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Audit & Auditors under the Companies Bill-2012

Posted by Studycafe Posted on Sunday, September 01, 2013 with No comments

Audit & Auditors under the Companies Bill-2012

The Companies bill, 2012 (Bill No. 121-C of 2011) was passed in Lok Sabha (Lower house of Indian Parliament) on 18^th December, 2012. It is steadily moving towards becoming new legislation for corporate India. The Companies Act, 1956 suffers from some defects in the provision relating to audit. These were surfaced after various scams and fraud that shocked the corporate India. Therefore, it was important that the entire audit standards and systems were upgraded to bring them in line with globally accepted practices and make auditors more liable. Therefore, Companies Bill, 2012 provides for certain reformed provisions in respect thereof. Provisions related to Audit & Auditors are mentioned in Sections 139 to 148 of chapter X.

Eligibility, Qualifications of Auditor [Section 141] :

As provided in Section 141(1), a person who is Chartered Accountant is eligible for appointment as an auditor of the company. If majority of partners of a firm are practicing Chartered Accountants in India, then such a firm may be appointed as an auditor. Where a firm including Limited Liability Partnership (LLP) is appointed as an auditor then only partners who are Chartered Accountants shall be authorized to act & sign on behalf of the firm.

Disqualifications of Auditor [Section 141(3)] :

The following persons shall not be eligible for appointment as an auditor of a company –

a) A body corporate other than LLP

b) An officer or an employee of the company

c) A person who is partner or who is in employment of an officer or employee of the company

d) A person who or his relative or partner –

i. is holding any security or interest (of Face Value more than Rs. 1000) in the company or its associate or its associate

ii. is indebted to the company or its subsidiary or its associate in excess of amount as may be prescribed

iii. has given guarantee or provided any security in connection with indebtedness to the third party to the company or its subsidiary or its associate in excess of amount as may be prescribed

e) A person or a firm who has direct or indirect business relationship

f) A person whose relative is a director or in employment as key managerial personnel

g) A person who has got audit of more than 20 companies at the time of appointment or reappointment

h) A person who has been convicted by court of an offence involving fraud & period of 10 years has not been elapsed

i) Any person whose subsidiary or associate company or any other form of entity which is engaged in rendering of services which are prohibited under Section 144

Section 141(4) has made it clear that if a person incurs any of the disqualification mentioned above after his appointment then he shall vacate the office.

Appointment of auditors [Section 139] :

Every company shall appoint an individual or a firm as an auditor at its first annual general meeting. Such auditor shall hold the office till conclusion of 6^th annual general meeting and thereafter till conclusion of every 6^th annual general meeting. Though appointment is for 5 years ratification is necessary at every annual general meeting.

In case of listed companies and certain other classes of companies to be prescribed, compulsory rotation is provided for :-

a) In case of an individual as an auditor after one term of 5 years

b) In case of a firm as an auditor after 2 terms of 5 years

The auditor after completion of his term/(s) shall not be eligible for re-appointment for a period of 5 years. If a firm which has common partners with outgoing firm on the date of appointment, then such firm can not be appointed as an auditor of the company. Every company shall need to comply with these requirements with 3 years from date when provisions come into force.

Members of company may resolve to provide :-

a) The auditing partner or auditing team shall be rotated at such intervals

b) The audit shall be conducted by more than one auditor

Remuneration of Auditors [Section 142] :

The remuneration of auditors shall be decided at general meeting. First auditor’s remuneration may be fixed by the board. The remuneration shall include the expenses incurred by the auditor in connection with the audit 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.

