Jomon K. George Chairman, CL Committee, SIRC

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1 SIRC Chapter X Audit & Auditors ( ) Companies (Audit & Auditors) Rules 2014 (1-14) Jomon K. George Chairman, CL Committee, SIRC

2 SIRC An all new enactment 470 sections (282 notified) 29 chapters 7 schedules 21 Rules notified

3 SIRC Important Schedules Schedule I - Tables MoA & AoA Schedule II - Useful Lives for depreciation Schedule III - General instructions for BS & PL Schedule VII - CSR Activities

4 SIRC Appointment of Auditors 139 (224) Every company shall at the first AGM appoint an individual or firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of the sixth AGM and thereafter till the conclusion of every sixth meeting. The company shall place the matter relating to such appointment for ratification by members at every AGM. Rules & Forms

5 Appointment of Auditors 139 (224) Before appointing, the company shall obtain a written consent from the auditor and a certificate that appointment is in order and that he is not disqualified u/s 141. The company shall inform the auditor and also file notice of appointment with RoC within 15 days of the meeting. Rules & Forms

6 Appointment of Auditors 139(224) No listed company/ class of companies as may be prescribed shall appoint an individual as auditor for more than 5 years and a firm for more than 2 terms of 5 consecutive years. A five year cooling is also envisaged. Existing companies shall comply with the requirements within three years. the CG may by rules, prescribe the manner of rotation Rules & Forms

7 Appointment of Auditors 139 (224) The members of a company may resolve to provide that : - the audit partner and his team shall be rotated - the audit shall be conducted by more than one auditor.

8 Appointment of Auditors 139 (224) The first auditor of a company shall be appointed by the board within 30 days of registration. If not done, it shall inform the members of the company who shall within 90 days at an EGM appoint the first auditor who shall hold office till the first AGM.

9 Appointment of Auditors 139(224) The first auditor of a government company shall be appointed by the CAG within 60 days of registration. If not done, the board shall appoint within next 30 days. if the board fails, it shall inform the members of the company who shall within 60 days at an EGM appoint the first auditor who shall hold office till the first AGM.

10 Appointment of Auditors 139(224) In the case of a government company, for every FY, the CAG shall appoint the auditor within 180 days from the commencement of the FY.

11 Appointment of Auditors 139 (224) Casual vacancy other than by resignation shall be filled in by the board within 30 days. Vacancy arising by resignation shall be filled by the company in GM within three months from the recommendation of the board. Casual vacancy in a government company shall be filled by CAG within 30 days. If not done, the board shall do so within the next thirty days.

12 Removal & Resignation 140 (224/225) The auditor appointed u/s 139 may be removed from his office only by special resolution, after obtaining prior approval of the CG. the auditor shall be given an opportunity of being heard. Rules & Forms

13 Removal & Resignation 140 (224/225) An auditor who has resigned from a company shall file a statement with RoC/CAG within 30 days indicating the reasons and facts of his resignation. Fine for non-compliance 50,000 to 5 lacs The procedure for appointing a person/firm other than the retiring auditor remains the same. A copy of the representation shall be filed with the RoC.

14 Removal & Resignation 140 (224/225) The tribunal may suo moto or on an application made by the CG or any person concerned, if it is satisfied that the auditor has acted in a fraudulent manner, it may direct the company to change its auditors. If CG has applied and the tribunal is satisfied that a change is required, it shall within 15 days, order the auditor not to function A five year ban is also envisaged if so removed.

15 Eligibility, Qualification/Disqualification 141 (226) Only a CA can be appointed as the auditor of a company A firm where majority of the partners are CAs may also be appointed as auditors. Where a firm including LLP is appointed, only CA partners shall act & sign for the firm.

16 Disqualification 141 (226) body corporate other than LLP an officer or employee of the company a partner/employee of an officer/employee of the company. a person or firm who has direct/indirect business relationship with company/sc/hc/ac/sc of HC Rules & Forms

17 Disqualification 141 (226) a person whose relative is a director/kmp of the company a person who is in fulltime employment a person/firm who is holding the audit of more than 20 companies a person who has been convicted for fraud and a period of 10 years has not elapsed from the date of the order.

18 Disqualification 141 (226) a person /his relative / partner is : - holding any security of or interest in the company SC/HC/AC/SC of HC of face value exceeding 1 lac - indebted to the company/sc/hc/ac/sc of HC for an amount exceeding 5 lacs - given guarantee or provided security to the company SC/HC/AC/SC of HC for an amount exceeding 1 lac. a person engaged in any services provided u/s 144

19 Remuneration 142 (224) - remuneration of the auditor shall be fixed in the GM or in such manner decided therein. - the board may fix the remuneration of the first auditor.

20 Powers & Duties of Auditors 143 (227) - right of access to books of account and vouchers - right to require information from the officers of the company These rights apply to subsidiary too insofar as it relates to consolidation.

21 Powers & Duties of Auditors 143 (227) Old 227 (1) (A) repeated. The auditor shall make a report on the FS laid before the AGM duly taking into account the following : - Provisions of the Act/Rules - Accounting Standards - Auditing Standards - Matters to be included in the AR under Act/Rules The auditor shall report whether the FS give a true & fair view of the state of affairs, profit/loss, cash flow.

