Ch. 10 Audit and Auditors: PYQ Decoder

May 20264(a)5 marksNew Scheme

(a)Kanchan Finance Ltd. is a listed company. Since the term of the present statutory auditor is to hold office up to the conclusion of the upcoming Annual General Meeting to be held on 25th August, 2026, the name of new statutory auditor, CA Trilok was placed before the Audit Committee. The audit committee recommended the name of CA Trilok for the consideration of the Board of Directors (BOD). However, the BOD was not convinced with the recommendations of the audit committee and it referred back the proposal to the audit committee for reconsideration. However, the members of the audit committee were not convinced with the reasons cited by the BOD and resent the proposal of CA Trilok to BOD again. The BOD was in disagreement with the opinion of the audit committee.

In light of the above facts, answer the following referring to the relevant provisions of the Companies Act, 2013:

(i)Who are the competent authorities that shall recommend the name for appointment as the auditor and briefly discuss the points the competent authority shall take into consideration before appointing a Chartered Accountant as auditor? (2 Marks)

(ii)How will the auditor be appointed in the present situation where the BOD disagrees with recommendations of the audit committee? (3 Marks)

(a)(i) As per Rule 3(1) of the Companies (Audit and Auditors) Rules, 2014,
•a company which is required to constitute an Audit Committee
under section 177 of the Companies Act, 2013, the competent authority would be the Audit Committee and
•a company which is not required to constitute an Audit
Committee under section 177, the competent authority would be the Board of Directors.
The competent authority shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and such qualifications and experience are commensurate with the size and requirements of the company.
The competent Authority shall have regard to any order or pending proceeding relating to professional matters of conduct against the proposed auditor before the Institute of Chartered Accountants of India (ICAI) or any competent authority or any Court.
It may call for such other information from the proposed auditor as it may deem fit.
(ii)As per Rule 3(1) of the Companies (Audit and Auditors) Rules, 2014:
Where a company is required to constitute the Audit Committee, the committee shall recommend the name of an individual or a firm as auditor to the Board for consideration.
Here, Kanchan Finance Ltd. is a listed company, therefore, Audit Committee shall be constituted by Board of directors under section 177.
If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the recommendation to the committee for reconsideration citing reasons for such disagreement.
If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider its original recommendation, the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration of the members in the annual general meeting.
Therefore, in the instant case, as the Board of directors of Kanchan Finance Ltd. was in disagreement with the opinion of the Audit Committee regarding the appointment of CA Trilok as an auditor, the Board shall send its own recommendation for consideration of the members in the annual general meeting, where the members will decide on the appointment of the auditor.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2026, 4(a) (New Scheme).

May 20251(b)5 marksNew Scheme

(b)Sangeeta was appointed as Statutory Auditor of ABC Ltd. in the Annual General Meeting (AGM) of the shareholders held on 20th August, 2023. However, Sangeeta met with an accident on 23rd December, 2023 and died. The Board of Directors of the ABC Ltd. filled up the casual vacancy caused by the sudden death of Sangeeta and appointed Keshav as the Statutory Auditor. The next AGM of the Company was scheduled for 28th August, 2024 in which the Board of Directors recommended for appointment of Aashish as Statutory Auditors before the shareholders.
Keshav objected for the appointment of Aashish and gave representation to the Company Secretary mentioning therein that his (Keshav) appointment was approved by the Board of Directors after the demise of Sangeeta thus can continue as Statutory Auditor of the Company till the conclusion of the next 6th Annual General Meeting and also threatened to report the matter to the Registrar and the NCLT.
Based on the above facts answer the followings:
(i)Explain the procedure to fill up the casual vacancy of the office of Statutory Auditor.
(ii)Whether the contention raised by Keshav is justified as per the provisions of the Companies Act, 2013?
(iii)What shall be your answer, if the casual vacancy in the office of the Statutory Auditor in the company was caused by resignation of
Sangeeta? (5 Marks)

