Definition of Auditing

Definition of Auditing ICAI, 2016 25-Aug-17 1

Definitions: (1) Auditing An audit is independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon. ICAI, 2016 25-Aug-17 2

Definition: Auditing An audit is independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon. ICAI, 2016 25-Aug-17 3

Definition: Auditing Analysis of the definition 1. Audit is Independent examination of Financial information 2. of any entity that entity may be profit oriented or not and irrespective of its size or legal form. For example Profit oriented Audit of Listed company engaged in business. On the other hand, Audit of NGO- not profit oriented. 3. The objective of the audit is to express an opinion on the financial statements ICAI, 2016 25-Aug-17 4

Definition: Auditing cntd. The person conducting this process should perform his work with knowledge of the use of the accounting statements and should take particular care to ensure that nothing contained in the statements will ordinarily mislead anybody. ICAI, 2016 25-Aug-17 5

Definition: Auditing This he can do honestly by satisfying himself that: cntd. (i) the accounts have been drawn up with reference to entries in the books of account; (ii) the entries in the books of account are adequately supported by underlying papers and documents and by other evidence; (iii) none of the entries in the books of account has been omitted in the process of compilation and nothing which is not in the books of account has found place in the statements; ICAI, 2016 25-Aug-17 6

Definition: Auditing cntd. (iv) the information conveyed by the statements is clear and unambiguous; (v) the financial statement amounts are properly classified, described and disclosed in conformity with accounting standards; and (vi) the statement of accounts taken as an integrated whole, present a true and fair picture of the operational results and of the assets and liabilities. ICAI, 2016 25-Aug-17 7

Objectives of Audit ICAI, 2016 25-Aug-17 8

Objectives of Audit As per SA-200 Overall Objectives of the Independent Auditor, in conducting an audit of financial statements, the overall objectives of the auditor are: ICAI, 2016 25-Aug-17 9

Objectives of Audit (a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and ICAI, 2016 25-Aug-17 10

Objectives of Audit (a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement thereby enabling the auditor to express an opinion on the financial statements ICAI, 2016 25-Aug-17 11

Objectives of Audit cntd. (b) To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor s findings. ICAI, 2016 25-Aug-17 12

Objectives of Audit cntd. The purpose of an audit is to enhance the degree of confidence. This is achieved by the expression of an opinion by the auditor ICAI, 2016 25-Aug-17 13

Objectives of Audit cntd. An audit conducted in accordance with SAs and relevant ethical requirements enables the auditor to form that opinion. ICAI, 2016 25-Aug-17 14

Audit Evidence ICAI, 2016 25-Aug-17 15

Audit Evidence Audit evidence may be defined as the information used by the auditor in arriving at the conclusions on which the auditor s opinion is based. ICAI, 2016 25-Aug-17 16

Audit Evidence Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. ICAI, 2016 25-Aug-17 17

Audit Evidence Audit evidence includes: cntd. (1) Information contained in the accounting records: Accounting records include the records of initial accounting entries and supporting records, such as records of electronic fund transfers; ICAI, 2016 25-Aug-17 18

Audit Evidence cntd. Point no. 1 Continued Audit evidence includes- invoices; contracts; the general and subsidiary ledgers, journal entries and other adjustments to the financial statements that are not reflected in journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations and disclosures. ICAI, 2016 25-Aug-17 19

Audit Evidence cntd. (2) Other information that authenticates the accounting records and also supports the auditor s rationale behind the true and fair presentation of the financial statements. ICAI, 2016 25-Aug-17 20

Audit Evidence cntd. Other information which the auditor may use as audit evidence includes, for example- minutes of the meetings, written confirmations from trade receivables and trade payables, manuals containing details of internal control etc. ICAI, 2016 25-Aug-17 21

Audit Evidence cntd. A combination of tests of accounting records and other information is generally used by the auditor to support his opinion on the financial statements. ICAI, 2016 25-Aug-17 22

Sufficiency and Appropriateness of Audit Evidence ICAI, 2016 25-Aug-17 23

Sufficiency and Appropriateness of Audit Evidence Audit evidence is necessary to support the auditor s opinion and report. It is cumulative in nature and is primarily obtained from audit procedures performed during the course of the audit. ICAI, 2016 25-Aug-17 24

Sufficiency and Appropriateness of Audit Evidence It may, however, also include information obtained from other sources such as previous audits. In addition to other sources inside and outside the entity, the entity s accounting records are an important source of audit evidence. ICAI, 2016 25-Aug-17 25

Sufficiency and Appropriateness of Audit Evidence cntd. As explained in SA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing, reasonable assurance is obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk to an acceptably low level. The sufficiency and appropriateness of audit evidence are interrelated. ICAI, 2016 25-Aug-17 26

Sufficiency and Appropriateness of Audit Evidence cntd. Sufficiency of Audit Evidence: Sufficiency is the measure of the quantity of audit evidence. ICAI, 2016 25-Aug-17 27

Sufficiency and Appropriateness of Audit Evidence cntd. The quantity of audit evidence needed is affected by the auditor s assessment of the risks of misstatement (the higher the assessed risks, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be required). Obtaining more audit evidence, however, may not compensate for its poor quality. ICAI, 2016 25-Aug-17 28

Sufficiency and Appropriateness of Audit Evidence cntd. Auditor s judgment as to sufficiency may be affected by the factors such as: (i) Materiality (ii) Risk of material misstatement (iii) Size and characteristics of the population. ICAI, 2016 25-Aug-17 29

