Companies Act, 2013 Flashcards
Mr. Shripal, a practising Chartered Accountant, has been appointed as an auditor of Rani Ltd on
12th June, 2021 for the year ended 31st March, 2022. The following persons have done following
transactions in securities of M/s Z Ltd.:
► Daughter of Mr. Y: Purchase of Securities on 10th September, 2021 of face value of
Rs. 45,000 (market value Rs. 90,000).
► Husband of daughter of Mr. Shripal: Purchase of Securities on 10th December, 2021 of face
value of Rs. 90,000 (market value Rs. 1,90,000).
All the above securities were sold on 18th February, 2022 for Rs. 3,00,000. Discuss the implications
of the above on the appointment of Mr. Shripal.
Auditor’s disqualifications as to security:
• As per section 141(3)(d)(i) of Companies Act, 2013, a person is disqualified to be appointed as an
auditor if he, or his relative or partner 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.
• As per Rule 10 of Companies (Audit and Auditor’s) Rules, 2014, the relative of the auditor may
hold the securities or interest in the company of face value not exceeding of { 1,00,000. It is also
provided 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.
• The term relative as defined in Sec. 2(77) includes daughter and daughter’s husband.
• Thus, the disqualifications will be applicable as the relative/s are holding securities of face value of more than Rs. 1,00,000 and market value is not important.
• In the present case, Mr. Y, has been appointed as an auditor of M/s Z Ltd. on 12th June, 2021 for the
year ended 31st March, 2 0 2 2. His daughter purchases securities of Z Ltd. on 10th Sep., 2 0 21 of face
value of { 45,000, whereas husband of daughter of Mr. Y purchases securities of Z Ltd. on 10th Dec.,
2021 of face value of {90,000. Aggregate face value of securities held by relatives of Mr. Y amounts
to { 1,35,000. Mr. Y was required to take corrective action within 60 days of 10th Dec. 2021 to bring
the value of securities held by relatives to { 1,00,000. However, securities were sold on 10th March,
2022 after expiry of 60 days from 10th Dec. 2021.
Conclusion: Mr. Y becomes disqualified for appointment as an auditor of R Ltd as per Sec 141(3)(d)(i) and he shall vacate his office on expiry of 60 days from 10th Dec. 2021 as he fails to take
corrective action so as to bring the shareholding of relatives within prescribed limit of { 1 Lac (face
Value).
CA. G, was appointed by DP Ltd., as Statutory Auditor. While doing the audit of DP Ltd.,
CA. G observed that certain loans and advances were made without proper securities;
certain trade receivables and trade payables were adjusted inter se; and personal
expenses were charged to revenue. As a company auditor comment on the, reporting
responsibilities of CA. G.
Duty of Auditor to Inquire on certain matters: Section 143(1) of the Companies Act,
2013 requires the auditor to make an enquiry in respect of specified matters during the
course of his audit. Since the law requires the auditor to make an enquiry, the Institute
opined that the auditor is not required to report on the matters specified in sub-section (1)
unless he has any special comments to make on any of the items referred to therein. If the
auditor is satisfied as a result of the enquiries, he has no further duty to report that he is
so satisfied. It is to be noted that the auditor is required to make only enquiries and not
investigate into the matters referred to therein.
The opinion of the Research Committee of the Institute of Chartered Accountants of
India on section 143(1) of the Companies Act, 2013 is worth considering and reproduced
below:
“The auditor is not required to report on the matters specified in sub-section (1) unless he
has any special comments to make on any of the items referred to therein. If he is satisfied
as a result of the inquiries, he has no further duty to report that he is so satisfied. In such
a case, the content of the Auditor’s Report will remain exactly the same as the auditor has
to inquire and apply his mind to the information elicited by the enquiry, in deciding whether
or not any reference needs to be made in his report. In our opinion, it is in this light that
the auditor has to consider his duties under section 143(1 ).”
Clause (a) of Section 143(1) requires the auditor to inquire: “Whether loans and advances
made by the company on the basis of security have been properly secured and whether
the terms on which they have been made are prejudicial to the interests of the company or
its members”.
If the auditor finds that the loans and advances have not been properly secured, he may
enter an adverse comment in the report but cannot probably doubt the true view of the
accounts by reference to this fact so long the loans and advances are properly described
and presented in terms of Part I of Schedule Ill to the Companies Act. Further the auditor
to inquire whether or not the terms on which the loans or advances have been made are
prejudicial to the interests of the company or its members. If it is, he should qualify his
report.
If trade receivables and trade payables are adjusted inter se, this amounts to merely
book entries. The auditor, as per clause (b) of section 143(1 ), should enquire “whether
transactions of the company which are represented merely by book entries are prejudicial
to the interests of the company”. This proposition has got to be inquired into by reference
to the effects of the book entries, unsupported by transactions, on the legitimate interests
of the company. The auditor has to exercise his judgment based on certain objective
standards”.
Regarding Personal Expenses, Clause (e) of section 143(1) requires the auditor to
inquire: “Whether personal expenses have been charged to revenue account”. The
charging to revenue of such personal expenses, either on the basis of the company’s
contractual obligations, or in accordance with accepted business practice, is perfectly
normal and legitimate or does not call for any special comment by the auditor. Where,
however, personal expenses not covered by contractual obligations or by accepted
business practice are incurred by the company and charged to revenue account, it would
be the duty of the auditor to report thereon. It suffices to say that if the auditor finds that
personal expenses have been charged to revenue and if the amounts are material, he
should qualify his report also.
