Audit & Auditors under Companies Act 2013

For your company, the impact on the different operational areas are highlighted below:

Appointmnet / Re-appointment:

  1. Appoint your auditor for a period of 5 years (unlike the earlier 1 year); however each year at the AGM the appointment will have to be reconfirmed
  2. You need to take a certificate from auditor prior to appointment/reappointment that his/her appointment/re-appointment, if made, would be in accordance with law
  3. Inform the auditor of his/her appointment/reappointment after the AGM
  4. Within 15 days of the AGM, file with the RoC the appointment/re-appointment of the auditor
  5. In some cases, individual auditor cannot be re-appointed after 1 term of 5 years, and a firm of auditors cannot be re-appointed after 2 terms of 5 years (10 years)*
  6. Cooling period (min. gap) of 5 years after 1 or 2 terms (as above) before same auditor can be re-appointed

* applicable only to (a) listed companies, (b) unlisted public companies with Share Capital > Rs10 crore, (c) private limited companies with Share Capital > Rs20 crore, (d) all companies with loans/borrowings >Rs 50 crore. You will have a transition period of 3 years, to manage this change in auditor/s. This thus will NOT be applicable to One Person Companies and Small Companies (a relief, isn’t it!!!).

Resignation / Change of Auditor

  1. In case of resignation of auditor, the board of directors is required to recommend name of new auditor within 30 days and required to call for an EGM within 3 months of recommendation of board of directors
  2. Auditor can be removed before expiry of term after obtaining prior approval of Central Government and then passing a special resolution at an EGM
  3. An auditor who has resigned is required to submit a statement giving reasons and other relevant facts to the company and the RoC within 30 days – Auditor to be fined min. Rs50,000 and max Rs5 lakhs if he/she does not comply with this
  4. Special resolutioin required to appoint new auditor, and special notice sent to shareholders’ to include a representation from the retiring auditor

A person / firm cannot be auditors of your company if he/she:

  1. is an employee / officer of the company
  2. is a partner of an employee / officer or relative of director / key management person of the company
  3. is already an auditor of 20 companies
  4. holds any security / interest in your company* >Rs1,000
  5. has direct or indirect business relationship with your company*
  6. or his/her related entity provides any of the following services to your company*: accounting and book keeping services, internal audit, design and implementation of any financial information system, actuarial services, investment advisory services, investment banking services, rendering of outsourced financial services, or any management services
  7. or his/her relative owes the company* >Rs5 lakhs
  8. has a relative who a security of face value > Rs1 lakh of your company

* also includes associate company, holding company or subsidiary company

Rights of your auditor:

  1. Access, at all times, to the books of account and vouchers
  2. To ask any of the officers of the company to give information and explanation required for audit
  3. In case of a holding company, the auditor shall also have access to all books of account of all the subsidiary company, even if a different statutory auditor is appointed
  4. To receive AGM/EGM notices

Duties of your auditor:

  1. Make a report on the accounts and financial statements and give a true and fair view of the state of your’s company’s affairs
  2. The Auditor’s Report is required to state: whether he/she sought and obtained all the required information and explanations, whether proper books of account have been kept, whether the financial statements comply with the accounting standards, whether there are adequate internal financial control systems,
  3. The Auditor is also required to mention whether any director is disqualified!
  4. To comply with all the auditing standards
  5. To report to the Central Government – within 60 days – if he/she believes any employee / officer is committing any fraud agains the company. What is interesting is that the auditor is required to report this to the Central Government; but first has to forward a report to the company’s board of directors and the board is bound to send a written reply within 45 days, leaving the auditor with 15 days to file his report to the Central Government. And if the auditor does not fulfill this duty he/she will be fined a min. of Rs1 lakh and a max. of Rs25 lakhs!!!

Penalties on the company:From Rs25,000 to Rs5 lakhs

Penalties on each responsible officer / director of the company: Rs10,000 to Rs1 lakh

Some companies required to conduct Cost Audit, in addition to financial / statutory audit. This is to be done by a practicing Cost Accountant.

Internal Audit mandatory for

  1. all listed companies
  2. unlisted public companies if: (a) share capital > Rs50 crores -or- (b) Turnover > Rs200 crores -or- (c) Loans/Borrowings >Rs100 crore -or- (d) Outstanding deposits >Rs25 crores
  3. private company has (a) Turnover >Rs200 crore -or- (b) Loans/Borrowings > Rs100 crore

Thus appointment of auditor and accepting an audit it is going to be a long-term committment from both sides. We suggest you speak to your auditor “now” and confirm his ability and willingness to accept your audit, especially given the new limit of only 20 audits for each practising CA.

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