Sufficiency and Appropriateness of Audit Evidence cntd. (i) Materiality may be defined as the significance of classes of transactions, account balances and presentation and disclosures to the users of the financial statements. ICAI, 2016 25-Aug-17 30

Sufficiency and Appropriateness of Audit Evidence cntd. Less evidence would be required in case assertions are less material to users of the financial statements. But on the other hand if assertions are more material to the users of the financial statements, more evidence would be required. ICAI, 2016 25-Aug-17 31

Sufficiency and Appropriateness of Audit Evidence cntd. (ii) Risk of material misstatement may be defined as the risk that the financial statements are materially misstated prior to audit. ICAI, 2016 25-Aug-17 32

Sufficiency and Appropriateness of Audit Evidence cntd. This consists of two components described as follows at the assertion level (a) Inherent risk (b) Control risk. Less evidence would be required in case assertions that have a lower risk of material misstatement. But on the other hand if assertions have a higher risk of material misstatement, more evidence would be required. ICAI, 2016 25-Aug-17 33

Sufficiency and Appropriateness of Audit Evidence cntd. Assertion- Assertions refer to representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur. ICAI, 2016 25-Aug-17 34

Sufficiency and Appropriateness of Audit Evidence cntd. Assertion- Assertions refer to representations by management that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur. ICAI, 2016 25-Aug-17 35

Sufficiency and Appropriateness of Audit Evidence cntd. (iii) Size of a population refers to the number of items included in the population. Less evidence would be required in case of smaller, more homogeneous population. But on the other hand in case of larger, more heterogeneous populations, more evidence would be required. ICAI, 2016 25-Aug-17 36

Sufficiency and Appropriateness of Audit Evidence cntd. Appropriateness of Audit Evidence: Appropriateness is the measure of the quality of audit evidence. ICAI, 2016 25-Aug-17 37

Sufficiency and Appropriateness of Audit Evidence cntd. The reliability of evidence is influenced by its source and by its nature, and is dependent on the individual circumstances under which it is obtained. ICAI, 2016 25-Aug-17 38

Sufficiency and Appropriateness of Audit Evidence cntd. SA 330, The Auditor s Responses to Assessed Risks requires the auditor to conclude whether sufficient appropriate audit evidence has been obtained. ICAI, 2016 25-Aug-17 39

Sufficiency and Appropriateness of Audit Evidence cntd. Whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level, and thereby enable the auditor to draw reasonable conclusions on which to base the auditor s opinion, is a matter of professional judgement. ICAI, 2016 25-Aug-17 40

Sources of Audit Evidence ICAI, 2016 25-Aug-17 41

Sources of Audit Evidence Some audit evidence is obtained by performing audit procedures to test the accounting records. For example- - through analysis and review, - reperforming procedures followed in the financial reporting process, - and reconciling related types and applications of the same information. ICAI, 2016 25-Aug-17 42

Sources of Audit Evidence cntd. Through the performance of such audit procedures, the auditor may determine that the accounting records are internally consistent and agree to the financial statements. ICAI, 2016 25-Aug-17 43

Sources of Audit Evidence cntd. More assurance is ordinarily obtained from consistent audit evidence obtained from different sources or of a different nature than from items of audit evidence considered individually. ICAI, 2016 25-Aug-17 44

Sources of Audit Evidence cntd. For example, corroborating information obtained from a source independent of the entity may increase the assurance the auditor obtains from audit evidence that is generated internally. ICAI, 2016 25-Aug-17 45

Sources of Audit Evidence cntd. Information from sources independent of the entity that the auditor may use as audit evidence may include confirmations from third parties, analysts reports, and comparable data about competitors. ICAI, 2016 25-Aug-17 46

Audit Procedures to Obtain Audit Evidence ICAI, 2016 25-Aug-17 47

Audit Procedures to Obtain Audit Evidence Audit evidence to draw reasonable conclusions on which to base the auditor s opinion is obtained by performing: (a) Risk assessment procedures; and (b) Further audit procedures, which comprise: (i) Tests of controls, when required by the SAs or when the auditor has chosen to do so; and (ii) Substantive procedures, including tests of details and substantive analytical procedures. ICAI, 2016 25-Aug-17 48

Audit Procedures to Obtain Audit Evidence cntd. Risk assessment procedures refer to the audit procedures performed to obtain an understanding of the entity and its environment, including the entity s internal control, to identify and assess the risks of material misstatement.. ICAI, 2016 25-Aug-17 49

Audit Procedures to Obtain Audit Evidence cntd. Audit procedures to obtain audit evidence can include : (i) Inspection (ii) Observation (iii) External Confirmation (iv) Recalculation (v) Reperformance (vi) Analytical Procedures (vii) Inquiry ICAI, 2016 25-Aug-17 50

Audit Procedures to Obtain Audit Evidence cntd. (i) Inspection: Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset. ICAI, 2016 25-Aug-17 51

Audit Procedures to Obtain Audit Evidence cntd. (ii) Observation: Observation consists of looking at a process or procedure being performed by others, for example, the auditor s observation of inventory counting by the entity s personnel, or of the performance of control activities. ICAI, 2016 25-Aug-17 52

Audit Procedures to Obtain Audit Evidence cntd. (iii) External Confirmation: An external confirmation represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium. ICAI, 2016 25-Aug-17 53

