Company Auditor, his Rights, Duties and Liabilities

 An auditor is an official whose job it is to carefully check the accuracy of business records. An auditor might be either an internal auditor, external auditor or independent auditor for accounting firms in the public or private sector.

Who can be appointed as an Auditor?

Only a qualified Chartered Accountant within the meaning of the Chartered Accountants Act, 1949 can be appointed as an auditor. However, the following points should also be considered for the appointment of auditor.

1. If the Chartered Accountant is holding a Certificate of Practice, and practicing in his individual capacity, he may be appointed as an auditor only as an individual.

2. If the Chartered Accountant is holding a Certificate of Practice and is a partner of a firm of chartered accountants, the firm may be appointed as auditor. Any partner of the firm may perform his duties in the name of the Firm.

3. If any person is holding a certificate authorizing him to act as an auditor, even though he is not a chartered accountant, he may be appointed as auditor. Such Certificates are not being issued since November 1, 1956.

Who cannot become Auditors of a Company?

The following persons are not qualified to be appointed as auditors of a company:

1. The auditing service is considered to be personal, therefore a body corporate cannot be appointed as auditor. This also ensures that the liability of the auditor does not become limited. A person holding any security of the company, carrying a voting right cannot be appointed as auditor.

2. A person who is indebted to the company in excess of Rs. 1000/-.

3. A person who has given guarantee or security to the company in relation to the indebtedness of any third person for a sum exceeding Rs.1000/-.

4. An officer or employee of the company.

5. If a person is disqualified to be appointed as auditor of any one company, he shall be disqualified to be appointed as auditor of

                                                  i.                  its subsidiary company.

                                                ii.                  its holding company.

                                              iii.                  subsidiary company of its holding company.

The above disqualification avoids any financial relationship between the auditor and the company.

Additional disqualification of an auditor:

An auditor who

1. has any direct financial interest in the company.

2. receives any loan or guarantee from or on behalf of the company.

3. has any business relationship (other than as an auditor) in the company.

4. has been in the employment in the company.

5. whose relative is in the employment of the company.

Appointment of Auditors:

The company in General Meeting may decide to have the accounts of a Branch Office audited otherwise than by the company’s auditor in which case the meeting should appoint any qualified person as auditor of the Branch or authorize the Board of Directors to appoint a qualified person as auditor for the Branch in consultation with the company’s auditors.

1. Section 224 (1B), prescribes limits for the chartered Accountants for holding company audits. A Chartered Accountant should ensure that his audits are within the limits prescribed before accepting the appointment as an auditor of the company.

2. There is no prohibition in appointing a relative of a director as auditor. However, under the Chartered Accountants Act 1949, he should disclose his interests/relationship in his audit report.

3. If the remuneration fixed for the auditor exceeds the prescribed limit, (as per Chartered Accountants Act), the auditor may be appointed by passing a special resolution. In some cases, approval of central Government is also required.

Other Points to be noted regarding appointment of auditors

1. If an employee of the Chartered Accountant in practice is director of a company, the chartered Accountant is not disqualified from being appointed as auditor.

2. A statutory auditor of a company cannot be appointed as an internal auditor.

3. An auditor of a company can however accept any other assignment with that company, as long as he she does not become the employee of the company.

4. IF a chartered accountant is indebted to a company, the firm( in which he is a partner) cannot be appointed as auditor. Similarly, if the firm is indebted to the company, the partner of the firm cannot be appointed as an auditor of the company.

5. After his appointment as an auditor to a company, if an auditor becomes disqualified due to any of the reasons stated above, his office will be deemed to be vacated.

Appointment & Reappointment of Auditor:

Reappointment of Auditor:

1. A retiring auditor may be re-appointed at the annual general body meeting by passing a resolution.

2. Reappointment of a retiring auditor is not automatic. A resolution at the annual general body meeting is required.

However, a retiring auditor shall not be reappointed,

1. When he does not qualify for reappointment.
2. When he is not interested or expressed unwillingness to accept reappointment.
3. When a resolution is passed in the AGM appointing some other auditor. Companies (Amendment) Bill, 2003 requires a special resolution.
4. When opted not to reappoint him.
5. When resolved to appoint some other auditor and such resolution could not be proceeded with, due to death, or disqualification of such person.

