Audit and Auditors
Section 139. Appointment of auditors.
139(1).
Every company must appoint an auditor either an individual or a firm at its first Annual General Meeting (AGM).
The appointed auditor shall hold office from the conclusion of that meeting until the conclusion of the sixth AGM (a term of five years).
Before appointment, the company must obtain:
Written consent from the auditor
A certificate confirming that the appointment complies with the prescribed conditions and eligibility under Section 141.
Once appointed, the company must:
Inform the auditor of the appointment.
File a notice of appointment with the Registrar of Companies (ROC) within 15 days of the AGM.
The term “appointment” includes reappointment.
139(2).
To ensure independence and avoid prolonged association, certain classes of companies (like listed and other prescribed companies) must rotate auditors as follows:
An individual auditor may serve for one term of five consecutive years only.
An audit firm may serve for two consecutive terms of five years each (ten years in total).
After completion of the term:
The same individual or firm cannot be reappointed as auditor in the same company for five years.
No firm with a common partner to the outgoing firm may be appointed as auditor for the next five years.
Existing companies were given three years from the commencement of this provision to comply.
These provisions do not affect the right of the company to remove an auditor or the right of the auditor to resign.
139(3).
The members of a company may resolve that:
In the case of an audit firm, the partner and audit team shall be rotated at certain intervals.
The company shall have joint auditors to conduct the audit.
139(4).
The Central Government may prescribe rules to govern the manner of auditor rotation.
For this purpose, the term “firm” includes a Limited Liability Partnership (LLP) registered under the LLP Act, 2008.
139(5).
In the case of a Government company or any company controlled or owned by the Central or State Government:
The CAG shall appoint the auditor within 180 days from the start of the financial year.
The auditor shall hold office till the conclusion of the next AGM.
139(6).
For companies other than Government companies:
The Board of Directors shall appoint the first auditor within 30 days of incorporation.
If the Board fails to do so, the members shall appoint the auditor at an extraordinary general meeting (EGM) within 90 days.
The first auditor shall hold office till the conclusion of the first AGM.
139(7).
For Government companies:
The C&AG shall appoint the first auditor within 60 days of incorporation.
If the C&AG fails, the Board shall appoint within the next 30 days.
If the Board also fails, the members shall appoint the auditor within the next 60 days at an EGM.
The auditor shall hold office till the conclusion of the first AGM.
139(8).
(a) For Non-Government Companies:
The Board shall fill the vacancy within 30 days.
If the vacancy arises due to resignation, the appointment must also be approved by shareholders at a general meeting within three months of the Board’s recommendation.
(b) For Government Companies
The C&AG shall fill the vacancy within 30 days.
If the C&AG fails, the Board shall fill it within the next 30 days.
The new auditor shall hold office till the next AGM.
139(9).
A retiring auditor can be reappointed at an AGM if:
He is not disqualified for reappointment.
He has not expressed unwillingness in writing.
The company has not passed a special resolution appointing another auditor or resolving not to reappoint him.
139(10).
If no auditor is appointed or reappointed at an AGM, the existing auditor shall continue to hold office until a new appointment is made.
139(11).
Where a company has an Audit Committee (as per Section 177) then:
All appointments, reappointments, and filling of casual vacancies of auditors must be made only after considering the recommendations of the Audit Committee.
Section 140. Removal, Resignation of Auditor and Giving of Special Notice.
140(1).
An auditor appointed under Section 139 can be removed from office before the expiry of his term only:
After obtaining prior approval of the Central Government,
By passing a special resolution at a general meeting of the company.
Before such removal, the auditor must be given a reasonable opportunity to be heard, meaning he must be allowed to explain or defend himself before action is taken.
A company cannot arbitrarily remove an auditor and both Central Government approval and shareholder approval are mandatory.
140(2).
If an auditor resigns from his position, he must, within 30 days from the date of resignation, file a statement in the prescribed form with:
The company
The Registrar of Companies (ROC)
If it is a Government company under Section 139(5), also with the Comptroller and Auditor-General of India (C&AG).
This statement must specify the reasons for resignation and other relevant facts.
140(3).