Powers & Duties of Auditors [Section 143] :

Every auditor shall have right of access of books of accounts and vouchers of the company. He may also call for information and explanation which may be necessary for performance. The auditor of the holding company shall have right to access records of all its subsidiaries in relation to consolidation of financial statements. The auditor shall make report on account examined by him. He shall state his opinions of the matters laid down under Section 143(3). If the auditor has any qualification in any matter, then it shall be supported by reasons. Section 143(9) states that it is a duty of the auditor to comply with auditing standards. In the case of a Government company, the Comptroller and Auditor-General of India (CAG) shall appoint the auditor and direct such auditor the manner in which the accounts of the Government company are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller and Auditor-General of India (CAG) which, among other things, include the directions, if any, issued by the Comptroller and Auditor-General of India, the action taken thereon and its impact on the accounts and financial statement of the company. If a company has branch office outside India then accounts of that branch shall be examined by the auditor or any accountant or any other person who is duly qualified to do so in accordance with laws of that country. He is required to prepare and send audit report of that branch to the auditor of the company. As stated in Section 143(12), if the auditor has found an offence involving fraud has been committed by officers or employees against the company then he shall immediately report the matter to Central Government within prescribed time and manner. If he fails to do so, then he shall be punishable with fine of between Rs. 1 lakh to Rs. 25 lakhs.

Prohibition of undertaking of certain services [Section 144] :

Auditor shall not provide following services directly or indirectly to the company or its subsidiary or its holding company :-

a) Accounting and book keeping services

b) Internal audit

c) Design and implementation of any financial information system

d) Actuarial services

e) Investment advisory services

f) Investment banking services

g) Rendering of outsourced financial services

h) Management services

i) Any other kind of services as may be prescribed

Provided that an auditor or audit firm who or which has been performing any non audit services on or before the commencement of this Act shall comply with the provisions of this section before the closure of the first financial year after the date of such commencement.

The term “directly or indirectly” shall include rendering of services :-

i. In case of auditor being an individual, either by himself or through his relative or any other person connected or associated with such individual

ii. In case of auditor being a firm, either itself or through any of its partners or through its parent, subsidiary or associate entity

Auditors to sign audit report [Section 145] :

The person appointed as an auditor shall sign auditor’s report or certify any other document of the company in accordance with provisions of Section 141(2).

Auditors to attend general meeting [Section 146] :

All notices, communication relating to any general meeting shall be forwarded the auditor. The auditor himself or his authorized representative, who shall be qualified to be an auditor shall have right to be heard on any part of business which concerns him as an auditor.

Removal, resignation of auditor [Section 140] :

The appointed auditor may be removed from his office before expiry of his term by special resolution after obtaining previous approval of Central Government in that behalf. The concerned auditor shall be given opportunity of being heard.

The auditor who has resigned from company shall file a statement in prescribed form with the company and the registrar within 30 days from date of resignation. If the auditor fails to do so, then he shall be punishable with fine of between Rs.50 thousands to Rs. 5 lakhs.

Special notice is required for a resolution at an annual general meeting for appointment of an auditor other than retiring auditor. Copy of such notice is to be sent to the retiring auditor.

Punishment for contravention [Section 147] :

If provisions of sections 139 to 146 are contravened then company shall be punishable with fine of between Rs. 25 thousands to Rs. 5 lakhs. Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or fine of between Rs. 10 thousands to Rs. 1 lakh.

If the auditor contravenes any provisions then he shall be punishable with fine of between Rs. 25 thousands to Rs. 5 lakhs. If the auditor has deceived the company or its shareholders or tax authorities, then he shall be punishable with imprisonment for a term which may extend to one year or with fine of between Rs. 1 lakh to Rs. 25 lakhs.

Cost audit in respect of certain companies [Section 148]:

Companies engaged in production of goods or providing such services as may be prescribed shall be directed to include utilization of material or labour or to other items of cost in the books of accounts. The audit of cost records shall be conducted by Cost Accountant in practice who shall be appointed by board and remuneration shall be decided by members is the manner as may be prescribed. No person appointed under section 139 as an auditor of the company shall be appointed for conducting the audit of cost records.

Secretarial audit of large companies [Section 204]

Every listed company and such class of companies as may be prescribed to annex with its Board’s report a Secretarial Audit Report, given by a Company Secretary in Practice, in such form as may be prescribed.

Constitution of National Financial Reporting Authority [Section 132] :

The Central Government may by notification constitute a National Financial Reporting Authority to provide for matters relating to accounting and auditing standards under this Act.