 

Appointment of Auditor against Casual Vacancy:

The Companies Act has not defined casual vacancy. But one can say that casual vacancy for an auditor arises due to disqualification, resignation, death, etc.

1. The Board of Directors may appoint an auditor to fill the casual vacancy caused by any reason other than by resignation.

2. Where there are more than one auditor, the remaining auditor may act as the auditor during the vacancy period.

3. Where the casual vacancy is due to resignation, the vacancy can be filled up only at a annual general meeting.

 

Appointment of Auditor by Special Resolution

In the case of companies mentioned below, appointment and reappointment of auditors at the annual general meeting shall be made only after passing a special resolution.

1. A company in which not less than 25% of the subscribed share capital is held as on the date of annual general meeting, jointly or singly, by,

1. a nationalized bank or a general insurance company or
2. any institution, financial or otherwise, established under State or Provincial Act, in which, not less than 51% of the subscribed capital is held by the State Government or
3. a central Government or a state government or a government company or a public financial institution.

Here, the following are to be noted:

1. Subscribed share capital includes preference share capital.

2. Special Resolution for the appointment of auditor is necessary even if a nationalized bank holds shares of the company in its name as security for loans advanced by it.

3. If any of the above mentioned companies fails to appoint the auditor by passing a special resolution in its annual general body meeting, the Central Government has the power to appoint the auditor of the company.

The term Public financial institution means

1. any institution constituted under any Central Act or
2. any institution in which not less than 51% of the paid up share capital is held or controlled by the Central government
3. The official gazette of the Central government mentioning the names of the Public Financial Institutions.

According to section 227 (1) of the Companies Act, 1956, a company auditor has the following rights:
 (1) Right of Access to Books of Accounts:   

Every auditor of a Company has a right of access at all times to the books of accounts and vouchers of the company whether kept at the head office of the company or elsewhere. Thus, the auditor may consult all the books, vouchers and documents whenever he so likes. This is his statutory right. He may pay a surprise visit without informing the Directors in advance but in practice, the auditors inform the Directors before they pay their visits.

 (2) Right to visit branch office:

According to section 228, if a company has a branch office, the accounts of the office shall be audited by the company’s auditor appointed under section 224 or by a person qualified for appointment as    auditor of the company under section 226. Where the Branch Accounts are not audited by a duly qualified auditor, the auditor has a right of access at all time to the books, accounts and vouchers of the company and thus, may visit the branch, if he deems it necessary.

(3) Right to receive notice of general meeting:

Under section 231 an auditor of a company has a right to receive notices and other communications relating to General Meeting in the same way as a member of the company.

(4) Right to attain general meeting:

He is also entitled to attend any General Meeting which he attends or any part of the business which concerns him as an auditor. According to the power of the auditor, he may make any statement or explanation with regard to the accounts as he may desire. He need not, however, answer any questions. Ordinarily, it is not necessary for the auditor to attend every General Meeting, but it will be good for him to attend meetings in the following circumstances:

(a)    When his report contains important qualifications directly affecting the management, so that his   remarks may not be misunderstood or misinterpreted.

(b)   When he has received a notice from the company that someone else is going to be proposed for appointment as auditor of the company at the Annual General Meeting.

(c)    When he has been specially asked by the management to be present.

(5) Right to send the audit report :

Under section 229, only the person appointed as auditor of the company, or where a firm is so appointed, only a partner in the firm practicing in India, may sign the auditor’s report, or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.

(6) Right to call for information and explation:

He has a right to obtain from the Directors and officers of the company any information and explanation as he thinks necessary for the performance of his duties as an auditor. This is another important power in the hands of the auditor. He will, however, decide as to which information or explanations he thinks necessary to obtain. It the Directors or officers of the company refuse to supply some information on the ground that in their opinion it is not necessary to furnish it, he has a right to mention the fact in his report.

