SAMPLE Auditing Final

CA FINAL- ADVANCED AUDITING – SAMPLE BOOK – COMPANY AUDIT, SA 700, SA
705
Sec. 138. Of Companies Act, 2013

Internal Audit
Every listed company and
Public company in the preceding F.Y having
 T.O Rs. 200 Cr. Or more
 Outstanding loans from banks and PFI exceeding Rs. 100 Cr. Or more at any point
during the year
 PUC Rs. 50 cr. Or more or
 Outstanding deposits Rs. 25 cr. Or more at any point during the year
Private Limited company having
 T.O Rs. 200Cr. Or more
 Outstanding loans from banks and PFI exceeding Rs. 100 Cr. Or more at any point
during the year
shall be required to appoint an internal auditor, who shall either be a chartered accountant or
a cost accountant, or such other professional as may be decided by the Board to conduct
internal audit of the functions and activities of the company
The audit committee if any / board shall decide the intervals in which the internal audit shall
be conducted and reported to the Board.
139. APPOINTMENT OF AUDITORS
APPOINTMENT OF SUBSEQUENT AUDITORS FOR NON GOVERNMENT COMPANY
Every company shall, at the first annual general meeting, appoint

 an individual or
 a firm as an auditor
who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual
general meeting and thereafter till the conclusion of every sixth meeting , 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.
As per proposed Companies Amendment Act, 2017 – RATIFICATION IS OMITTED.
 In case of a company that is required to constitute an Audit Committee under section 177,
the committee, and, shall recommend the name of an individual or a firm as auditor to the
Board for consideration
 in cases where such a committee is not required to be constituted, the Board, shall consider
and recommend an individual or a firm as auditor to the members in the annual general
meeting for appointment.
CA AKS Krishnan M.Com, FCA – Sample book – Advanced auditing – Hand book
 If the Board agrees with the recommendation of the Audit Committee, it shall further
recommend the appointment of an individual or a firm as auditor to the members in the
annual general meeting.
 If the Board disagrees with the recommendation of the Audit Committee, it shall refer back
the recommendation to the committee for reconsideration citing reasons for such
disagreement.
 If the Audit Committee, after considering the reasons given by the Board, decides not to
reconsider its original recommendation, the Board shall record reasons for its
disagreement with the committee and send its own recommendation for consideration of
the members in the annual general meeting; and if the Board agrees with the
recommendations of the Audit Committee, it shall place the matter for consideration by
members in the annual general meeting.
The company shall place the matter relating to such appointment for ratification by members at
every annual general meeting.
Students will generally get doubt – what if in AGM he is not ratified? Whether it amounts to
removal?
Actually you all know that in AGM there are 4 ordinary business. Appointment or reappointment
of auditor is one of the business. If the business is not completed, then AGM will get adjourned.
Hence this question will not arise unless it is stated he is expressly removed.
PRE REQUISITE FOR APPOINTMENT OF AUDITORS

Before such appointment is made, the written consent of the auditor to such appointment, and a
certificate that
 the individual or the firm, as the case may be, is eligible for appointment and is not
disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the
rules or regulations made thereunder;
 the proposed appointment is within the limits laid down by or under the authority of the
Act;
 the list of proceedings against the auditor or audit firm or any partner of the audit firm
pending with respect to professional matters of conduct, as disclosed in the certificate, is
true and correct
 whether the auditor satisfies the criteria provided in section 141
The company shall inform the auditor concerned of his or its appointment, and also file a notice
of such appointment with the Registrar within fifteen days of the meeting in which the auditor is
appointed in Form ADT 1. (For ratification ADT 1 need not be filed once again every year)
ROTATION OF AUDITOR:
No Company which is
 Listed
 unlisted public companies having paid up share capital of Rs. 10 crores or more OR
borrowings having public borrowings from financial institutions, banks or public
deposits of Rs. 50 crores or more
 private limited companies having paid up share capital of Rs. 20 Rs. 50 crores or more
OR having public borrowings from financial institutions, banks or public deposits of Rs.
50 crores or more
RECENT AMENDMENTS: PUC 20 crores has now been increased to Rs. 50 crores
from June 2017.
 shall appoint or re-appoint an individual as auditor for more than one term of five
consecutive years
 an audit firm as auditor for more than two terms of five consecutive years
COOLING PERIOD:
(i) an individual auditor who has completed his term shall not be eligible for re-appointment
as auditor in the same company for five years from the completion of his term;
(ii) an audit firm which has completed its term shall not be eligible for re-appointment as
auditor in the same company for five years from the completion of such term:
On the date of appointment no audit firm having a common partner or partners to the other audit
firm, whose tenure has expired in a company immediately preceding the financial year, shall be
appointed as auditor of the same company for a period of five years:
INTERPRETATION:
RULE 6 says: If a partner who is in charge of the firm AND ALSO CERTIFIES THE FINANCIAL
STATEMENTS of a company retires from the old firm (outgoing firm) and joins new firm. Then
new firm is disqualified. If he is not signing partner, then they can appoint the new firm.
CAN THE MEMBERS DECIDE ROTATION OF PARTNERS INSIDE FIRM
Powers of General meeting
Members of a company may resolve to provide that—

(iii) in the audit firm appointed by it, the auditing partner and his team shall be rotated at such
intervals as may be resolved by members; or
(iv) the audit shall be conducted by more than one auditor.
APPOINTMENT OF SUBSEQUENT AUDITOR OF GOVERNMENT COMPANY
In the case of a Government company or any other company owned or controlled, directly or
indirectly, by the Central Government, or by any State Government or Governments, or partly by the
Central Government and partly by one or more State Governments, the Comptroller and Auditor-
General of India shall, in respect of a financial year, appoint an auditor duly qualified to be
appointed as an auditor of companies under this Act, within a period of one hundred and eighty
days from the commencement of the financial year, who shall hold office till the conclusion of
the annual general meeting.
APPOINTMENT OF FIRST AUDITOR OF NON GOVERNMENT COMPANIES
The first auditor of a company, other than a Government company, shall be appointed by the
Board of Directors within thirty days (MD alone cannot appoint) from the date of registration of
the company and
in the case of failure of the Board to appoint such auditor, it shall inform the members of the
company, who shall within ninety days (FROM INCORPORATION) at an extraordinary general
meeting appoint such auditor and
Tenure: such auditor shall hold office till the conclusion of the first annual general meeting.
FIRST AUDITOR OF GOVERNMENT COMPANIES
shall be appointed by the Comptroller and Auditor-General of India within sixty days from the date
of registration of the company and
in case the Comptroller and Auditor-General of India does not appoint such auditor within the said
period, the Board of Directors of the company shall appoint such auditor within the next thirty
days;
and in the case of failure of the Board to appoint such auditor within the next thirty days, it shall
inform the members of the company who shall appoint such auditor within the sixty days at an
extraordinary general meeting,
Interpretation: First 60 days – C & AG Shall appoint – Next 30 days Board shall appoint – after
failure – they have to intimate shareholders and within 60 days from the last date of CAG failure
– Shareholder shall appoint - so if the board intimated shareholder on say – 40th day – they have
only 20 more days.
Tenure: who shall hold office till the conclusion of the first annual general meeting.
HOW TO FILL THE CASUAL VACANCY OF AUDITORS

