6

COMPANY AUDITOR

Company Auditor-
Company Auditor- Qualifications and disqualifications,
Company Auditor- Appointment, Rotation, Removal, Remuneration, Rights and Duties
Auditors Report-Contents and Types
Liabilities of Statutory Auditors under the Companies Act 2013

1. INTRODUCTION

The business of a Sole trading concern or a Partnership firm is managed by the owners themselves, where as in case of a company
the ownership and the management vest in different persons. The shareholders, who are the owners of the company, have no right
to take part in the management of business. The affairs of joint stock companies are managed by directors. To ensure that the
money invested by the shareholders is managed properly, the audit is compulsory under the Companies Act for all types of
companies, whether public or private. The emphasis of all these regulations is that the auditor should be independent. Hence,
appointment of auditor, his powers, his duties, etc., are governed by rules given in the Act.
According to Sec. 224 of the Companies Act 1956, every company shall appoint an auditor to audit its books of accounts. The
Companies Act 2013 has also made the audit of accounts of companies in India compulsory. After the completion of audit, the
auditor has to submit his report to the shareholders of the company. The shareholders do not take part in the day to day
management of the company. The auditor acts as an agent of the shareholders. The position of the auditor is therefore very vital. He
reports to the shareholders about the finances of the company.
Under the above backdrop, this chapter highlights the provisions of Companies Act relating to the auditor and his reports. You will
also learn who is an auditor, how auditor is appointed, what are the qualifications, rights and duties of the auditor, meaning of
auditors report and how and when auditors will qualify his opinion.

2. WHO IS AN AUDITOR

A person who conducts an audit is an Auditor. An auditor is a professional that accumulates and evaluates evidence to report
whether the company complies with the established set of procedures or standards. An auditor may function as an employee or an
independent professional.
When the auditor works for the organization, he or she is usually referred to as an Internal Auditor. The internal auditor often
conducts periodic audits that may encompass several areas on a rotating basis. As an example, the internal auditor may focus on
the manufacturing process during one quarter of the year, while devoting a second quarter to evaluating the financial record keeping
of the company. Often, the internal auditor will set up a schedule to ensure that audits are conducted on each critical portion of the
company at least once per calendar. So many acts require the organizations to get their accounts audited by an independent
external agency. This independent external agency is known as External Auditor of the organization. The external auditor has to
check the accounts of the organization, and their compliances to various rules and regulations. The idea behind using an external
auditor is that the audit will be free of bias and not influenced by office politics or internal relationships that exist among the
employees of the company. No connection to the company is permitted, as it may be construed as biasing the auditors report. To
be fair and equitable, an external auditor should familiarize himself with the nature of the business he is auditing prior to starting the
job.

3. ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF AN AUDITOR

The provision of section 141 of the Companies Act, 2013 provides for Eligibility, Qualifications and Disqualifications of Auditors of
company. This section corresponds to section 226 of the Companies Act, 1956 i.e. Qualifications and disqualifications of auditors.
Section 141 of CA 2013 has come into force on 1st April, 2014.

ELIGIBILITY AND QUALIFICATIONS OF AUDITORS OF A COMPANY

1. Chartered Accountants (CA): A person shall be eligible for appointment as an auditor of a company only if he is a chartered
accountant. The term chartered accountant means a chartered accountant as defined in clause (b) of subsection (1) of section
2 of the Chartered Accountants Act, 1949 who holds a valid certificate of practice under sub-section (1) of section 6 of that Act.
That means Chartered Accountants holding certificate of practice (CoP) can only be appointed as an auditor of a company. In other
words, an auditor must be a member of ICAI and he should also hold a valid CoP.
2. Firm of Chartered Accountants (CA Firm): A firm of Chartered Accountants is qualified for appointment as an auditor of a
company where majority of partners practicing in India. CA firm may be appointed by its firm name to be auditor of a company.
 Thus the eligibility requirement that a firm could be appointed as an auditor, only if all the partners practicing in India are
qualified for appointment has now been changed under the New Companies Act, 2013. In other words, there is no need to
practice in India by all partners of a CA firm as required under the Companies Act, 1956.
Accordingly, if majority of partners of a CA firm practicing in India, the firm shall be eligible to be appointed as an auditor in a
company.
3. Limited Liability Partnership (LLP) : A Limited Liability Partnership (LLP) may also be appointed as an auditor of a company.
However, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the LLP firm.
Thus, A person shall appointed as an auditor if he is chartered accountant within the meaning of Chartered Accountants Act,
1949 and holding valid certificate of practice and acting in capacity as

a) Individual
b) Partnership Firm
c) Limited Liability partnership
It has been further provided that only partners who are Chartered Accountants will be authorised to sign on behalf of the firm.

4. DISQUALIFICATIONS OF AUDITORS OF A COMPANY

According to Provisions of Section 141(3) of the Companies Act, 2013, following persons shall not be eligible as auditor of the
company:
a) Body Corporate: A body corporate other than a limited liability partnership registered under the Limited Liability Partnership
Act, 2008 shall not be eligible for appointment as an auditor of a company
b) Officer or Employee: An officer or employee of the company shall not be eligible for appointment as an auditor of a company.
c) Partner or Employee: A person who is a partner, or who is in the employment, of an officer or employee of the company shall
not be eligible for appointment as an auditor of a company.
d) Relative or Partner: The following person including his relatives or partners shall also not be eligible for appointment as an
auditor of a company.
Security or Interest: A person who, or his relative or partner 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. . It has been further
provided that relative may hold security or interest in the company of face value not exceeding one lac rupees.
Indebted to Company: A person who, or his relative or partner is indebted to the company, or its subsidiary, or its
holding or associate company or a subsidiary of such holding company, in excess Rs. 5, 00,000.
Guarantee or Security: A person who, or his relative or partner has given guarantee or provide any security in
connection with the indebtness of any third person to the company or its subsidiary, or its holding or associate
company or a subsidiary of such holding company for value in excess of Rs. 1 lacs.

e) Business Relationship: 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 shall not be
eligible for appointment as an auditor of a company.
Here the business relationship shall be interpreted as any transactions enter into for a commercial purpose except:
a) Nature of Professional Services: Commercial transactions which are in the nature of professional services permitted to be
rendered by an auditor or audit firm by the professional bodies regulated such members.
b) Ordinary Course of Business: Commercial transactions which are in the ordinary course of business of the company at
arms 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.
f) Director or KMP: A person whose relative is a director or is in the employment of the company as a director or Key
Managerial Personnel (KMP) shall not be eligible for appointment as an auditor of a company.
g) Full time Employment and Audit Limit: 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 20 companies shall not be eligible for appointment as an auditor of a company.
h) Convicted by Court: A person who has been convicted by a court of an offence involving fraud and a period of 10 years has
not elapsed from the date of such conviction.
i) Consulting and Specialised Services: Any person, whose subsidiary or associate company or any other form of entity, is
engaged as on the date of appointment in consulting and specialised services as provided in section 144.