(7) Right to claim Remuneration:

Company auditor has right to claim remuneration. His remuneration will be fixed by appointing authority and it will be paid by company.

(8) Right to Correct any Wrong Statement:

The auditor is required to make a report to the members of the company on the accounts examined by him and on every Balance Sheet and Profit and Loss Account and on every other document declared by this Act to be part of or annexed to the Balance Sheet or Profit and Loss Account which are laid before the company in General Meeting during his tenure of office. The Directors have a duty to prepare them and present them to the auditor. The auditor cannot require but advise the Directors to amend their system of maintaining accounts if it is faulty. If his suggestions are not carried out, he has a right to refer the matter to the members. If the method of accounting is inadequate, he must state the fact in his report that proper books of accounts have not been kept by the company.

Duties of an Auditor :

(1)   Duty to make a report to the member :

The auditor shall report to the shareholders on the accounts examined by him. The report so submitted shall contain the following:

      (a) Whether, in his opinion, the Profit and Loss Account referred to in his report exhibits a true and fair view of the profit or loss.

(b) Whether, in his opinion, the Balance Sheet referred to in his report is properly drawn up so as to exhibit a true and fair view of the state of affairs of the business according to the best of the information and explanations given to him as shown by the books of accounts.

(c) Whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit.

(d) Whether, in his opinion, proper books of accounts 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 purpose of his audit have been received from branches not visited by him.

(e) Whether the report on the accounts of any branch office audited under section 228 by a person other than the company’s auditor has been forwarded to him as required by (c) of sub-section (3) of that Section and how he had dealt with the same in preparing the auditor’s report.

(f) Whether the company’s Balance Sheet and Profit and Loss Account dealt with by the report are in agreement with the books of accounts and returns.

Where any of the matters referred to above is answered in the negative or with a qualification, the auditor’s report shall state the reason for the answer.

Under section 227 (4A), the Central Government may, by general or special order, direct that, in the case of such class or description of companies as may by specified in the order, the Auditor’s Report shall also include a statement on such matters as may be specified therein.

The Central Government before making any such order may consult the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949, in regard to the class or description of companies, if the Government thinks it necessary.

In exercise of the powers conferred by sub-section (4A) of section 227 of the Companies Act, 1956, the Central Government has issued the Manufacturing and other Companies (Auditor’s Report) Order, 1975 which applies to every company which is engaged in one or more of the following activities:

(i) Manufacturing, mining or processing,

(ii) Supplying and rendering services,

(iii) Trading, and

(iv) The business of financing investment, Chit Fund, Nidhi or mutual benefit societies.

The order will not apply to banks. The order requires that the Auditor’s Report on the accounts of every company examined by him to whom this order applies, for any financial year ending on a day on or after January 1, 1976, should contain matters specified in paragraphs 4 and 5 of the order.

(2)   Duty to make enquiries:

The auditor shall enquire:

(a) Whether loans and advances made by a company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members.

(b) Whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company.

(c) Where the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company, as consists of shares, debentures and other securities have been sold at a price less than at within 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) Whether it is stated in the books and papers 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 account books and the Balance sheet is correct, regular and not misleading.

(3) Duty to assist inspectors:
Under section 240, it is the duty of an auditor “to preserve and to produce to an inspector or any person authorized by him in this behalf with the previous approval of the Central Government, all books and papers of, or relating to the other body corporate which are in their custody or poser and otherwise to give to the Inspector all assistance in connection with the investigation which they are reasonably able to give.
(4) Duty to certify statutory Report :

According to section 165 (4), the auditors of the company shall, in so far as the statutory report relates to the shares allotted by the company, the cash received in respect of shares and the receipts and payments of the company, certify it as correct after the same has been certified as correct by not less than two Directors of the company, one of whom shall be a Managing Director. (Every company shall within a period of not less than one month and not more than six months from the date from which the company is entitled to commence business, hold a General Meeting of the members which shall be called the statutory Meeting.)

