Transcript New Concepts, Initiatives and Opportunities in the

Presentation
By
CA Anil Sharma
Audit and Auditors
• Chapter X.
• Sections 139 to 148.
• All sections are applicable w.e.f. 1.4.2014 except :
– Second proviso to subsection (4) and Subsection (5) of
Sec.140- Removal of auditor
• The Companies (Audit and Auditors) Rules, 2014.
( applicable w.e.f. 1.4.2014)
Tuesday, July 21, 2015
Section 139(6)- First Auditor’s
appointment
• To be appointed by the BOD with in 30 days of
incorporation of the company,
• If BOD does not appoint, shall inform the
members
• Members shall within 90 days appoint first
auditors of the company,
• First auditor to hold office till the conclusion
of first AGM.
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Sec 139(1) - Auditors appointment
• Manner and procedure of selection prescribed
in Rule 3:
– Audit Committee, if there or Board to take into
consideration before recommending to BOD:
• The qualification and experience of the person proposed,
• Any pending disciplinary proceedings against the person,
• To assess whether commensurate to the size and
requirement of the company
– BOD to recommend to AGM
– BOD may refer back the matter to Audit Committee
to reconsider
– BOD may not agree to the recommendations of
Audit Committee, to explain the reasons in the
Board meeting.
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Sec 139(1) - Auditors appointment
• Auditors to be appointed for 5 years at a time in
the AGM
• Provided that such appointment shall be subject to
ratification in every annual general meeting till the
sixth such meeting by way of passing of an
ordinary resolution.
• Explanation to Rule 3 - For the purposes of this
rule, it is hereby clarified that, if the appointment
is not ratified by the members of the company, the
Board of Directors shall appoint another individual
or firm as its auditor or auditors after following the
procedure laid down in this behalf under the Act.
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Sec 139(1) - Auditors appointment
• Rule 4- Before appointing / reappointing,
company to obtain written consent of the auditor
and a certificate stating that:
– is not disqualified for appointment under the Act, the
CA Act, 1949 and the rules or regulations made
thereunder;
– the proposed appointment is as per the term provided
under the Act;
– the proposed appointment is within the limits laid
down by or under the authority of the Act;
– the list of proceedings pending with respect to
professional matters of conduct, as disclosed in the
certificate, is true and correct.
• After appointment, the company to inform the
auditor and to file a notice to this respect with in
15 days with Registrar in Form- ADT-1.
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Sec 139(2) - Auditors Rotation
•Listed companies and prescribed class of
companies cannot have the same auditor
• In case of a firm, after two terms of 5 years each
• In case of an individual, after one term of 5 years
•Such outgoing audit firm cannot become auditor
for a period of 5 years.
•The prohibition covers firms which have
common partners too.
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Sec 139(2) - Auditors Rotation
• Rule 5 : the class of companies shall mean the
following classes of companies excluding one
person companies and small companies:– (a) all unlisted public companies having paid up share capital
of rupees ten crore or more;
– (b) all private limited companies having paid up share capital
of rupees twenty crore or more;
– (c) all companies having paid up share capital of below
threshold limit mentioned in (a) and (b) above, but having
public borrowings from financial institutions, banks or public
deposits of rupees fifty crores or more.
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Sec 139(4) - Auditors Rotation
•Rule 6: Manner of rotation
• Audit Committee, where in existence, to recommend the
name to be rotated in place of the present incumbent on
expiry of his term other wise BOD itself
• The period for which he has been holding office as auditor
prior to the commencement of the Act shall be taken into
account to calculate the period of five consecutive years
• Income auditor shall not be eligible if he is associated with the
outgoing auditor under the same network of audit firms or is
operating under the same trade mark or brand
• Break in term for a continuous period of 5 years only be
considered as fulfilling the requirement of eligibility
• if a partner, who is in charge of an audit firm and also certifies
the financial statements of the company, retires from the said
firm and joins another firm of chartered accountants, such
other firm shall also be ineligible to be appointed for a period
of five years.
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Sec 139(4) - Auditors Rotation
• Rule 6: Manner of rotation
• Audit Committee, where in existence, to recommend the name to be
rotated in place of the present incumbent on expiry of his term other
wise BOD itself
• The period for which he has been holding office as auditor prior to the
commencement of the Act shall be taken into account to calculate the
period of five consecutive years
• Income auditor shall not be eligible if he is associated with the outgoing
auditor under the same network of audit firms or is operating under the
same trade mark or brand
• Break in term for a continuous period of 5 years only be considered as
fulfilling the requirement of eligibility
• if a partner, who is in charge of an audit firm and also certifies the
financial statements of the company, retires from the said firm and joins
another firm of chartered accountants, such other firm shall also be
ineligible to be appointed for a period of five years.
• Such rotation will have to be effected by companies covered by this
requirement within 3 years of the date of commencement of this law.
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Sec 140- Auditors Removal / Resignation
• Removal of an existing auditor within the 5 years term shall
be possible only by
– Passing of a special resolution and
– Also CG approval ( Form ADT-2 to be filed)
• Also, the auditor will have to be heard before the approval
is given for the change of auditor.
• In case of a resignation by the auditor, there is a need to file
(with company, ROC and where applicable, CAG) within 30 days a
statement in Form ADT-3 giving the reasons and other facts
as may be relevant in regard to the resignation.
• NCLT could order for change of auditors when it is satisfied
that the auditors have directly or indirectly acted in a
fraudulent manner or abetted or colluded in any fraud.