Audit Procedures to Obtain Audit Evidence cntd. (iv) Recalculation: Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically. ICAI, 2016 25-Aug-17 54

Audit Procedures to Obtain Audit Evidence cntd. (v) Re-performance: Re-performance involves the auditor s independent execution of procedures or controls that were originally performed as part of the entity s internal control. ICAI, 2016 25-Aug-17 55

Audit Procedures to Obtain Audit Evidence cntd. (vi) Analytical Procedures: Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. ICAI, 2016 25-Aug-17 56

Audit Procedures to Obtain Audit Evidence cntd. (vii) Inquiry: Inquiry consists of seeking information of knowledgeable persons, both financial and non- financial, within the entity or outside the entity. ICAI, 2016 25-Aug-17 57

Audit Procedures to Obtain Audit Evidence cntd. Inquiry is used extensively throughout the audit in addition to other audit procedures. Inquiries may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry process. ICAI, 2016 25-Aug-17 58

Audit Procedures to Obtain Audit Evidence cntd. At this stage, it would be pertinent to discuss further audit procedures, which comprise: (i) (ii) Tests of controls, when required by the SAs or when the auditor has chosen to do so; and Substantive procedures, including tests of details and substantive analytical procedures. ICAI, 2016 25-Aug-17 59

Audit Procedures to Obtain Audit Evidence cntd. Tests of controls: Test of controls may be defined as an audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. ICAI, 2016 25-Aug-17 60

Audit Procedures to Obtain Audit Evidence cntd. Substantive Procedures: Substantive procedure may be defined as an audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise: (i) Tests of details (of classes of transactions, account balances, and disclosures), and (ii) Substantive analytical procedures. ICAI, 2016 25-Aug-17 61

Audit Procedures to Obtain Audit Evidence cntd. Audit Procedures Risk Assessment Procedures Other Procedures Test of Controls Substantive Procedures Test of Details Analytical Procedures Test of Transactions i.e. Vouching Test of Balances i.e. Verification ICAI, 2016 25-Aug-17 62

Definition : Audit Risk It is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk. ICAI, 2016 25-Aug-17 63

Definition : Audit Risk It is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk. ICAI, 2016 25-Aug-17 64

Definition: Misstatement It is a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud. ICAI, 2016 25-Aug-17 65

Definition : Misstatement It is a difference between a reported financial statement item and that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud. ICAI, 2016 25-Aug-17 66

Risk of Material Misstatement It is the risk that the financial statements are materially misstated prior to audit. This consists of two components, described as follows at the assertion level: (i) Inherent risk The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. ICAI, 2016 25-Aug-17 67

Risk of Material Misstatement It is the risk that the financial statements are materially misstated prior to audit. ICAI, 2016 25-Aug-17 68

Definitions: (4) Risk of Material Misstatement This consists of two components (i) Inherent risk The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement before consideration of any related controls. ICAI, 2016 25-Aug-17 69

Definitions: (4) Risk of Material Misstatement (i) Inherent risk The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement before consideration of any related controls. ICAI, 2016 25-Aug-17 70

Definitions: (4) Risk of Material Misstatement For example Technological developments might make a particular product obsolete thereby causing inventory to be more susceptible to overstatement ICAI, 2016 25-Aug-17 71

Risk of Material Misstatement cntd. (ii) Control risk The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity s internal control. ICAI, 2016 25-Aug-17 72

Risk of Material Misstatement cntd. (ii) Control risk The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure will not be prevented, or detected and corrected, on a timely basis by the entity s internal control. ICAI, 2016 25-Aug-17 73

Risk of Material Misstatement cntd. Control Risk is a function of the effectiveness of the design, implementation and maintenance of Internal Control. ICAI, 2016 25-Aug-17 74

Risk of Material Misstatement cntd. Internal control can only reduce but not eliminate risk of material misstatement because of inherent limitations of internal control. ICAI, 2016 25-Aug-17 75

Risk of Material Misstatement cntd. For example Possibility of human error or mistakes. ICAI, 2016 25-Aug-17 76

Risk of Material Misstatement cntd. Some control risk will always exist. ICAI, 2016 25-Aug-17 77

Definition : Detection Risk It is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements. ICAI, 2016 25-Aug-17 78

Definitions: (5) Detection Risk It is the risk that the auditor s procedures will not detect a misstatement ICAI, 2016 25-Aug-17 79

Definition : Professional Judgment It is the application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. ICAI, 2016 25-Aug-17 80

Definition: Professional Skepticism It is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence. ICAI, 2016 25-Aug-17 81

Definition: Professional Skepticism It is an attitude that includes a questioning mind ICAI, 2016 25-Aug-17 82

Definition : Reasonable Assurance In the context of an audit of financial statements, Reasonable Assurance is a high, but not absolute, level of assurance. ICAI, 2016 25-Aug-17 83

Qualities of an Auditor ICAI, 2016 25-Aug-17 84

Qualities of an Auditor An auditor is concerned with the reporting on financial matters of business and other institutions. ICAI, 2016 25-Aug-17 85

Qualities of an Auditor cntd. The qualities required, according to Dicksee, are tact, caution, firmness, good temper, integrity, discretion, industry, judgement, patience, clear headedness and reliability. In short, all those personal qualities that go to make a good businessman contribute to the making of a good auditor. ICAI, 2016 25-Aug-17 86

