1. Applicability of Section 143
Apart from applying to the auditor of a company, the provisions of this section ( i.e all the matters discussed below in this article) shall mutatis mutandis apply to
a. The Cost Accountant in practice conducting cost audit under Section 148 or
b. The Company Secretary in practice conducting secretarial audit under Section 204.
2. Inquiry on certain matters ( Similar to Section 227 (1A) of Companies Act, 1956)
Apart from exercising the right of access at all times and requiring information from officers of the company, the auditor has to inquire into the following matters, namely
1.Whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members.
2.Whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company.
3.Where the company not being an investment company or a banking company, whether so much of assets of the company as consist of shares, debentures and other securities have been sold at a price less than at which they were purchased by the company.
4.Whether loans and advances made by the company have been shown as deposits
5.Whether personal expenses have been charged to revenue account.
6.Where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading.
Again, as was the case in the Companies Act, 1956, under this Companies Act, 2013 also, the auditor is required to inquire on the matters said above and the reporting requirement on this clause arises only when the auditor is not satisfied with the inquiry on the above mentioned matters.
3. Matters connected with Audit Report
a. 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 the Companies Act, 2013, to be laid before the company in the general meeting.
b. The auditor’s report shall be issued after taking into account the Provisions of Companies Act, 2013 Accounting and Auditing Standards Matters which are required to be included in the audit report under the provisions of Companies Act, 2013 or any rules made ( For e.g Companies (Audit and Auditors) Rules, 2014) or Matters to be included based on any order made by Central Government in consultation with the National Financial Reporting Authority. Best of the information and knowledge available.
c. Finally, the auditor shall make a report to the members of the company, that the accounts, financial statements give a true and fair view of the state of the company’s 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.
4. What the report should state The auditor’s report shall also state ( apart from discussed above)
a. Whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements
b. Whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him.
c. Whether the report on the accounts of any branch office of the company audited under sub-section (8) of Section 143, by a person other than the company’s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report.
d. Whether the company’s balance sheet, profit and loss account and cash flow statement[1] dealt with in the report are in agreement with the books of account and returns.
e. Whether, in his opinion, the financial statements comply with the accounting standards.
f. The observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company.
g. Whether any director is disqualified from being appointed as a director under sub-section (2) of Section 164.
h. Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith.
i. Whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.
j. Such other matters as may be prescribed These matters are prescribed by the Companies (Audit and Auditors) Rules, 2014.
The auditor’s report shall also include their views and comments on the following matters, namely
a. Whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statements
b. Whether the company has made provision, as required under any law or accounting standards, for material foreseeable losses, if any, on long term contracts including derivative contracts.
c. Whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company
5. Manner of stating of any “Qualifications”
i. Where any of the matters required to be included in the audit report is answered in the negative or with a qualification, the report shall state the reasons there for.
ii. Even though the Companies Act, 2013 is silent in prescribing about the manner of presenting a qualified opinion ( including disclaimer of opinion or adverse opinion), we can take reference from Section 227 (3) (e) of Companies Act, 1956. Accordingly, under the Companies Act, 2013, the auditor can express a qualified opinion / disclaimer of opinion/adverse opinion as the case may be in thick type or in italics.
6. Special Focus on reporting of fraud Section 143 (12) casts an additional responsibility on auditors with respect to reporting of fraud. The section begins with a non-obstante clause. If the 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, the auditor shall report the matter to the Central Government immediately but not later than sixty days of the auditors knowledge , after following the procedure below , the procedure being given by Companies (Audit and Auditors) Rules, 2014
A. The auditor shall forward his report to the Board of Directors or the Audit Committee, as the case may be, immediately after the auditor comes to know of the fraud , seeking their reply or observations within forty five days.
B. On receipt of such reply or observations the auditor shall forward his report and the reply or observations of the Board of Directors or Audit Committee along with the auditors comment on such reply or observations of the Board of Directors or the Audit Committee, to the Central Government within fifteen days of receipt of such reply from the Board of Directors or Audit Committee.
C. In case the auditor fails to get any reply or observations from the Board of Directors or Audit Committee within forty five days, then the auditor shall forward his report to the Central Government along with a note containing the details of the report earlier forwarded to the Board of Directors or Audit Committee, for which he failed to receive any reply or observations within the stipulated time.
D. The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same.
E. The report shall be on the letter- head of the auditor containing postal address, e-mail address and contact number and shall be signed by the auditor with his seal and shall indicate his membership number.
F. The report shall be in the form of a statement as specified in Form ADT-4.
G. The provisions of this rule shall also apply, mutatis mutandis, to a cost auditor and a secretarial auditor during the performance of his duties under section 148 and section 204 respectively. Restricted Scope of reporting on fraud The auditor’s responsibility with respect to reporting on fraud discussed above is restricted to fraud either presently being committed or committed in the past, against the company by officers or employees of the company. This does not include
a. Fraud by the company, either discovered by the auditor or that comes to the knowledge of the auditor ( either past or present).
b. Fraud on the company by external parties other than officers or employees of the company that comes to the knowledge of auditor or discovered by the auditor. Even though the exclusions above gets fitted in Companies Auditors Report Order, 2003 (CARO, 2003) (presently for the purpose of passive reference, a connection is resorted to CARO,2003 understanding fully that there is a necessity for revised CARO ) and would also be factored in the order that the Central Government in consultation with National Financial Reporting Authority would give ( i.e in the New Version of CARO), the auditor’s responsibility in case of the fraud stated as exclusion in point a & b above would not extend to communication of the same to the Board of Directors or the Audit Committee and eventually to Central Government.
7. Signing of audit reports- Section 145
a. The auditor shall sign the audit report or sign or certify any other document of the company in accordance with the provisions of Section 141(2) of the Companies Act, 2013 ( Sec. 141 (2) reads as follows “ Where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are Chartered Accountants shall be authorised to act and sign on behalf of the firm”).
b. The qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditor’s report shall be read before the company in general meeting and shall be open to inspection by any member of the company.
8. Conclusion The Companies Act, 2013 has certainly added to the responsibilities of an independent auditor. This additional responsibility coupled with a necessity/ possible arrival of revised addendum (i.e revised CARO) will usher in a new era of challenges and greater transparency in reporting front.
