Chapter-X (Sec.139–148) of the Companies Act, 2013 (CA, 2013) covers the topics relating to the audits and auditors of any company. The provisions of section 143 of the CA, 2013 has already been come into force from 1st day of April, 2014 vide Notification No. S.O. 902(E) issued dated 27-03-2014.
The provisions of Sec. 143 has further been amended vide the Companies (Removal of Difficulties) Seventh Order, 2014 [S.O. 2226(E)] w.e.f. 04-09-2014 and the Companies (Amendment) Act, 2015.
This section mainly dealt with the rights of an auditor and his duties in respect of the company in which he has appointed as an auditor. Additionally, this sections also describe the auditing standards which has to be followed by the auditor while conducting audit functions of any company.
Section 143(1) – Rights and Powers to access and enquire by Company Auditors
In accordance with the provisions of section 143(1) of CA, 2013, the auditor have right to access the books of account and vouchers of a company and the records of all its subsidiaries, if any, in relation to the Consolidation of Financial Statements (CFS).
Note that auditor have power to access such records at all times even the same has been kept at the registered office or elsewhere. He shall also be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor.
Following are the other matters which may inquire by the auditor of a company:
(a) Secured Loans:
Secured loans and advances made by the company should be properly secured and terms are not prejudicial to the interests of the company or members.
(b) Book Entries:
Transactions represented merely by book entries are not prejudicial to the interests of the company.
(c) Sale of Securities:
Assets consisting of shares, debentures and other securities of the company except investment or banking company have not been sold at below purchase price.
(d) Loans and Advances as Deposits:
Loans and advances made by the company have not been shown as deposits.
(e) Personal Expenses:
Personal expenses have not been charged to revenue account.
(f) Allotment of Share for Cash:
If any shares have been allotted for cash, the same has actually been received otherwise the position as stated in the books of account is correct, regular and not misleading.
Section 143(2) – Auditors Report to Members of a Company
In compliance with the provisions of section 143(2) of CA, 2013, the auditor shall provide a report on accounts examined and on financial statements required by or under this Act to be laid down in General Meeting (GM) of the company.
Such report shall be made after taking into account the provisions of CA, 2013 and rules made thereunder in addition to the Accounting Standards (AS) and Standards on Auditing (SA) and such other matters as may be prescribed.
Note that to the best of his information and knowledge the audited accounts and financial statements shall 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.
Section 143(3) – Additional Matters to be stated in Auditors Report
In addition to the above mentioned information the auditor’s report shall also state:
(a) Obtain Information:
The auditor shall sought and obtained information and explanations necessary for audit purpose otherwise he shall state the details thereof and the effect of such information on the financial statements.
(b) Proper Books of Account:
In the opinion of the auditor, the books of account has been kept properly as per law and proper returns have been received from branches not visited by him.
(c) Incorporate Branch Audit Report:
The auditor of the company shall receive the branch audit report and shall state the manner in which he has dealt with the same in his report.
(d) Financial Statement in consistent with Books of Account:
The auditors shall state whether the B/S and P/L account are in agreement with the books of account and returns.
(e) Comply AS:
The financial statements shall comply with the Accounting Standards.
(f) Adverse effect of Auditors Comment:
The observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company.
(g) Disqualified Directors:
Whether any director is disqualified from being appointed as a director u/s section 164(2) of the Companies Act, 2013.
(h) Maintenance of Accounts:
Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith.
(i) Internal Control System:
Whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.
For the financial years commencing on or after 1st April, 2015 (FY 2015-2016), the report of the auditor shall also state about existence of adequate internal financial controls system and its operating effectiveness as required by the newly inserted Rule 10A (w.e.f. 14th Oct, 2014) of the Companies (Audit and Auditors) Amendment Rules, 2014.
(j) Other Matters:
Such other matters as may be prescribed.
Section 143(4) – Negative or Qualified Report by Auditor
Section 143(4) provides that if any matters is answered in the negative or with a qualification the reasons for the same should be stated by the auditor in his report of the company.
Section 143(5) – Government Company Auditor and Audit Report
The provisions of sub-section (5) of section 143 has been amended vide the Companies (Removal of Difficulties) Seventh Order, 2014 [S.O. 2226(E)] issued dated 4th September, 2014.
Accordingly, in exercising the powers conferred u/s 139(5) or 139(7), the Comptroller and Auditor-General (C & AG) of India shall appoint the auditor of a Government company or any other company owned or controlled either by the Central Government or State Governments.
Further, the C & AG of India shall direct such appointed auditor the manner in which the accounts of the company are required to be audited.
Thereafter, a copy of audit report shall be submitted to C & AG of India by the auditor so appointed after taking into account the directions, if any, issued by CAG of India and the action taken thereon and its impact on the accounts and financial statement of the company.
Section 143(6) – CAG Right to Supplementary Audit of Government Company
The CAG shall within 60 days from audit report received u/s 143(5) have right to conduct a supplementary audit by the person authorised by him to require additional information on matters and in form as directed by him.
Then, the CAG shall comment upon or supplement such audit report and the same shall be sent by the company in compliance with the first proviso of section 143(6) to every member, trustees for debenture-holder and persons so entitled to copies of audited financial statements u/s 136(1) and also be placed before AGM at the same time and in the same manner as the audit report.
