B COM NOTES. PREPARED BY: ABHISHEK D K M. COM., (B. ED.,).

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ABHISHEK D K, COMMERCE LECTURER.
UNIT 5:
COMPANY AUDITOR:
Company Auditor:
Definition:
An Auditor is a qualified Chartered Accountant appointed for the purpose of examining the
accounts of a Joint Stock Company and giving the report thereon to the shareholders every
year at the annual general meeting.
Statutory qualifications of an Auditor:
a. A person can be appointed as an Auditor of a Company only if he is a Chartered
Accountant within the meaning of the Chartered Accountants Act, 1949.
b. In case, a firm is appointed as an Auditor of a Company, all the partners of the firm
must be Chartered Accountants.
c. The holder of a certificate under the Restricted Auditors’ Certificate (Part B States)
Rules, 1956 is also qualified to act as an Auditor of a Company.
Professional qualities of an Auditor:
Apart from being becoming the member of Institute of Chartered Accountants of India, he
should possess the following professional qualities:
1. He must have thorough knowledge of Principles and Practice of all aspects of
Accountancy. He must be familiar with all systems of Accountancy in use.
2. He must have thorough knowledge of audit case laws as per the various cases decided
by courts in and outside India.
3. He should have adequate knowledge of financial management, industrial,
administrative and business organization.
4. He must have upto date knowledge of Companies Act and Mercantile Laws.
5. He should not disclose the secrets of his clients.
6. He should hear the arguments or opinions of others carefully.
7. He should have high moral standards and should not accept and sign a report or
statement which he does not believe to be true and fair.

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8. He must be impartial while discharging his duties. He should not be influenced by
others directly or indirectly.
9. An auditor must be honest in his report. He should bring out true facts and figures in
his report.
10. He should be tactful enough to extract certain information from his client, when such
information is inadequate or that the client is not aware about it.
Appointment of Auditors:
Appointment of Auditor in Government Company [Section 139 (5), 139 (8), 139 (11)]:
The appointment of auditor in Government Company or Government Controlled (directly /
indirectly) Company shall be held in accordance with the following provisions:
The First Auditor shall be appointed by the Comptroller and Auditor General within 60 days
from the date of incorporation and in case of failure to do so, the Board shall appoint auditor
within next 30 days and on failure to do so by Board of Directors, it shall inform the
members, who shall appoint the auditor within 60 days at an extraordinary general meeting
(EGM), such auditor shall hold office till conclusion of first Annual General Meeting.
In case of subsequent auditor for existing government companies, the Comptroller & Auditor
General shall appoint the auditor within a period of 180 days form the commencement of the
financial year and the auditor so appointed shall hold his position till the conclusion of the
Annual General Meeting.
In the case of a company whose accounts are subject to audit by an auditor appointed by the
Comptroller and Auditor General of India, be filled by the Comptroller and Auditor General
of India within thirty days. In case, the Comptroller and Auditor General of India does not
fill the vacancy within the said period, the Board of Directors shall fill the vacancy within
next thirty days.
The Act also provides that in case the Company has an Audit Committee, then all
appointments of Auditor including filling of casual vacancy, shall be made after taking into
account the recommendation of the Committee.

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Re-Appointment of Retiring Auditor [Section 139 (9)]:
At any annual general meeting, a retiring auditor shall be re-appointed as auditor of the
company except under the following circumstances:
a. He is not qualified for re-appointment.
b. He has given the company a notice in writing of his unwillingness to be re-appointed.
c. A special resolution has been passed at that meeting appointing somebody else instead
of him or providing expressly that retiring auditor shall not be re-appointed.
Section 139 (10) lays that where at any annual general meeting, no auditor is appointed or
re-appointed, the existing auditor shall continue to be the auditor of the company.
Rotation of Auditors [Section 139 (3)]:
Members of a company can provide for following by passing a resolution:
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.
A transition period of 3 years from the commencement of the act has been prescribed for the
company existing on or before the commencement of the Act, to comply with the provisions
of the rotation of auditor.
Rotation of Auditors on Expiry of their term [Section 139 (4) and Rule 6]:
Rotation of Auditors on expiry of auditor’s term, then same procedures will be followed as
required for appointment of auditors.
The procedure is as under:
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 case, the Board shall

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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.
For the purpose of rotation, the period for which the auditor is holding office prior to the
commencement of this act will also be counted in calculating the period of 5 years or 10
years as the case may be. The incoming auditor / audit firm shall not be eligible if such
auditor / audit firm is associated with the outgoing auditor / audit firm under the same
network of audit firms i.e., includes the firms operating / functioning under the same brand
name, trade name or 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.
When a company has appointed two or more persons as joint auditors, 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.
Casual Vacancy in the office of Auditor [Section 139 (8)]:
Any casual vacancy in the office of an auditor shall:
i. In the case of a company other than a company whose accounts are subject to audit by
an auditor appointed by the Comptroller and Auditor General of India, be filled by the
Board of Directors within thirty days, but 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 three months of the recommendation of the Board
and he shall hold the office till the conclusion of the next annual general meeting.
ii. In the case of a company whose accounts are subject to audit by an auditor appointed
by the Comptroller and Auditor General of India, be filled by the Comptroller and
Auditor General of India within thirty days.
It may be noted that in case, the Comptroller and Auditor General of India does not fill the
vacancy within the said period, the Board of Directors shall fill the vacancy within next thirty
days.