Any casual vacancy in the office of an auditor shall—
 in the case of non – governmental company and the vacancy caused other than by
resignation, be filled by the Board of Directors within thirty days,
 but if such casual vacancy is as a result of the resignation of an auditor, such appointment
shall also be approved by the company at a general meeting convened within three
months of the recommendation of the Board and he shall hold the office till the conclusion
of the next annual general meeting;
 in the case of a government C& AG have to fill within thirty days:
 If Comptroller and Auditor-General of India does not fill the vacancy within the said
period, the Board of Directors shall fill the vacancy within next thirty days.
A retiring auditor may be re-appointed at an annual general meeting, if—
 he is not disqualified for re-appointment;
 he has not given the company a notice in writing of his unwillingness to be re-
appointed; and
 a special resolution has not been passed at that meeting appointing some other
auditor or providing expressly that he shall not be re-appointed.
AUTOMATIC RE APPOINTMENT
Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor
shall continue to be the auditor of the company. [But for that the auditor shall be eligible for
reappointment i.e in case of firm, they will be having further 5 years] (technically, AGM will conclude
only after the 4 ordinary course of business concluded. If the auditor has not got appointed or re
appointed – the AGM does not technically end. The tenure of the auditor as per provision of
companies act is upto the conclusion of 6th AGM. Hence this also support that there will not be
situation where no auditor)
140. REMOVAL, RESIGNATION OF AUDITOR AND GIVING OF

SPECIAL NOTICE
This section consists of 3 things – Removal of auditor, resignation – appointing new auditor (other
than retiring auditor who is eligible for re appointment)
PROCEDURE FOR REMOVAL
 The auditor appointed under section 139 may be removed from his office before the expiry
of his term only by a special resolution of the company, after obtaining the previous
approval of the Central Government (Regional Director)
 Form ADT 2 to be submitted to ROC within 30 days of passing board resolution.
 After obtaining CG consent, the company shall hold the general meeting within sixty days
of receipt of approval of the Central Government for passing the special resolution
 The auditor concerned shall be given a reasonable opportunity of being heard
PROCEDURE FOR RESIGNATION

The auditor who has resigned from the company shall file within a period of thirty days from the
date of resignation, a statement in Form ADT 3 with the company and the Registrar, and
in case of government companies, the auditor shall also file such statement with the Comptroller
and Auditor-General of India, indicating the reasons and other facts as may be relevant with
regard to his resignation.
Contravention: he or it shall be punishable with fine which shall not be less than Rs. 50 thousand
but which may extend to Rs. 5 lakhs.
AFTER COMPANIES AMENDMENT ACT, 2017:
Contravention: he or it shall be punishable with fine which shall not be less than Rs. 50 thousand or
remuneration of auditor which ever is less but which may extend to Rs. 5 lakhs.
APPOINTING OTHER PERSON IN THE PLACE OF RETIRING AUDITOR

Special notice shall be required for a resolution at an annual general meeting appointing as auditor
a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-
appointed, except where the retiring auditor has completed a consecutive tenure of five years in the
case of individual or, ten years in the case of firm.
On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the
retiring auditor.
OPPORTUNITY OF BEING HEARD
Where the retiring auditor makes with respect thereto representation in writing to the company,
The company shall, unless the representation is received by it too late for it to do so,—
 in any notice of the resolution given to members of the company, state the fact of the
representation having been made; and
 send a copy of the representation to every member of the company to whom notice of
the meeting is sent, whether before or after the receipt of the representation by the
company,
and if a copy of the representation is not sent as aforesaid because it was received too late or because
of the company’s default, the auditor may (without prejudice to his right to be heard orally) require
that the representation shall be read out at the meeting:
If a copy of representation is not sent as aforesaid, a copy thereof shall be filed with the Registrar:
 If the NCLT is satisfied on an application either of the company or of any other aggrieved
person that the rights conferred by this sub-section are being abused by the auditor,
then, the copy of the representation may not be sent and the representation need not
be read out at the meeting.
 The Tribunal either suo motu or on an application made to it by the Central Government or
by any person concerned, if it is satisfied that the auditor acted in a fraudulent manner
or colluded in any fraud by, or in relation to, the company or its directors or officers, it may,
by order, direct the company to change its auditors:
 if the application is made by the Central Government and the Tribunal is satisfied that any
change of the auditor is required, it shall within fifteen days of receipt of such application,
make an order that he shall not function as an auditor and the Central Government may
appoint another auditor in his place:
 Provided further that an auditor, whether individual or firm, against whom final order has
been passed by the Tribunal under this section shall not be eligible to be appointed as an
auditor of any company for a period of five years from the date of passing of the order and the
auditor shall also be liable for action under section 447.
141. ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF

AUDITORS
 A person shall be eligible for appointment as an auditor of a company only if he is a
chartered accountant:
 In case of firm where majority of partners practicing in India are qualified for appointment
as aforesaid may be appointed by its firm name to be auditor of a company.
 firm including a limited liability partnership can be appointed as an auditor of a company,
 But only the partners who are chartered accountants shall be authorised to act and sign
on behalf of the firm.
The following persons shall not be eligible for appointment as an auditor of a company,
namely:—
a) a body corporate other than a limited liability partnership registered under the Limited
Liability Partnership Act, 2008; (Foreign LLP – not possible)
b) an officer or employee of the company;
c) a person who is a partner, or who is in the employment, of an officer or employee of the
company;
d) a person who, or his relative or partner—
i. Is holding any security (even single rupee) of or interest in the company or its
subsidiary, or of its holding or associate company or a subsidiary of such holding
company:
ii. Relatives (in aggregate) may hold security or interest in the company of face value not
exceeding Rs. 1 lakh. (That too they are allowed to hold only in the company in which
his relative is appointed as auditor and not in holding or subsidiary)
iii. in the event of acquiring any security or interest by a relative, above the threshold
prescribed, the corrective action to maintain the limits as specified above shall be
taken by the auditor within sixty days of such acquisition or interest. (Only one time
it is allowed i.e at the time of appointment. They cannot keep on buying and selling
within 60 days)
iv. is indebted to the company or its subsidiary or its holding or associate company or
a subsidiary of such holding company, in excess of Rs. 5 lakhs shall not be eligible
for appointment. (Even one rupee more than Rs. 5 Lakhs amount to disqualification
even it is happened in the ordinary course of business.)
v. a person who or whose relative or partner has given a guarantee or provided any
security (in aggregate) in connection with the indebtedness of any third person to
the company, or its subsidiary, or its holding or associate company or a subsidiary
of such holding company, in excess of Rs. 1 lakh shall not be eligible for
appointment;
e) a person or a firm who, whether directly or indirectly, has business relationship with the
company, or its subsidiary, or its holding or associate company or subsidiary of such holding
company or associate company;
Exceptions:
 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;
 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.
f) a person whose relative is a director or is in the employment of the company as a director or

