Responsibilities of an Auditor: Disqualification of Director

Responsibilities of an Auditor: Disqualification of Director

An auditor can be an individual or a firm appointed by an organization to execute an audit. A person should be authorized by the regulatory authority of accounting and auditing or possess distinctly restricted qualifications to act as an auditor. A person is qualified for the appointment as the auditor of the company only if he is a C.A. under the Chartered Accountants Act 1949. A firm where all the partners practicing in India are qualified to be appointed as an auditor may be called to audit a company. The certificate holder under the auditor’s certificate rules 1956 is also be entitled to appointment as an auditor.

Powers and Duties of an Auditor

Under section 143 of the Companies Act, 2013, if an auditor of a company, in the course of his duty has reason to believe that an offense involving fraud has been committed against the company by its officers or employees, he shall immediately report the matter to the Central Government. Different sub-sections under section 143 are-
• Section 143(1) – powers and duties of the director.
• Section 143(2) – Audit report.
• Section 143(3) – Duties of an auditor.
• Section 143(5) to 143(7) – Power of C&AG in the case of a government company.
• Section 143(8) – Branch audit.
• Section 143(9) and section 143(10) – the auditor must follow auditing criteria issues by NFRA.
• Section 143(12) to section 143(15) – Reporting of fraud by an auditor.

Section 143(1) –

Powers: Right to access books of accounts and Right to seek an explanation.
The duties of the auditor are to check –
• Loans and advanced gave without adequate security.
• Transactions are listed as book entries.
• Sales of investment below cost.
• Loans and advanced shows ad deposits.
• Charging personal expenses to revenue account.
• Shares issued for cash but details are not protected.

Section 143(2) –

The auditor has to comment on whether the financial statement is showing a true and fair view or not.

Section 143(3) –

An auditor must firm an opinion or prepare reports for the following;
1. To obtain necessary and sufficient information and explanation regarding the financial statements.
2. An adequate book of accounts is maintained as per law.
3. The branch audit report has been prepared by the person sent by the company other than the statutory auditor.
4. Whether the balance sheet and profit and loss account are in agreement with the book of account and returns.
5. The Auditor must firm his opinion on financial matters which harm the functioning of the company.
6. Whether any director is disqualified under section 164 or not.
7. Any adverse or negative comment regarding the maintenance of the book of accounts.
8. Whether internal control measures are adequate or not.
9. Any other matter that the company may prescribe in the future.
The auditor’s report, as per section 143(3)(g), shall also state, whether any director is disqualified from being appointed as a director under section 164. A director can be disqualified if his company has not filed annual returns to MCA for a continuous period of three years.

The auditor’s report shall also state –

• Whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for his audit;
• Whether the report on the accounts of any branch office audited under sub-section (8) by a person other than the company auditor has been sent to him under the provision to that subsection and how he has dealt with it in preparing his report;
• Whether, proper books of account have been kept by the company. The auditor should decide this after examining the books and returns of branches not visited by him;
• Whether, the financial statements of the company comply with the account standards; the audit report should also state observations or comments of the auditors on financial transactions or matters which may affect the functioning of the company adversely;
• Whether the profit/loss account and balance sheet dealt with in the audit report are in agreement with the books of account and returns;
• Whether the company has adequate internal financial controls concerning financial statements in place’
• Whether any director is disqualified from being appointed as a director under sub-section (2) of section 164; any qualification, reservation, or adverse remark relating to the maintenance of accounts and other matter connected therewith.

How auditor will review a director is disqualified or not?

• Receive DIR-8 from company directors every year before the audit. DIR-8 is a declaration by directors that they are not disqualified to proceed as director of the company or not disqualified from being appointed as a director.
• Check the status of the directorship of the Director on the MCA website and then check whether all the companies in which such person is the director has completed their annual filing with the ROC or not.
• Based on a declaration from the directors in DIR-8 and by analyzing the MCA website, the auditor shall conclude whether the director is disqualified or not. The auditor can report if all the directors are non- disqualified simply in the audit report.

If a director is disqualified, then how to report on the audit report?

As per the Section 143(3)(g), the auditor shall specifically mention in its audit report the disqualification of the Director. The auditor shall mention the following in its auditor report:
• Name of the Disqualified Director;
• Date of Disqualification;

• Reason for disqualification of Director;


Auditors have the duty to discharge their statutory functions with due diligence. Many stakeholders would reply to the auditor’s reports for accessing the financial picture of the company. However, there cannot be any particular prescription of negligence keeping in view the expectations of all the stakeholders. However, auditors are required to carry out their work within the discipline of the level provisions and the standards of accounting. The work of the auditors must uphold the highest standards of excellence and independence. Non-compliance with such standards should invite stringent penalties. The committee was of the view that the basic duties of the auditors and their liability need to be laid down in the law itself rather than in the Rules. Quantification of penalties for auditors may be prescribed in the rules. It was also expressed that the auditor signing the consolidated financial statement should be empowered to access the records, books, and documents of the entities. It was also felt that such right of the Auditor would be subject to rules framed in the Act. Because of the legal position that a statutory auditor will not be able to access all books and records of all entities whose accounts are consolidated, by the limitations of his appointment in the holding company, adequate records stating the basis for the consolidation of accounts should be made available to him.

By | 2021-01-27T17:45:56+05:30 January 27th, 2021|Removal of Disqualification of Directors|0 Comments

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