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Appointment of Auditor other than retiring Auditor by special notice [Section 140 (4)]:
Special notice shall be required from members proposing to move a resolution at the next
annual general meeting to appoint a person other than the retiring auditor or to provide that
the retiring auditor shall not be re-appointed.
Such special notice shall not be required in case where the retiring auditor has completed a
consecutive tenure of five years or, as the case may be, ten years, as provided under sub-
section (2) of section 139.
Following points are relevant for the purpose of special notice:
i. Company, on receipt of such special notice for removing auditor, should forthwith
send a copy of the same to the retiring auditor.
ii. If the auditor makes a representation in writing to the company and requests for its
notification to the members, the company shall:
a. State the fact of representation in any notice of resolution, and
b. Send copy of representation to members to whom notice of meeting is sent,
whether before or after the receipt of representation by the company.
c. If the copy of representation is not so sent, copy thereof should be filed with
the Registrar.
Audit Report:
It is a document prepared by the auditors appointed to examine and certify the accounting
records and financial position of a firm. It must be filed every year by an incorporated or
registered firm (along with its audited financial statements) with the appropriate regulatory
authority.
Capital Reserve:
A Capital Reserve is an account on the Balance Sheet that can be used for contingencies or to
offset capital losses. It represents the accumulated capital surplus of a company, created out
of capital profit, such as the upward revaluation of its assets to reflect their current market
value after appreciation, or profits on the sale of assets.

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Contingent Liability:
A Contingent Liability is a potential liability. It depends on a future event occurring or not
occurring. Example: Lawsuit expenses, Warranty Reserves, etc.
Rights / Powers of a Company Auditor:
The following are the important Rights / Powers of a Company Auditor:
1. Right to access to books of accounts and vouchers:
An auditor of a company has a right to access to the books of accounts and vouchers
of the company whether they are kept at the head office of the company or elsewhere.
2. Right to examine the cost records:
An auditor of a company has a right to examine the cost records along with the
quantitative records relating to production, sales, stocks, etc.
3. Right to obtain information and explanations:
An auditor of a company has a right to obtain from the directors and officers of the
company such information and explanation as he may think necessary for the
performance of his duties as an auditor.
4. Right to correct any wrong statement:
An auditor of a company has a right to correct any wrong statement made by the
Directors relating to the accounts to be laid before the company in the general meeting.
5. Right to comment on the inadequacy of the accounting system in his report:
If the system of maintaining accounts is inadequate, he can advice the directors to
amend the system of accounting.
6. Right to visit branches:
The auditor of the company can visit the branch and examine the books of accounts
and vouchers at the branch.
7. Right to receive notice and other communications of general meeting:
An auditor of a company has right to receive notice and other communications
relating to any general meeting, in the same way as a member of the company.
8. Right to attend the general meeting of the shareholders:
An auditor has the right to attend every general meeting of the shareholders.
9. Right to speak at the general meeting:

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An auditor of a company has a right to speak at the general meeting where his
certified accounts are discussed.
10. Right to sign the audit report:
An auditor has a right to sign the audit report.
11. Right to report to the members of the company:
An auditor has a right to report to the members of the company, if the accounts
audited by him show an unsatisfactory state of affairs.
12. Right to be indemnified:
An auditor of a company, being an officer of the company, has a right to be
indemnified out of the assets of the company, for any liability incurred by him in
defending himself against any proceedings by the company.
13. Right to receive any remuneration for his audit work:
An auditor of a company has a right to receive remuneration for his audit work
provided he has completed the work which he undertook.
14. Auditor’s right of lien:
An auditor has a particular lien on the books of accounts audited by him for non-
payment of audit fees.
Duties and Responsibilities of a Company Auditor:
The various duties and responsibilities of an auditor of a company can be grouped into four
categories. They are:
1. Statutory Duties.
2. Contractual Duties.
3. Certain duties imposed by legal or court decisions.
4. Duties arising out of Professional Etiquette.
1. Statutory Duties:
Statutory Duties refers to the duties imposed by the statute, i.e., by the Companies Act.
It may be noted that the statutory duties of an auditor cannot be restricted either by the
Articles of Association of the company or by any resolution of the members of the
company or by the directors of the company.
The various statutory duties of an auditor under the Companies Act are:

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i. Duty to make certain enquiries:
An auditor of a company should enquire:
a. Whether loans and advances have been properly secured.
b. Whether loans and advances have been shown as deposits.
c. Whether the transactions of the company are not prejudicial to the
interests of the company.
d. Whether the personal expenses have been charged to revenue account.
ii. Duty to Report:
An auditor of a company should make a report to the shareholders on the
accounts examined by him and Balance Sheet and Profit and Loss Account.
iii. Duty to comply with the directives of the Central Government:
The Central has been empowered to issue necessary directives to the auditors
of certain companies to give specific reports on certain matters. When the
central government issues any such directions, the auditors are required to
comply with those directives.
iv. Duty to sign his audit report.
v. Duty to give a statement in prospectus:
A prospectus issued by an existing company should contain a statement
from the auditor.
vi. Duty to certify the statutory report.
vii. Duty to certify the declaration of the solvency of the company.
viii. Duty to assist Central Government in connection with prosecution.
ix. Duty to make report on public deposits.
2. Contractual Duties:
An auditor is appointed by an agreement with his client, i.e., the company. So, he has
some duties arising out of the common law or the law of contract. He has to perform
all those duties which he has expressly or impliedly undertaken to perform under his
contract with the company.
The important contractual duties of an auditor are:
i. An auditor has a duty to see that his appointment is in order.
ii. He must perform all the duties under common law.

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3. Duties imposed by legal or court decisions:
i. An auditor must make himself fully acquainted with his duties under the
Companies Act and the Articles of Association of the company.
ii. He must not confine himself only to verify the arithmetical accuracy of the
Balance Sheet but should also enquire into its real accuracy and fairness.
iii. He should satisfy himself about the valuation of assets.
iv. He should perform his duties with great care and skill.
v. It is the duty of a company auditor to check the stock properly.
4. Duties arising out of Professional Etiquette:
i. Every auditor should carry on his duties with due regard to public interest.
ii. An auditor should comply with the rules and regulations formulated by the
Institute of Chartered Accountants of India.
iii. He must be honest, sincere, technically competent and independent.
iv. He should disclose full and fair information about the working and financial
position of the company.
Liabilities of a Company Auditor:
A company auditor is appointed under the Companies Act. So, his liabilities are determined
by the Companies Act. Under the Companies Act, the liabilities of a company auditor can be
grouped under two heads. They are:
1. Civil Liabilities.
2. Criminal Liabilities.
1. Civil Liabilities:
Liability of an auditor to pay damages is known as Civil Liability.
The civil liabilities of a company auditor may be grouped under five heads. They are:
i. Liability for Negligence.
ii. Liability under Companies Act (Liability for Misfeasance).
iii. Liability under Consumer Protection Act.
iv. Liability for Unaudited Statements.
v. Liability for Negligence of Assistants.

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i. Liability for Negligence:
 An auditor is expected to perform his duties with reasonable care and
skill.
 Of course, no person can promise to always use highest degree of skill
and display extraordinary knowledge while discharging their duties.
An auditor is liable to the following persons for negligence while discharging
his duties:
a. To his client, with whom he has contractual relationship.
b. To third parties, if the auditor knows or had reasonable opportunity to
know that he (the third party) is relying on the skill and judgement of
the auditor.
c. However, in case of Fraud, the auditor is liable to all persons.
The Consequences of Negligence are Compensatory Damages and Special Damages.
ii. Liability under Companies Act (Liability for Misfeasance):
 Misfeasance implies Breach of Duty or negligence in the performance
of duties.
 It also implies wrongful performance of a fiduciary duty.
 In otherwords, it means Breach of Trust or Duty imposed by Law.
 If an auditor of a company does something wrongfully in the
performance of his duties, resulting in financial loss to the company,
his is guilty of misfeasance.
 The Liability for Misfeasance arises only if any loss is suffered due to
negligence or Breach of Duty.
 If no loss is suffered due to misfeasance, liability does not arise.
Action for misfeasance can be initiated within 5 years:
a. From the date of order of winding up.
b. From the first appointment of the liquidator or
c. Of the cause of action having arisen, whichever is longer.