National Financial Reporting Authority shall :-

a) make recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors

b) monitor and enforce the compliance with accounting standards and auditing standards in such manner as may be prescribed

c) oversee the quality of service of the professions associated with ensuring compliance with such standards, and suggest measures required for improvement in quality of service and such other related matters as may be prescribed

d) perform such other functions relating to clauses (a), (b) and (c) as may be prescribed.

Any person aggrieved by any order of the National Financial Reporting Authority, may prefer an appeal before the Appellate Authority constituted in such manner as may be prescribed.

Conclusion

Minister for Corporate Affairs (in 2011), Veerappa Moily, had said “Mandatory rotation of statutory auditors every five years to make them more practical. This would ensure that promoter or company or management does not change auditor who is doing good job prematurely.” There are a number of issues regarding interpretation of these provisions on which clarifications would be required. The Companies bill, 2012 has bestowed powers to the auditor with certain responsibilities. The proposed provisions in new act have ensured auditor’s independence and duties of auditors have been enhanced.

This Article has been shared by Saurabh Wagle. He can be reached at saurabh.wagle@gmail.com

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NEW AUDITOR'S REPORT FORMAT

Posted by Unknown Posted on Friday, August 16, 2013 with No comments

New Auditor’s Report Format as Given is SA700

Independent Auditor’s Report

To the Members of

ABC Company Limited.

We have audited the accompanying financial statements of ABC Company Limited (“the Company”), which comprise the Balance Sheet as at March 31, 2013, and the Statement of Profit and Loss and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management is responsible for the preparation of these financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Company in accordance with the Accounting Standards referred to in sub-section (3C) of section 211 of the Companies Act, 1956 (“the Act”). This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

In our opinion and to the best of our information and according to the explanations given to us, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India:

a) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2013;

b) in the case of the Profit and Loss Account, of the profit/ loss for the year ended on that date; and

c) in the case of the Cash Flow Statement, of the cash flows for the year ended on that date.

1. As required by the Companies (Auditor’s Report) Order, 2003 (“theOrder”) issued by the Central Government of India in terms of sub-section (4A) of section 227 of the Act, we give in the Annexure a statement on the matters specified in paragraphs 4 and 5 of the Order.

2. As required by section 227(3) of the Act, we report that:

a) we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit;

b) in our opinion proper books of account as required by law have been kept by the Company so far as appears from our examination of those books

c) the Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement dealt with by this Report are in agreement with the books of account.

d) in our opinion, the Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement comply with the Accounting Standards referred to in subsection (3C) of section 211 of the Companies Act, 1956;

e) on the basis of written representations received from the directors as on March 31, 2013, and taken on record by the Board of Directors, none of the directors is disqualified as on March 31, 2013, from being appointed as a director in terms of clause (g) of sub-section (1) of section 274 of the Companies Act, 1956.

f) Since the Central Government has not issued any notification as to the rate at which the cess is to be paid under section 441A of the Companies Act, 1956 nor has it issued any Rules under the said section, prescribing the manner in which such cess is to be paid, no cess is due and payable by the Company.

For XYZ and Co.

Chartered Accountants

FRN:

Name of the Member

(Designation)

Membership No. :

Place:

Date:

The Annexure referred to in paragraph 1 of the Our Report of even date to the members of ABC Company Limited. on the accounts of the company for the year ended 31^st March, 2013.

On the basis of such checks as we considered appropriate and according to the information and explanation given to us during the course of our audit, we report that:

1. (a) The company has maintained proper records showing full particulars including quantitative details and situation of its fixed assets.

(b) As explained to us, fixed assets have been physically verified by the management at reasonable intervals; no material discrepancies were noticed on such verification.

(c) In our opinion and according to the information and explanations given to us, no fixed asset has been disposed during the year and therefore does not affect the going concern assumption.

2. (a) As explained to us, inventories have been physically verified during the year by the management at reasonable intervals.

(b) In our opinion and according to the information and explanations given to us, the procedures of physical verification of inventories followed by the management are reasonable and adequate in relation to the size of the company and the nature of its business.

(c) In our opinion and on the basis of our examination of the records, the Company is generally maintaining proper records of its inventories. No material discrepancy was noticed on physical verification of stocks by the management as compared to book records.