(b)(i) Procedure to fill up the casual vacancy of the office of the Statutory Auditor
Section 139(8) of the Companies Act, 2013 (the Act) describes the procedure for filling up the vacant position of the office of Statutory Auditor caused by a casual vacancy.
Accordingly, in case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor and General of India, the Board of directors may fill any casual vacancy in the office of an auditor within 30 days. Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next annual general meeting.
Further, in terms of Section 139(11) of the Act, where a Company is required to constitute an Audit Committee under Section 177 of the Act, 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.
(ii)Whether the contention raised by Keshav is justified?
As per the above provision [Section 139(1) of the Act], Keshav (auditor appointed in a casual vacancy) can hold office until the conclusion of the next annual general meeting i.e. 28th August, 2024.
Thus, the company can validly appoint Aashish as Statutory Auditors in the AGM held on 28th August, 2024. Hence, the contention raised
by Keshav is not justified. Further, in this AGM, the Board of Directors of ABC Ltd. have already recommended to the shareholders for the appointment of Aashish as the new Statutory Auditor.
(iii)If the casual vacancy in the office of the Statutory Auditor in the company was caused by resignation of Sangeeta.
As per Section 139(8)(i) of the Act, where the casual vacancy is caused by 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.
If the casual vacancy in the office of auditor (Sangeeta) was caused by resignation of Sangeeta, the appointment of Keshav shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and the tenure of such new auditor shall be till the conclusion of the next AGM.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2025, 1(b) (New Scheme).

May 20254(a)5 marksNew Scheme

(a)XYZ Ltd., uses an Accounting Software for recording its financial transactions.
The statutory auditor of the company while auditing finds the following issues:
Some journal entries were altered without creating edit logs for all such changes.
The audit trail feature was disabled for certain modules (e.g., inventory adjustments, inter-company transactions).
Keeping in view of the above issue, advice the company on the followings:
(i)Audit trail and Edit Log requirements
(ii)The back-up of books of accounts. (5 Marks)

(a)The second proviso to Section 128(1) of the Companies Act, 2013 allows company to keep books of account or other relevant papers in electronic mode as per manner specified in Rule 3 of the Companies (Accounts) Rules, 2014.
Rule 3(1) states the books of account and other relevant books and papers maintained in electronic mode shall remain accessible in India, at all times, so as to be usable for subsequent reference.
(i)Audit Trail and Edit Log [Proviso to Rule 3(1)]
In order to ensure audit trial, in case of company which uses accounting software for maintaining its books of account, the proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 requires that:
(1)For the financial year commencing on or after the 1st day of April,
2023,
(2)Every such company (which uses accounting software) shall use only such accounting software,
(3)Which has a feature of recording audit trail of each and every transaction,
(4)Creating an edit log of each change made in books of account along with the date when such changes were made and
(5)Ensuring that the audit trail cannot be disabled.
Further, Sub-rule 5 requires there shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law.
Advice to the Company:
XYZ Ltd. has not complied with the Audit Trail and Edit Log requirements of the Companies Act, 2013 since the journal entries were altered without creating edit logs and audit trail feature was also partially disabled.
Therefore, XYZ Ltd. should ensure compliance with the above provisions by enabling edit log features for all entries linked to its creation and alteration, and enabling the audit trail feature for all modules.
(ii)The back-up of books of accounts
Proviso to sub-rule 5 of Rule 3 requires the back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a daily basis.
Hence, the issue raised by the statutory auditor of XYZ Ltd. with respect to mandatory requirement of maintaining the audit trail and edit log requirement, and with respect to maintenance of the backup of books of accounts is correct.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2025, 4(a) (New Scheme).

January 20251(b)5 marksNew Scheme

(b)Sohan Lal was appointed as the statutory auditor of RST Ltd., a nongovernment company at the Annual General Meeting held on 30th September, 2023. He has resigned after two months as he wanted to discontinue the practice and surrendered his Certificate of Practice and joined a multinational company.

Explain how the new auditor will be appointed by RST Ltd. and the conditions to be complied with in this regard.