key managerial personnel;
g) a person who is in full time employment elsewhere or a person or a partner of a firm holding
appointment as its auditor, if such persons or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than twenty companies;
(FOR COUNTING CEILING LIMIT OF 20 COMPANIES DO NOT CONSIDER - ONE
PERSON COMPANY, DORMANT COMPANY, SMALL COMPANY AND PRIVATE
COMPANY HAVING PAID UP CAPITAL LESS THAN RS. 100 CRORES – FROM
05.06.2015) – (Provided there were no default in filing financial statement or Annual
returns 13.06.2017)
h) a person who has been convicted by a court of an offence involving fraud and a period of
ten years has not elapsed from the date of such conviction;
i) any person whose subsidiary or associate company or any other form of entity, is engaged
as on the date of appointment in consulting and specialized services as provided in section
144. After Amendment Act 2017 a person who directly or indirectly renders any service
referred to in section 144 to the company or its holding/ subsidiary company
Where a person appointed as an auditor of a company incurs any of the disqualifications
mentioned in sub-section (3) after his appointment, he shall vacate his office as such auditor and
such vacation shall be deemed to be a casual vacancy in the office of the auditor
142. REMUNERATION OF AUDITORS

WHO WILL FIX REMUNERATION & WHAT IT INCLUDES
The remuneration of the auditor of a company shall be fixed in its general meeting or in such
manner as may be determined therein:
The Board may fix remuneration of the first auditor appointed by it.
The remuneration shall, in addition to the fee payable to an auditor, include the expenses, if any,
incurred by the auditor in connection with the audit of the company 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
143. POWERS AND DUTIES OF AUDITORS AND AUDITING

STANDARDS
(1) Every auditor of a company shall have a right of access at all times to the books of account and
vouchers of the company, whether kept at the registered office of the company or at any other
place and shall be entitled to require from the officers of the company such information and
explanation
Inquire into the following matters, namely:—
(a) 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;
(b) whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company;
(c) where the company not being an investment company or a banking company, whether so
much of the assets of the company as consist of shares, debentures and other securities have
been sold at a price less than that at which they were purchased by the company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) 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:
Amendment act 2017
The auditor of a holding company shall also have the right of access to the records of all its
subsidiaries and associates in so far as it relates to the consolidation of its financial statements with
that of its subsidiaries and associates.
(2) The auditor shall make a report to the members of the company and to the best of his
information and knowledge, the said 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.
(3) The auditor’s report shall also state—
(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 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 and profit and loss account 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 with reference
to financial stamens (Amendment Act 2017) in place and the operating effectiveness
of such controls (14.10.2014);
Note: The auditors of the following companies are not required to report about the Internal
Financial Controls w.e.f. 13th June 2017 [i.e. any report issued after that and would include
audit reports issued for year ended 31.3.2017 if issued after 13.6.17]
 One person Company
 Small Company
 Private Companies which have turnover less than Rs. 50 crores as per latest
audited financial statement AND which has aggregate borrowings from banks
or financial institutions or any body corporate at any point of time during the
financial year less than rupees Rs. 25 crores.
This exemption is applicable only if the company has filed financial statement and annual
returns. 13.06.2017
(j) whether the company has disclosed the impact, if any, of pending litigations on its
financial position in its financial statement;
(k) 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;
(l) whether there has been any delay in transferring amounts, required to be transferred,
to the Investor Education and Protection Fund by the company
(4) In the audit report under this section is answered in the negative or with a qualification, the
report shall state the reasons therefor.
(5) In the case of a Government company, the Comptroller and Auditor-General of India shall
appoint the auditor and direct such auditor the manner in which the accounts of the Government
company are required to be audited (Directions and Sub directions) and thereupon the auditor so
appointed shall submit a copy of the audit report to the Comptroller and Auditor-General of India
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.
(6) The Comptroller and Auditor-General of India shall within sixty days from the date of receipt
of the audit report under sub-section (5) have a right to,—
(a) conduct a supplementary audit of the financial statement of the company by such person
or persons as he may authorise in this behalf; and for the purposes of such audit, require
information or additional information to be furnished to any person or persons, so
authorised, on such matters, by such person or persons, and in such form, as the
Comptroller and Auditor-General of India may direct; and
(b) comment upon or supplement such audit report:
Comments given by the Comptroller and Auditor-General of India upon, or supplement to, the
audit report shall be sent by the company to every person entitled to copies of audited financial
statements U/s. 136 and also be placed before the annual general meeting of the company at the
same time and in the same manner as the audit report.
(7) the Comptroller and Auditor- General of India may, if he considers necessary can order for test
audit to be conducted
(8) Where a company has a branch office, the accounts of that office shall be audited either by the
auditor appointed for the company (herein referred to as the company’s auditor) under this Act or
by any other person qualified for appointment as an auditor of the company under this Act and
appointed as such under section 139, or where the branch office is situated in a country outside
India, the accounts of the branch office shall be audited either by the company’s auditor or by an
accountant or by any other person duly qualified to act as an auditor of the accounts of the branch
office in accordance with the laws of that country and the duties and powers of the company’s
auditor with reference to the audit of the branch and the branch auditor,
Provided that the branch auditor shall prepare a report on the accounts of the branch examined
by him and send it to the auditor of the company who shall deal with it in his report in such manner
as he considers necessary.
(9) Every auditor shall comply with the auditing standards.
(10) He shall comply with the standards of auditing as recommended by the Institute of Chartered
Accountants of India, in consultation with and after examination of the recommendations made
by the National Financial Reporting Authority:
Provided that until any auditing standards are notified, any standard or standards of auditing
specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing
standards
(11) The Central Government may, in consultation with the National Financial Reporting
Authority, by general or special order, direct, in respect of such class or description of companies,
as may be specified in the order, that the auditor’s report shall also include a statement on such
matters as may be specified therein. (CARO, 2016)
(12) If an 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, he shall immediately report the matter to the Central
Government if the amount of fraud is Rs. 1 Crore or more (immaterial fraud need not be reported
to C.G) not later than sixty days of his knowledge and after following the procedure indicated
herein below:
a. auditor shall forward his report relating to fraud to the Board or the Audit Committee, as
the case may be, immediately (not later than 2 days after noticing fraud) after he comes to
knowledge 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 or the Audit Committee along with his comments (on such
reply or observations of the Board or the Audit Committee) to the Central Government
within fifteen days of receipt of such reply or observations;
c. 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 along with a note containing the details of his report that was
earlier forwarded to the Board or the 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 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 provision 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.
If the fraud does not crossed Rs. 1 crore the auditor has to report to audit committee U/s.
177 (if any), or to the board. And the explanation to this has to be disclosed in boards
report u/s. 134.
(13) No duty to which an auditor of a company may be subject to shall be regarded as having been
contravened by reason of his reporting the matter referred to in sub-section (12) if it is done in good
faith.
(14) The provisions of this section shall mutatis mutandis apply to—
a) the cost accountant in practice (Amendment Act 2017) conducting cost audit under
section 148; or
b) the company secretary in practice conducting secretarial audit under section
204
c) If any auditor, cost accountant or company secretary in practice do not comply with
the provisions of sub-section (12), he shall be punishable with fine which shall not be
less than Rs. 1 lakhs but which may extend to Rs. 25 lakhs.
144. AUDITOR NOT TO RENDER CERTAIN SERVICES