Qualities of an Auditor cntd. In addition, he must have the shine of culture for attaining a great height. He must have the highest degree of integrity backed by adequate independence. In fact, Code of Ethics mentions integrity, objectivity and independence as one of the fundamental principles of professional ethics. ICAI, 2016 25-Aug-17 87

Qualities of an Auditor cntd. He must have a thorough knowledge of the general principles of law which govern matters with which he is likely to be in intimate contact. ICAI, 2016 25-Aug-17 88

Qualities of an Auditor cntd. Needless to say, where undertakings are governed by a special statute, its knowledge will be imperative; in addition, a sound knowledge of the law and practice of taxation is unavoidable. ICAI, 2016 25-Aug-17 89

Qualities of an Auditor cntd. He must pursue an intensive programme of theoretical education in subjects like financial and management accounting, general management, business and corporate laws, computers and information systems, taxation, economics, etc. Both practical training and theoretical education are equally necessary for the development of professional competence of an auditor for undertaking any kind of audit assignment. ICAI, 2016 25-Aug-17 90

Qualities of an Auditor cntd. The auditor should be equipped not only with a sufficient knowledge of the way in which business generally is conducted but also with an understanding of the special features peculiar to a particular business whose accounts are under audit. The auditor, who holds a position of trust, must have the basic human qualities apart from the technical requirement of professional training and education. ICAI, 2016 25-Aug-17 91

Qualities of an Auditor cntd. He is called upon constantly to critically review financial statements and it is obviously useless for him to attempt that task unless his own knowledge is that of an expert. An exhaustive knowledge of accounting in all its branches is the sine qua non of the practice of auditing. He must know thoroughly all accounting principles and techniques. ICAI, 2016 25-Aug-17 92

Qualities of an Auditor cntd. Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had succinctly summed up the overall view of what an auditor should be as regards the personal qualities. He said, an auditor must be honest that is, he must not certify what he does not believe to be true and must take reasonable care and skill before he believes that what he certifies is true. ICAI, 2016 25-Aug-17 93

Inherent Limitations of Audit ICAI, 2016 25-Aug-17 94

Inherent Limitations of Audit As per SA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing, the auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor s opinion being persuasive rather than conclusive. ICAI, 2016 25-Aug-17 95

Inherent Limitations of Audit As per SA 200, the auditor cannot reduce audit risk to zero and cannot therefore obtain absolute assurance. This is because there are inherent limitations of an audit ICAI, 2016 25-Aug-17 96

Inherent Limitations of Audit cntd. The inherent limitations of an audit arise from: (i) The Nature of Financial Reporting: The preparation of financial statements involves judgment by management in applying the requirements of the entity s applicable financial reporting framework to the facts and circumstances of the entity. ICAI, 2016 25-Aug-17 97

Inherent Limitations of Audit cntd. In addition, many financial statement items involve subjective decisions or assessments or a degree of uncertainty, and there may be a range of acceptable interpretations or judgments that may be made. ICAI, 2016 25-Aug-17 98

Inherent Limitations of Audit cntd. (ii) The Nature of Audit Procedures: There are practical and legal limitations on the auditor s ability to obtain audit evidence. ICAI, 2016 25-Aug-17 99

Inherent Limitations of Audit cntd. For example: 1. Fraud may involve sophisticated and carefully organised schemes designed to conceal it. Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement that involves, for example, collusion to falsify documentation which may cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither trained as nor expected to be an expert in the authentication of documents. ICAI, 2016 25-Aug-17 100

Inherent Limitations of Audit cntd. 2. An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given specific legal powers, such as the power of search, which may be necessary for such an investigation. ICAI, 2016 25-Aug-17 101

Inherent Limitations of Audit cntd. (iii) Timeliness of Financial Reporting and the Balance between Benefit and Cost: The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive. Appropriate planning assists in making sufficient time and resources available for the conduct of the audit. Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between the reliability of information and its cost. ICAI, 2016 25-Aug-17 102

Inherent Limitations of Audit cntd. (iii) Timeliness of Financial Reporting and the Balance between Benefit and Cost: the relevance of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between the reliability of information and its cost. ICAI, 2016 25-Aug-17 103

Inherent Limitations of Audit cntd. (iv) Other Matters that Affect the Limitations of an Audit: In the case of certain assertions or subject matters, the potential effects of the limitations on the auditor s ability to detect material misstatements are particularly significant. ICAI, 2016 25-Aug-17 104

Inherent Limitations of Audit Such assertions or subject matters include: cntd. - Fraud, particularly fraud involving senior management or collusion. - The existence and completeness of related party relationships and transactions. - The occurrence of non-compliance with laws and regulations. - Future events or conditions that may cause an entity to cease to continue as a going concern. ICAI, 2016 25-Aug-17 105

Inherent Limitations of Audit cntd. Because of the limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with SAs. ICAI, 2016 25-Aug-17 106

Section 139 of the Companies Act, 2013 Appointment of Auditors ICAI, 2015 25-Aug-17 107

Section 139(1): Appointment of subsequent auditors in case of Non-Government Companies Section 139(1) of the Companies Act, 2013 provides that every company shall, at the first annual general meeting appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. ICAI, 2015 25-Aug-17 108

Section 139(1): Appointment of subsequent auditors in case of Non-Government Companies Every company means here that no distinction among various companies has been made in this section. i.e each and every company has to appoint its auditors For example no distinction would be made public ltd company, private ltd company, OPC, small company etc. in application of sec 139. ICAI, 2015 25-Aug-17 109