Other Disqualifications
j) If a partner is disqualified, then the firm will automatically be disqualified,
k) In case of insolvency or unsound mind, a person ceases to be a member of ICAI, so he will automatically be disqualified for
appointment as an auditor.
VACATION OF OFFICE BY AN AUDITOR OF A COMPANY [SECTION 141(4)]

Further According to Provisions of Section 141(4) of the Companies Act, 2013, where a person appointed as auditor of the company
incurs any of the disqualification mentioned in Section 141(3) of the Companies Act, 2013 after his appointment, he shall vacate his
office as such auditor and such vacancy shall be deemed to be casual vacancy in the officer of the auditor.

5. APPOINTMENT OF AUDITOR

All the companies registered under the Companies Act, 2013 or any previous Company law, whether public or private and whether
having a share capital or not are required to maintain proper books of accounts under the provisions of section 128 of the
Companies Act, 2013. Companies have also to get their Books of accounts audited as required under section 139 of the Act. Audit
is an examination of accounting records undertaken with a view to establish the correctness or otherwise of the transactions
reflected therein. It involves an intelligent scrutiny of the books of account of a Company with reference to documents, vouchers and
other relevant records to ensure that the entries made therein give a true picture of business Therefore, there is need to appoint
Statutory Auditor.
Section 139 of the Companies Act, 2013 contains provisions regarding Appointment of Auditors. Discussion on appointment of
auditors may be grouped under two broad headings-
1. Appointment of First Auditors.
2. Appointment of Subsequent Auditors

Appointment of
Auditor

First Auditor Subsequent Auditor

Other than Goverment Other than Goverment Company

Govt. Company Company Govt. Company

Appointment by Appointment Appointment by Appointment by

BoD by C&AG Members in GM C&AG

Hold the office till Hold the office Hold the office Hold the office till
till conclusion from 1st AGM to the conclusion of
conclusion of 1st 6th AGM
of 1st AGM AGM
AGM

SITUATIONS FOR APPOINTMENT OF AUDITOR

A. Appointment of First Auditor of the Company

a) In Non-Government Companies
b) In Government Companies
B. Appointment of Auditor in First Annual General Meeting
a) In Non-Government Companies
b) In Government Companies
C. Appointment of Auditor due to Casual Vacancy
a) Casual Vacancy due to resignation of Auditor
b) Casual Vacancy due to any other Reason
D. Appointment of Auditor due to non ratification of Auditor
E. Appointment of Retiring Auditor
 F. In case of No auditor is appoint in AGM, then how to appoint auditor

5.1 APPOINTMENT OF FIRST AUDITOR

Appointment of First Auditor for Non-Government Companies

The first auditor of a company (other than Government companies) shall be appointed by the Board of Directors within thirty days
from the registration of the company. Before the appointment of auditor is made, a written consent of the auditor to such
appointment, and a certificate from him that if the appointment is made, it shall be in accordance with the conditions as may be
prescribed, shall be obtained from the auditor.
Tenure: First Auditor appointed by Board shall hold office till the conclusion of the first annual general meeting (AGM) of the
Company.
In case of Board fails to appoint First Auditor

Section 139(6) also provides that in the case of failure of the Board to appoint the first auditors within 30 days of incorporation of
the Company, it shall inform the members of the Company, who shall within 90 days at an extraordinary general meeting
appoint the first auditor and such auditor shall hold office till the conclusion of the first annual general meeting.
However in every Annual General Meeting, the appointment of Statutory Auditors should be ratified. If ratification of appointment
is not made by the members in the Annual General meeting, the Board shall appoint another individual or Firm as Auditors as
per procedures laid down under the Act.
As states above, the duty of the Board to inform members about their failure to appoint first auditor, triggers immediately on
expiry of the 30 days period whereas the duty of the members of the Company to appoint first auditor, triggers immediately on
receipt of information of non appointment by the Board. The members, shall within 90 days from the date of information being
sent to them, appoint auditor and such auditor shall hold office till the conclusion of the first annual general meeting.

The Board of Director will recommend the name of auditor or auditor firm to Shareholder. Shareholder in after discussion EGM will
appoint the auditor by passing of Ordinary Resolution.

Appointment of First Auditor in case of Government Company

The First auditor shall be appointed by the Comptroller and Auditor General within 60 days from the date of registration of Company.
Remuneration: Section 142 of the Act prescribed that Board may fix remuneration of the first auditor appointed by it.
Resolution involved: Appointment of First auditor by passing of Board Resolution whether in the Meeting of Board of Directors or by
Circular Resolution on the recommendation of the Comptroller and Auditor General.

In case of failure of appointment by C&AG:

In case the Comptroller and Auditor-General of India does not appoint such auditor within the said period of 60 days, the Board of
Directors of the Company shall appoint such auditor within the next 30 days (60+30=90).

In case of failure of appointment by C&AG and Board Both

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 the 60 days at an extraordinary general meeting, who shall hold office till the conclusion of the first
annual general meeting. As states above, the duty of the Board to inform members about their failure to appoint first auditor, triggers
immediately on expiry of the 90 days period whereas the duty of the members of the Company to appoint first auditor, triggers
immediately on receipt of information of non appointment by the Board. The members, shall within 60 days from the date of
information being sent to them, appoint auditor and such auditor shall hold office till the conclusion of the first annual general
meeting. Tenure: First Auditor appointed by EGM shall hold office till the conclusion of the first annual general meeting of the
Company.

