1. Duties of Auditors

1. Duty of Auditor to Inquire on certain matters Sec 143(1)

It is the duty of auditor to inquire into the following matters-

• (a) Whether loans & advances made by the co. on the basis of security have been properly secured & whether the terms on which they have been made are prejudicial to the interests of the co. or its members;
• (b) Whether transactions of the co. which are represented merely by book entries are prejudicial to the interests of the co.;
• (c) Where the co. not being an investment co. or a banking co., whether so much of the assets of the co. as consist of shares, debentures & other securities have been sold at a price less than that at which they were purchased by the co.;
• (d) Whether loans & advances made by the co. have been shown as deposits;
• (e) Whether personal expenses have been charged to revenue account;
• (f) Where it is stated in the books & documents of the co. that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, & if no cash has actually been so received, whether the position as stated in the account books & the balance sheet is correct, regular & not misleading.

For Section 143(1), it could be said that the auditor should make a report to the members in case he finds answer to any of these matters in adverse.

2. Duty to Sign the Audit Report - Sec 145

As per section 145 of the Companies Act, 2013, the person appointed as an auditor of the co. shall sign the auditor's report or sign or certify any other document of the co., in accordance with the provisions of section 141(2) & the qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the co. mentioned in the auditors' report shall be read before the co. in general meeting & shall be open to inspection by any member of the co.

3. Duty to comply with Auditing Standards-Sec 143(9) & (10)

- As per section 143(9) of the Companies Act, 2013, every auditor shall comply with the auditing standards.

Further, as per section 143(10) of the Act, the CG may prescribe the standards of auditing or any addendum thereto, as recommended by the ICAI, constituted u/s 3 of the CA Act, 1949, in consultation with & after examination of the recommendations made by the NFRA.

Provided that until any auditing standards are notified, any standard, or standards of auditing specified by the ICAI shall be deemed to be the auditing standards.

4. Duty to Audit Report - Sec 143(3)

As per sub-section (3) of section 143, the auditor's report shall also state-

1. Whether he has sought & obtained all the information & explanations which to the best of his knowledge & belief were necessary for the purpose of his audit & if not, the details thereof & the effect of such information on the FS;
2. Whether, in his opinion, proper books of account as required by law have been kept by the co. so far as appears from his examination of those books & proper returns adequate for the purposes of his audit have been received from branches not visited by him;
3. Whether the report on the accounts of any branch office of the co. audited under sub-section (8) by a person other than the company's auditors has been sent to him under the proviso to that sub-section & the manner in which he has dealt with it in preparing his report;
4. Whether the company's balance sheet & profit & loss account dealt with in the report are in agreement with the books of account & returns;
5. Whether, in his opinion, the FS comply with the accounting standards;
6. The observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the co.;
7. Whether any director is disqualified from being appointed as a director under sub-section (2) of the section 164;
8. Any qualification, reservation or adverse remark relating to the maintenance of accounts & other matters connected therewith;
9. Whether the co. has adequate internal financial controls with reference to FS in place & the operating effectiveness of such controls;
   (Note: Section143(3)(i) shall not apply to a private co.:-(i) which is a one person co. or a small co.; or(ii) which has turnover less than 50 crores as per latest audited FS & which has aggregate borrowings from banks or financial institutions or anybody corporate at any point of time during the F.Y. less than 25 crore)
10. Such other matters as may be prescribed. Rule 11 of the Companies (Audit & Auditors) Rules, 2014 prescribes the other matters to be included in auditor's report. The auditor's report shall also include their views & comments on the following matters, namely:-
    1. Whether the co. has disclosed the impact, if any, of pending litigations on its financial position in its FS;
    2. Whether the co. has made provision, as required under any law or accounting standards, for material foreseeable losses, if any, on long term contracts including derivative contracts;
    3. Whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education & Protection Fund by the co.
    4. (i) Whether the management has represented that, to the best of it's knowledge & belief, other than as disclosed in the notes to the accounts, no funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the co. to or in any other person(s) or entity (ies), including foreign entities ("Intermediaries"), with the understanding, whether recorded in writing or otherwise, that the Intermediary shall, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the co. ("Ultimate Beneficiaries") or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries;
       (ii) Whether the management has represented, that, to the best of it's knowledge & belief, other than as disclosed in the notes to the accounts, no funds have been received by the co. from any person(s) or entity(ies), including foreign entities ("Funding Parties"), with the understanding, whether recorded in writing or otherwise, that the co. shall, whether, directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party ("Ultimate Beneficiaries") or provide any guarantee, security or the like on behalf of Ultimate Beneficiaries; &
       (iii) Based on such audit procedures that the auditor has considered reasonable & appropriate in the circumstances, nothing has come to their notice that has caused them to believe that the representations under sub-clause (i) & (ii) contain any material misstatement.
    5. Whether the dividend declared or paid during the year by the co. is in compliance with section 123 of the Companies Act, 2013.
    6. Whether the co. has used such accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility & the same has been operated throughout the year for all transactions recorded in the software & the audit trail feature has not been tampered with & the audit trail has been preserved by the co. as per the statutory requirements for record retention.