Section 139(1): Appointment of subsequent auditors in case of Non-Government Companies Every company shall. Shall indicates that it would be mandatory for every company to appoint its auditors. You must remember that may is discretionary and shall is mandatory. ICAI, 2015 25-Aug-17 110

Section 139(1): Every Company to appoint Auditors Every Company Shall At First AGM Appoint an Auditor(individual or firm) ICAI, 2015 25-Aug-17 111

Section 139(1): Every Company to appoint Auditors Example- 1. Individual Rohit Kumar Chartered Accountant appointed as auditor of XYZ Ltd. ICAI, 2015 25-Aug-17 112

Section 139(1): Every Company to appoint Auditors Example- 2. Proprietorship Firm of CA Rohit Kumar Rohit Kumar & Co. Chartered Accountants appointed as auditor of XYZ Ltd. ICAI, 2015 25-Aug-17 113

Section 139(1): Every Company to appoint Auditors Example- 3. Partnership Firm of CA Rohit Kumar and CA Mohit Kumar Rohit Mohit & Co. Chartered Accountants appointed as auditor of XYZ Ltd. ICAI, 2015 25-Aug-17 114

Section 139(1): Every Company to appoint Auditors Shall hold office From that meeting Till The Sixth AGM ICAI, 2015 25-Aug-17 115

Section 139(1): Appointment of subsequent auditors in case of Non-Government Companies with the meeting wherein such appointment has been made being counted as the first meeting. ICAI, 2015 25-Aug-17 116

Section 139(1): Appointment of subsequent auditors in case of Non-Government Companies For example If appointment is made on 12-09-2015 for the financial year 2015-16, this meeting would be taken as the first meeting. 10-09-2016 - second meeting 11-09-2017- third meeting 12-09-2018- fourth meeting 11-09-2019- fifth meeting 10-09-2020- sixth meeting Auditor appointed on 12-09-2015 would hold office till the conclusion of sixth meeting i.e. for 5 years. ICAI, 2015 25-Aug-17 117

Section 139(1): Every Company to appoint Auditors Note 1: Ratification by members at every AGM ICAI, 2015 25-Aug-17 118

Section 139(1): Every Company to appoint Auditors Here the term RATIFICATION means CONFIRMATION that the auditor appointed earlier would continue in his office. ICAI, 2015 25-Aug-17 119

Section 139(1): Appointment of subsequent auditors in case of Non-Government Companies If the appointment is not ratified by the members of the company, Ans- the Board of Directors shall appoint another individual or firm as its auditor. ICAI, 2015 25-Aug-17 120

Section 139(1): Every Company to appoint Auditors Note 2: Selection of auditors as per Rule 3 ICAI, 2015 25-Aug-17 121

Section 139(1): Every Company to appoint Auditors Note 3: Before such appointment : 1. Written consent of the Auditor + ICAI, 2015 25-Aug-17 122

Section 139(1): Every Company to appoint Auditors 2. Certificate from him (re. appointment in accordance with conditions) ICAI, 2015 25-Aug-17 123

Section 139(1): Every Company to appoint Auditors Note 4: Certificate to indicate- That the auditor satisfies the criteria of Section 141 ICAI, 2015 25-Aug-17 124

Section 139(1): Every Company to appoint Auditors Section 141 is regarding disqualifications of a person to be appointed as an auditor ICAI, 2015 25-Aug-17 125

Section 139(1): Every Company to appoint Auditors Note 5: Company to inform the Auditor 1. About his appointment + ICAI, 2015 25-Aug-17 126

Section 139(1): Every Company to appoint Auditors 2.File a notice with the Registrar within 15 days ( re. appointment) in ADT-1 ICAI, 2015 25-Aug-17 127

Section 139(1): Every Company to appoint Auditors Note 6: Appointment includes reappointment ICAI, 2015 25-Aug-17 128

Section 139(2): Rotation of Auditor No listed company or a company belonging to such class or classes of companies as prescribed under rules, shall appoint or re-appoint- (a) an individual as auditor for more than one term of 5 consecutive years; and (b) an audit firm as auditor for more than two terms of 5 consecutive years. ICAI, 2015 25-Aug-17 129

Section 139(2): Rotation of Auditors No listed Company or a prescribed company shall appoint or reappoint- ICAI, 2015 25-Aug-17 130

Section 139(2): Rotation of Auditors (a) An individual Auditorfor more than one term of 5 years(consecutive) ICAI, 2015 25-Aug-17 131

Section 139(2): Rotation of Auditors (b) Firm Auditor- for more than two term of 5 years(consecutive) ICAI, 2015 25-Aug-17 132

Section 139(2): Rotation of Auditor Provided that - (i) an individual auditor who has completed his term under clause (a) shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of his term; (ii) an audit firm which has completed its term under clause (b), shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of such term. ICAI, 2015 25-Aug-17 133

Section 139(2): Rotation of Auditors Note 1: Once term is completed- would not be eligible for reappointment for 5 years ICAI, 2015 25-Aug-17 134

Section 139(2): Rotation of Auditor Note 2: The class of companies shall mean the following classes of companies: (a) all unlisted public companies having paid up share capital of rupees ten crore or more; ICAI, 2015 25-Aug-17 135

Section 139(2): Rotation of Auditor (b) all private limited companies having paid up share capital of rupees twenty crore or more; ICAI, 2015 25-Aug-17 136

Section 139(2): Rotation of Auditor (c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more. ICAI, 2015 25-Aug-17 137

