fp4auditcoa2013

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Final Course Paper 4 Corporate and Allied Law

S Sundar Raman, FCA

© The Institute of Chartered Accountants of India Recorded on: 20-October-2014



1• This lecture has been delivered by faculty members to supplement the

Study Material, Practice Manual and other content

2• The views expressed in this lecture are of the Faculty Member.

3

• The content of this video lecture has not been specifically discussed

by the Council of the Institute or any of its Committees and the viewsexpressed herein may not be taken to necessarily represent the viewsof the Council or any of its committees

2© ICAI



The e-Lectures, PPT, Podcastsand Video lectures on ICAI

Cloud Campus aim tosupplement the Study Material,

Practice Manual and

Supplementary Study Material

The lecture recordings are madeaccording to the syllabus andlaws existing/ applicable as on

the date of recording.

Due to changes in law, there is

likely to be some time gapbetween these changes and therecording of updated lectures.

Hence, students are advised torefer to the Study Material

including Supplementary Study

Material, if any, and otherrelevant legislation for latest

provisions/ amendmentsrequired for forthcoming

examination.

3

This e-Lecture was Recorded on:

October 20, 2014

© ICAI



Eligible Person as Auditorof Company = Chartered

Accountant

Firm as Auditor (including

LLP) = If majority of thePartners practising in Indiaare Chartered Accountants

=> Only CA can sign onbehalf of the Firm

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A Pvt ltd – wherein both the members are CA’s.

Mr.Ranjith qualified CA – who is a Director of the company.

Mr.Balu qualified CA – who is a partner of Mr.Ganesh in “Ganesh andBala LLP”. Mr. Ganesh is the company secretary of MNC India Ltd.

Mr.Pillai, CA - whose brother Mr.Kathir has subscribed to

• 5000 shares of Rs.10/- each in MNC India.

• 7500 shares of Rs.10/- each in PQR India sub of MNC India

• 6000 shares of Rs.10/- each in ST India – in which MNC has 25% voting power

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Individual Spouse

Father(Including

StepFather)

Mother(Including

StepMother)

Son(includingStep Son) – Son’s

Wife

Daughter

-Daughter’sHusband

Brother –Including

StepBrother

Sister –Including

StepSister

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a. A bodycorporate other

than LLP

b. An officer oremployee of the

Company

c. Partner or inthe employmentof /with above

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d. A person or his relative or partner -

(i) Holding any security in Company / Subsidiary / Holding / Associate

Company (Relative may hold FV not exceeding Rs.1 Lakh)

(ii) is indebted to company/subsidiary/holding/ associate company foramount > Rs. 5 Lakhs

(iii) has given a guarantee /security for 3rd person to

company/subsidiary/holding/associate company for amount > Rs. 1 Lakh

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(e) Person / Firm has business relationship with company directly orindirectly with the Company, or its Subsidiary, Holding or AssociateCompany or Subsidiary of such Holding Company or Associate Company(except prof services and transactions at FMV as customer in case oftelecommunication, airline, hotel and other similar business)

(f ) a person whose relative is director / KMP

(g) a Person who is in full time employment elsewhere or a person or aPartner of a Firm holding audits of more than 20 Companies on thedate of appointment or re–appointment as Auditor,

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(h) a Person who has been

convicted by a Court, of anoffence involving fraud, anda period of 10 years has not

elapsed from the date ofsuch conviction.

(i) any Person whoseSubsidiary or Associate

Company or any other formof Entity, is engaged as onthe date of appointment, in

consulting andspecialized services as

provided in Sec.144.

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Auditor afterappointment =

becomes subject toany of the abovedisqualifications

Deemed to haveautomatically

vacated the off ice

Vacancy = CasualVacancy.