RELEVANT PROVISIONS RELATING TO APPOINTMENT OF FIRST AUDITOR OF COMPANY

Which Section will apply for appointment of First

Section 139(1)
Auditor

Board of Directory By Passing Board Resolution in Board

Who will Appoint First Auditor
Meeting

Time Limit for Appointment of First Auditor Within 30 days from Incorporation of Company

Who will Appoint Fist Auditor if Board of Director Members of Company by Passing of Ordinary Resolution
Fails to Appoint First Auditor in Extra Ordinary General Meeting
 First Auditor may hold office until conclusion of First
What is the Tenure of Office of First Auditor?
Annual General Meeting

Whether First Auditor can be remove before First

Annual General Meeting, If appointed in Yes, By Board of Directors
Board Meeting.

Whether First Auditor can be remove before First Yes, by Members of Company by Passing of Special
Annual General Meeting, If appointed in General Resolution, After obtaining the previous approval of
Meeting. Central Government in that behalf

Whether First Auditor can be Appoint Through AOA No, the Appointment of First Auditor by the Articles of
& MOA. Company will not be valid.

5.2 APPOINTMENT OF SUBSEQUENT AUDITOR / REAPPOINTMENT OF AUDITOR

Appointment of Subsequent Auditor in case of Non-Government Companies:

Every Non-Government company shall, at the first annual general meeting appoint an individual or a firm as an auditor who shall
hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion
of every sixth meeting.
The following points need to be noted in this regard-
(i) The company shall place the matter relating to such appointment of ratification by member at every Annual General Meeting.
(ii) Before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him or it that
the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor.
(iii) The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141.
(iv) The company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the
Registrar within 15 days of the meeting in which the auditor is appointed.

Manner and Procedure of Selection of

Auditors:

Tenure: The auditor appointed in the AGM

meeting shall hold office from the conclusion
of that meeting till the conclusion of the sixth
annual general meeting, with the meeting
wherein such appointment has been made
being counted as the first meeting
Appointment of Subsequent Auditor in
Government Companies:
In case of subsequent auditor for existing
government companies, the Comptroller &
Auditor General shall appoint the auditor
within a period of 180 days from the
commencement of the financial year and the
auditor so appointed shall hold his position till
the conclusion of the Annual
General Meeting Audit Committee: 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
recommendations of the Committee.
Company shall at the first annual general
meeting, appoint an individual or a firm as an
auditor on the recommendation of C&AG who
shall hold office from the conclusion of next
Annual General Meeting (AGM). Company
shall inform the auditor concerned of his or its
appointment and also file a notice of such
appointment with the Registrar in Form ADT-
1 within 15 days of the meeting in which the
auditor is appointed. [6]
Tenure: The auditor appointed in the AGM meeting shall hold office from the conclusion of that meeting till the conclusion of next
general meeting.

5.3 APPOINTMENT OF AUDITOR IN CASE OF CASUAL VACANCY

What is 'Casual Vacancy?
The expression 'casual vacancy' has not been defined in the Companies Act. Simply stated, a casual vacancy in the office of an
auditor means a vacancy caused in the office of an auditor by his death, disqualification, resignation, etc.
It has been held in the case of the Institute of Chartered Accountants of India v Jnanendranath Saikia (1955) 25 Comp
Case 53, 56 (Assam) that casual vacancy is not a vacancy created by any deliberate omission on the part of the
company to appoint an auditor at its annual general Meeting.
Casual Appointment in Non-Government Companies
Filing of Casual Vacancy by Board of Directors:
Section 139(8) of the Companies Act, 2013 prescribed that the Board of Director fill casual vacancy in the office of an auditor due to
reason other than resignation within 30 days of such resignation. Before the appointment of auditor is made, the written consent of
the auditor to such appointment, and a certificate from him that if the appointment, is made, it shall be in accordance with the
conditions as may be prescribed, shall be obtained from the auditor. Certificate shall also indicate whether the auditor satisfies the
criteria provided in [7] section 141.
Tenure: Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next Annual General Meeting.
Filing of Casual Vacancy by Members in AGM:
If any casual vacancy in the office of an auditor is caused by the Resignation of an Auditor, such vacancy shall only be filled by the
company in general meeting convened within three months of the recommendation of the Board.
In case of casual vacancy arising out of resignation of the existing auditor, the board shall recommend appointment of an Individual
or audit firm as auditor within 30 days of the date of casual vacancy and the shareholders shall appoint within 3 months from the
date of such recommendation of the Board and the said Individual or Audit firm shall hold the office till conclusion of the next annual
general meeting.
Remuneration: Section 142 of the Act prescribed that the remuneration of the auditor of a Company shall be fixed by members in
General Meeting.
Casual Appointment in Government Companies
Filing of Casual Vacancy by C&AG 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 30 days of such casual
vacancy.
Filing of Casual Vacancy by Board in case of failure of C&AG
If vacancy is not filled by the Comptroller and Auditor General of India within 30 days, the Board of Directors shall fill the vacancy
within next 30 days (30+30=60).

5.4 APPOINTMENT OF AUDITOR DUE TO NON-RATIFICATION OF AUDITOR

Here ratification means formal consent of shareholders for continuance as auditors. If in any AGM auditor is not ratified by the
Shareholders then exiting auditor shall be liable to leave its post and such vacant place of auditor in the Company will be consider
as Casual Vacancy. As per explanation of rule 3 Board of Director shall appoint new auditor after following the process of casual
vacancy.
*There is no provision of ratification of auditor in case of government Companies because tenure of the auditor in Government
Companies up to next Annual General Meeting of the Company only.

5.5 RE-APPOINTMENT OF RETIRING AUDITOR

A retiring auditor may be reappointed at an annual general meeting, if following three conditions are satisfied:
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
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.
However, passing a resolution for that purpose at the annual general meeting is essential for the re-appointment/ratifying for the
appointment of the retiring auditor who is still qualified and willing to act. Till this is done, a retiring auditor cannot be said to have
been re-appointed as contemplated by the section. In this view, it is not correct to say that in the absence of the resolution to the
effect that the retiring auditors shall not be re-appointed; the retiring auditors shall stand re-appointed as auditors of the company. It
is not mandatory to reappoint the retiring auditor even if 3 things stipulated above are not attracted.