22 Powers & Duties of Auditors 143 (227) New items in main body : - observations or comments on financial transactions or matters having adverse effect on the functioning of the company. - any qualification/reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith. - whether there are adequate internal controls system in place and its operating effectiveness. - such other matters as may be prescribed Rules & Forms

23 Powers & Duties of Auditors 143 (227) New requirement : - Every auditor shall comply with Auditing Standards prescribed by CG, recommended by ICAI, in consultation with NFRA. - The CG in consultation with NFRA may specify that the auditors report shall include matters specified in the order.

24 Powers & Duties of Auditors 143 (227) New requirement : - if the auditor has reason to believe that an offence involving Fraud is being or has been committed by officers or employees of the company, he shall report the same to the CG in the manner prescribed. Saving Clause for Auditor. The requirement extends to Cost/Secretarial Audit as well Penalty for non-compliance 1-25 lacs Rules & Forms

25 Powers & Duties of Auditors 143 (227) - the accounts of a branch office shall be audited by the company s auditor or by a person qualified to be the Co s auditor - Branches abroad may be audited by a person qualified under the law of that land. - He shall submit his report to the company s auditor - he too shall report fraud as in 143(12)

26 Auditor not to render certain services 144 An auditor shall not render the following services to the company/hc/sc directly or indirectly : - accounting & book keeping - internal audit - design & implementation of FIS - actuarial services - investment banking/investment advisory - outsourced financial services - management services - any other services as may be prescribed One years time to comply

27 Auditor to sign audit report The person appointed as auditor of the company shall sign the auditors report in accordance with the provisions of section 141(2) Comments having an adverse effect on the functioning of the company shall be read in the AGM and shall be kept open for inspection.

28 Auditor to attend AGM 146 The auditor shall unless exempted from the company attend the AGM personally or through a qualified representative. All notices of general meeting to be sent to him He has the right to be heard on matters concerning him as auditor.

29 Penalties 147 If any of the provisions of sections is contravened, - The company shall be punishable with a fine of to 5 lacs. - Every officer - imprisonment of one year and/or fine of lac

30 Penalties 147 -Auditor (139/143/144/145) - Fine of lacs - If wilful, he shall be punishable with imprisonment of one year and fine of 1-25 lacs. He shall refund the remuneration Shall also pay damages to the company/authorities for loss Arising out of incorrect reporting. Partners/firm to be responsible jointly and severally.

31 Cost Audit 148 (233B) CG may direct cost audit of certain companies New thrust on Cost auditing Standards Auditor cannot do Cost Audit Cost auditor to submit his report to the Board who shall forward the same with explanations for reservation, to the CG, within 30 days.

32 Jomon K. George

33 Companies (Audit & Auditors) Rules Consequence of non-ratification The board shall appoint another individual/firm after following the procedures laid down under the Act.

34 Companies (Audit & Auditors) Rules Notice to RoC about auditors appointment The notice shall be in Form ADT 1

35 Companies (Audit & Auditors) Rules Companies to which rotation is applicable Unlisted public companies with PuC of 10 Cr or more Private companies with PuC of 20 Cr or more All companies (except OPC/Small Companies) having borrowings/public deposits of 50 cr or more Contd..

36 Companies (Audit & Auditors) Rules Manner of rotation Firms under same network not allowed Partner resigning and joining another firm Not allowed Illustrative Chart is given in the rules. Three years to comply...

37 Companies (Audit & Auditors) Rules Application to CG to remove auditor The application shall be in Form ADT 2

38 Companies (Audit & Auditors) Rules Statement to be filed by the resigning auditor The application shall be in Form ADT 3

39 Companies (Audit & Auditors) Rules Business relationship to exclude : professional services of a CA Transactions in the ordinary course of business by telecom, airline, hospitals, hotels and other similar businesses

40 Companies (Audit & Auditors) Rules Matters to be included in the Auditors Report (Rule 11) Whether the company has disclosed the impact of pending litigations on its financial position in the FS. Whether the company has made provisions for material foreseeable losses on long term contracts including derivative contracts. Whether there have been delays in transferring amounts to IEPF.

41 Companies (Audit & Auditors) Rules Reporting of Fraud To report to CG within 60 days. Forward his report to the Board/AC seeking their reply within 45 days. To report to CG with such replies within 15 days.. If no reply is recd.., he shall send a note on the report given to the board/ac contd..

42 Companies (Audit & Auditors) Rules Reporting of Fraud To be send to Secretary, MCA in a sealed cover by RPAD or SP followed by an confirming the same. It should be on the letterhead of the auditor with Address, Seal, Signature and Mem. No. It shall be in Form ADT 4 End

CHAPTER X AUDIT AND AUDITORS

DRAFT RULES UNDER COMPANIES ACT, 2013 CHAPTER X AUDIT AND AUDITORS Manner and procedure of selection of auditors 10.1 For the purpose of sub-section (1) of section 139, (1) In the case of a company that