Audit Trail means, a step-by-step sequential record which provides evidence of the documented history of financial transactions to its source. An auditor can trace every step of, the financial data of a particular transaction right from the general ledger to its source document with the help of the audit trail.

Managerial Remuneration

"The auditor of the co. shall, in his report u/s 143, make a statement as to whether the remuneration paid by the co. to its directors is in accordance with the provisions of this section, whether remuneration paid to any director is in excess of the limit laid down under this section & give such other details as may be prescribed".

The aforesaid reporting requirement for auditors of public companies needs to be covered in auditor's report under the Section "Report on Other Legal & Regulatory Requirements".

5. Duty to Report on Frauds - Sec 143(12)

A. Reporting to the Central Government -

As per section 143(12) of the Companies Act, 2013, if an auditor of a co. in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the co. by its officers or employees, the auditor shall report the matter to the Central Government within such time & in such manner as may be prescribed.

If an auditor of a co., in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of 1 crore or above, is being or has been committed against the co. by its officers or employees, the auditor shall report the matter to the Central Government.

The manner of reporting the matter to the Central Government is as follows:

1. The auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than 2 days of his knowledge of the fraud, seeking their reply or observations within 45 days;
2. On receipt of such reply or observations, the auditor shall forward his report & 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 CG within 15 days from the date of receipt of such reply or observations;
3. In case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of 45 days, he shall forward his report to the CG along with a note containing the details of his report that was earlier forwarded to Board or Audit Committee for which he has not received any reply or observations;
4. 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;
5. The report shall be on the letter-head of the auditor containing postal address, e-mail address & contact telephone number or mobile number & be signed by the auditor with his seal & shall indicate his Membership Number; &
6. The report shall be in the form of a statement as specified in Form ADT-4.

B. Reporting to the Audit Committee or Board -

In case of a fraud involving lesser than the amount specified in sub-rule (1) [i.e. less than 1 crore], the auditor shall report the matter to Audit Committee constituted u/s 177 or to the Board immediately but not later than 2 days of his knowledge of the fraud & he shall report the matter specifying the following:

1. Nature of Fraud with description;
2. Approximate amount involved; &
3. Parties involved.

C. Disclosure in the Board's Report:

The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during the year shall be disclosed in the Board's Report: -

1. Nature of Fraud with description;
2. Approximate Amount involved;
3. Parties involved, if remedial action not taken; &
4. Remedial actions taken.

Section 143(13) of the Companies Act, 2013 states that no duty to which an auditor of a co. may be subject to shall be regarded as having been contravened by reason of his reporting the matter above if it is done in good faith.