(5) Duty in relation to the issue of prospectus :

In case of prospectus issued by an existing company, there will be previous three or four years financial statements. When such prospectus is certified by company auditor people can rely on the values shown.

(6) Duty in relation to declaration of the solvency :

When a company goes into its voluntary winding up and a declaration of solvency is made by its Directors under section 488 (I), such a declaration is to be accompanied by the report of the auditors of the company under section 488(2). It is the duty of the auditors to make such a report.

Other Duties of an Auditor :

1. An auditor should correspond in writing with the previous auditor:

He should see that for his appointment, the Articles of Association brave been complied with or not.”

2. It is the duty of an auditor that he should not adopt foul means over the shareholders to get himself appointed as an auditor and maintain his office at two places to defraud others.

3. The auditor should inform the shareholders about the violation of the provisions of the Sections of the Companies Act.

4. It is the duty of an auditor not to practice as an auditor unless he is a member of the Institute and holds a Certificate of Practice granted by the Council of the Institute.

6. While auditing the accounts of a company, it becomes the duty of an auditor to scrutinize debentures in detail and examine properly the rules in the Debenture Trust Deed.

7. An auditor, who fails to verify cash in hand and to draw the attention of the shareholders to the unsatisfactory condition of the bank which he audits and fails to bring to bear on his work that skill and diligence in the performance of his duties which were required of him, is guilty of professional misconduct punishable under section 20(2) and 21(3) of the Chartered Accountants Act, 1949.

8. It is the duty of an auditor that he should verify investments himself while certifying such investments.

9. An auditor should check properly the stock and the accounts.

10. That it is the duty of a company’s auditor in general to satisfy himself that the securities of the company in fact exist and are in the safe custody, cannot be gainsaid.

Liabilities of an Auditor:


(A) Civil Liabilities :

Civil liabilities arise when there are dispute between two parties for a loss caused to one due to the act of another. In this case, the auditor is called upon to pay damages as decided by the court. These may be of the following types


1. Liability of Negligence

Negligence means acting carelessly or failing to perform a duty enjoyed upon a person. An auditor is expected to perform his duties as an agent of the shareholders by exercising care and diligence in the implementation of statutory requirements for the maintenance and presentation of the financial statement. Auditor must be kept himself up to date with the information if he commits some negligence the purpose of audit is failed.


2. Liability of Liable

In the report the auditor may criticize any person. If it is based on the fact there is no liability of the auditor. On the other hand the auditor is liable in order to avoid this liability the auditor should take care that the report is based on facts and is prepare with good intention.


3. Liability of the Third Party

The auditor is expert in finding out the errors and frauds and is aware how to check the books of accounts. Many third parties as the shareholders, investors, tax authorities, creditors and government rely upon his reports. So if he makes any type of error or fraud, he is liable to pay the damages.


4. Misstatement in Prospectus

According to section 59 The civil liability of an auditor arises due to misstatement in prospectus. Where a prospectus invites person to subscribe for shares or debentures of a company, the auditor shall be liable to pay compensation to every person who subscribe for a purchase any shares or debentures on the faith of the prospectus for any loss or damage be may reason of any untrue statements.


5. Breach of Contract

If the auditor fails to fulfill the term of the contract the civil liability arises of an audited. In case if he omits the all or some conditions of contract, if he cannot make the secrecy, if fails to provide the true and fair view to the owner, he is liable to pay to the owner if sustain any finacial loss.


(B) Criminal Liabilities :

Since for certain purpose of the companies Act, and auditor is deemed to be an officer of the company, he is a liable for such. Act of omission or commission constituting offence under the Act.


1. Misstatement in Prospectus (Sec-63)

Here a prospectus containing any untrue or misstatement is issued with the consent of auditor who shall be punished the with imprisonment which may extend up to two years or with fine which may extend up to Rs. 5,000/- or both.