An auditor appointed under this Act shall provide to the company only such other services as are
approved by the Board of Directors or the audit committee, as the case may be, but which shall not
include any of the following services (whether such services are rendered directly or indirectly to the
company or its holding company or subsidiary company, namely
(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; and
(i) any other kind of services as may be prescribed:
AIR – MAID (Mnemonic)
Transitional Provision:
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.
Provision includes:
 in case of auditor being an individual, either himself or through his relative or any other
person connected or associated with such individual or through any other entity,
whatsoever, in which such individual has significant influence or control, or whose name
or trade mark or brand is used by such individual;
 in case of auditor being a firm, either itself or through any of its partners or through its
parent, subsidiary or associate entity or through 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
145. AUDITOR TO SIGN AUDIT REPORTS, ETC

The person appointed as an auditor of the company shall sign the auditor’s report or sign or certify
any other document of the company in accordance with the provisions of sub-section (2) of section
141, and 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
146. AUDITORS TO ATTEND GENERAL MEETING
All notices of, and other communications relating to, any general meeting shall be forwarded to the
auditor of the company, and the auditor shall, unless otherwise exempted by the company, attend
either by himself or through his authorised representative, who shall also be qualified to be an
auditor, any general meeting and shall have right to be heard at such meeting on any part of the
business which concerns him as the auditor.
What is “unless exempted by the company”: In GM the members have to accept / AOA has to permitin
this regard.
147. PUNISHMENT FOR CONTRAVENTION

CIVIL LIABILITY
If any of the provisions of sections 139 to 145 (both inclusive) is contravened,
the company shall be punishable
with fine which shall not be less than Rs. 25 thousand but which may extend to Rs. 5 Lakhs and
every officer of the company who is in default shall be punishable

with imprisonment for a term which may extend to one year or with fine which shall not be less
than Rs. 10 thousand but which may extend to Rs. 1 lakh, or with both.
If an auditor of a company contravenes any of the provisions of section 139, section 143, section
144 or section 145, the auditor shall be punishable. (146 – is specifically excluded)
with fine which shall not be less than Rs. 25 thousand but which may extend to Rs. 5 lakhs:
After companies Amendment Act 2017

with fine which shall not be less than Rs. 25 thousand but which may extend to Rs. 5 lakhs OR
FOUR TIMES THE REMUNERATION OF THE AUDITOR, WHICH EVER IS LESS
If an auditor has contravened such provisions knowingly or willfully with the intention to deceive
the company or its shareholders or creditors or 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
Rs.1 lakh but which may extend to Rs. 25 lakh.
After companies Amendment Act 2017

with fine which shall not be less than Rs. 50 thousand but which may extend to Rs. 25 lakhs or
EIGHT TIMES THE REMUNERATION OF THE AUDITOR, WHICH EVER IS LESS
Where an auditor has been convicted he shall be liable to—
(i) refund the remuneration received by him to the company; and
(ii) pay for damages to the company, statutory bodies or authorities or to any other
persons for loss arising out of incorrect or misleading statements of particulars made
in his audit report.
The Central Government shall, specify any statutory body or authority or an officer for ensuring
prompt payment of damages to the company or the persons such body, authority or officer shall
after payment of damages to such company or persons file a report with the Central Government
in respect of making such damages in such manner as may be specified in the said notification.
FOR CRIMINAL LIABILITY:
Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner
or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in
any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether
civil or criminal as provided in this Act or in any other law for the time being in force, for such act
shall be of the partner or partners concerned / COLLUDED of the audit firm and of the firm jointly and
severally.
After Amendment Act 2017
For imprisonment i.e other than fine – only the partner concerned is liable.
148. COST AUDIT TO BE CONDUCTED BY COST ACCOUNTANT – COST

AUDIT RULES.
Cost Audit –
Regulatory Sectors: DOTES Non Regulatory Sectors: MTS

Telecommunication Machinery used in Defence, Space, Atomic
research
Electricity Turbo jets
Oil & Gas Tyres & Tubes
Drugs & Pharma Steel & Cement
Sugar & Industrial Alcohol, fertilizers Medical Devices
Cost Audit: Cost Audit:
If T.O - Rs. 50 Crores or more in overall If T.O Rs.100 Crores or more in overall
products AND Rs. 25 crores individual products AND Rs. 35 crores individual
product. product.
Keep Cost Records:
If T.O. Rs. 35 crores or more
Board should appoint cost auditor within 180 days from the commencement of the Financial year.
After appointment within 30 days intimate C.G in form CRA – 2. He shall submit report in CRA 3
to board within 180 days from the conclusion of the F.Y. and within 30 days of getting the report
board of directors has to forward it to C.G.
Exception:
 For companies which gets 75% of revenue from Exports
 Companies operate in SEZ
 Company engaged in generation of electricity for captive consumption through captive
generation plant.
The tenure of cost auditor will be 180 days from the close of financial year or till he submits the
report for the financial year for which he was appointed.
TEST YOUR KNOWLEDGE