5.6 APPOINTMENT OF AN AUDITOR, WHEN NONE IS APPOINTED IN AGM

Sub-Section (10) of section 139 stipulates 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. Hence, it is clear that the retiring (existing) auditor even if not re-
appointed, may still be automatically appointed if the Company fails to appoint an Auditor in place of the existing auditor.
Tenure: If no auditor is appointed in AGM then retiring auditor will continue as auditor of the company from the conclusion of this
AGM to conclusion of 6th Annual General Meeting of the Company subject to ratification by shareholder in every AGM.

6. ROTATION OF AUDITOR

As per new Companies Act 2013, the following companies are compulsorily required to appoint or reappointment company auditor
on rotation basis:

1. all listed public companies

2. all unlisted public companies having paid up share capital of rupees ten crore or more;
3. all private limited companies having paid up share capital of rupees twenty crore or more;
4. all companies public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more.
Above said companies shall not be permitted to appoint or reappointment
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years:
This means rotation of company auditor will not be possible after completion of 5 consecutive years in case of an individual auditor
and 10 consecutive years in case of an audit firm.

However, companies existing before Companies Act 2013 and falling under any of the above categories are required to comply with
above requirements within 3 years from the date commencement of new companies Act.

7. REMOVAL AND RESIGNATION OF AUDITOR

To maintain independence and fearless audit, there should not be any treat for unfair removal and right to resign to protest.

Removal (Sub section 1):

The auditor may be removed from his office before expiry of his term only by special resolution after approval from central
government. The auditor concern shall be given opportunity of being heard.

Resignation (Sub section 2):

The auditor who resigns from the company shall file, within a period of thirty days from his resignation a statement with the company
and the Registrar indicating the reason and other facts as may be relevant with regard to his resignation. In case of Government
Company, this statement shall also be filed with the Comptroller and Auditor General of India.

If auditor does not file such statement, he or it shall be punishable with fine which shall not be less than fifty thousand rupees but
which may extend to five lakh rupees.

Denial of Re appointment (Sub section 4):

If, it is proposed to appoint another auditor in place of retiring auditor or not to re appoint retiring auditor except where retiring
auditor has completed his tenure of five or ten years as the case may be; a special notice shall be required to be circulated for the
resolution.

On receipt of special notice of such resolution, the company shall immediately send a copy of such notice to retiring auditor.

On receipt of copy of such notice, the retiring auditor may make a representation of reasonable length and request its notification to
the members of the company. Unless such representation received too late for circulation, the company shall (a) state the fact of
such representation in the notice of the resolution to members of the company and (b) send a copy of the representation to every
member of the company to whom the notice of meeting is sent. If the copy of the representation is not sent to members, a copy of
the representation shall be filed with the Registrar. If the Tribunal is satisfied on an application either of the company or any other
aggrieved person that the right of making representation are being abused by the auditor, then, the copy of the representation may
not be sent and the representation need not be read out at the meeting.

Change of Auditor by order of Tribunal (Sub section 5):

The tribunal either its own or on an application made by the central government or by any concerned person may by order direct the
company to change its auditor. The tribunal shall make such order, when it is satisfied that the auditor has, 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.

If such application was made by the Central government and the tribunal is satisfied that any change is required, it shall within
fifteen days of receipt of application make an order that he shall not function as an auditor and the central government may
appointment another auditor in his place.

The auditor, 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 five years from the date of passing of the order and the auditor shall also be liable for action
under section 447, which deals with punishment for fraud. Please note, the explanation to sub section (1) of section 139 clarifies
that for this chapter dealing with Audit and Auditors, term appointment include re appointment.

8. REMUNERATION OF AUDITOR (SECTION 142)

Independence from any bias of management in fixation of remuneration is a key of good governance and audit.

Fixing Remuneration: The remuneration of an auditor shall be fixed in general meeting in such manner or in such manner as may
be determined therein. The remuneration of first auditor shall be fixed by board of directors.

Independence of Audit Remuneration: The remuneration shall include the expenses, if any, incurred by the auditor in connection
with the audit of the company and any facility extended to him but does not include any remuneration paid to him for any other
service rendered by him at the request of the company.

9. POWERS / RIGHTS OF AUDITORS

Auditor will have access to books of accounts and vouchers, not only to those kept at registered office of the company but also to
those kept at any other place. Such access shall be available at all times. Also, auditor of a holding company shall have access to
the books of all of its subsidiary companies for the purpose of consolidation of financial statements of holding company and its
subsidiaries.

As per the provisions contained in the companies Act 2013, the following rights have been given in order to enable him to discharge
his duties properly:

1. Right to access

Every auditor of a company shall have right to access at all time to book of accounts and vouchers of the company. The Auditor
shall be entitled to require from officers of the company such information and explanation as he may consider necessary for
performance of his duties. There is an inclusive list of matter for which auditor shall seek information and explanation. The list
includes issues related to:

a) Loans and Advances made by the Company: Auditor shall inquire into 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 not
prejudicial to the interest of the company or its members. It is applicable to all loans and advances made on the basis of
security. The auditor should verify that the security held against the loans and advances made by the company are legally
enforceable and also ascertain the valuation of securities to see whether the loan is fully secured or partly secured.

b) Transactions represented by book entries: Auditor is required to inquire whether the transactions of the company which
are represented merely by book entries are not prejudicial to the interests of the company. He should verify the all book entry
transactions and determine whether such transactions have actually taken place and are not prejudicial to the interest of the
company.

c) Sale of investments: Auditor should inquire, whether so much of the assets of the company (except an investment company
or a banking company) as consists of shares, debentures and other securities, have been sold at a price less than that at
which they were purchased by the company. Auditor must verify the cases where securities are sold at a price less than their
cost of acquisition and if he finds that such sale is bona fide the price realized is considered to be reasonable, having regards
to the circumstances of each case, no further reporting is required.

d) Loans and Advances shown as deposits: Auditor must verify whether loans and advances made by the company have
been shown as deposits. The auditor must inquire in respect of all the deposits shown by the company and satisfy himself
that the loans and advances have not been shown as deposits.

e) Charging of Personal expenses to revenue account: Auditor should inquire as to whether personal expenses have been
charged to revenue account. Auditor must ensure that no personal expenses of directors and officers of the company have
been charged to revenue account.
 f) Allotment of shares for cash: Auditor should inquire as to whether cash has actually been received in respect of shares
stated to have been allotted for cash and if no cash has actually been so received, whether the position as stated in the
account books and balance sheet is correct, regular and not misleading. In this connection, auditor must ensure in respect
of shares allotted in cash by the company that cash has actually been received in respect of such allotment by the company.