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Action for misfeasance can be initiated only when the company is being
wound up. Compensatory damages can be claimed from all the officers of
the company, including an auditor, for the loss suffered due to misfeasance.
iii. Liability under Consumer Protection Act:
The following points should be borne in mind:
a. The auditor gives his opinion or advice on payment of fees. Therefore,
they come under the purview of Consumer Protection Act.
b. If any Chartered Accountant gives opinion or advice contrary to the
provisions of law or an opinion not supported by any judicial decisions,
he may be called upon to compensate by paying damages for the loss
suffered as a result of his opinion or advice.
iv. Liability for Unaudited Statements:
 A Chartered Accountant may accept assignments other than his audit
work.
 However, since he has associated himself in the preparation of
financial statements, there is every possibility of a third party to
presume that he is the auditor of the company to which he had
prepared financial statements and that the books of accounts were duly
audited. In such an event, a Chartered Accountant becomes liable.
 However, to avoid such misinterpretations, the Chartered Accountant
should be very careful while entering into a contract / agreement with a
client.
 Actually, when he is not required to audit the books of accounts, or
where he is not required to perform a complete audit, such facts should
be clearly stated in the letter of appointment.
v. Liability for Negligence of Assistants:
 An auditor is entitled to rely on the work performed by the assistants.
But, he should ensure that his assistants are not negligent and the audit
is conducted with due care and skill.
 However, he will continue to be responsible for forming and
expressing his opinion on the financial information.

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2. Criminal Liabilities:
Criminal Liability means liability for a crime. Criminal Liability of an auditor arises
out of an act constituting a crime, say, misrepresentation of facts, falsification of facts,
issue of false certificates, making of false statement, destruction of any voucher or
document or doing of any other act, with an intent to deceive others.
The criminal liabilities of an auditor may arise under:
i. The Companies Act, 1956 (Revised, 2013).
ii. The Indian Penal Code, 1860.
iii. The Income Tax Act, 1961.
iv. The Chartered Accountants Act, 1949.
i. The Companies Act, 1956 (Revised, 2013):
The following are the criminal liabilities of an auditor under The Companies
Act:
I. For False Records:
 Section 539 of Companies Act, prescribes severe criminal
punishment; if any false or fraudulent entry is made in any
register, books of accounts or records of the company.
 The officers of the company who are found guilty of the
offense including the auditor will be punishable with
imprisonment and shall also be liable to fine.
II. For False Statement:
If an auditor makes any false statement or omits any material fact
known to him intentionally, in any Return, Certificate, Report, Balance
Sheet, Prospectus, etc., under Section 628 of the Companies Act, he is
punishable with imprisonment and also be liable to fine.
III. For Willful Default:
If an auditor intentionally makes a default in presenting the auditor’s
report or signing a document, his shall be punishable under Section
233 of the Companies Act, with fine.
ii. The Indian Penal Code, 1860:

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The following are the criminal liabilities of an auditor under The Indian Penal
Code:
 Indian Penal Code prescribes simple imprisonment up to six months
with fine for furnishing false information.
 A false statement or declaration on oath attracts imprisonment up to 7
years and fine.
iii. The Income Tax Act, 1961:
The following are the criminal liabilities of an auditor under The Income Tax
Act:
 A qualified Chartered Accountant or the auditor of a company can act
as an authorized representative and appear before the Income Tax
Authority or the Appellate Tribunal in connection with the proceedings
under the Income Tax Act.
 As such, an auditor may become criminally liable under certain
circumstances such as submission of false returns of income tax, or
induce any person to make false statements with income tax authorities.
iv. The Chartered Accountants Act, 1949:
The following are the criminal liabilities of an auditor under The Chartered
Accountants Act:
 Under this Act, if a person not being a Chartered Accountant acts as an
auditor of a company and signs any document, he becomes liable for
criminal prosecution.
 Further, a qualified auditor’s membership may be cancelled if he is
found guilty of professional misconduct.
Professional Ethics of Auditors:

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 Professional ethics means the basic principles of right action for the members of a
profession.
 A profession can gain public trust and confidence only if specific norms of behaviour
of the members of the profession are laid down and observed strictly.
 It is only through a strict observance of the code of conduct that the members of a
profession would be relied upon as persons of charter and integrity.
The International Federation of Accountants is of the opinion that “an essential pre requisite
for any group of such persons (professional accountants) is the acceptance and observance of
professional ethical standards regulating their relationship with clients, employees, employers,
fellow members of the group and the public generally”.
The Federation emphasizes the following principles for professional accounts:
a. Integrity:
A professional accountant should be a man of integrity. Nobody should be able to
lure him away from his professional duties.
b. Independence:
Accountant should be independent, having no interests or control in the concern other
than his professional assignment.
c. Objectivity:
He should be objective in giving his opinion or report. He should not be away by
feeling or biases.
d. Confidentiality:
An accountant should maintain the confidentiality of the business of the customer. He
should not disclose any information, which he gets while doing his professional duty
to any third person.
e. Technical standards:
He must adhere to technical standards laid down in the form of accounting standards
and standard accounting practices. While reporting on the true and fair aspect of
financial standards, these standards should be kept in mind.
f. Competence:

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Accountant should be professionally competent to perform his duty according to the
needs of the assignment.
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