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CASUAL VACANCY
• In case of a Government company:-
To be filled by CAG within 30 days
If not done by CAG then Board shall fill within next 30
days
• In case of other than Government companies:– By the Board,
– if caused due to resignation then approved by
shareholders within three months from the
recommendation of the Board is also required.
• If in any AGM no auditor is appointed or
reappointed, the existing auditor shall continue
Sec 141-Eligibility of an auditor
• To be a chartered accountant or
• firm of chartered accountants or
• A LLP
• ‘Chartered Accountant’ has been defined
• In case of firm , majority of partners practicing in India
should be qualified to be appointed as such.
• In case of LLP, only partners who are Chartered
Accountant in practice shall be authorised by firm to act
and sign on behalf of firm.
Sec 141- Auditors disqualifications
• Enhanced disqualifications
• If the person holds any security or interest in the
Company, subsidiary, holding, associate or cosubsidiary.
• If a relative holds any security in the Company,
subsidiary, holding, associate or co-subsidiary in
excess of Rs. 1 Lakh , However, the corrective action
to maintain the limits shall be taken by the auditor
within sixty days of such acquisition or interest. (Rule
10).
• Indebtedness of the person or his relative or partner
in excess of Rs. 5 Lakhs or has guaranteed or
provided security for a third party to the Company,
subsidiary, holding, associate or co-subsidiary for an
amount in excess of Rs. 1 Lakh (Rule 10).
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Sec 141- Auditors disqualifications
• New disqualifications
• Having direct or indirect business relationship with the
Company, subsidiary, holding, associate or co-subsidiary
except
– (i) commercial transactions which are in the nature of
professional services permitted to be rendered by an auditor or
audit firm under the Act and the Chartered Accountants Act,
1949 and the rules or the regulations made under those Acts;
– (ii) commercial transactions which are in the ordinary course of
business of the company at arm’s 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.
• Relative is a director or is employed as a director or KMP in
the company.
• A person convicted of fraud and 10 years not having
elapsed from such conviction.
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Sec 141(3)(g)-Cap on number of audits
• Provides a cap of twenty companies per
partner.
• Earlier Act provided for limits only covering
public companies. No such reference in the
Section.
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Section -143-Duties of an auditor
Subsection (1) – Enquiries to be made.
Sub section (2) – to make a report to the members.
Section -143-Duties of an auditor
Sub section (3) – Auditors Report to state the
following other matters (Rule 11):
• (a) whether the company has disclosed the impact, if any, of
pending litigations on its financial position in its financial
statement;
• (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.
Sec 143(12)- Reporting of Frauds by Auditors
• If the auditor has sufficient 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 report the matter to the Central
Government immediately but not later than sixty days of
his knowledge and after following the procedure given in
Rule 13.
• The report shall be sent to the Secretary, MCA in a sealed
cover by Registered Post with A/D or by Speed post
followed by an e-mail in confirmation of the same.
• Provision also apply to a cost auditor and a secretarial
auditor during the performance of his duties under
section 148 and section 204 respectively.
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Procedure for reporting fraud by auditors
• Rule 13- Report to be submitted in Form ADT-4
– (i) auditor shall forward his report to the Board / the
Audit Committee, immediately after he comes to
knowledge of the fraud, seeking their reply or
observations within forty-five days;
– (ii) on receipt of such reply or observations the
auditor shall forward his report and the reply or
observations of the Board or the Audit Committee
along with his comments (on such reply) to the
Central Government within fifteen days of receipt of
such reply or observations;
– (iii) in case the auditor fails to get any reply or
observations from the Board or the Audit Committee
within the stipulated period of forty-five days, he shall
forward his report to the Central Government.
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Sec 144- Auditors – Prohibited services
• Auditors can provide only such services as are
approved by the AC / Board, but cannot provide
the following either directly or indirectly to the
company, its holding and subsidiaries:
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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
Management services
Any other kind of services as may be prescribed
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Sec 144- Auditors – Prohibited services
• In case of an audit firm, this prohibition extends to
– The audit firm
– All its partners
– Its parent, subsidiary and associate entity and
– Any other entity, whatsoever, in which the firm or
any partner of the firm has significant influence or
control, or whose name or trade mark or brand is
used by the firm or any of its partners
• Any auditor or firm already providing any non- audit
services shall comply with the provisions before
closure of the first financial year after the date of
such commencement.
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Auditors - Penalties
• Contravention of law
– Relating to appointment, rotation, powers and
duties, prohibited services or signing of audit
report –Min Rs.25,000 to Max Rs. 5 Lakhs
– If done willfully with an intention to deceive –
imprisonment up to 1 year and penalty of Rs. I
Lakh to Rs. 25 Lakhs.
• Also to refund the audit fee to the Company
• Pay damages to those who have lost on
account of such incorrect / misleading
statements or particulars in his audit report
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Auditors - Penalties
• Prosecution by NFRA (on suo moto or reference
based investigation)
– Penalty
• Min Rs.1 Lakh to 5 times the fees received,
for individuals
• Min Rs.10 Lakh to 10 times the fees
received, for firms
– Debar from practice
• Member / firm for a min 6 months to 10
years period
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Auditors - Penalties
• Class action suit by members / depositors
– in case of improper or misleading statements
in the audit report or fraudulent, unlawful or
wrongful act
– Liability against the firm and each partner
who was involved
– In case of proof of fraud / abetting to fraud,
then the liability will be joint and several for
the auditor, his partners and firm
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THANK YOU
Contact me at:
9811320203
[email protected]
Tuesday, July 21, 2015