1 Procedure for appointment of First auditors? If not appointed by the board?
2 Resignation of auditor- What should the board do?
Government institution holding 30% share capital in a company. Is there any need to
3
pass Special resolution in appointing auditor?
4 Auditor resigned. Procedure for auditor and the company.
Wife of auditor held shares worth Rs. 1 lakhs in the company. Can the auditor continue
5
to be the auditor?
6 Procedure for removal of first auditor.
7 Is there any exclusion for counting Ceiling Limit for audit assignments?
A firm having 2 partners holding 41 Private company audit with paid up capital all less
8
than Rs. 5 lakhs. Can they get appointment in another private limited company.
The management overstated the inventories and auditor cannot able to find even after
9
applying the audit procedures.
Auditor denies signing the report before being approved by the board even after
10
conducting the audit.
Security held by relative of an auditor for a value of more than Rs.200,000, Is there any
11
violation?
12 Ceiling limit for auditors
13 What is termed as Business relationship. What are their exclusions?
Can a firm be appointed as auditor where it has a common partner with earlier audit
14
firm
15 Prohibited services of auditors
16 Penalty for providing prohibited service for auditors
17 Can the board of directors of government company appoint first auditor?
18 Father In law is director want to appoint daughter in law as auditor
19 Exempted companies from cost audit
Contents of audit report and in case if you find fraud how as an auditor you will be
20
dealing with?
21 Appointment of First auditor for public company, Government company.
22 MD of a company wants to appoint Mr. J who is his close friend as auditor.
A firm got appointed as auditor. One of the partner of the firm is working as company
23
secretary of the company. Are they qualified?
24 A auditor is of unsound mind. But holding COP. Can we appoint him as auditor?
A private limited company having Turn over Rs. 200 crores. Whether Audit committee
25
has to recommend Auditors?
26 A company having borrowings Rs. 51 crores. Whether rotation of auditor mandatory.
27 Whether rotation of auditors applicable to small company?
28 A private company having borrowings Rs. 50 crores. Whether rotation is mandatory?
29 Can a board appoint a firm of auditor for continuous period of 10 years
30 Can a company request rotation of partners of a same audit firm?
A firm got re constituted – because of admission/ retirement of partner. Does it amount

31
to dissolution of firm? Even if the name of the firm change?
Firm having 2 partners. Having 36 public company audit. Got 7 private company audit.
32
One of them having PUC 150 crores.
One CA having indebted to a company Rs. 10 lakhs. Knowing that he may be appointed
33
as auditor he settled his dues. Then later he got appointed as auditor. Is it valid?
Fortis Hospital Ltd appointed CA Vasu as auditor. He suffered heart attack and
34
admitted in hospital Rs. 6 lakhs bill came. Which they settled after a week time.
35 Auditor appointed but he refused to appoint.
BOD restricted auditor to attend GM saying only in the GM where adoption of accounts,
36
they have to invite auditor.
Three branches in a company. One of it contributes only less than 2% of total T.O of the
37
company. Is that branch needs to be audited.
38 In AGM BOD/ shareholders not filled the vacancy of Auditor who is liable to retire.
39 Auditor resigned. How to fill vacancy. Also advice in case auditor is removed.
Stock were overstated. Auditor have not seen perfectly. Company paid dividend from
40
capital. Auditors sued.
41 5 points to be stated in Audit report
Mr. D, practising CA is indebted to V ltd Rs. 2 lakhs engaged in telecom service. Mr. D is
42 also indebted to A ltd Rs. 3 lakhs, hospital. His wife is indebted to A ltd Rs. 3 Lakhs,
which is subsidiary of V ltd. Mr. D is proposed to get appointed in V ltd and A ltd.
A ltd, a subsidiary of government company where CAG appointed a firm of CA as

43 auditor. Is the appointment valid? Who can appoint first and subsequent auditor? Who
is next authorities if they failed?
ANSWER TO QUESTIONS
1. Section 139.
The board shall appoint the auditors incase of non government company. If the board does
not appoint then the members shall appoint within 90 days from incorporation.
In case of government company C&AG shall appoint within sixty days from date of
registration. In case of failure board shall appoint within next 30 days. If the board also does
not appoint members shall appoint within 60 days of C&AG failure.
2. Section 140. Board shall appoint new auditor within 30 days and such appointment shall
be ratified in an EGM within 3 months.
3. No
4. Section 140.The auditor has to file form ADT-3. Board shall appoint new auditor within
30 days and such appointment shall be ratified in an EGM within 3 months.
5. Since the face value of securities held does not exceed 1 lakh rupees the auditor would not
attract disqualifications under Section 141(3). Therefore he can continue as an auditor.
6. Procedure for removal of first auditor:
 Board resolution
 File ADT-2 to CG within 30 days
 Within 60 days of CG approval conduct EGM
 Pass special resolution and remove auditor.
7. Yes. Section 141(3)(g). One person company, dormant company, and small company and
private company having paid up capital less than 100 crores shall be excluded for purposes
of ceiling limit.
8. yes
9. As per KINGSTON COTTON MILLS CASE auditor is only a watch dog and not a blood
hound and therefore he cannot be held liable in this case.
10. The board has to sign first then the auditor shall sign.
11. Assuming it is face value disqualification under Section 141(3) is attracted.
12. Section 141(3)(g). 20 companies excluding One person company, dormant company, and
small company and private company having paid up capital less than 100 crores shall be
excluded for purposes of ceiling limit
13. Arms length pricing. Exclusions include:
 Electricity
 Travel
 Any other transaction in ordinary course of business
14. No
15. Section 144.
 Accounting and book keeping services
 Internal audit
 Design and implementation of any financial information system
 Actuarial services
 Investment advisory services
 Investment banking services
 Management services
16. Section 147. Rupees 25000 to 500000 fine. Surrender fees. In case of criminal liability one
year imprisonment.
17. Yes provided C&AG failed to appoint within 60 days of incorporation.
18. She is a relative and hence disqualified under Section 141(3).
19. companies operating in special economic zones, captive consumption of electricity and
companies whose 75% turnover is from exports.
20. Section 143(12)
21. Refer answer 1
22. MD alone cannot appoint only BOD can appoint.
23. CS is a key managerial person and hence disqualification under Section 141(3) is
attracted.
24. No
25. Section 177 is not applicable to a private company.
26. Yes
27. No
28. Yes
29. No and individual can be appointed as an auditor for a maximum period of 5 years.
30. Yes
31. No
33. Yes
34. This is an exception to disqualifications.
35. It amounts to resignation.
36. He has right to attend all GM.
37. Yes all branches should be audited irrespective of their turnover.
38. Existing auditor will continue till new auditor is appointed.
39. Refer answer 4
40. Auditors are guilty of professional misconduct.
41. Opinion paragraph, emphasis of matter paragraph
43. Yes the appointment is valid.
SA 700 “Forming an Opinion and Reporting on Financial
Statements”
The basic elements of the Auditor’s Report
o Title;
o Addressee;
o Introductory (Opening) Paragraph
o Management’s Responsibility for the Financial Statements.
o Auditor’s Responsibility
o Auditor’s Opinion
o Other Reporting Responsibilities
o Signature of the Auditor
o Date of Auditor’s Report.
o Place of signature
(a) Opening Paragraph: the introductory paragraph in the auditor’s report shall:
o Identify the entity like XYZ Ltd

o State that the financial statements have been audited;
o Specify the date or period covered by each financial statement comprising the financial
statements.
o Refer to the summary of significant accounting policies and other explanatory
information
(b) A description of the responsibility of management (or other appropriate term) for the
preparation of the financial statements;
(c) A description of the auditor’s responsibility to express an opinion on the financial