Section 139(2): Rotation of Auditor Class of Companies for Rotation of Auditor including Listed Companies + excluding OPC (One Person Company) and Small Companies All unlisted public companies having paid up share capital ` 10 crore All private limited companies having paid up share capital ` 20 crore All companies having paid up share capital of below threshold limit mentioned, but having public borrowings from financial institutions, banks or public deposits ` 50 crore ICAI, 2015 25-Aug-17 138

Section 139(2): Rotation of Auditors Note 3: Firm having common partner to the other audit firm whose tenure has expired shall not be eligible for appointment. ICAI, 2015 25-Aug-17 139

Section 139(2): Rotation of Auditors For example: CA. X is a common partner in firm M/s ABC & Co. and M/s XYZ & Co. If M/s ABC & Co. has completed its tenure as an auditor in MWF Ltd. then M/s XYZ & Co. shall not be eligible to be appointed as an auditor in MWF Ltd. for 5 years. ICAI, 2015 25-Aug-17 140

Section 139(2): Rotation of Auditors Note 4: Every company shall comply with these requirements within three years from the date of commencement of this Act. ICAI, 2015 25-Aug-17 141

Section 139(4): Manner of Rotation of Auditor Illustration explaining rotation in case of individual auditor Number of consecutive years for which an individual auditor has been functioning as auditor in the same company [in the first AGM held after the commencement of provisions of section 139(2)] Maximum number of consecutive years for which he may be appointed in the same company (including transitional period) Aggregate period which the auditor would complete in the same company in view of column I and II I II III 5 Years (or more than 5 years) 3 years 8 years or more 4 years 3 years 7 years 3 years 3 years 6 years 2 years 3 years 5 years 1 year 4 years 5 years ICAI, 2015 25-Aug-17 142

Section 139(4): Manner of Rotation of Auditor Illustration explaining rotation in case of audit firm Number of consecutive years for which an audit firm has been functioning as auditor in the same company [in the first AGM held after the commencement of provisions of section 139(2)] Maximum number of consecutive years for which the firm may be appointed in the same company (including transitional period) Aggregate period which the firm would complete in the same company in view of column I and II I II III 10 Years (or more than 10years) 3 years 13 years or more 9 years 3 years 12 years 8 years 3 years 11 years 7 years 3 years 10 years 6 year 4 years 10 years 5 years 5 years 10 years 4 years 6 years 10 years 3 year 7 years 10 years 2 years 8 years 10 years 1 years 9 years ICAI, 2015 10 years 25-Aug-17 143

Section 139(2): Rotation of Auditor Note 5: Right of the company to remove an auditor or the right of the auditor to resign shall not be prejudiced. ICAI, 2015 25-Aug-17 144

Section 139(3): Rotation of Auditor Members of a company may resolve that- (a) the auditing partner and his team shall be rotated; or (b) the audit conducted by more than one auditor. ICAI, 2015 25-Aug-17 145

Section 139(4): Manner of Rotation of Auditor Rule 6 prescribes the manner of rotation of auditors ICAI, 2015 25-Aug-17 146

Section 139(4): Manner of Rotation of Auditor Note 1: The Audit Committee shall recommend to the Board, the name of the audit firm on expiry of the term. ICAI, 2015 25-Aug-17 147

Section 139(4): Manner of Rotation of Auditor Note 2: The Board shall consider the recommendation of Audit committee (where required), and in other cases, the Board shall itself consider the matter of rotation of auditors and recommend the next auditor. ICAI, 2015 25-Aug-17 148

Section 139(4): Manner of Rotation of Auditor Note 3: For the purpose of the rotation of auditors- the period prior to the commencement of the Act shall be considered for calculating the period of five consecutive years or ten consecutive years. ICAI, 2015 25-Aug-17 149

Section 139(4): Manner of Rotation of Auditor Note 4: For the purpose of the rotation of auditors- the incoming auditor shall not be eligible if associated with the outgoing auditor under the same network of audit firms. ICAI, 2015 25-Aug-17 150

Section 139(4): Manner of Rotation of Auditor same network includes the firms operating or functioning under the same brand name, trade name or common control. ICAI, 2015 25-Aug-17 151

Section 139(4): Manner of Rotation of Auditor Note 5: For the purpose of rotation of auditors,- (a) a break in the term for 5 continuous years shall fulfill the requirement of rotation; ICAI, 2015 25-Aug-17 152

Section 139(4): Manner of Rotation of Auditor For example, if CA. X has completed his tenure of 5 years in 2015-16. Now, he will have to break for 5 continuous years from 2016-17 to 2020-21. ICAI, 2015 25-Aug-17 153

Section 139(4): Manner of Rotation of Auditor (b) if a partner, who is in charge of an audit firm and also certifies the financial statements of the company, retires from the firm and joins another firm of chartered accountants, such other firm shall also be ineligible to be appointed for a period of five years. ICAI, 2015 25-Aug-17 154

Section 139(4): Manner of Rotation of Auditor For example, CA. X is a partner and in-charge of M/s XYZ & Co. He also certifies the financial statement of the company. M/s XYZ & Co. has completed its tenure in MWF Ltd. as auditor. Now, CA. X retires from M/s XYZ & Co. and joins M/s ABC & Co. Here, M/s ABC & co. shall also be disqualified to be appointed as an auditor of MWF Ltd. ICAI, 2015 25-Aug-17 155