The provisions regarding fraud reporting shall also apply, mutatis mutandis, to a cost auditor & a secretarial auditor during the performance of his duties u/s 148 & section 204 respectively.

If any auditor, cost accountant or company secretary in practice does not comply with the provisions of section 143(12), he shall be liable to a penalty of

1. in case of a listed co., be liable to a penalty of 5 lakhs; &
2. in case of any other co., be liable to a penalty of 1 lakh.

The auditor is also required to report under clause (xi)(a) of paragraph 3 of CARO, 2020 during the year. If yes, the nature & the amount involved is to be indicated.

The definition of fraud as per SA 240 & the explanation of fraud as per Section 447 of the 2013 Act are similar, except that u/s 447, fraud includes 'acts with an intent to injure the interests of the co. or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.' However, an auditor may not be able to detect acts that have intent to injure the interests of the co. or cause wrongful gain or wrongful loss, unless the financial effects of such acts are reflected in the books of account/FS of the co.

For example,

• (i) An auditor may not be able to detect if an employee is receiving pay-offs for favoring a specific vendor, which is a fraudulent act, since such pay-offs would not be recorded in the books of account of the co.;
• (ii) If the password of a key managerial personnel is stolen & misused to access confidential/restricted information, the effect of the same may not be determinable by the management or by the auditor.

6. Duty To Report On Any Other Matter Specified By CG

The CG may, in consultation with the NFRA, 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.

Under this power given to CG, the CG has issued CARO, 2020.

7. Duties as to Branch Audit - Sec 143(8)

Qualifications of Branch Auditor - Where a co. has a branch office, the accounts of it shall be audited either by the auditor appointed for the co. under this Act or by any other person qualified for appointment as an auditor of the co. under this Act & appointed as such u/s 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.

The branch auditor shall prepare a report on the accounts of the branch examined by him & send it to the auditor of the co. who shall deal with it in his report in such manner as he considers necessary.

Reporting of fraud by the auditor shall also extend to such branch auditor to the extent it relates to the concerned branch.

8. Duty to state the reason for qualification or negative report- Sec 143(4)

As per section 143(4), where any of the matters required to be included in the audit report is answered in the negative or with a qualification, the report shall state the reasons there for.

2. APPLICABILITY OF COMPANIES (AUDITOR'S REPORT) ORDER, 2020

1. In exercise of the powers conferred by section 143(11) of the Companies Act, 2013 the Central Government hereby makes the COMPANIES (AUDITOR'S REPORT) ORDER, 2020.
2. It shall apply to every co. including a foreign co. as defined in clause (42) of section 2 of the Companies Act, 2013, except-
   • (i) a banking co. as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;
   • (ii) an insurance co. as defined under the Insurance Act, 1938;
   • (iii) a co. licensed to operate u/s 8 of the Companies Act;
   • (iv) a One Person Co. as defined under clause (62) of section 2 of the Companies Act & a small co. as defined under clause (85) of section 2 of the Companies Act; &
   • (v) a private limited co., not being a subsidiary or holding co. of a public co.,
     • having a paid up capital & reserves & surplus not more than 1 crore as on the BS date &
     • which does not have total borrowings exceeding 1 crore from any bank or financial institution at any point of time during the F.Y. &
     • which does not have a total revenue as disclosed in Schedule III to the Companies Act, 2013 (including revenue from discontinuing operations) exceeding 10 crores during the F.Y. as per the FS.

Provided this Order shall not apply to the auditor's report on consolidated financial statements except clause (xxi) of paragraph 3.

3. Reasons to be stated for unfavourable or qualified answers. -

Where, in the auditor's report, the answer to any of the questions referred to in paragraph 3 is unfavourable or qualified, the auditor's report shall also state the basis for such unfavourable or qualified answer, as the case may be.

Where the auditor is unable to express any opinion on any specified matter, his report shall indicate such fact together with reasons as to why it is not possible for him to give his opinion on the same.