“The C & AG may direct the appointed auditor about the manner in which the accounts of
the Government company are required to be audited and thereupon the auditor so
appointed shall submit a copy of the audit report to the Comptroller and Auditor-General
of Indian. What are the relevant sections of the Companies Act, 2013 and steps involved
in the audit of Government Companies?
The following steps are involved in the audit of government companies:
(i) Appointment of Auditors under Section 139(5) and 139(7) read with section
143(5) of the Companies Act, 2013 - Statutory auditors of Government Companies
are appointed or re-appointed by the C&AG. There is thus, a departure from the
practice in vogue in the case of private sector companies where appointment or reappointment
of the auditors and their remuneration are decided by the members at
the annual general meetings. In the case of government companies, though the
appointment of statutory auditors is done by the C&AG, the remuneration is left to the
individual companies to decide based on certain guidelines given by the C&AG in this
regard.
(ii) The C&AG may direct the appointed auditor on the manner in which the accounts
of the Government company are required to be audited and the auditor so appointed
has to submit a copy of the audit report to the Comptroller and Auditor-General of
India. The report, among other things, includes the directions, if any, issued by the
C&AG, the action taken thereon and its impact on the accounts and financial
statement of the company.
The report under section 143(5) is in addition to the reports issued by the Statutory
Auditors under various other clauses of section 143.
(iii) Supplementary audit under section 143(6)(a) of the Companies Act, 2013 -The
Comptroller and Auditor-General of India shall within 60 days from the date of receipt
of the audit report have a right to conduct a supplementary audit of the financial
statements of the government company by such person or persons as he may
authorize in this behalf and for the purposes of such audit, require information or
additional information to be furnished lo any person or persons, so authorised, on
such matters, by such person or persons, and in such form, as the C&AG may direct.
(iv) Comment upon or supplement such Audit Report under section 143(6)(b) of the
Companies Act, 2013 - Any comments given by the C&AG upon, or in supplement
to, the audit report issued by the statutory auditors shall be sent by the company
to every person entitled to copies of audited financial statements under subsection
(1) of section 136 of the said Act i.e. every member of the company, to every
trustee for the debenture-holder of any debentures issued by the company, and to all
persons other than such member or trustee, being the person so entitled and also be
placed before the annual general meeting of the company at the same time and
in the same manner as the audit report.
(v) Test audit under section 143(7) of the Companies Act, 2013 -Without prejudice to
the provisions relating to audit and auditor, the C&AG may, in case of any company
covered under sub-section (5) or sub-section (7) of section 139 of the said Act, if
he considers necessary, by an order, cause test audit to be conducted of the accounts
of such company and the provisions of section 19A of the Comptroller and Auditor -
General’s (Duties, Powers and Conditions of Service) Act, 1971, shall apply to
the report of such test audit.
Dharam & Karam Company Ltd. had prepared its financial statements for the financial year
2021-22 which were approved by the Board of Directors of the company and thereafter they were
signed by the Chairperson of the company as authorized by the Board, as well as by its CEO, CFO
and CS, respectively. Also, its board report was signed by its Managing Director as well as by an
Executive Director. You are required to comment whether financial statements and the Board’s
report of the company have been signed by the persons mandatorily required to sign, as prescribed
by the relevant Act.
As per section 134 of the Companies Act, 2013, the financial statements, including consolidated
financial statements, if any, shall be approved by the Board of Directors before they are signed on
behalf of the Board by the Chairperson of the Company where he is authorized by the Board or by
two directors out of which one shall be Managing Director, if any, and the Chief Executive Officer,
the Chief Financial Officer and the Company Secretary of the Company, wherever they are
appointed, or in the case of One Person Company, only by one director, for submission to the
auditor for his report thereon.
The Board’s report shall be signed by its chairperson of the company if he is authorised by the
Board and where he is not so authorised, shall be signed by at least two directors, one of whom
shall be a Managing Director.
Here, Dharam and Karam Company Ltd. had prepared its financial statements for the financial year
2021-22 which were approved by the Board of Directors of the company and thereafter they were
signed by the Chairperson of the company as authorised by the Board, as well as by its CEO, CFO
and CS, respectively. Also, its board report was signed by its Managing Director as well as by an
Executive Director.
Hence, it can be said that the financial statements and the Board’s report of the Dharam and Karam
Company Ltd. have been signed are in accordance with section 134 of the Companies Act, 2013.
SN - Auditor’s right to Lien as per Companies Act, 2013.
Auditor’s Right to Lien as per the Companies Act, 2013: Auditor can exercise lien on
books and documents placed at his possession by the client for non-payment of fee for
work done on the following conditions:
(i) Documents retained must belong to the client who owes the money;
(ii) Documents must have come into possession of the auditor on the authority of the
client;
(iii) The auditor can retain the documents only if he has done work on the documents
assigned to him;
(iv) Such documents can be retained which are connected with the work on which fees
have not been paid.
Under section 128 of the Act, books of account of a company must be kept at the
registered office. These provisions ordinarily make it impracticable for the auditor to
have possession of the books and documents. The company provides reasonable facility
to auditor for inspection of the books of account by directors and others authorised to
inspect under the Act.
Taking an overall view of the matter, it seems that though legally, auditor may exercise
right of lien in cases of companies, it is mostly impracticable for legal and practicable
constraints. His working papers being his own property, the question of lien, on them
does not arise.