Section 139(5): Appointment of subsequent auditors in case of Government Companies As per Section 139(5), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, the Comptroller and Auditor- General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of 180 days from the commencement of the financial year, who shall hold office till the conclusion of the AGM. ICAI, 2015 25-Aug-17 156

Section 139(5): Appointment of subsequent auditors in case of Government Companies In the case of a Government company, the Comptroller and Auditor-General of India shall, appoint an auditor within a period of 180 days from the commencement of the financial year, who shall hold office till the conclusion of the AGM. ICAI, 2015 25-Aug-17 157

Section 139(6): Appointment of First Auditors in the case of a company, other than a Government Company The first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within 30 days from the date of registration of the company. ICAI, 2015 25-Aug-17 158

Section 139(6): Appointment of First Auditors in the case of a company, other than a Government Company In the case of failure of the Board to appoint the auditor, it shall inform the members of the company. The members of the company shall within 90 days at an extraordinary general meeting appoint the auditor. Appointed auditor shall hold office till the conclusion of the first AGM. ICAI, 2015 25-Aug-17 159

Section 139(7): Appointment of First Auditors in the case of Government Company In the case of a Government company, the first auditor shall be appointed by the Comptroller and Auditor- General of India within 60 days from the date of registration of the company. ICAI, 2015 25-Aug-17 160

Section 139(7): Appointment of First Auditors in the case of Government Company For example, The first auditor of Health and Wealth Ltd., a Government company, was appointed by the Board of Directors. Is the appointment valid? (Note: Students may also refer Q. No. 8(a) of the Practice Manual (Edition: July, 2015)) ICAI, 2015 25-Aug-17 161

Section 139(7): Appointment of First Auditors in the case of Government Company No. In the case of a Government Company, the appointment of first auditor is governed by the provisions of section 139(7) of the Companies Act, 2013 which states that the first auditor shall be appointed by the C&AG of India within 60 days from the date of registration of the company. ICAI, 2015 25-Aug-17 162

Section 139(7): Appointment of First Auditors in the case of Government Company In case the Comptroller and Auditor-General of India does not appoint such auditor within the above said period, the Board of Directors of the company shall appoint such auditor within the next 30 days. Further, in the case of failure of the Board to appoint such auditor within next 30 days, it shall inform the members of the company who shall appoint such auditor within 60 days at an extraordinary general meeting. Auditors shall hold office till the conclusion of the first annual general meeting. ICAI, 2015 25-Aug-17 163

Section 139(8): Filling of a Casual Vacancy Filling of casual vacancy {u/s 139 (8)} Other Companies Govt. Companies To be filled by BOD within 30 days To be filled by C&AG within 30 days In case of resignation, appointment by BOD should be approved by Co. at AGM In case of failure, BOD shall fill within 30 days ICAI, 2015 25-Aug-17 164

Section 139(8): Filling of a Casual Vacancy As per Section 139(8), any casual vacancy in the office of an auditor shall - (i) In the case of a company other than a Government company be filled by the Board of Directors within 30 days. ICAI, 2015 25-Aug-17 165

Section 139(8): Filling of a Casual Vacancy If such casual vacancy is due to the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting. ICAI, 2015 25-Aug-17 166

Section 139(8): Filling of a Casual Vacancy For example, Due to the resignation of the existing auditor, the Board of directors of X Ltd. appointed CA. Hari as the auditor. Is the appointment of CA. Hari as auditor valid? (Note: Students may also refer Q. No. 5(a) of the Practice Manual (Edition: July, 2015)) ICAI, 2015 25-Aug-17 167

Section 139(8): Filling of a Casual Vacancy No. Any casual vacancy in the office of an auditor shall be filled by the BOD within 30 days. If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the Board. ICAI, 2015 25-Aug-17 168

Section 139(8): Filling of a Casual Vacancy (ii) In the case of a Government company, be filled by the Comptroller and Auditor-General of India within 30 days. It may be noted that in case the Comptroller and Auditor-General of India does not fill the vacancy within the said period the Board of Directors shall fill the vacancy within next 30 days. ICAI, 2015 25-Aug-17 169

Section 139(9): Re-appointment A retiring auditor may be re-appointed at an annual general meeting, if- (a) he is not disqualified for re-appointment; ICAI, 2015 25-Aug-17 170

Section 139(9): Re-appointment (b) he has not given the company a notice in writing of his unwillingness to be re-appointed; and ICAI, 2015 25-Aug-17 171

Section 139(9): Re-appointment and (c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed. ICAI, 2015 25-Aug-17 172

Section 139(10): No auditor appointed Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company. ICAI, 2015 25-Aug-17 173

Section 139(11): Appointment of Auditor in case of Audit Committee Where a company is required to constitute an Audit Committee under section 177, all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee. ICAI, 2015 25-Aug-17 174

Section 139(1), (5), (6) and (7) at a glance Explain the following: (a) Appointment of First Auditor of a Non-Government Company. (b) Appointment of First Auditor of a Government Company. (c) Appointment of Subsequent Auditor of a Non-Government Company. (d) Appointment of Subsequent Auditor of a Government Company. (Note: Students may also refer Q. No. 46 of the Practice Manual (Edition: July, 2015)) ICAI, 2015 25-Aug-17 175

Section 139(1), (5), (6) and (7) at a glance Appointment of Auditors: Section 139 of the Companies Act, 2013 contains provisions regarding appointment of Auditors. Provisions related to appointment of auditors may be grouped under two broad headings- I Appointment of First Auditors. II Appointment of Subsequent Auditors. ICAI, 2015 25-Aug-17 176