2. Right to obtain information and explanation from Officers

This right of the auditor to obtain from the officers of the company such information and explanations as he may think necessary for
the performance of his duties as auditor is a wide and important power. In the absence of such power, the auditor would not be able
to obtain details of amount collected by the directors, etc. from any other company, firm or person as well as of any benefits in kind
derived by the directors from the company, which may not be known from an examination of the books. It is for the auditor to decide
the matters in respect of which information and explanations are required by him. When the auditor is not provided the information
required by him or is denied access to books, etc., his only remedy would be to report to the members that he could not obtain all
the information and explanations he had required or considered necessary for the performance of his duties as auditors.

3. Right to receive notices and to attend General Meeting

It is a prime requirement under section 146, that the company must send all notices and communication to the auditor, relating to
any general meeting, and he shall attend the meeting either through himself or through his representative, who shall also be an
auditor. Such auditor must be given reasonable opportunity to speak at the meeting on any part of the business which concerns him
as the auditor.

4. Right to report to the members of the company on the accounts examined by him:

The auditor shall make a report to the members of the company on the accounts examined by him and on every financial
statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking
into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the
audit report under the provisions of this Act or any rules made there under or under any order made under this section and to the
best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the companys
affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.

5. Right to sign audit reports

The auditor of the company shall sign the auditors report or sign or certify any other document of the company and financial
transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditors report shall be
read before the company in general meeting and shall be open to inspection by any member of the company.

6. Right to remuneration

On completion of his work an auditor is entitled to his remuneration. The rights of the auditor cannot be limited or abridged either by
articles or resolution of the members. The remuneration of the auditor of a company shall be fixed in its general meeting or in such
manner as may be determined therein. It must include the expenses, if any, incurred by the auditor in connection with the audit of
the company and any facility extended to him but does not include any remuneration paid to him for any other service rendered by
him at the request of the company.

7. Right to be mentioned in Company Prospectus

As per section 26, the company must mention in their prospectus the name, address and consent of the auditors of the company.

8. Right to inspect Branch Accounts

According to section 143(8), where the accounts of any branch office are audited by a person other than the companys auditor, the
companys auditor shall be entitled to visit the branch office, if he deems it necessary to do so for the performance of his duties as
an auditor. He shall also have access at all times to the books, accounts and vouchers of the company maintained at the branch
office.

However, in the case of banking companies having a branch office outside India it shall be sufficient, if the auditor is allowed access
to such copies of, and extracts from, the books and accounts of the branch as have been transmitted to the principal office in India.

9. Right to Lien:

In terms of the general principles of law, any person having the lawful possession of somebody elses property, on which he has
worked, may retain the property for non-payment of his dues on account of the work done on the property. On this premise, auditor
can exercise lien on books and documents placed at his possession by the client for non-payment of fees, for work done on the
books and documents.
Powers of Comptroller and Auditor General of India in Case Government Company

In case of Government Company, the Audit Report among other things, shall include the directions, if any, issued by the
Comptroller and Auditor General of India (CAG), the action taken and the impact thereof on the Companys accounts and financial
statement.

The CAG shall have a right to the conduct a supplementary audit of financial statement of the company and comment upon or
supplement such audit report within 60 days from the date of receipt of the audit report u/s 143 (5). Provided that any comments
given by the CAG upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of
audited financial statements u/s 136 (1) 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.

The CAG may, by an order, cause test audit to be conducted of the accounts of company covered u/s 139 (5) or 139 (7) and the
provisions of section 19A of the Comptroller and Auditor-Generals (Duties, Powers and Conditions of Service) Act, 1971, shall
apply to the report of such test audit

10. DUTIES OF AUDITORS

The duties of a company auditor under Companies Act 2013 may be discussed under the following heads:

1. Make report: The auditor shall make a report to the members of the company on accounts examined by him on every
financial statement and shall state:(a) Whether he has sought and obtained all the necessary information and
explanations,(b) Whether proper books of account have been kept,(c) Whether companys balance sheet and profit and
loss account are in agreement with books of accounts and returns.
2. Audit report of Government Company: The auditor of the government company will be appointed by the Comptroller and
Auditor-General of India and such auditor shall act according to the directions given by them. He must submit a report to them
which should include the action taken by him and impact on accounts and financial statement of the company. The
Comptroller and Audit General of India shall within 60 days of receipt of the report have right to (a) conduct a supplementary
audit and (b) comment upon or supplement such audit report. The Comptroller and Audit General of India may cause test
audit to be conducted of the accounts of such company.
3. Liable to pay damages: As per section 245, the depository and members of the company have right to file an application
before the tribunal if they are of the opinion that the management or conduct of the affairs of the company are being conducted
in a manner prejudicial to the interests of the company. They also have right to claim damages or compensation from the
auditor for any improper or misleading statement made in his audit report or for any fraudulent or unlawful conduct.
4. Branch Audit: Where a company has a branch office, the accounts of that office shall be audited either by the auditor
appointed for the company, or by any other person qualified for appointment as an auditor of the company. The branch auditor
shall prepare a report on the accounts of the branch examined by him and send it to the auditor of the company who shall deal
with it in his report in such manner as he considers necessary.
5. Auditing Standards: Every auditor shall comply with the auditing standards. The Central Government shall notify these
standards in consultation with National Financial reporting Authority. The government may also notify that auditors report shall
include a statement on such matters as notified.
6. Fraud Reporting: If an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe
that an offence involving fraud is being or has been committed against the company by officers or employees of the company,
he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.
7. Winding up: As per section 305, at the time of voluntary winding up of a company it is a mandatory requirement that auditor
should attach the copy of the audits of the company prepared by him.
8. Other Duties: Besides the above duties, there are other duties of an auditor to be performed in course of his audit. These are:

The auditor should give all possible assistance to the inspectors in case of an investigation of the affairs of the company.