Note that if CG is a member of a Govt. company then CG shall cause u/s 394(1) an Annual Report on the working and affairs of that company to be prepared within 3 months of AGM before which the comments given by CAG and audit report is placed under the proviso to section 143(6).
Section 143(7) – CAG Power to Test Audit of Government Company
The CAG may also by an order cause test audit of the company covered under section 139 (5) or (7) of the companies act, 2013. The report of such test audit shall apply the provisions of section 19A of the Comptroller and Auditor-General’s (Duties, Powers and Conditions of Service) Act, 1971.
Section 143(8) – Branch Audit of a Company
The accounts of branch office of a company shall be audited by:
A) For Branch Office in India
i) The company’s auditor; or
ii) Any other qualified person appointed u/s 139 as auditor.
B) For Branch Office outside India
i) The company’s auditor; or
ii) An accountant; or
iii) Any other qualified person to act as an auditor in accordance with laws of that country.
The duties and powers of the company’s auditor shall be prescribed with reference to the branch audit the branch auditor.
The branch auditor shall send report to the auditor of the company who shall deal with it in his report in such manner as he considers necessary.
Section 143(9) – Mandatory to comply with SAs
In accordance with the provisions of section 143(9) of the companies Act, 2013, the auditing standards must be complied with by every auditor.
The term “Auditing Standards” has been defined in clause (7) of section 2 of CA, 2013 which means the standards of auditing or any addendum thereto for companies or class of companies referred to in sub-section (10) of section 143.
Section 143(10) – Auditing Standards prescribed by CG or specified by ICAI
The Central Government prescribes Standards of Auditing (SA) as recommended by the Institute of Chartered Accountants of India (ICAI) in consultation with and after examination of the recommendations made by the National Financial Reporting Authority (NFRA).
Note that until any SAs are notified by CG, any SA specified by CA Institute shall be deemed to be the auditing standards.
Section 143(11) – Statement on specified matters (CARO – 2015) in Auditors Report
The Central Government may direct by issuing an order in consultation with the NFRA that the auditor’s report of certain class or description of companies shall also include a statement on specified matters.
Accordingly, such reporting requirements has now been prescribed by the Ministry of Corporate Affairs (MCA) under the Companies (Auditor’s Report) Order, 2015 (CARO – 2015) issued vide Order No. S.O. 990(E) w.e.f. 10-04-2015.
Section 143(12) – Reporting of Fraud committed against Company
The provisions of sub-section (12) of section 143 has been wholly substituted by the Companies (Amendment) Act, 2015 and shall override all other provisions of this section.
If the auditor has sufficient reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the CG within 60 days of his knowledge.
In case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted u/s 177 or to the Board in other cases within 45 days and in such manner as may be prescribed.
However, the companies shall disclose the details about such frauds in the Board’s report in such manner as may be prescribed if auditors have reported frauds to the audit committee or the Board but not reported to the Central Government.
Additionally, as per new clause (ca) inserted in sub-section (3) of section 134 by the Companies (Amendment) Act, 2015 w.e.f. 29-05-2015, a board report including details in respect of frauds reported by auditors u/s 143(12) other than those which are reportable to the CG, shall be attached to statements laid before a company in general meeting.
Note that as per Rule 12 and 13 of the Companies (Audit and Auditors) Rules, 2014, the duties of fraud reporting by the auditor shall also extend to branch auditor to the extent it relates to the concerned branch.
Section 143(13) – Duties of Auditor done in Good Faith
No duty shall be regarded as contravened if it is done in good faith by the auditor of a company while reporting the matter referred to in section 143(12) of CA, 2013.
Section 143(14) – The provisions also apply to CS and CMA in Practice
The provisions of section 143 shall also apply to the Company Secretary (CS) in practice conducting secretarial audit u/s 204 or the Cost Accountant (CMA) in practice conducting cost audit u/s 148.
In sub-section (4) of section 148, it has also been clearly stated that an audit conducted under section 148 shall be in addition to the audit conducted under section 143.
Section 143(15) – Punishment for Contravention in Fraud Reporting
If any auditor, CS or CMA in practice do not comply with the provisions of sub-section (12) of section 143, he shall be punishable with fine of ₹ 100000 – ₹ 500000.
Punishment for not complying with provisions of Section 143
Section 143 is mandatory in nature and therefore, an auditor should not ignore any provisions mentioned therein. In other words, all provisions of section 143 of CA, 2013 must be complied with by the auditor of a company otherwise in accordance with sec. 147(2) he shall be punishable with a minimum fine of ₹ 25000 (twenty-five thousand rupees) and the same may be extend upto ₹ 500000 (five lakh rupees).
Moreover, if an auditor has contravened the provisions of section 143 knowingly or wilfully with the intention to deceive either of the following:
i) Company; or
ii) Shareholders; or
iii) Creditors; or
iv) Tax Authorities,
he shall be punishable with imprisonment for a term which may extend to ONE YEAR and with fine which shall not be less than one lakh rupees (₹ 100000) but which may extend to twenty-five lakh rupees (₹ 2500000).