(b)Filling Up Casual Vacancy [ Section 139(8)]
Any vacancy arising in the office of the auditor due to any reason except on the expiry of his term is known as a casual vacancy.
As per section 139(8) of the Companies Act, 2013 (the Act), the Board of Directors (other than a Government Company) has power to fill casual vacancy in the office of the auditor within 30 days.
In case of casual vacancy due to the resignation of the auditor, such appointment shall be approved by the company by passing an ordinary resolution at a General Meeting convened within three months of the recommendation of the Board.
Any auditor so appointed in a casual vacancy shall hold office until the conclusion of the next annual general meeting.
Appointment of auditors to fill casual vacancy shall be made after taking into account the recommendation of the Audit Committee, (if any). [Section 139(11)].
Written and signed consent and certificate shall be obtained from the auditor stating the appointment shall be in accordance with the conditions as may be prescribed under Rule 4 of the Companies (Audit and Auditors) Rules, 2014 and satisfies the criteria provided in Section 141 of the Act. The Company shall inform the auditor concerned of his or its appointment.
Compliances:
As per section 140(2) and (3) of the Act read with Rule 8 of Companies (Audit and Auditors) Rules, 2015, the resigning auditor shall file
Form ADT-3 with the company and the Registrar of Companies (ROC) along with valid reasons within 30 days of the date of resignation.
The company shall file a notice of appointment in Form ADT-1 with the ROC within fifteen days of the meeting in which the auditor is so appointed.
The new auditor appointed under Rule 3 shall submit a certificate that:
(i)the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for appointment under sections 139, 141, and other applicable provisions of the Companies Act, 2013, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder;
(ii)A written consent to act as the auditor.
(iii)the proposed appointment is within the limits laid down by or under the authority of the Act;
(iv)The list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
(v)The new auditor must communicate with the resigning auditor to ensure there are no professional or ethical concerns.
Thus, the Statutory Auditor can be appointed as per the procedure mentioned above.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 1(b) (New Scheme).

January 20253(b)5 marksNew Scheme

(b)(i) Members of World One Limited, holding more than 2% of the total voting power wants the company to give a special notice to move a resolution for appointment of an auditor other than retiring auditor. Explain whether members can do so as per the provisions of the Companies Act, 2013.

(ii)If a member of a listed company who has casted his vote through electronic voting, can attend general meeting of the company and change his vote subsequently?

(b)(i) According to section 115 of the Companies Act, 2013, where, by any provision contained in this Act or in the Articles of a company, special notice is required for passing any resolution, then the notice of the intention to move such resolution shall be given to the company by such number of members holding not less than 1% of the total voting power, or holding shares on which such aggregate sum not exceeding five lakh rupees, as may be prescribed, has been paid-up.
In such a case, the company shall give its members notice of the resolution in the manner as prescribed in Rule 23 of the Companies (Management and Administration) Rules, 2014.
Further, section 140(4) of the Companies Act, 2013 (the Act), provides provision for the appointment of an auditor other than the retiring auditor. As per this section, special notice shall be required for a resolution at an annual general meeting for appointing a person as an auditor in place of the retiring auditor, or providing expressly that a retiring auditor should not be re-appointed.
In the present case, the provisions of section 115 of the Act have been duly complied with. That is to say the notice of the intention to move such a resolution as to appointment of auditor other than the retiring auditor has been given by members of World One Limited, holding more than 2% (i.e. more than 1 %) of the total voting power. Accordingly, members can do so as per the provisions of the Companies Act, 2013.
Alternate Answer
Rule 23(1) of the Companies (Management and Administration) Rules, 2014 specifies that a special notice required to be given to the company shall be signed, either individually or collectively by such number of members holding not less than one percent of total voting power or holding shares on which an aggregate sum of not less than 5,00,000 rupees has been paid up on the date of notice.
As per the facts of the question, Members of World One Limited, holding more than 2% of the total voting power, wants the company to give a special notice to move a resolution for appointment of an auditor other than the retiring auditor.
From the above provision, it can be inferred that the members holding 2% of total voting power can approach the company to give a special notice. However, they cannot force the company to give a special notice to move a resolution for appointment of an auditor other than the retiring auditor as stated in the question.
(ii)According to Rule 20(4) (v) (f) (C) of the Companies (Management and Administration) Rules, 2014, the notice of the meeting shall clearly state that the members who have cast their vote by remote e-voting prior to the meeting may also attend the meeting but shall not be entitled to cast their vote again.
Thus, in the given question, if a member of a listed company has casted his vote through electronic voting, he can still attend the general meeting of the company but neither he can vote again nor he can change his vote.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 3(b) (New Scheme).