In case an existing company issues prospectus, it should contain a statement of profit & losses for the last 5 years
showing the rate of dividends paid each classes of shares for each year and a statement of assets & liabilities of the
company. It is the duty of auditor to certify all these statements.

11. AUDITORS REPORT

Concept and Definitions

An Audit report is the end product of the auditing. It is concluding part of the audit process as an auditor has to go through following
three phases while conducting an audit.
(a) Preliminary work for audit.
(b) Conduct of actual audit, and
 (c) Conclusion of audit, which means submission of Audit Report.
Therefore, Audit Report is called as the ultimate and final product of every audit.
The meaning of Audit Report can be well understood from the following selected definitions
A Report is a statement of collected & considered facts, so drawn up as to give clear and concise information to
persons who are not already in possession of the full facts of the subject matter of the report.- Lan Cester
The Report shall either contain as expression of opinion regarding the financial statements, taken as a whole or an
assertion to the effect that an opinion cannot be expressed when an overall opinion cannot be expressed, the reason
therefore should be stated. In all cases, where auditors name is associated with financial statements the report
should contain a clear cut indication of the character of the auditors examination, if any, and the degree of
responsibility he is taking.- J. B. Ray
In short, the Audit Report is nothing but a statement of observation gathered & considered while proving conclusive evidence of
companys financial position. It is a medium through which an auditor expresses his opinion on the financial statement under audit. It
is an important part of the audit as it provides the results of the audit conducted by the auditor.

BASIC ELEMENTS OF THE AUDITORS' REPORT

The Basic Elements of the Auditors' Report are -

1. Title:
The Auditor's Report should have an appropriate title i.e. I; "Auditor's Report". It should be distinguished from other Reports, e.g.
reports of officers of the entity, Board of Directors.

2. Addressee:
The Auditor's Report should be appropriately addressed as required by the circumstances of the engagement and applicable laws
and regulations. Ordinarily, the Auditors Report is addressed to the authority appointing the Auditor.

3. Opening or Introductory Paragraph:

a) The Auditor's Report should identify the Financial Statements of the entity that have been audited, including the date of
and period covered by the Financial Statements.
b) The Report should include a Statement that the Financial Statements are the responsibility of the entity's management
and a Statement that the responsibility of the Auditor is to express an opinion on the Financial Statements based on the
audit.
4. Scope Paragraph:
a) The Auditor's Report should describe the scope of the audit by stating that the audit was conducted in accordance with
auditing Standards generally accepted in India.
b) The Report should include a statement that the audit was planned and performed to obtain reasonable assurance whether
the Financial Statements are free of material misstatement.
c) The Auditor's Report should describe the Audit as including examining, on a test basis, evidence to support the amounts
and disclosures in Financial Statements, assessing the accounting principles used in the preparation of the Financial
Statements, assessing significant estimates made by management, in the preparation of Financial Statements, &
evaluating the overall position of Financial Statements.
d) The Report should include a statement by the Auditor that the audit provides a reasonable basis for his opinion.
5. Opinion Paragraph:
The Opinion paragraph of the Report should indicate the Financial Reporting framework used to prepare the Financial Statements. It
should state the Auditor's opinion as to whether the Financial Statements give a true and fair view in accordance with the financial
reporting framework and, where appropriate, whether the Financial Statements comply with the statutory requirements.
6. Date of the Report:
The date of an Auditor's Report is the date on which the Auditor signs the Report expressing an opinion on the Financial
Statements. The Auditor should not date the Report earlier than the date on which the Financial Statements are signed or approved
by Management.
7. Place of Signature:
The Report should name the specific location, which is ordinarily the city where the Audit Report is signed.

8. Auditor's Signature: The Report should be signed by the Auditor in his personal name. Where a Firm is appointed as the
Auditor, the Report should be signed in the personal name of the Auditor and in the name of the Audit Firm. The Partner /
Proprietor signing the Report should mention his ICAI Membership Number.
TYPES OF AUDIT REPORT / AUDIT OPINION

In general, there are two main types of audit opinion: Unmodified and Modified Opinion. In Unmodified Opinion, an auditor
issues this opinion to financial statements that prepared in all material respect and comply with accounting standards being use.

However, for Modified Opinion, there are three sub opinions which are issued to financial statements that are not prepared in
material respect with others matter. We will discuss later. Those three modified opinion are: qualified, adverse and disclaimer
opinion. So, in total, there are four types of audit opinion such as; Unmodified (unqualified), qualified, adverse and disclaimer
opinion.

UNMODIFIED OPINION/REPORT
(a) An opinion is said to be unmodified, when the Auditor concludes that the Financial Statements give a true and fair view in
accordance with the financial reporting framework used for the preparation and presentation of the Financial Statements.

Or,

(b) The Auditor gives a Clean or Unmodified Report, when he does not have any significant reservation in respect of matters
contained in the Financial Statements.

An Unmodified Opinion indicates the following -

The Financial Statements have been prepared using the Generally Accepted Accounting Principles, which have been
consistently applied,
The Financial Statements comply with relevant statutory requirements and regulations, and (c) There is adequate
disclosure of all material matters relevant to the proper presentation of the financial information, subject to statutory
requirements, where applicable.
Any changes in the accounting principles or in the method of their application, and the effects thereof, have been properly
determined and disclosed in the Financial Statements.