If the auditor fails to file the statement as required 140(2) then:
He shall be liable to a penalty of ₹50,000 or an amount equal to his audit remuneration, whichever is less
If the failure continues, a further penalty of ₹500 per day shall apply from the second day of default, subject to a maximum of ₹2,00,000.
140(4).
A special notice is required for any resolution at an AGM that proposes:
To appoint a person other than the retiring auditor.
To state explicitly that the retiring auditor shall not be reappointed.
However, such notice is not required where the retiring auditor has already completed his maximum term (five years for an individual or ten years for a firm) under Section 139(2).
Upon receipt of such notice, the company must immediately send a copy to the retiring auditor.
The retiring auditor has the right to make a written representation (within reasonable length) and request that it be circulated to all members of the company.
If time permits, the company must:
Mention in the notice to members that the auditor has made a representation.
Send a copy of the representation to every member along with the meeting notice.
If it is received too late or not circulated, the auditor may request that his representation be read out at the meeting.
If the representation is not circulated, a copy must be filed with the Registrar.
If it is received too late or not circulated, the auditor may request that his representation be read out at the meeting.
If the representation is not circulated, a copy must be filed with the Registrar.
However, if the Tribunal (NCLT) finds that the auditor is misusing this right it may order that the representation not be sent or read out.
140(5).
If the Tribunal (NCLT), either:
On its own motion
On an application by the Central Government or any interested person, is satisfied that the auditor has acted fraudulently, or abetted or colluded in any fraud by or in relation to the company, its directors, or officers, it may order that:
The auditor shall cease to function as auditor.
The Central Government may appoint another auditor in his place.
Where the application is made by the Central Government and the Tribunal upholds it, the order must be passed within 15 days from receipt of the application.
An auditor (individual or firm) against whom a final order is passed under this section:
Cannot be appointed as auditor in any company for a period of five years from the date of such order
Shall also be liable for punishment under Section 447 (fraud).
Explanation.
If the auditor is a firm, both the firm and every partner who acted in a fraudulent manner or colluded in the fraud shall be held personally liable.
Explanation.
For the purpose of this section, the term “auditor” includes a firm of auditors as well as an individual auditor.
Section 141. Eligibility, qualifications and disqualifications of auditors.
141(1).
A person shall be eligible for appointment as an auditor of a company only if he is a Chartered Accountant within the meaning of the Chartered Accountants Act, 1949.
A firm may be appointed as an auditor if the majority of its partners practising in India are qualified Chartered Accountants. Such a firm may be appointed in its firm name.
141(2).
When a firm or LLP is appointed as an auditor, only the partners who are Chartered Accountants shall be authorised to act and sign the audit report on behalf of the firm.
141(3).
The following persons shall not be eligible for appointment as an auditor of a company:
A body corporate other than a limited liability partnership registered under the LLP Act, 2008.
An officer or an employee of the company.
A person who is a partner, or who is in the employment, of an officer or employee of the company.
A person who, or whose relative or partner:
Holds any security or interest in the company, its subsidiary, holding or associate company, or subsidiary of such holding company.
A person who is indebted to the company, its subsidiary, holding or associate company, or subsidiary of such holding company, beyond the prescribed limit.
A person who has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its subsidiary, holding or associate company, or subsidiary of such holding company, beyond the prescribed limit.
A person or a firm who, whether directly or indirectly, has any business relationship with the company, or its subsidiary, holding, or associate company, or subsidiary of such holding company, of such nature as may be prescribed.
A person whose relative is a director or is in the employment of the company as a director or key managerial personnel.
A person who is in full-time employment elsewhere, or a person or partner of a firm holding appointment as auditor of more than twenty companies at the date of such appointment.
A person who has been convicted by a court of an offence involving fraud and ten years have not elapsed since such conviction.
A person who, directly or indirectly, renders any of the services referred to in Section 144 to the company, or its holding or subsidiary company.
However, a relative may hold securities or interest in the company of a face value not exceeding ₹1,000 or such other amount as may be prescribed.
Explanation
For the purposes of this clause, the term Directly or Indirectly shall have the same meaning as assigned to it in Section 144.
141(4).
If an auditor, after his appointment, becomes subject to any of the disqualifications specified in 141(3) , he shall vacate his office immediately.
Such vacation shall be deemed to be a casual vacancy in the office of the auditor and shall be filled in accordance with Section 139(8).