statements and the scope of the audit, that includes:
 The significance of ‘scope paragraph’ is to inform the users about the practices and
procedures followed in conduct of audit by the auditor.
 The auditor states in this paragraph that the audit was planned and performed in
accordance with generally auditing standards generally accepted in India.
 The significance of this paragraph lies in the fact that auditor wishes to convey to
readers about the scope of audit by highlighting the nature and process of audit.
 The test check approach of audit adopted by the auditor in performing his work as
also the significant aspect of evaluation of accounting principles and accounting
estimates is also clarified. The basic objective of auditing that the auditor provides only
“reasonable assurance” is emphasised Signifies inherent limitations of audit.
 It is a description of the auditor’s responsibility to express an opinion on the financial
statements and the scope of the audit, that includes:
 A reference to Standards on Auditing and the law or regulation; and
 A description of an audit in accordance with those Standards.
 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, but not for the
purpose of expressing an opinion on the effectiveness of the entity’s internal control.
 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
(d) An opinion paragraph containing an expression of opinion on the financial statements

and a reference to the applicable financial reporting framework used to prepare the financial
statements (including identifying the jurisdiction of origin of the financial reporting
framework);
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:
 in the case of the Balance Sheet, of the state of affairs of the Company as at March 31,
20XX;
 in the case of the Profit and Loss Account, of the profit/ loss for the year ended on that
date; and
 in the case of the Cash Flow Statement, of the cash flows for the year ended on that
date
Report on Other Legal and Regulatory Requirements As required by the Companies