For issuing an Unmodified Audit Report, the Auditor has to satisfy himself that -

a) Evidence: Reasonable evidence is obtained in support of transactions recorded in the books of account.
b) Standards: Accounting entries passed in the books of account are in conformity with the generally applicable accounting
principles and Accounting Standards followed consistently.
c) True and Fair: The Financial Statements prepared represent a true and fair summary of the transactions that took place
during the year.
d) Classification: The process of classification and aggregation followed in the preparation of the Financial Statements is fair
and it does not hide a material fact nor does it highlight something, which may distort the real state of affairs.
e) Format: The form of Financial Statements is in accordance with the form prescribed by law, if any.
f) Free of Misstatements: There are no material misstatements in the Financial Statements. No material transaction
recorded in the books of account is illegal or beyond the legal competence of the Company.

MODIFIED AUDIT OPINION/REPORT

When the Auditor issues any Report other than unqualified, his Report is said to be modified and it includes -
i. Matters that do not affect the Auditor's Opinion - with Emphasis of Matter Paragraph.
 ii. Matters that do affect the auditor's Opinion viz:
Qualified Opinion,
Adverse Opinion and,
Disclaimer of Opinion

QUALIFIED OPINION/REPORT
If the auditor has any reservation in respect of the certain matters mentioned in the financial statements, he may qualify his report.
The auditor may qualify his report only when the subject matter of qualification affects the truthfulness and fairness of the financial
statement materially.

In other words, qualifies opinion is type of modified audit opinion where auditors, after their testing, make conclusion that there are
material misstatement found in the financial statements. However, those misstatements are not pervasive. Pervasive here is a bit
subjective as it is based on auditors judgment. But, as said in standard, misstatement is pervasive to financial statements if those
misstatements are not affecting the financial statements and users decision making.

In term of seriousness, the qualified audit opinion is serious than unqualified, yet it is better than adverse and disclaimers. We will
talk about disclaimer and adverse opinion later in this article.

ADVERSE OR NEGATIVE OPINION/REPORT

Adverse opinion is issued to the financial statements where auditors examined and concluded that those financial statements are
materially misstated and pervasive. In other words, If the auditor is of the opinion that the financial statement does not show the true
and fair view of the state of affairs of the business, he shall give an adverse or Negative Report.

Compared to qualified opinion, adverse opinion is more serious than. This opinion is the message to users of financial statements
that they should not rely on these financial statements in their decision making. This opinion is a bit different from qualified opinion.
For qualified opinion, auditor found material misstatement in the financial statements, but those misstatements are not pervasive.
Yet, adverse opinion, misstatements are both material and pervasive.

DISCLAIMER OPINION/REPORT
Disclaimer of opinion by the way is different from both qualified and adverse. While conducting the audit, the auditor may fail to
obtain the required information and explanation or the books of accounts may not be available due to various reasons, or there may
arise various situations, which shall restrict the scope of the duties of the auditor. Under such situations, he may not be in a position
to form an opinion, and then the auditor shall disclaim giving an opinion.

In other words, auditor issues the disclaimer of opinion where they could not obtain and unable to access the audit evidence for
individual items or in aggregation to support their testing. Auditor believe that, for those items that they are not able to access and
obtain information could be materially misstate and pervasive. This is happen after auditor try their best to negotiate with client to
obtain all of those importance information and client still reject no matter it is intention or unintentional.

LIABILITIES OF STATUTORY AUDITORS UNDER THE COMPANIES ACT 2013

There are tremendous Changes in new Provisions under the Companies Act, 2013 with respect to Auditors as compared to the old
Companies Act, 1956. The new Act intents to improve Corporate Governance and to further strengthen regulations. The Onus and
responsibilities of Auditors becomes cumbersome. Lot of responsibilities imposed under the Act & Rules.

Lord Justice Topes had once famously remarked that: The auditor is a watchdog and not a bloodhound. But Companies Act, 2013
does not seem to echo this thought! The kind of stringent measures prescribed against auditors gives the picture that the Act indeed
expects the auditors to be bloodhounds in discharging their duties and not merely be watch dogs.

The Satyam debacle seems to have cast a very gloomy image in the minds of regulators as far the auditors are concerned. In the
current write up, we have brought out the penal provisions and the actions which can be initiated by various regulatory and non
regulatory authorities in case of any lapse on the part of the Auditors in discharging their duties effectively.

PENALTY FOR NON-COMPLIANCE WITH ANY OF THE PROVISIONS CONTAINED IN SECTIONS 139, 143, 144 AND 145 OF
THE ACT

Section 139 provides for appointment of auditors, Section 143 deals with power and duties of auditors, Section 144 is on certain
services which an auditor cannot render and Section 145 is on signing of audit report and other documents by auditor. Auditor shall
be punishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5, 00,000/-. If an auditor has
contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax
authorities, he shall be punishable with imprisonment for a term which may extend to 1 year and with fine which shall not be less
than Rs. 1,00,000/- but which may extend to Rs. 25,00,000/-.
Convicted auditor shall refund the remuneration received by him from the Company and pay for damages to the company, bodies or
authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.

PENALTY FOR FAILURE TO DISCLOSE FRAUD

As per Section 143(12), if in the course of the performance of his duties as auditor, he has reason to believe that an offence
involving fraud is being or has been committed against the company by officers or employees of the company, Auditor shall
immediately report the matter to the Central Government. In case of any failure on his part to comply with this duty, he shall be
punishable with fine which shall not be less than Rs. 1,00,000/- but which may extend to Rs. 25,00,000/-.

Penalty for professional misconduct NFRA - Watch on the watch dogs!

National Financial Review Authority (NFRA) shall have power to investigate, either suo motu or on a reference made to it by the
Central Government into the matters of professional or other misconduct committed by any member or firm of chartered
accountants, registered under the Chartered Accountants Act, 1949.

Where professional or other misconduct is proved, NFRA shall have the power to make order for

(A) Imposing penalty of

not less than Rs. 1, 00,000/-, but which may extend to five times of the fees received, in case of individuals; and
not less than Rs.10,00,000/-, but which may extend to ten times of the fees received, in case of firms;

(B) Debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered
Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 for a minimum
period of 6 months or for such higher period not exceeding 10 years as may be decided by the NFRA.

ACTION IN CASE OF FRAUD BY AUDITORS

Change of auditors by NCLT: The NCLT either suo motu or on an application made to it by the Central Government or by any
person concerned, if it 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. Such an auditor 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.