Section 142. Remuneration of auditors.
The remuneration (payment) of the auditor is decided by the members of the company in a general meeting, or in a way determined by them during that meeting.
However, for the first auditor (who is appointed by the Board), the Board of Directors itself can fix the remuneration.
The term “remuneration” includes not just the audit fees, but also any expenses the auditor incurs while carrying out the audit, and any facilities the company provides to assist in the audit process.
However, it does not include payment for other services (like consultancy or advisory work) provided by the auditor at the company’s request.
Those are considered separate services, not part of audit remuneration.
Section 143. Powers and duties of auditors and auditing standards.
143(1).
Every auditor of a company shall have the right to access, at all times, the books of account, vouchers, and records of the company, whether kept at the registered office or elsewhere.
The auditor may require from the officers of the company such information and explanations as he considers necessary for the performance of his duties.
It shall be the duty of the auditor to inquire into the following matters:
(a). Whether loans and advances made by the company on the basis of security have been properly secured.
(b). Whether the terms are not prejudicial to the company’s interests.
(c). Whether transactions represented merely by book entries are prejudicial to the company.
(d). Whether, in the case of a company investments in shares, debentures or other securities have been sold at a price less than the purchase price.
The company in this case doe not include investment or banking company,
(d). Whether loans and advances shown as deposits are actually deposits.
(e). Whether personal expenses have been charged to revenue account.
(f). Whether cash has actually been received for shares stated to be allotted for cash.
If the company is a holding company, the auditor shall also have the right of access to the records of its subsidiary.
Associate companies as necessary for the audit of consolidated financial statements.
143(2).
The auditor shall make a report to the company’s members on the accounts examined by him.
There should be a report on every financial statement laid before the company in the general meeting.
The report shall state whether, to the best of his information and knowledge, the financial statements give a true and fair view of:
The company’s affairs, profit or loss, and cash flow.
The report also states whether they comply with the provisions of this Act and the applicable accounting and auditing standards.
143(3).
The auditor’s report shall also state:
(a). Whether all information and explanations necessary for the audit were obtained.
(b). Whether proper books of account have been kept.
(c). Whether the auditor’s report on branch offices has been considered.
(d). Whether the balance sheet and profit and loss account agree with the books of account.
(e). Whether accounting standards have been complied with.
(f). Any observations or comments that may have an adverse effect on the company’s functioning.
(g). Whether any director is disqualified under Section 164(2).
(h). Any qualification, reservation, or adverse remark relating to the accounts or records.
(i). Whether the company has adequate internal financial controls with reference to financial statements and whether they are operating effectively.
(j). Such other matters as may be prescribed.
143(4).
Where any of the matters referred to in 143 (3) are answered in the negative or with qualification, the auditor shall state the reasons for the same in his report.
143(5).
In the case of a Government company or any company owned or controlled by the Central or State Government:
The CAG shall direct the manner in which the audit is to be conducted and shall give such instructions as he deems necessary to the company’s auditor.
143(6).
The auditor appointed under 143(5) shall submit a copy of his audit report to the C&AG, who may:
(a).
Conduct a supplementary audit within 60 days of receipt of the report.
(b).
Comment upon or supplement the audit report.
Such comments or supplementary report shall be placed before the Annual General Meeting along with the auditor’s report.
143(7).
The CAG may also conduct a test audit of the accounts of a Government company or a company controlled by the Government.
The test audit can be conducted at any time he considers necessary.
143(8).
In the case of branch offices, the accounts shall be audited either by the company’s main auditor or by any other qualified auditor.
This also includes one residing in a foreign country where the branch is situated.
The branch auditor’s report shall be sent to the company’s main auditor, who shall incorporate relevant details in his report.
143(9).
Every auditor shall comply with the auditing standards prescribed under this Act.
143(10).
The Central Government may prescribe auditing standards recommended by the Institute of Chartered Accountants of India (ICAI).
This has to be done in consultation with and after examination by the National Financial Reporting Authority (NFRA).
143(11).
The Central Government may, in consultation with NFRA, direct that the auditor’s report of certain classes of companies include a statement on additional specified matters.
143(12).