January 20256(a)5 marksNew Scheme

(a)Top Spinners Foundation is a company registered under section 8 of the Companies Act, 2013 with a view to promote young and talented people towards becoming of world class cricketers. The foundation selects young boys and girls from different parts of the country via talent hunt competitions and other references from its members, thereby giving them proper training with residential facilities at the designated clubs opened for the purpose. The Foundation had been incorporated as a charitable institution in 2016. Currently it is having 1200 members. The Annual General meeting of the company is usually held at the club cum registered office of the company at Jaipur.
The members in one of the general meetings have strongly suggested that the next Annual general meeting of the company be held at a hotel in near vicinity of the Registered office at Jaipur instead of the Club as the same has a congested sitting area.
It was also decided by the foundation itself that a 15 days’ notice prior to the Annual General Meeting be given with facility of only physical voting and no E-Voting to be provided to the members.
Referring to the relevant rules and provisions of the Companies Act, 2013 decide on the following:
(i)Whether it is compelling upon the board to consider the directions regarding shift of the venue for the meeting?
(ii)Whether a 15 days' prior notice is valid and as per the law?
(iii)Whether the decision to provide the facility of only physical voting and not E-Voting valid?

(a)(i) Whether it is compelling upon the Board to consider the directions regarding shift of the venue of the meeting?
In the case of section 8 company, in pursuance of the second proviso to section 96(2) of the Companies Act, 2013, the time, date and place of each Annual General Meeting is required to be decided upon before-hand by the board of directors having regard to the directions, if any, given in this regard by the company in its general meeting. [Notification G.S.R. 466(E) issued by the Ministry of Corporate Affairs on the 5th June, 2015].
Hence, the directors are bound to consider the directions regarding shifting of venue for the next Annual General Meeting.
Alternate Answer to Part (i)
As per the facts of the question, the members, in one of the general meetings, have strongly suggested that the next AGM of the company be held near the vicinity of the Registered Office at Jaipur instead of the club as the same has congested sitting area.
Since only suggestions have been given in one of the general meetings, the same cannot be construed as a compulsion on the part of the Board to act thereon. A mere suggestion will not tantamount to be a binding direction. In other words, a suggestion is just an idea or an opinion that someone proposes which need be compulsorily acted upon, while a direction is a set of instructions for where to go or what to do.
So, the suggestion by the shareholders is non-binding on the Board.
(ii)Whether a 15 days’ prior notice is valid as per law?
Notification G.S.R. 466(E) issued by the Ministry of Corporate Affairs dated 5th June, 2015 provides that section 8 company can hold a meeting with minimum of 14 days' notice as against 21 days' notice otherwise applicable under section 101 (1) of the Companies Act, 2013.
Hence, the director can validly issue a 15 days' notice being greater than 14 days as provided in the notification and the notice is as per the law.
(iii)Whether the decision to provide the facility of only physical voting and not e-voting valid?
Yes, as per the provision of section 108 of the Companies Act, 2013 read with Rule 20 of the Companies (Management and Administration) Rules, 2014, section 8 company, having a number of members of 1000 or more, is required to provide e- voting facility to its members at a general meeting. Hence, the decision of the foundation, to provide the facility of only physical voting and not E-voting, is not valid as section 8 Company is having 1200 members.
OR
(i)Whether the members Mr. H, Mr. K and Mr. J can validly issue special notice to the company?
According to section 115 of the Companies Act, 2013 (the Act), where, by any provision contained in this Act or in the Articles of a company, special notice is required for passing any resolution, then the notice of the intention to move such resolution shall be given to the company by such number of members holding not less than 1% of the total voting power, or holding shares on which such aggregate sum not exceeding five lakh rupees, as may be prescribed, has been paid-up.
Rule 23 of the Companies (Management & Administration) Rules, 2014, provides that a special notice required to be given to the company shall be signed, either individually or collectively by such number of members holding not less than one percent of total voting power or holding shares on which an aggregate sum of not less than 5,00,000 rupees has been paid up on the date of the notice.
As per section 140 (4) of the Act, a special resolution is required to be passed for appointment of an auditor other than the retiring auditor at an annual general meeting.
Mr. H, Mr. J and Mr. K are together holding shares of (1,50,000 + 1,00,000 + 2,50,000) = ₹ 5,00,000, which is equal to the minimum
required shares to be held by members for validly issuing a Special Notice. Hence, they can validly ask the company to issue the special notice.
(ii)Last date for issue of Special Notice:
Rule 3 of Companies Management and Administrative Amendment Rules 2014:
The notice referred to in sub-rule (1) shall be sent by members to the company not earlier than three months but at least fourteen days before the date of the meeting at which the resolution is to be moved, exclusive of the day on which the notice is given and the day of the meeting.
Hence, in the above case, the special notice shall be sent by the members to the company latest by 13.09.2024.
(iii)Whether the company needs to communicate the special notice to the other members after receipt of the same?
Yes, the company shall immediately after receipt of the notice, give its members notice of the resolution at least seven days before the meeting, exclusive of the day of dispatch of notice and day of the meeting, in the same manner as it gives notice of any general meetings.
Alternate Answer
In the question, it is mentioned that Srinivas Iron and Steel Limited is a Public Sector, Listed Company, which means that, being a Public Sector Company, it is a Government Company.
According to 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 one hundred and eighty days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting.
Changing the Auditor: For changing the Auditor of a Government Company, the Auditor can be changed after seeking consent of the Board and thereafter by writing to the C&AG, New Delhi, by mentioning the reference of negligence on the part of the Statutory Auditors for not reporting the fraud committed in the Company.
Thereafter, considering the request of the company, the C&AG can change the auditor or the audit firm. However, the remuneration of the auditors shall be approved by the shareholders in its general meeting on the recommendations of the Audit Committee as well the Board of Directors of the company.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, January 2025, 6(a) (New Scheme).