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DOI = 01.4.2014

Appt of Aud = 30.4.2014 - BOD

Appt of Aud = 29.7.2014 = Members in EGM

Within 30 days from

date of registration

Within 90 days from

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First Auditor appointed on 30.4.2014

Hold Office till = Conclusion of First AGM

Auditor appointment in First AGM (for next Year)

Hold Office till = Conclusion of 6th AGM

F.Yr ending 31.03.2015 => 6 mts => 30.9.2015

5 years

1 year

F.Yr ending 31.03.2020

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DOI = 01.4.2014

Appt of Aud = 30.5.2014 – C &AG

Appt of Aud = 29.6.2014 = BOD

Appt of Aud = 28.8.2014 = Members in EGM

Within 60 days from

date of registration

Within 30 days from

failure

Within 60 days fromfailure© ICAI 14



First Auditor-Appointment by Board within 30 days from

date of registration (DOI)

Board Failure: Company in EGM – within 90 days to

appoint and auditor shall hold office till first AGM

First Auditor – C & AG cases – within 60 days from DOI

C & AG failure => Failing which BOD to appoint in next 30

days. Failing which company in GM to appoint in next 60

days

Managing Director of PQR Ltd. himself wants to

appoint Mr.Ram, a practicing Chartered Accountant,

as first auditor of the company.

Can MD do so?

NO.

Only Board

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BOD within 30 days can fill the vacancy. (If due toresignation – SH to ratify within 3 months)

Tenure: Shall hold office until the conclusion of the

next annual general meeting.

C & AG Apt: C & AG within 30 days – failing which BODwithin next 30 days.

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Co. shall appoint Auditor(s) in First AGM

Tenure: From the conclusion of AGM - Until conclusion of 6th AGM and thereafter till the conclusion of every 6th AGM

Selection made by Board based on the Recommendation to bemade by Audit Committee (Rule 3)

Company shall intimate the auditor & file the notice within 15

days to RoC in Form ADT -1

Auditor shall give written consent and certificate thatappointment satisfies the criteria u/s 141

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F.yr ending 31.3.2016 = 2nd AGM – 1st AR

F.yr ending 31.3.2017 = 3rd AGM – 2nd AR

F.yr ending 31.3.2018 = 4th AGM – 3rd AR

F.yr ending 31.3.2019 = 5th AGM – 4th AR

F.yr ending 31.3.2020 = 6th AGM – 5th AR

Ratification

Ratification

Ratification

Ratification

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If not ratified, the Board shall appoint another individual / firm asauditor.

Company shall place the matter for ratification at each andevery AGM.

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The auditor appointed - u/r 3 shall submit acertificate that -

• The Individual or the Firm, is eligible and not disqualified

for appt under the Act or under the CA Act, 1949• The proposed appointment is as per the Act;

• The proposed appointment is within the limits laid down byor under the authority of the Act;

• The list of proceedings against the auditor or audit fi rmor any partner of the audit firm pending with respect toprofessional matters of conduct, as disclosed in thecertificate, is true and correct.

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Audit

Committee

Board

Dis-Agrees Agrees

AGM Appt

© ICAI

recommends

Own recommendation

Send Back

Recommends to Members in AGM

21



Qualifications and Experience of the Individual / Firm.

Whether such Qualifications and Experience are commensurate with the size

and requirements of the Company.

Order /Pending Proceedings against Individual / Firm relating to professionalmatter of conduct, before the ICAI /Competent Authority/Court.

Any other information which the Committee has called for from the Proposed Auditor.