If an auditor, during the performance of his duties, has reason to believe that an offence involving fraud is being or has been committed against the company by its officers or employees:
(a).
If the fraud involves an amount exceeding the prescribed limit then:
The auditor shall report it to the Central Government within the prescribed time and manner.
(b).
If the amount is below the prescribed limit, the auditor shall report it to the Audit Committee or to the Board of Directors.
The details of such report shall be disclosed in the Board’s Report.
143(13).
No duty of confidentiality shall prevent the auditor from reporting fraud in good faith under this section, and no liability shall attach to him for doing so.
143(14).
The provisions of this section shall apply, mutatis mutandis to:
(a). A cost accountant conducting a cost audit under Section 148.
(b). A company secretary conducting secretarial audit under Section 204.
143(15).
If any auditor, cost accountant, or company secretary fails to comply with 143(5) then:
(a). In the case of a listed company, he shall be liable to a penalty of ₹5,00,000
(b). In the case of any other company, he shall be liable to a penalty of ₹1,00,000.
Section 144. Auditor not to render certain services.
144(1).
An auditor appointed under this Act may provide only such other services as are:
(a). Approved by the Board of Directors or the Audit Committee.
(b). Not included in the prohibited list specified under this section.
144(2).
An auditor shall not provide, whether directly or indirectly, to the:
(a). Company itself
(b). Its holding company
(c). Its subsidiary company, any of the following prohibited services:
(a). Accounting and bookkeeping services: Preparing & maintaining financial records that the auditor will later examine compromises independence.
(b). Internal audit: The auditor cannot function as an internal checker of controls or systems..
(c). Design & Implementation of financial information system: Auditors can’t design or set up systems that produce financial data they later audit.
(d). Actuarial services: Involving the estimation of financial risks and liabilities (like insurance or pensions), which must remain independent.
(e). Investment advisory services: Auditors cannot advise on investment decisions or strategies.
(f). Investment banking services: Auditors cannot assist in raising funds, issuing securities, or structuring financial deals.
(g). Rendering of outsourced financial services: Such as payroll or accounting work for the company.
(h). Management services: Auditors cannot take part in company management or decision-making.
(i). Any other kind of service as may be prescribed: The Central Government may specify more categories of restricted services in the future.
144(3).
If, before the commencement of this Act, an auditor or firm was engaged in providing any of the services mentioned in 144(2) tehn:
Such services must be discontinued before the end of the first financial year following the commencement of this Act.
This provision gave companies time to align with the new compliance requirements.
Explanation.
For the purposes of this section:
Where the auditor is an individual, the term Directly or Indirectly includes services rendered:
(a). By himself.
(b). Through a relative or any other person connected or associated with him.
(c). Through an entity over which he has control, significant influence, or which uses his name, trademark, or brand.
Where the auditor is a firm, Directly or Indirectly includes services rendered:
(a). By the firm itself.
(b). Through any of its partners, parent, subsidiary, or associate entities.
(c). Through any other entity controlled or influenced by the firm or its partners, or which uses the firm’s name, trademark, or brand.
Section 145. Auditor to sign audit reports.
The auditor appointed by the company must personally sign the auditor’s report and sign or certify any other document of the company.
This has to be done in accordance with Section 141(2) : So only a qualified Chartered Accountant (or a qualified partner in case of a firm/LLP) can do so.
Sometimes qualifications, observations, or comments made by the auditor on the company’s financial transactions or matters may have an adverse effect on the functioning of the company must be read before the members at the general meeting.
The auditor’s report and the remarks contained in it shall also be open to inspection by any member of the company.
Section 146. Auditors to attend the general meeting.
Every notice and communication related to any general meeting must be sent to the company’s auditor. (Includes AGM & EGM).
The auditor must attend the general meeting personally or through an authorised representative.
The authorised representative must also be qualified to be an auditor under the Act.
During the meeting, the auditor has the right to speak on any matter that concerns him as the auditor.
This gives the auditor an opportunity to explain or clarify his findings directly to the company’s members (shareholders).
Exemption
The company may, if it chooses, exempt the auditor from attending a particular meeting but unless such exemption is given, attendance is mandatory.
Section 147. Punishment for contravention.
147(1).
If any company contravenes the provisions of Sections 139 to 146 then both the company and its officers are liable to penalty.