2. Requirements of Reports (Sec-225)

Here the auditor does not confirm to the requirement of reports as per sec-229 he shall be punished with fine, which may extend up to Rs. 1,000.


3. Assistant to Investigate (Sec-240)

Auditor has statutory duty to assist any investigator appointed by the central Government in collecting any information of the company otherwise he shall be punished with imprisonment which may extend up to six month or with a fine up to Rs. 2,000/- or both for continuous default Rs. 200/- per day may also be charged.


4. Assistance to Prospectus (Sec-242)

On the basis of report of an inspector control Government may prosecute any officer. Auditor is to assist in such prosecution otherwise he is to be punished for contempt of court.


5. Return Books, Papers Property etc. (Sec-477)

At the time of winding up of a company, court may ask the auditor to return any property books or papers of the company otherwise he can be arrested.


6. Public Examination (Sec-478)

On the report of official liquidation, the audition of the companies to the publicly examined. Notes of such examination shall be used as evidence in any civil or criminal proceeding against the auditor.

7. Falsification of Books of Accounts (Sec-539)

Where the auditor is guilty of destruction, multilation, alteration, falsification of any books papers securities, he shall be imprisoned which may extend up to 7 years and shall also be liable to fine.


8. Prosecution of Auditor (Sec-545)

Where auditor is found be guilty of any criminal offence by the liquidator of the company, he shall be prosecuted.


9. False Statement In Any Return

Where the auditor makes any false statements in any material respect in any return report, certification, balance sheet etc, he shall be imprisoned which may extend up to 2 year and shall also be liable to fine.


10. Disqualified Auditor (Sec-254(6))

The company ordinance has clearly stated the persons who are not qualified as auditor, but if an unqualified auditor may act as auditor of the company. He is liable to fine up to Rs. 5,000/- rupees.


11. Non-Compliance (Sec-260)

In case when the auditor makes any report or signed against the legal requirement and the report may be not true the auditor is liable to fine for Rupees 2,000/- if it is willful fault.


12. Auditor Report

If the auditor make the report with the extent to profit himself and the third party for any loss for a material consideration it is a criminal liablity. He may be punished for six months and fine upto 2,000/- rupees.


13. Assist Inspector (Sec-268)

The auditor has to give all the necessary assistance in connection with investigation to the inspector. Some times the auditor may fail to give it. In this case he shall be punishable up to one year and fixed up to ten thousand rupees.


14. Auditor Account (Sec-384(4))

The auditor is liable to submit his report after or within he two months at the end of the period to which account relates. If he fails there is a fine up to rupees 5,000/-


15. False Evidence (Sec-419)

If any person provides false evidence he is punishable up to two years and liable for fine also. The evidence may be affidavit oath or some affirmation etc.


16. Winding (Sec-420)

The criminal liability of company officers including auditor may be composed may year before or during liquidation of company of criminal offences like concealing or removing property, concealing or falsifying document and papers. The liquidation can go to the court of law for proving the breach of duty.


17. False Statement (Sec-492)

Whoever makes a statement false or incorrect or omits any material fact shall be punishable with imprisonment for a term, which may extend to three year and shall be liable to a fine not exceeding twenty thousand rupees.


18. Professional Misconduct

If the auditor fails to follow the rules of their own profession he is liable for the criminal liability. For this default the council can with draw the certificate of practice. The council can also go to the court of law for prosecuting the concerned auditor. The auditor can suffer the jail or fine or both.

(C) Other Liabilities

1. Honorary Audit

The auditor on the honorary basis may also accept an audit work. After the completion of the audit work he is bound to submit his report.


2. Joint Audit

When the two auditors carried out the work of audit it is called as the joint audit. It is possible by the two independent auditors under the agreement. Sometimes, a business concern may have two or more than two business places in different cities or countries conduct the audit by one auditor. So this audit is conduct the responsibilities lies on the head of every auditor who had done the work of audit. It is also stated in the audit report.