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AUDIT AND AUDITORS - Proposed Amendments in the Companies Act 2013

News and Press Release - Dated:- 2-2-2016 - Appointment of Auditors 10.1 Section 139(1) provides that the shareholders at the Annual General Meeting (AGM) shall appoint an auditor of a company, for a consecutive period of five years, and that his appointment shall be ratified every year at the AGM. The first proviso to the said sub-section requires the company to place the matter relating to such appointment, for ratification by the members in each AGM. During the consultation, clarity was sough .....

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ears would be akin to removal of the auditor and provisions of Section 140(1) should come into play. Explanation to Rule 3 of Companies (Audit and Auditors) Rules, 2014, provides for such a situation and requires that the Board shall appoint another individual or firm as the auditor (s) after following the procedure laid down in this behalf under the Act. There is an inconsistency due to the two provisions, wherein removal would require a special resolution and approval of the Central Government .....

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he filling up such casual vacancy arising due to resignation should apply. This may be made explicit in the section itself. Rotation of auditors 10.4 Section 139 (2) provides for the rotation of auditors, and requires such rotation after five consecutive years, in case of individual, and ten consecutive years, in case of a firm. The third proviso to Section 139 (1) requires for the compliance of the provisions of rotation within three years from the commencement of the Act. Rule 6(2) of the Comp .....

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either omit the provisions or increase the transition period to five years in view of implementation of Indian Accounting Standards. It was pointed out that the new requirements have been largely accepted by the auditors. The Committee noted that the three years transitional period provided to companies was reasonable and required no modification. Further, the intention of the legislation had been accurately translated in the Rules, and for this purpose, a transitional time period of three years .....

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s Twenty Crore or more were required to follow this provision. The threshold has been prescribed keeping in view the importance of such a provision for the purposes of good corporate governance and larger public interest. The Committee, therefore, decided against increasing this threshold to reduce the coverage of private companies. Disqualification of Auditors 10.7 Section 141 (3) (d) of the Act, inter alia, provides that a person shall not be eligible for appointment as an auditor of a company .....

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ive be restricted only to financially dependent relatives. 10.8 The Committee deliberated on the suggestion and noted that the definition of the term relative had been significantly changed and the coverage reduced to only eight relatives. It was also noted that restricting the coverage to financially dependent relatives in the Indian context would impair the principle of ensuring independence of the auditor. It was deliberated whether the difficulties expressed would be addressed if the thresho .....

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r associate company, or any other form of entity is engaged on the date of appointment, in the services prohibited under Section 144, shall be disqualified from being appointed as an auditor. It was suggested during the public consultation that the language of Section 141(3) (i) was such that a firm which was engaged in any of the activities mentioned in Section 144 anywhere in the world, and was rendering any such service to companies other than the auditee company, could not be appointed as an .....

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amending the clause. Powers and duties of auditors and auditing standards 10.10 The first proviso to Section 143 (1) of the Act provides that the auditor of a holding company shall also have the right to access the books of accounts of subsidiary companies, in connection to the consolidation of accounts. In view of this, it was suggested that the auditor of the holding company should also have the right of access to accounts and records of a joint venture/ associate company, also in connection .....

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ce and the operating effectiveness of such controls. This has to be read with Section 134 (5) (e) on the Directors Responsibility Statement which also defines internal financial controls, and Rule 8(5)(viii) of Companies (Accounts) Rules, 2014. Rule 10A of the Company (Audit and Auditors) Rules, 2014, makes the requirement under Section 143(3)(i) optional for FY 14-15 and is mandatory from FY 15-16 onwards. It has been expressed that auditing internal financial control systems by auditors would .....

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ts. 10.12 It was brought before the Committee that a combined reading of the requirements of Section 129(3), 129(4) as well as Sections 143(2) and 143(3) of the Companies Act, 2013, suggests that the Act prescribes the same reporting requirements for the auditors for both the standalone and consolidated financial statements. The application of the auditor s specific reporting requirements under Section 143(3) of the Act for consolidated financial statements may result in practical issues around .....

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t report on CARO may not be practicable for the audit of the consolidated financial statements. In the case of Indian subsidiary, associate and joint venture companies, such reporting requirements would also be covered by the auditor s report on the financial statements of those Indian entities. Further, the requirement to report on internal financial controls is quite exhaustive and application of the same to the consolidated financial statements would significantly enlarge the scope of audit o .....

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ection 143(5) provides that in case of a Government company, the Comptroller and Auditor General (C&AG) shall appoint the auditor and direct such auditor on the manner in which the accounts are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the C&AG which, among other things, include the directions, if any, issued by the C&AG, the action taken thereon and its impact on the accounts and financial statement of the company. It wa .....

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12) provides that if an auditor of a company 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 company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed. After due consideration, the Committee concluded that the words is being committed appearing in th .....

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ection should be given to auditors for liabilities arising on account of reporting on fraud u/s 143 (12). The Committee noted that Section 143 (13) already provided for adequate protection. Auditor not to render certain services 10.16 Section 144 prohibits rendering of certain non-audit services directly or indirectly to the auditee company or its holding company or subsidiary company. Clarity was sought on the term management services used in Section 144(h). It was also suggested that restricti .....

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itor and auditee, and thus may impinge on the independence of the auditor. It, therefore, recommended no change in the provision, or for providing any exemption to any class of companies. However, it was recommended that ICAI, after consulting the Ministry of Corporate Affairs, should come up with a guidance note for auditors. Punishment for contravention 10.17 Section 147(5) provides that where an audit is conducted by an audit firm, and it is proved that the partner or partners of the audit fi .....

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