Company Audit amendments in simple language

I am posting the amendments in Company Audit in both paragraph and tabular form. These amendments are very important for both IPCC and CA final students. The weightage of Company Audit can be up to 25 marks in IPCC Group 2. Moreover, these amendments are relevant for both Company Law and Audit.

Appointment of auditors

Contrasting the appointment procedure at every annual general meeting under the 1956 Act, the auditor will now be appointed for a duration of five years, with a requirement to ratify such an appointment at each annual general meeting [section 139(1) of 2013 Act]. Further, the Explanation to section 139(4) of 2013 Act states that in respect of appointment of a firm as the auditor of a company, the firm shall include a limited liability partnership registered under the Limited Liability Partnership Act, 2008.

Also, the section 141 of  2013 Act mentions that where a firm, including a limited liability partnership is appointed as an auditor of a company, only those partners who are chartered accountants shall be allowed to work and sign on behalf of the firm.

Section 141 of the 2013 Act further specifies an added list of disqualifications, and extends the disqualification to also include  relatives. It mentions that a person who, or his relative or partner is holding any security of or interest in the

company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company of face value over and above one thousand rupees or such amount as may be set 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.1,00,000 ; or has given a guarantee or provided any security in association 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, for Rs.1,00,000, will not be qualified to be appointed as an auditor. In addition, a person or a firm who, whether directly or indirectly, has business connection with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed, will be ineligible from being appointed as an auditor.

It would be appropriate to make a note of that the draft rules include 15 relationships in the list of relatives including step son/daughter and step brother/sister.

The disqualification also extends to person or a partner of a firm who has an audit of more than twenty companies as well as a person who is in full time employment elsewhere. [section 141 (3)(g) of the 2013 Act].

The meaning of a relative does not give cognizance to the Code of Ethics set by the ICAI and therefore, there are likely to be interpretational issues. Moreover, the 2013 Act does not state as to what would comprise as indirect interest and hence in absence of direction it would be not easy to appraise the degree of insinuation on the audit profession.

Mandatory firm rotation

The section 139(2) of 2013 Act has introduced the notion of rotation of auditors and audit firms also. It mentions that in case of listed companies (and other class(es) of companies as may be prescribed) it would be compulsory to rotate auditors every five years in case of the appointment of an individual as an auditor and every 10 years in case of the appointment of an audit firm with a uniform cooling  off period of five years in both the cases. Further, firms with common partners in the outgoing audit firm will also be disqualified for appointment as auditor during the cooling off phase. The 2013 Act has permitted a conversion phase of three years for complying with the requirements of the rotation of auditors. Further, the section 139(3) of 2013 Act also grants an alternative to shareholders to further need rotation of the audit partner and staff at such intervals as they may opt.

Currently, while the 1956 Act does not have any requirements regarding the auditor or audit firm rotation, the Code of Ethics issued by the ICAI has a requirement to rotate audit partners, in case of listed companies, after every seven years with a cooling-off period of two years.

Non-audit services to audit clients

The 2013 Act mentions that any service to be rendered by the auditor requires to be permitted by the board of directors or the audit committee. Further, the auditor is restricted from providing particular services, which include the following:

•

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, and any other service which may be prescribed (no other service has been prescribed)

Further, the section 144 of 2013 Act specifies that such services cannot be rendered by the audit firm either directly or indirectly through itself or any of its partners, its parent or subsidiary or through any other entity whatsoever, in which the firm or any other partner from the firm has considerable influence or control or whose name or trademark or brand is being used by the firm or any of its partners. The 1956 Act presently does not mention any necessities regarding the non-audit services.

Joint audits

The 139(3) of 2013 Act states that members of the company may require the audit procedure to be conducted by more than one auditor.  

Auditors liability

The range and degree of the auditor’s liability, has been considerably enhanced under the 2013 Act. Now, the auditor is not just

exposed to several new types of liabilities, though, these liabilities prescribed in the existing 1956 Act have been made more

stringent. The auditor is now subject to oversight by multiple regulators apart from the ICAI such as The National Financial Reporting Authority (NFRA, and the body replacing the NACAS) is now authorised to investigate matters involving professional or other wrongdoing of the auditors. The penalty provisions and other repercussions that an auditor may now be subject to according to the 2013 Act includes financial penalties, imprisonment, debaring of the auditor and the firm, and in case of frauds, can even be subject to class action suits.

Additional responsibilities of the auditor

The 2013 Act requires definite new aspects which require to be covered in an auditors’ report. These include the following:

•

The observations or comments of the auditors on financial transactions or matters which have any unfavorable consequence on the working of the company [section 143(3)(f) of the 2013 Act]

•

Any qualification, reservation or adverse remark regarding the maintenance of accounts and other matters associated therewith

[section 143(3)(h) of the 2013 Act]

•

Whether the company has sufficient internal financial controls system in place and the operating efficiency of such controls

[section 143(3)(i) of the 2013 Act]

There are additional reporting requirements mentioned in the draft rules which include reporting on pending litigations, etc which are already covered either by the accounting standards or guidance from the ICAI, and thus result in duplication.

The section 143(12) of 2013 Act requires an auditor to report to the central government within 30 days in a format set within the draft rules, if he or she has any reasons to consider that any offence involving fraud is being committed or has been committed against the company by its officers or employees. Additionally as per section 143(15) of the 2013 Act, where any auditor does not fulfill with the above requirements, he  or she shall be chargeable with a fine which shall not be less than 1 lakh INR, but which may extend to 25 lakh INR. These requirements are in addition to the existing requirements under the Companies Act 1956.

Key Points
S. No.	Particulars	As per Companies Act 1956	As per Companies Act 2013
1	Appointment of Auditors	At every AGM	Once in every five years
2	Appointment of firm as an auditor	Shall not include LLP	Shall include LLP
3	Disqualification of Auditor	Section 226 does not cover relatives	The new companies Act extends the disqualification to also include relatives.
4	Mandatory firm rotation	No such requirement	1. Listed companies in case of an individual auditor- mandatory to rotate auditors every five years.  2. In case of audit firm - mandatory to rotate auditors every ten years.
5	Non-audit services to audit clients	No permission required by the Board of Directors or the Audit Committee	Permission required by the Board of Directors or the Audit Committee for rendering the non-audit services to audit clients
6	Auditors Liability	Auditor regulated by the ICAI only	The auditor is now oversight by the multiple regulators apart form the ICAI such as the National Finanical Reporting Authority(NFRA)
7	Reporting of the offence to the CG	No such reporting required	An auditor to report to the central government within 30 days in a format set within the draft rules, if he or she has any reasons to consider that any offence involving fraud is being committed or has been committed against the company by its officers or employees
8	Fine for not reporting of the offence to the CG	Not applicable	Fine which shall not be less than 1 lakh INR, but which may extend to 25 lakh INR.