(Auditor’s Report) Order, 2016 (“the Order”) issued by the Central Government of India in
terms section 143 (11) of the Act, we give in the Annexure a statement on the matters specified
in paragraphs 3 and 4 of the Order As required by section 143 (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, Cash Flow Statement and statement of
changes in equity dealt with by this Report are in agreement with the books of account
d. In our opinion, the aforesaid financial statements comply with the Indian Accounting
Standards prescribed under Section 133 of the Act, read with relevant rules issued thereunder;
(e) On the basis of the written representations received from the Directors as on
31 March 20XX and taken on record by the Board of Directors, none of the Directors are
disqualified as on 31 March 20XX from being appointed as a Director in terms of subsection 2
of Section 164 of the Act;
(f) With respect to the adequacy of the internal financial controls over financial reporting of
the Company and the operating effectiveness of such controls, refer to our separate report in
“Annexure B” and
(g) With respect to the other matters to be included in the Auditor’s Report in accordance with
Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of
our information and according to the explanations given to us:
1. The Company has disclosed the impact of pending litigations on its financial position in its
financial statements – Refer Note XX to the financial statements;
2. The Company has made provision, as required under the applicable law or accounting
standards, for material foreseeable losses, if any, on long-term contracts including derivative
contracts – Refer Note XX to the financial statements;
3. There has been no delay in transferring amounts, required to be transferred, to the Investor
Education and Protection Fund by the Company; and
4. The Company has provided requisite disclosures in the standalone financial statements as
to holdings as well as dealings in Specified Bank Notes during the period from 8 November
2016 to 30 December 2016. Based on audit procedures and relying on the management
representation, we report that the disclosures are in accordance with books of account
maintained by the Company and as produced to us by the Management – Refer Note XX to
the financial statements
(f) The auditor’s signature;
(g) The date of the auditor’s report; and
(h) The place of signature.
Auditor’s Report for Audits Conducted in Accordance with Both Auditing Standards issued
by the Institute of Chartered Accountants of India and International Standards on Auditing.
AUDIT REPORT FORMAT FOR YEAR ENDING 31.03.2019
INDEPENDENT AUDITOR’S REPORT
To the Members of ABC Company Limited
Report on the Audit of the Standalone Financial Statements1
Opinion
We have audited the standalone financial statements of ABC Company Limited (“the
Company”), which comprise the balance sheet as at 31st March 20XX, and the statement of
Profit and Loss, (statement of changes in equity) and statement of cash flows for the year then
ended, and notes to the financial statements, including a summary of significant accounting
policies and other explanatory information [in which are included the Returns for the year
ended on that date audited by the branch auditors of the Company’s branches located at
(location of branches)]
us, the aforesaid standalone 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, of the state of affairs of the Company as at March 31,
20XX, and profit/loss, (changes in equity) and its cash flows for the year ended on that date.
Basis for Opinion
We conducted our audit in accordance with the Standards on Auditing (SAs) specified under
section 143(10) of the Companies Act, 2013. Our responsibilities under those Standards are
further described in the Auditor’s Responsibilities for the Audit of the Financial Statements
section of our report. We are independent of the Company in accordance with the Code of
Ethics issued by the Institute of Chartered Accountants of India together with the ethical
requirements that are relevant to our audit of the financial statements under the provisions of
the Companies Act, 2013 and the Rules thereunder, and we have fulfilled our other ethical
responsibilities in accordance with these requirements and the Code of Ethics. We believe that
the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these matters.
[Description of each key audit matter in accordance with SA 701.]
Management’s Responsibility for the Standalone Financial Statements
The Company’s Board of Directors is responsible for the matters stated in section 134(5) of the
Companies Act, 2013 (“the Act”) with respect to the preparation of these standalone financial
statements that give a true and fair view of the financial position, financial performance,
(changes in equity)5 and cash flows of the Company in accordance with the accounting
principles generally accepted in India, including the accounting Standards specified under
section 133 of the Act. This responsibility also includes maintenance of adequate accounting
records in accordance with the provisions of the Act for safeguarding of the assets of the
Company and for preventing and detecting frauds and other irregularities; selection and
application of appropriate implementation and maintenance of accounting policies; making
judgments and estimates that are reasonable and prudent; and design, implementation and
maintenance of adequate internal financial controls, that were operating effectively for
ensuring the accuracy and completeness of the accounting records, relevant to the preparation
and presentation of the financial statement that give a true and fair view and are free from
material misstatement, whether due to fraud or error. In preparing the financial statements,
management is responsible for assessing the Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless management either intends to liquidate the Company or
to cease operations, or has no realistic alternative but to do so.
Those Board of Directors are also responsible for overseeing the Company’s financial
reporting process.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with SAs will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these financial statements.
Other Matter
We did not audit the financial statements/ information of ………………. (number) branches
included in the stand alone financial statements of the Company whose financial
statements/financial information reflect total assets of Rs. ……………….. as at 31st March
20XX and the total revenue of Rs. ………………. for the year ended on that date, as considered
in the standalone financial statements/information of these branches have been audited by the
branch auditors whose reports have been furnished to us, and our opinion in so far as it relates
to the amounts and disclosures included in respect of branches, is based solely on the report
of such branch auditors.
Our opinion is not modified in respect of these matters. Report on Other Legal and Regulatory
Requirements As required by the Companies (Auditor’s Report) Order, 2016 (“the Order”),
issued by the Central Government of India in terms of sub-section (11) of section 143 of the
Companies Act, 2013, we give in the Annexure a statement on the matters specified in
paragraphs 3 and 4 of the Order, to the extent applicable.
As required by Section 143(3) of the Act, we report that:
(a) We have sought and obtained all the information and explanations which to the best of
our knowledge and belief were necessary for the purposes of our audit.
(b) In our opinion, proper books of account as required by law have been kept by the
Company so far as it appears from our examination of those books [and proper returns
adequate for the purposes of our audit have been received from the branches not visited by
us.]
(c) [The reports on the accounts of the branch offices of the Company audited under Section
143(8) of the Act by branch auditors have been sent to us and have been properly dealt with
by us in preparing this report.]
(d) The Balance Sheet, the Statement of Profit and Loss, and the Cash Flow Statement dealt
with by this Report are in agreement with the books of account [and with the returns received
from the branches not visited by us].
(e) In our opinion, the aforesaid standalone financial statements comply with the Accounting
Standards specified under Section 133 of the Act, read with Rule 7 of the Companies
(Accounts) Rules, 2014.
On the basis of the written representations received from the directors as on 31st March, 20XX
taken on record by the Board of Directors, none of the directors is disqualified as on 31st
March, 20XX from being appointed as a director in terms of Section 164 (2) of the Act.
(g) With respect to the adequacy of the internal financial controls over financial reporting of
the Company and the operating effectiveness of such controls, refer to our separate Report in
“Annexure A”.
(h) With respect to the other matters to be included in the Auditor’s Report in accordance with
Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of
our information and according to the explanations given to us:
i. The Company has disclosed the impact of pending litigations on its financial position in its
financial statements – Refer Note XX to the financial statements; [or the Company does not
have any pending litigations which would impact its financial position]
ii. The Company has made provision, as required under the applicable law or accounting
standards, for material foreseeable losses, if any, on long-term contracts including derivative
contracts – Refer Note XX to the financial statements; [or the Company did not have any long-
term contracts including derivative contracts for which there were any material foreseeable
losses.]
iii. There has been no delay in transferring amounts, required to be transferred, to the Investor
Education and Protection Fund by the Company {or, following are the instances of delay in
transferring amounts, required to be transferred, to the Investor Education and Protection
Fund by the Company or there were no amounts which were required to be transferred to the
Investor Education and Protection Fund by the Company}.
For XYZ & Co
Chartered Accountants
SA 705 “Modifications to the Opinion in the Independent
Auditor’s Report”
The auditor may modify the opinion in the auditor’s report in the following circumstances:
i. If the auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or
ii. If the auditor is unable to obtain sufficient appropriate audit evidence to conclude
that the financial statements as a whole are free from material misstatement.
iii. If financial statements prepared in accordance with the requirements of a fair
presentation framework do not achieve fair presentation,
Types of modifications possible to the said report are below-mentioned:
(i) Qualified Opinion:
a. The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to
the financial statements; or
b. The auditor is unable to obtain sufficient appropriate audit evidence on which to
base the opinion, but the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but not pervasive.
(ii) Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements, individually or
in the aggregate, are both material and pervasive to the financial statements.
(iii) Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is unable
to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor
concludes that the possible effects on the financial statements of undetected misstatements, if
any, could be both material and pervasive.
The features of a qualified report are-
(i) Clarity: The Auditor must express the nature of qualification, in a clear and unambiguous
manner.
(ii) Explanation: Where the Auditor answers any of the statutory affirmations in the negative
or with a qualification, his report shall state the reasons for such answer.
(iii) Placement: All qualifications should be contained in the Auditor’s Report. When there
are notes which are subject matter of a qualification, the same should preferably be annexed
to the Auditors’ Report. However a reference to the notes to Accounts in the Auditors’ Report
does not automatically become a qualification.
(iv) Except for: A quantified opinion should be expressed as “except for” for the effects of the
matter to which qualification related. It would not be appropriate to use phrases such as “with
the foregoing explanation” or “subject to” in the opinion paragraph as these are not
sufficiently clear or forceful.
(v) Quantification: It is also necessary that the auditor should quantify, wherever possible,
the effect of individual as well as the total effect of all qualifications on statement of profit and
loss and/or state of affairs these qualifications on the financial statements in a clear and
unambiguous manner. In circumstances where it is not possible to quantify the effect of the
qualifications accurately the auditor may do so on the estimates made by the management
after carrying out such audit tests as are possible and clearly indicate that the figures given
are based on the estimates of the management.
(vi) Nature of qualification: Vague statements the effect of which on accounts cannot be
ascertained like ‘the trade receivables balances are subject to confirmation’, ‘no provision for
taxation has been made in view of the loss during the year’ etc., should be avoided.
(vii) Violation of law: Where the company has committed an irregularity resulting in a breach
of law, the Auditor should bring the same to the notice of the shareholders by properly
qualifying his report.
(viii) Notes – Report Relationship – Where notes of a qualificatory nature appear in the
accounts, the Auditors should state all qualifications independently in their report so that the
user can assess the significance of these qualifications.
(ix) Draft Report: The auditor may discuss matters of qualification with the management or
those charged with governance of the company to acquire their views. It is not necessary that
the Auditor should accept the management’s view and modify his opinion. But it would
enable the Auditor to accurately draft the qualifications in his Final Report
Aspects to be Considered before Qualifying the Audit Report:
There may be certain circumstances when an auditor may not be able to express an
unqualified opinion,for example, there is a limitation on the scope of the auditor’s work or
there is a disagreement with management regarding the acceptability of the accounting
policies selected, the method of their application or the adequacy of financial statement
disclosures.
If the auditor shall express a qualified opinion -
A clear description of all the substantive reasons should be included in the report and, unless
impracticable, a quantification of the possible effect(s), individually and in aggregate, on the
financial statements should be mentioned in the auditor’s report. A qualified opinion should
be expressed as “except for” for the effects of the matter to which qualification related.
An illustrative Format of Qualified Audit Report:
SA 705 “Modifications to the Opinion in the Independent Auditor’s Report” states that there
may be circumstances when it is not practicable to quantify (material and pervasive) the
effect of modifications made in the audit report accurately. – In those situation give adverse
opinion – If it is quantifiable (material but not pervasive) – give qualified opinion.
ILLUSTRATION
Basis for Qualified Opinion
ABC Company Limited’s investment in XYZ Company, a foreign associate whose net worth
has been fully/substantially eroded, is carried at Rs. XXX in the Balance Sheet as at March 31,
20XX. We were unable to obtain sufficient appropriate audit evidence about the carrying
amount of ABC Company Limited’s investment in XYZ Company as at March 31, 20XX
because we were denied access to the financial information, management, and the auditors of
XYZ Company. Consequently, we were unable to determine whether any adjustments to
these amounts were necessary.
Qualified Opinion
us, except for the possible effects5 of the matter described in the Basis for Qualified Opinion
paragraph, the aforesaid standalone 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 of the state of affairs of the Company as at 31st March
20XX, and its profit/loss and its cash flows for the year ended on that date.
Adverse Opinion:
The auditor shall express an adverse opinion when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the aggregate,
are both material and pervasive to the financial statements.
Pervasive:
A term used, in the context of misstatements, to describe the effects on the financial statements
of misstatements or the possible effects on the financial statements of misstatements, if any,
that are undetected due to an inability to obtain sufficient appropriate audit evidence.
Pervasive effects on the financial statements are those that, in the auditor’s judgment:
(i) Are not confined to specific elements, accounts or items of the financial statements;
(ii) If so confined, represent or could represent a substantial proportion of the financial