These sections deal with appointment, qualification, duties, and rights of auditors.
The company is punishable with a fine of not less than ₹25,000 but which may extend to ₹5,00,000.
Every officer of the company who is in default is punishable with a fine of not less than ₹10,000 but which may extend to ₹1,00,000.
147(2).
If an auditor contravenes any provision of Section 139, Section 143, Section 144 or Section 145 then:
He is punishable with a fine of not less than ₹25,000 but which may extend to ₹5,00,000, or up to four times the remuneration of the auditor, whichever is less.
If the auditor has knowingly or will fully committed such contravention with the intention to deceive the company, shareholders, creditors , tax authorities, then:
He is punishable with imprisonment for a term which may extend to one year and with a fine of not less than ₹50,000.
This fine may extend to ₹25,00,000 or up to eight times his remuneration, whichever is less.
147(3).
Where an auditor is convicted under 147(2), he shall be liable to refund the remuneration received by him to the company.
He shall also pay damages to the company, statutory authorities, members or creditors for any loss arising out of incorrect or misleading statements in his audit report.
147(4).
The Central Government will, by notification, specify the statutory body, authority or officer responsible.
This is done for ensuring prompt payment of damages to the company or persons entitled under 147(3).
After making the payment of damages, such body or officer must file a report with the Central Government in the manner specified.
147(5).
When a company’s audit is conducted by an audit firm, the firm is responsible for the audit.
If it is proved that one or more partners of the firm have:
Acted fraudulently.
Abetted (helped)
Taken part in any fraud related to the company or its officers.
The liability that arises, whether civil or criminal, will fall on both the concerned partner and partners of the firm.
The liability would be Jointly on the firm and Severally on the concerned partner.
Both the partner or partners and the firm will be jointly and severally liable, meaning each can be held responsible for the entire liability.
However, for criminal liability other than fine, only the partner or partners who acted fraudulently or colluded in the fraud shall be held personally liable.
Section 148. Central Government to specify audit of items of cost in respect of certain companies.
148(1).
The Central Government may, by order, require certain classes of companies engaged in producing specific goods or providing particular services to maintain cost records.
These records must include details of material used, labour employed, and other cost elements.
If the company is governed by a special law, such as electricity or telecom laws, the Government must consult the respective regulatory authority before issuing such an order
148(2).
If the Central Government finds it necessary, it may direct that the cost records of such companies be audited by a cost auditor.
This requirement applies only to companies that meet the prescribed limits of net worth or turnover.
148(3).
The cost audit must be carried out by a Cost Accountant, who is appointed by the Board of Directors, while his remuneration is fixed by the members of the company.
A statutory auditor appointed under Section 139 cannot perform the cost audit; both roles must remain independent.
The cost auditor must follow the Cost Auditing Standards issued by the Institute of Cost Accountants of India and approved by the Central Government.
148(4).
The cost audit is separate and in addition to the regular financial audit conducted under Section 143.
A company may therefore have both a statutory audit and a cost audit.
148(5).
The rights, duties, qualifications, and disqualifications applicable to statutory auditors also apply to cost auditors.
The company must provide all facilities and assistance required for conducting the audit.
After completion, the cost audit report must be submitted to the Board of Directors.
148(6).
The company must forward the cost audit report to the Central Government within 30 days of receiving it from the cost auditor.
Along with the report, the company must provide explanations for any qualifications or remarks made by the auditor.
148(7).
After reviewing the cost audit report and the company’s explanations, if the Central Government requires more details, it can ask the company to provide additional information.
The company must submit the required information within the time specified.
148(8).
If the company, its officers, or the cost auditor fails to comply with the provisions of this section:
(a).
The company and its officers are punishable as per Section 147(1):
Fine for the company: minimum ₹25,000 and up to ₹5,00,000
Fine for each officer in default: minimum ₹10,000 and up to ₹1,00,000
(b).
The cost auditor is punishable as per Sections 147(2) to (4):
Fine between ₹25,000 and ₹5,00,000 or up to four times his remuneration, whichever is less.
Imprisonment up to one year and higher fine if the act was done with intent to deceive.
Liability to refund audit fees and pay damages for any loss caused due to false or misleading audit reports.