September 20241(b)5 marksNew Scheme

(b)(i) Right Trading Limited is a company engaged in trading of automobile spare parts. During the current financial year 2024-25, Mr. J the CFO retired due to bad health. The company appointed Mr. C as the new CFO. On verification of the financial statements and statutory returns of the company, Mr. C advised the Board of Right Trading Limited to revise the financial statements for the year 2021-22.

Examine, with reference to the applicable provisions of the Companies Act, 2013, whether M/s Right Trading Limited can do so? (3 Marks)

(ii)M/s DEF is conducting the audit of Right Trading Limited for the past 9 years. Now due to the requirement of rotation of auditors, M/s DEF is going to retire at the upcoming Annual General Meeting and in its place M/s XYZ will be appointed as the Auditor of Right Trading Limited. One of the partner Mr. F, who was in charge of the certification of the financial statements of the company retired from the firm of M/s DEF and joined the firm of M/s XYZ.

Examine, considering the provisions of the Companies Act, 2013 about the validity of the appointment of M/s XYZ. (2 Marks)

(b)(i) Voluntary Revision of Financial Statements or Board’s Report on the Approval of the Tribunal
As per section 131 of the Companies Act, 2013, if it appears to the directors of a company that:
a.the financial statement of the company does not comply with the provisions of section 129; or
b.the report of the Board does not comply with the provisions of section 134
they may prepare revised financial statement or board’s report in respect of any of the 3 preceding financial years after obtaining the approval of the Tribunal on an application made by the company within fourteen days of the decision taken by the Board.
A certified copy of the order of the Tribunal shall be filed with the Registrar of Companies within 30 days of the date of receipt of the certified copy.
In the given question, Mr. C has advised the Board of Right Trading Limited to revise the financial statements for the year 2021-22. The Board of Directors can do so as the said financial statements are pertaining to not later than three preceding financial years (from 2024- 2025) and by obtaining the approval of the Tribunal within fourteen days of the decision taken by the Board.
(ii)As per section 139(2) of the Companies Act, 2013, listed companies and such class of companies as prescribed, shall not appoint or re- appoint an audit firm as auditor for more than two terms of five consecutive years.
Further, on the date of appointment, an audit firm shall not have any partner or partners who are/were also the partner/s to the other audit firm, whose tenure has been expired in a company immediately preceding the financial year.
It means, if a partner (common partner), who is in charge of an audit firm and also certifies the financial statements of the company, retires from the said firm and joins another firm of Chartered Accountants, such other firm shall also be ineligible to be appointed as succeeding auditor of same company after two terms of five consecutive years. i.e. cooling period. [Rule 6(3) of Companies (Audit and Auditors) Rules, 2014]
The audit of Right Trading Limited was conducted by M/s DEF and after expiry of two consecutive terms, it is proposed to appoint M/s XYZ. Mr. F is the common partner in M/s DEF and M/s XYZ, hence, the appointment of M/s XYZ is not valid.
Assumption: In this question, nothing is specified about the nature of the company. Hence, drawing a positive assumption that Right Trading Limited is a company on which the provisions related to rotation of auditors [as specified under section 139(2)], are applicable.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2024, 1(b) (New Scheme).