Paid-Up Capital & Reserves & Surplus

• While calculating the paid-up capital, amount of calls unpaid should be deducted from & the amount originally paid-up on forfeited shares should be added to the figure of paid-up capital.
• Share application money received should not be considered as part of the paid-up capital.
• Convertible instruments whether optionally or fully convertible should be considered in paid up share capital only once the actual shares are issued by the company.
• "Reserves & Surplus" consists of: Capital Reserves; Capital Redemption Reserve; Securities Premium; Debenture Redemption Reserve; Revaluation Reserve; Share Options O/s Account; Other Reserves-(specify the nature & purpose of each reserve & the amount in respect thereof); Surplus i.e., balance in statement of profit & loss. (Debit balance of statement of profit & loss shall be shown as a negative figure under the head "Surplus".) Both capital as well as revenue reserves should be taken into consideration.
• It is important to note that as per Division II of Schedule III to the Act, equity component of compound financial instrument, revaluation surplus, debt/equity instrument through other comprehensive income (OCI), effective portion of cash flow hedges, exchange difference on translating the FS & other items of OCI are not considered to be part of reserve & surplus.

Borrowings

• Borrowings from banks or financial institutions can be long term or short term & are normally in the form of term loans, demand loans, export credits, cash credits, overdraft facilities, bills purchased or discounted.
• Current maturity of long term borrowings will also form part of borrowings.
• O/s dues in respect of credit cards would also be considered.
• O/s balances of such borrowings should be considered as borrowing.
• There is no stipulation in the Order that it should be a secured borrowing or an unsecured borrowing.
• Non-fund based credit facilities, to the extent such facilities have devolved & have been converted into fund based credit facilities, should also be considered as o/s borrowings.
• The figures of o/s borrowing would include the amount of bank guarantees issued by the bank on behalf of the co. where such guarantee(s) has been invoked & encashed or where, say, a letter of credit has been devolved on the co.
• In case of term loans, interest accrued & due is considered as a borrowing whereas interest accrued but not due is not considered as a borrowing.
• In case the co has a cash credit facility, whose balance is fluctuating in nature, the Order would apply to the co. in case on any day during the F.Y. concerned, the amount o/s in the cash credit facility along with other borrowings as per books of the co. exceeds 1 crore.
• The condition would also apply notwithstanding the fact that the co. has been granted an overdraft facility against, say, fixed deposits, of the co. with the concerned bank.

Revenue

• The term, "revenue", for the purpose of this Order shall be total revenue disclosed in Schedule III to the Act for companies required to comply with AS & total income for companies required to comply with Ind AS.
• Accordingly, the total revenue/total income would include other income as per Schedule III.

Branch Audit/Liasion Office

• The Order is also applicable to the audits of branch(es) of a co. since section 143(8) clearly specifies that a branch auditor has the same duties in respect of audit as the company's auditor.
• The Order is also applicable to the audits of project office/liaison office established by a co. outside India, to whom the Order applies.

3. MATTERS TO BE INCLUDED IN THE AUDITOR'S REPORT AS PER CARO, 2020

4. CARO – 21 Clauses

1. Property, Plant & Equipment and Intangible Assets
2. Inventory and Working Capital
3. Loans, Investments, Guarantees and Securities – Nature of Transactions
4. Loans, Investments, Guarantees and Securities – Compliance with Sections 185 and 186
5. Deposits
6. Cost Records
7. Statutory Dues
8. Undisclosed Income
9. Repayment of Loans or Other Borrowings
10. Issue of Securities / Proceeds
11. Fraud
12. Nidhi Company
13. Related Parties
14. Internal Audit System
15. Non-cash Transactions
16. Registration with RBI and NBFCs
17. Cash Losses
18. Resignation of Statutory Auditors
19. Material Uncertainty relating to Ability to Meet Liabilities
20. Corporate Social Responsibility
21. CARO Remarks on Consolidated Financial Statements