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Applicability:

(a) Listed Company(b) Unlisted Company => Paid-Up Capital > Rs.10 crs

(c) Private Limited Co’s => Paid-Up Capital > Rs.20 crs

(d) Any Coy having public borrowing from banks / FI /

Deposits > Rs.50 crs

Tenure / Cooling Period:

a)An individual auditor – for 1 term of five consecutive

years – Cooling period of 5 years

b)Firm – for 2 term of 5 consecutive years – cooling

period of 5 years

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Audit firm having a common partner or partners whose tenure has expired inimmediately pfy shall not be appointed for 5 years

Right given to members to decide about rotation of partners within the firm duringthe tenure of appointment. Audit shall be conducted by more than one auditor

Period held before commencement of the act is taken into account – s.t atransition period of 3 years

Auditor or audit firm under the same network of audit firms shall not be eligible, underrotation

Under this chapter – “ Firm” includes “ LLP”

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Applicability:

a. Government company or

b. any other company owned or controlled, directly or indirectly, bythe CG, or SG or Governments

• Time Limit: Within a period of 180 days from the commencement of the financialyear.

• Tenure: Till conclusion of the annual general meeting.

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Retiring auditor may be re-appointed at AGM 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;• a special resolution has not been passed at that meeting for

appointing some other auditor or providing expressly thathe shall not be re-appointed

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Where company has audit committee every matter has to bedone based on its recommendations

Where No auditor apptd – Existing auditor shall continue –Sec.139(10)

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Auditor may be removedbefore expiry of term by

SR after obtaining CGapproval in Form ADT -2 . Auditor shall be given

opportunity of beingheard.

Resigning Auditor shallfile to ROC within 30

days – Form ADT - 3,and In case of GovtCompanies, with C&AGalso, failing which Fine

Rs.50,000 – Rs.5,00,000

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Grounds of seekingremoval of Auditor,

Details ofQualifications in Accounts in past

3Yrs

Details ofOpportuni ty of

being heard given,

Details of Civil /Criminal

Proceedingspending,

Special Noticereceived for

Removal of Auditors

Percentage ofCapital held byMembers who

propose removal of Auditors,

Whether all due Audit Fees hasbeen paid to the

concerned Auditors

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Details of Other Services rendered by such Auditors to theCompany,

Number of years for which audit is pending

Stage of accounts for each financial year, e.g. yet to beapproved by Board, or yet to be handed over to Auditors, etc.

Dispute with regard to Books of Accounts in the possessionof Auditors but not delivered back to the Company.

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Special notice to be sent for appointment of auditor other than the existingauditor before expiry of term

Company shall send notice to the auditor

Auditor shall send written representation

Company shall specify it in the notice and send to all members along withnotice, If not sent, it shall be filed with ROC

If the representation is delayed by the auditor , then it shall be read out atthe meeting

If auditor abuses the rights then representation needn't be sent/read out.

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Situation Tribunal is satisfied that the Auditor of a Company has, directly

or indirectly,1. acted in a fraudulent manner, or 2. abetted or colluded in any

fraud by the Company or i ts Directors or Officers.

Applicatio

n

Suo–motu by Tribunal, or Application by CG / Application by any

person concerned.

Order ofTribunal

1. Order change of its Auditors, on the above cited grounds.2. CG Appln: Tribunal shall make an order within 15 days of receipt of

application, that the person shall not function as an Auditor. CG may

appoint another Auditor in his place.

Effect of

Tribunal’sFinal

Order

1. No Appt of that auditor in the company = for 5 years.

2. Liability = All partners of Firm3. The erring Auditors are also liable for action u/s 447 (Fraud).

[Imprisonment of 6 mts to 10 Years and Fine not less than the amount

equal to fraud and a maximum of 3 times of amount of fraud]

4. In case of criminal liability of any Audit Firm, the liability other than

fine shall devolve only on the concerned Partner(s) who acted in a

fraudulent manner, or abetted or colluded in the fraud.© ICAI

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Remuneration fixed byCoy in GM or such

manner as the Coy inGM determine

First Auditor – BoardMeeting.

Remuneration = AuditFee + Expenses

Incurred + Facilityextended to auditor –

Fees for other services

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Auditor shall have access toBOA(incl subsidiary) at all times,

either at RO or other place

Officers shall give info & expln tothe auditor for performance of

duties and other inquiriesregarding loans &

advances/prejudicialtransactions/personal

expenses/shares allotted forcash etc.

