARO 2016

23. Section 143(9)- Compliance of AS
• Compliance of Accounting Standards
(AS) & Standards on Auditing (SA)-
Mandatory
• Any deviation should be explained
with reasons as to why auditor opted
should be made clear.
• Reference to Guidance notes & other
materials released by ICAI.

24. • Services which the auditor are not entitled to
provide. Services which an auditor cannot
provide:-
1. Accounting and Book keeping services
2. Internal audit
3. Design and implementation of any financial
information system
4. Actuarial services
5. Investment advisory services & Investment
banking services
6. Rendering of outsourced financial services
7. Management services any other kind of
services as may be prescribed
Section 144: Other Services by Auditor

25. 1. This results in restricting the ability of an audit firm to
provide most non-audit services !!! However by being
independent even the auditor can provide many
other 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 the
Management be held liable if they appoint the auditor for
providing prohibited services ??
4. Amendment to be made so that section is applicable for
specified list of companies only.
“LAST”
PRATICAL CHALLENGES-

26. Company has Branch in India
1. Audited shall be performed
by Company Auditor
2. Any other qualified Person
u/s 139 of act.
Section 143(8)- Branch Audit
Company has Branch outside
India
1. Auditedshallbeperformedan
Accountant.
2. Any other person
qualified who is qualified
to perform such audit
Such branch auditor should
prepare a report on the books of
accounts of the branch audited by
him & send a copy of such audit
report to the company auditor.

27. Section 143(10)- National Financial Reporting
Authority
• NFRA is regulatory authority for auditing,
accounting and financial reporting, to advice on
matters related to Auditing Standards in addition
to Accounting Standards and also to act as a
regulatory body for accountancy profession
Section 143(11)- Reporting in Auditor’s Report
• The Central Government may in
consultation with the NFRA direct that the
audit report in case of specific class of
companies shall include a statement on
such matters as may be specified therein.

28. • 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 govt
in good faith as per second schedule
of the Chartered Accountants Act,
1949.
Section 143(13)- Reporting in Good Faith

29. The provisions of Section 143 shall be
equally applicable to-
• Company Secretary in practice
conducting secretarial audit u/ 204
(or)
• Cost Accountant performing cost
audit u/s 148.
• Section 148 governing Cost Audit
mentions about the same.
Section 143(14)- Applicability to CS & CMA

30. • The qualifications, observations or comment
on functioning of the company in the auditor’s
report shall be read before the general
meeting
Section 145-Auditor to Attend
AGM
• Notices and communications related to AGM
shall be forwarded to the auditor.
• The auditor shall attend AGM either himself
or through representative & have the right to
be heard at the meeting.
Section 145-Auditor to Sign report