3. (a) According to the information and explanations given to us and on the basis of our examination of the books of account, the Company has not granted any loans, secured or unsecured, to companies, firms or other parties listed in the register maintained under Section 301 of the Companies Act, 1956. Consequently, the provisions of clauses iii (b), iii(c) and iii (d) of the order are not applicable to the Company.

(e) According to the information and explanations given to us and on the basis of our examination of the books of account, the Company has not taken loans from companies, firms or other parties listed in the register maintained under Section 301 of the Companies Act, 1956. Thus sub clauses (f) & (g) are not applicable to the company.

4. In our opinion and according to the information and explanations given to us, there is generally an adequate internal control procedure commensurate with the size of the company and the nature of its business, for the purchase of inventories & fixed assets and payment for expenses & for sale of goods. During the course of our audit, no major instance of continuing failure to correct anyweaknesses in the internal controls has been noticed.

5. a) Based on the audit procedures applied by us and according to the information and explanations provided by the management, the particulars of contracts or arrangements referred to in section 301 of the Act have been entered in the register required to be maintained under that section.

b)As per information & explanations given to us and in our opinion, the transaction entered into by the company with parties covered u/s 301 of the Act does not exceeds five lacs rupees in a financial year therefore requirement of reasonableness of transactions does not arises.

6. The Company has not accepted any deposits from the public covered under section 58A and 58AA of the Companies Act, 1956.

7. As per information & explanations given by the management, the Company has an internal audit system commensurate with its size and the nature of its business.

8. As per information & explanation given by the management, maintenance of cost records has been prescribed by the Central Government under clause (d) of sub-section (1) of section 209 of the Act and we are of the opinion that prima facie the prescribed accounts and records have been made and maintained.

9. (a) According to the records of the company, undisputed statutory dues including Provident Fund, Investor Education and Protection Fund, Employees’ State Insurance, Income-tax, Sales-tax, Wealth Tax, Service Tax, Custom Duty, Excise Duty, cess to the extent applicable and any other statutory dues have generally been regularly deposited with the appropriate authorities. According to the information and explanations given to us there were no outstanding statutory dues as on 31^st of March, 2012 for a period of more than six months from the date they became payable.

(b) According to the information and explanations given to us, there is no amounts payable in respect of income tax, wealth tax, service tax, sales tax, customs duty and excise duty which have not been deposited on account of any disputes.

10. The Company does not have any accumulated loss and has not incurred cash loss during the financial year covered by our audit and in the immediately preceding financial year.

11. Based on our audit procedures and on the information and explanations given by the management, we are of the opinion that, the Company has not defaulted in repayment of dues to a financial institution, bank or debenture holders.

12. According to the information and explanations given to us, the Company has not granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities.

13. The Company is not a chit fund or a nidhi /mutual benefit fund/society. Therefore, the provision of this clause of the Companies (Auditor’s Report) Order, 2003 (as amended) is not applicable to the Company.

14. According to information and explanations given to us, the Company is trading in Shares, Mutual funds & other Investments. Proper records & timely entries have been maintained in this regard & further investments specified are held in their own name.

15. According to the information and explanations given to us, the Company has not given any guarantees for loan taken by others from a bank or financial institution.

16. Based on our audit procedures and on the information given by the management, we report that the company has not raised any term loans during the year.

17. Based on the information and explanations given to us and on an overall examination of the Balance Sheet of the Company as at 31^st March, 2012, we report that no funds raised on short-term basis have been used for long-term investment by the Company.

18. Based on the audit procedures performed and the information and explanations given to us by the management, we report that the Company has not made any preferential allotment of shares during the year.

19. The Company has no outstanding debentures during the period under audit.

20. The Company has not raised any money by public issue during the year.

21. Based on the audit procedures performed and the information and explanations given to us, we report that no fraud on or by the Company has been noticed or reported during the year, nor have we been informed of such case by the management.

For XYZ and Co.

Chartered Accountants

FRN:

Name of the Member

Place: (Designation)

Date: Membership No. :