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Whether loans and advances made by the company havebeen properly secured and whether the terms areprejudicial to members;

Whether transactions which are represented merely bybook entries are prejudicial to the company;

Where the company not being an investment company or a

banking company, whether shares were sold at less thanpurchase price

© ICAI 35



Whether loans & advances are shown as deposits;

Whether personal expenses have been charged to revenue account;

Where it is stated in the books and documents of the company that anyshares:-

=> have been allotted for cash, whether cash has actually beenreceived 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 sheetis correct, regular and not misleading.

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Items

reported on

The Auditor shall make a Report to the Members of the

Company –

(a) on the accounts examined by him, and(b) on every Financial Statements which are required by or

under this Act to be laid before the

Company in General Meeting.

Reporting

Considerations

The Report shall be made after taking into account, the following –

(a) the provisions of the Act,

(b) the accounting and auditing Standards,

(c) matters which are required to be included in the Audit Report

under the provisions of the Act / Rules / Order u/s 143(11)

(d) best of his information and knowledge.

Essence of

Report

In addition to other reporting matters, the Audit Report shall state

whether the said Accounts, Financial Statements, give a true and

fair view of –

(a) the state of the Company’s affairs as at the end of the financial

year,

(b) Profit or Loss,

(c) Cash Flow for the year.© ICAI

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Obtaining Info/Explanation

Proper BOA(incl Branch)

Observation on Maintenance of Accounts

BS and P&L = are in agreement with BOA / Returns

Truth & Fairness of FSObservation on Financial Transactions having adverse effect on the functioning of the Company

Director Disqualification

Adequacy of Internal Financial Controls

Impact of pending litigations on the financial position

Adequacy of the provision towards losses (including towards derivative contracts)

Delay in transferring funds to Investor Education and Protection Fund.

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Branch shall be audited and reported by:

• Company Auditor himself

• Branch Auditor separately appointed• In case of Foreign branch, auditor as per Foreign laws

CG in consultation with NAFRA shall direct certain points tobe included in Audit Report

• Non compliance with this Section – Fine Rs.1,00,000 – Rs.25,00,000

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Situation: In the course of the performance of his duties as auditor, hasreason to believe that an offence involving fraud is being or has beencommitted against the company by officers or employees

Report Immediately to Board / Audit Committee - to reply within 45 days

Report to CG along with Board / AC Opinion within 45 days from the receiptof reply (Form ADT-4 / RPAD / E-mail)

Non compliance of above: Fine of Min - Rs.1,00,000; Max – Rs.25,00,000

© ICAI 40



Accounting andbook keeping

services;Internal audit;

Design andimplementation of

any financialinformation system;

Actuarial services;Investment advisory

services;Investment banking

services;

Rendering ofoutsourced financial

services;

Managementservices; and

Any other kind ofservices as may be

prescribed .

© ICAI 41



Auditor shall/certify Auditor’s report and subsequent qualifications

All general meeting notices shall be forwarded to the auditor

Penalty for Non-Compliance:• Company : Rs.25,000 – Rs.5,00,000

• Officer: Imprisonment 1y &or Rs.10k – Rs.1L

• Auditor: Rs.25,000 – Rs.5,00,000

• Auditor(willingly): 1y Imp &or Rs.1L – Rs.25L

© ICAI 42



Once convicted, auditor shall:

• Refund remuneration to coy

• Pay for damages to the coy/authorities etc.• CG shall ensure payment for damages

• In case of Audit Firm, Partners shall be jointly/severallyliable

© ICAI 43



Cost audit shall be conducted by Cost Auditor appointed by the Board,who shall be a Cost Accountant and not the company auditor

All rights, duties and powers of Company auditor shall apply to costauditor

Cost audit is in additional to audit u/s 143

CG may call for additional explanation

Penalty : Same as given in Section 147

© ICAI 44

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