Section 139(1), (5), (6) and (7) at a glance (a) Appointment of First Auditor of a Non-Government Company: As per Section 139(6) of the Companies Act, 2013, the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within 30 days from the date of registration of the company. In the case of failure of the Board to appoint the auditor, it shall inform the members of the company. The members of the company shall within 90 days at an extraordinary general meeting appoint the auditor. Appointed auditor shall hold office till the conclusion of the first annual general meeting. ICAI, 2015 25-Aug-17 177

Section 139(1), (5), (6) and (7) at a glance (b) Appointment of First Auditor of a Government Company: Section 139(7) of the Companies Act, 2013 provides that in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of India within 60 days from the date of registration of the company. ICAI, 2015 25-Aug-17 178

Section 139(1), (5), (6) and (7) at a glance In case the Comptroller and Auditor-General of India does not appoint such auditor within the above said period, the Board of Directors of the company shall appoint such auditor within the next 30 days. Further, in the case of failure of the Board to appoint such auditor within next 30 days, it shall inform the members of the company who shall appoint such auditor within 60 days at an extraordinary general meeting. Auditors shall hold office till the conclusion of the first annual general meeting. ICAI, 2015 25-Aug-17 179

Section 139(1), (5), (6) and (7) at a glance (c) Appointment of Subsequent Auditor of a Non- Government Company: As per section 139(1) of the Companies Act, 2013, every company shall, at the first annual general meeting appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. ICAI, 2015 25-Aug-17 180

Section 139(1), (5), (6) and (7) at a glance (d) Appointment of Subsequent Auditor of a Government Company: As per Section 139(5) of the Companies Act, 2013, in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, the Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of 180 days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting. ICAI, 2015 25-Aug-17 181

Section 141 of the Companies Act, 2013 Eligibility, Qualifications and Disqualifications of Auditors ICAI, 2015 25-Aug-17 182

Section 141(1): Eligibility /Qualification for Appointment as Auditor A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant. It may be noted that a firm whereof majority of partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company. ICAI, 2015 25-Aug-17 183

Section 141(2): Authorisation to Act and Sign Where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm. ICAI, 2015 25-Aug-17 184

Section 141(3): Disqualifications of Auditors Under sub-section (3) of section 141 along with Rule 10 of the Companies (Audit and Auditors) Rule, 2014, the following persons shall not be eligible for appointment as an auditor of a company, namely: ICAI, 2015 25-Aug-17 185

Section 141(3): Disqualifications of Auditors (a) a body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008; (b) an officer or employee of the company; ICAI, 2015 25-Aug-17 186

Section 141(3): Disqualifications of Auditors (c) a person who is a partner, or who is in the employment, of an officer or employee of the company; ICAI, 2015 25-Aug-17 187

Section 141(3): Disqualifications of Auditors Following persons are disqualified from being appointed as auditor of a company: (i) partner of an officer of the company; (ii) employee of an officer of the company; (iii) partner of an employee of the company; (iv) employee of an employee of the company ICAI, 2015 25-Aug-17 188

Section 141(3): Disqualifications of Auditors (d) a person who, or his relative or partner - (i) 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. However, the relative may hold security or interest in the company of face value not exceeding Rs. 1 lakh. ICAI, 2015 25-Aug-17 189

Section 141(3): Disqualifications of Auditors 1. For example, Mr. A, a practicing Chartered Accountant, is holding securities of XYZ Ltd. having face value of Rs. 900/-. Here, Mr. A is disqualified for appointment as an Auditor of XYZ Ltd. ICAI, 2015 25-Aug-17 190

Section 141(3): Disqualifications of Auditors 2. For example, Mr. P is a practicing Chartered Accountant and Mr. Q, the relative of Mr. P, is holding securities of ABC Ltd. having face value of Rs. 90,000/-. Here, Mr. P is not disqualified for appointment as an Auditor of ABC Ltd. ICAI, 2015 25-Aug-17 191

Section 141(3): Disqualifications of Auditors 3. For example, BC & Co. is an Audit Firm having partners Mr. B and Mr. C, and Mr. A the relative of Mr. C, is holding securities of MWF Ltd. having face value of Rs. 1,01,000/-. Here, BC & Co. is disqualified from being appointed as an Auditor of MWF Ltd. ICAI, 2015 25-Aug-17 192

Section 141(3): Disqualifications of Auditors Provided that the condition of rupees one lakh shall, be also applicable in the case of a company not having share capital or other securities. Provided further that in the event of acquiring any security or interest by a relative, above the threshold prescribed, the corrective action to maintain the limits as specified above shall be taken by the auditor within sixty days of such acquisition/ interest. ICAI, 2015 25-Aug-17 193

Section 141(3): Disqualifications of Auditors (ii) 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. 5 lakh; or ICAI, 2015 25-Aug-17 194

Section 141(3): Disqualifications of Auditors A person shall be disqualified to be appointed as auditor if he or his relative or his partner is indebted in excess of Rs. 5 Lakhs to : (i) the company; or (ii) its subsidiary; or (iii) its holding company; or (iv) its associate company; or (v) a subsidiary of such holding company. ICAI, 2015 25-Aug-17 195

Section 141(3): Disqualifications of Auditors (iii) has given a guarantee or provided any security in connection 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, in excess of Rs. 1 lakh. ICAI, 2015 25-Aug-17 196