statements; or
(iii) In relation to disclosures, are fundamental to users’ understanding of the financial

statements
EXAMPLE OF ADVERSE OPINION
Basis for Adverse Opinion
The Company’s financing arrangements expired and the amount outstanding was payable on
March 31, 20XX. The Company has been unable to re-negotiate or obtain replacement
financing and is considering filing for bankruptcy. These events indicate a material
uncertainty that may cast significant doubt on the Company’s ability to continue as a going
concern and, therefore, it may be unable to realise its assets and discharge its liabilities in the
normal course of business. The financial statements (and notes thereto) do not disclose this
fact.
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse
Opinion paragraph, the financial statements do not give the information required by the
Companies Act, 2013 in the manner so required and also do not give a true and fair view in
conformity with the accounting principles generally accepted in India of the state of affairs of
the Company as at 31st March, 20XX, and its profit/loss and its cash flows for the year ended
on that date.
What is Disclaimer of Opinion
As per SA 500 “Audit Evidence”, the auditor must collect sufficient and appropriate audit
evidence, on the basis of which he draws his conclusion to form an opinion, on the financial
statements. But, if the auditor fails to obtain sufficient information to form an overall opinion
on the matter contained in the financial statements, he issues a disclaimer of opinion.
The reasons due to which the auditor is not able to collect the audit evidence are:
(i) Scope of audit is restricted;

(ii) The auditor may not have access to the books of accounts, e.g.:-
i. Books of A/c’s of the company seized by IT authorities.
ii. Sometimes, inventory verifications at locations outside the city bound the scope of
duties of the auditor.
In such a case, the auditor must state in his audit report that-
“He is unable to express an opinion because he has not been able to obtain sufficient and
appropriate audit evidence to form an opinion
ILLUSTRATION
Basis for Disclaimer of Opinion
We were appointed as auditors of the Company after March 31, 20XX and thus could not
observe the counting of physical inventories at the beginning and end of the year.
Accordingly, we were unable to satisfy ourselves by alternative means concerning the
inventory quantities held at March 31, 20XX and March 31, 20XX which are stated in the
Balance Sheet at Rs. XXX and Rs. XXX, respectively.
In addition, the introduction of a new computerised accounts receivable system in September

20XX resulted in numerous errors in accounts receivable. As of the date of our audit report,
Management was still in the process of rectifying the system deficiencies and correcting the
errors. We were unable to confirm or verify by alternative means accounts receivable included
in the Balance Sheet at a total amount of Rs. XXX as at March 31, 20X1.
As a result of these matters, we were unable to determine whether any adjustments might
have been found necessary in respect of recorded or unrecorded inventories and accounts
receivable in the Balance Sheet, and the corresponding elements making up the Statement of
Profit and Loss and Cash Flow Statement.
Opinion
Because of the significance of the matters described in the Basis for Disclaimer of Opinion
paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide
a basis for an audit opinion. Accordingly, we do not express an opinion on the financial
statements.

SAMPLE Auditing Final

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CA FINAL- ADVANCED AUDITING – SAMPLE BOOK – COMPANY AUDIT, SA 700, SA

Sec. 138. Of Companies Act, 2013

139. APPOINTMENT OF AUDITORS

APPOINTMENT OF SUBSEQUENT AUDITORS FOR NON GOVERNMENT COMPANY

Every company shall, at the first annual general meeting, appoint

As per proposed Companies Amendment Act, 2017 – RATIFICATION IS OMITTED.

PRE REQUISITE FOR APPOINTMENT OF AUDITORS

CAN THE MEMBERS DECIDE ROTATION OF PARTNERS INSIDE FIRM

Powers of General meeting

Members of a company may resolve to provide that—

FIRST AUDITOR OF GOVERNMENT COMPANIES

HOW TO FILL THE CASUAL VACANCY OF AUDITORS

140. REMOVAL, RESIGNATION OF AUDITOR AND GIVING OF

PROCEDURE FOR RESIGNATION

APPOINTING OTHER PERSON IN THE PLACE OF RETIRING AUDITOR

141. ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF

 commercial transactions which are in the nature of professional services permitted

f) a person whose relative is a director or is in the employment of the company as a director or

142. REMUNERATION OF AUDITORS

143. POWERS AND DUTIES OF AUDITORS AND AUDITING

144. AUDITOR NOT TO RENDER CERTAIN SERVICES

(a) accounting and book keeping services;

AIR – MAID (Mnemonic)

145. AUDITOR TO SIGN AUDIT REPORTS, ETC

147. PUNISHMENT FOR CONTRAVENTION

every officer of the company who is in default shall be punishable

After companies Amendment Act 2017

After companies Amendment Act 2017

148. COST AUDIT TO BE CONDUCTED BY COST ACCOUNTANT – COST

Regulatory Sectors: DOTES Non Regulatory Sectors: MTS

TEST YOUR KNOWLEDGE

2 Resignation of auditor- What should the board do?

4 Auditor resigned. Procedure for auditor and the company.

6 Procedure for removal of first auditor.

12 Ceiling limit for auditors

13 What is termed as Business relationship. What are their exclusions?

15 Prohibited services of auditors

16 Penalty for providing prohibited service for auditors

17 Can the board of directors of government company appoint first auditor?

18 Father In law is director want to appoint daughter in law as auditor

19 Exempted companies from cost audit

21 Appointment of First auditor for public company, Government company.

26 A company having borrowings Rs. 51 crores. Whether rotation of auditor mandatory.

27 Whether rotation of auditors applicable to small company?

28 A private company having borrowings Rs. 50 crores. Whether rotation is mandatory?

29 Can a board appoint a firm of auditor for continuous period of 10 years

30 Can a company request rotation of partners of a same audit firm?

A firm got re constituted – because of admission/ retirement of partner. Does it amount

35 Auditor appointed but he refused to appoint.

41 5 points to be stated in Audit report

A ltd, a subsidiary of government company where CAG appointed a firm of CA as

6. Procedure for removal of first auditor:

11. Assuming it is face value disqualification under Section 141(3) is attracted.

13. Arms length pricing. Exclusions include:

15. Section 144.

17. Yes provided C&AG failed to appoint within 60 days of incorporation.

18. She is a relative and hence disqualified under Section 141(3).

20. Section 143(12)

21. Refer answer 1

22. MD alone cannot appoint only BOD can appoint.

25. Section 177 is not applicable to a private company.

34. This is an exception to disqualifications.

35. It amounts to resignation.