Disqualification for appointment as auditor: A person who has been convicted by a court of an offence involving fraud and a
period of 10 years has not elapsed from the date of such conviction shall be disqualified to be appointed as auditor of any company.

Action under Section 447: Any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which
shall not be less than 6 months but which may extend to 10 years and shall also be liable to fine which shall not be less than the
amount involved in the fraud, but which may extend to 3 times the amount involved in the fraud.

Liability of firm: Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of
the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or
its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for
such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally.

Class Action Suits: Any 100 or more members/deposit holders of the company or 10% of the total number of members/deposit
holders of the company can file a class action suit to claim damages or compensation or demand any other suitable action against
the auditor in the manner prescribed under Section 245 of the Act. Action under this section can be initiated against the auditor
including audit firm of the company for any improper or misleading statement of particulars made in the audit report or for any
fraudulent, unlawful or wrongful act or conduct.

Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit
firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of
particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.

AUDITORS LIABILITY IN CASE OF UNLAWFUL ACTS OR DEFAULTS BY CLIENTS

The auditor's basic responsibility is to report whether in his opinion the accounts show a true and fair view and in discharging his
responsibility he has to see as to how the particular situations affected his position. The general thinking with regard to unlawful acts
or defaults by clients appears to be that the auditor should not 'aid or abet' but he is apparently not under any legal obligation to
disclose the offence. A professional accountant would himself be guilty of a criminal offence if he advises his client to commit any
criminal offence or helps or encourages in planning or execution of the same or conceals or destroys evidence to obstruct the
course of public justice or positively assists his client in evading prosecution. A professional accountant in his capacity as auditor,
accountant, or tax representative has access to a variety of information concerning his clients. On some occasions, he may acquire
knowledge that his client has been guilty of some unlawful act, default, fraud, or other criminal offence. The duty of the professional
accountant in such a case would depend upon the actual circumstances of the situation. Due consideration should be given to the
exact nature of services that a professional accountant is rendering to his client, i.e. is he representing the client in income-tax
proceedings or is he acting in the capacity of an auditor or an accountant or a consultant.

The Institute of Chartered Accountants of India has considered the role of chartered accountants in relation to taxation frauds by an
assessee and has made the following major recommendations:

(i) A professional accountant should keep in mind the provisions of Section 126 of the Evidence Act whereby a barrister, an
attorney, a pleader or a Vakil is barred from disclosing any communication made to him in the course of and for the purpose
of his employment.
(ii) If the fraud relates to past years when the accountant did not represent the client, the client should be advised to make a
disclosure. The accountant should also be careful that the past fraud does not in any way affect the current tax matters.
(iii) In case of fraud relating to accounts examined and reported upon by the professional accountant himself, he should advise
the client to make a complete disclosure. In case the client refuses to do so, the accountant should inform him that he is
entitled to dissociate himself from the case and that he would make a report to the authorities that the accounts prepared or
examined by him are unreliable on account of certain information obtained later. In making such a report, the contents of the
information as such should not be communicated unless the client consents in writing.
(iv) In case of suppression in current accounts, the client should be asked to make a full disclosure. If he refuses to do so, the
accountant should make a complete reservation in his report and should not associate himself with the return.

However, it can be argued that the auditor has a professional obligation to ensure that the client is fully aware of the seriousness of
the offence and to seriously consider full disclosure of the matter.

It has been clearly established in various case laws that the auditor is expected to know the contents of documents and records and
ascertain whether the affairs of the client are being conducted in an unlawful manner. It is in the course of the work, he comes
across any unlawful acts, it is his duty to bring it to the notice of the client as also to make a disclosure in his report in appropriate
cases. In this regard, one has to bear in mind the consequence of the act in relation to the professional code to which an auditor is
subjected. Under the code, an auditor cannot disclose confidential information unless permitted by the client or unless required by
law. Each case has to be judged on its circumstances. However, in every case he has to assess the implications of the unlawful act
or default on the true and fair character of the accounting statements.

The question of liability of an auditor for unlawful acts or defaults by clients should be considered in the light of the broad parameters
given above. However, it appears that if an auditor was aware of any unlawful act having been committed by client in respect of
accounts audited by him and the unlawfulness was not rectified by proper disclosure or any other appropriate means, the auditor
owes a duty to make a suitable report. If he does not, he may be held liable, if the true and fair character of the accounts has been
vitiated.

RESPONSIBILITIES OF AN AUDITOR IN CASE OF MATERIAL MISSTATEMENT RESULTING FROM MANAGEMENT

FRAUD
Responsibilities of an auditor in case of Material misstatement resulting from management fraud: Misstatement in the financial
statements can arise from fraud or error. The term fraud refers to an Intentional Act by one or more individuals among
management, those charged with governance. The auditor is concerned with fraudulent acts that cause a material misstatement in
the financial statements.

Fraud involving one or more members of management or those charged with the governance is referred to as management fraud.
The primary responsibility for the prevention and detection of fraud rests with those charged with the governance and the
management of the entity.

Further an audit conducted in accordance with the standards on auditing generally accepted in India, is designed to provide
reasonable assurance that the financial statements taken as a whole are free from material misstatement whether caused by error
or fraud. The fact that an audit is carried out may act as deterrent, but the auditor is not and cannot be held responsible for the
prevention of fraud and error. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material
misstatements of financial statements will not be detected, even though the audit is properly planned and performed in accordance
with the standards on auditing generally accepted in India. An audit does not guarantee that all material misstatement will be
detected because of such factors, as the use of judgment, the use of testing, the inherent limitations of internal control and the fact
that much of the evidence available to the auditor is persuasive rather than conclusive in nature.

Certain levels of management may be in a position to override control procedures designed to prevent similar frauds by other
employees. Auditors opinion on the financial statements is based on the concept of obtaining reasonable assurance, hence in an
audit; the auditor does not guarantee that material misstatements will be detected.
QUESTIONS

1. Write a short note on - Auditors liability in case of unlawful acts or defaults by clients.
2. Explain briefly responsibilities of an auditor in case of material misstatement resulting from Management Fraud