May 20245(a)5 marksNew Scheme

(a)Stallworth Ltd., a listed company having a paid up share capital of ₹ 11 crore with a turnover of ₹ 100 crore had appointed an Audit Committee which recommended M/s ANC & Associates, a firm of Chartered Accountants having such qualifications and experience as is required for appointment as the auditor of the company. The next Annual General Meeting (the AGM) was due on 30.09.2023. The Board disagreed with the said recommendation of the committee and refer back to it for reconsideration. The Audit Committee was adamant on appointing the above firm of the chartered accountants.

Discuss in the light of the Companies Act, 2013:

(i)The course of action for Board of Directors to resolve the above deadlock. What would be your answer, if above situation was that of filling the casual vacancy of auditors?

(ii)The steps to be taken by the Board of Directors for appointment of auditors in case there was no requirement of Audit Committee in the

company? (5 Marks)

(a)According to section 177 of the Companies Act, 2013 read with the Companies (Meetings of Board and its Powers) Rules, 2014 , in every listed public company- an Audit Committee shall be constituted by Board of directors.

Rule 6 of Companies (Meetings of Board and its Powers) Rules, 2014 , provides that in case of a company that is required to constitute an Audit Committee under section 177, the committee, and, in cases where such a committee is not required to be constituted, the Board, shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and whether such qualifications and experience are commensurate with the size and requirements of the company.

The audit committee shall recommend the name of an individual or a firm as auditor to the Board for consideration; the Board shall consider and recommend an individual or a firm as auditor to the members in the Annual General Meeting (AGM) for appointment.

If the Board disagrees with the recommendation of the Audit Committee- It shall refer back the recommendation to the committee for reconsideration citing reasons for such disagreement.

(i)In the given question, the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration of the members in the AGM.

Section 139(8) provides that the Board may fill any casual vacancy in the office of an auditor within 30 days.

Section 139(11) prescribes that 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.

Hence, the position will remain same even in case of casual vacancy.

(ii)In case there was no requirement of appointment of an audit committee then the BOD shall recommend to the members in the AGM, the name of an individual or a firm which can be appointed as auditor after considering qualifications and experience of such individual or firm and other matter as laid therein.

Source⁠‌‌‌‌⁠: ICAI Suggested Answers, May 2024, 5(a) (New Scheme).

May 20232(b)6 marksOld Scheme

(b)(i) A fraud was reported to SFIO by Statutory Auditors of PQ Ltd. in the current financial year 2021-22. A Competent Authority during the investigation observed that there is a need to re-open the accounts of PQ Ltd. for the financial year 2015- 16 and therefore, they filed an application before the National Company Law Tribunal (NCLT) to issue the order against PQ Ltd. for re-opening of its accounts and recasting the financial statements for the financial year 2015-16. Examine the validity of the application filed by the Competent Authority to NCLT. (3 Marks)

(ii)SSR & Co. (Statutory Auditors) while conducting audit for financial year 2021-22, find out some manipulative entries in books of accounts of ASR Ltd. Auditors told the MD that internal control system of company is not reliable. The Board of Directors of ASR Ltd them to accept the assignment of designing and implementation of suitable financial information system to strengthen the internal control mechanism of the Company. The Company offered them a fee of ₹ 10 lakh plus taxes for this assignment for betterment of company. But Statutory Auditor refused to take the assignment. What are the consequences if they accept this

assignment? (3 Marks)

(b)(i) Section 130(1) of the Companies Act, 2013 apply to Court/ Tribunal for re-
opening of accounts - A company shall re-open its books of account and recast its financial statements, on an application made by the Central Government, or other competent authorities as prescribed under section130 (1) of the Companies Act, 2013 to the NCLT to the effect that -
(i)the relevant earlier accounts were prepared in a fraudulent manner; or
(ii)the affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements.
Time Limit: No order shall be made under sub-section (1) in respect of re-opening of books of account relating to a period earlier than eight financial years immediately preceding the current financial year.
In the given instance, application filed by Competent authority, with its recommendation for reopening and recasting of financial statements for the period 2015-2016 is within the prescribed period of eight financial years immediately preceding the current financial year i.e. 2021-2022, is validly filed to NCLT.
(ii)According to section 144 of the Companies Act, 2013, an auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the Audit Committee, as the case may be. But such services shall not include designing and implementation of any financial information system.
In the said instance, the Board of directors of ASR Ltd. requested its Statutory Auditors, SSR & Co. to accept the assignment of designing and implementation of suitable financial information system to strengthen the internal control mechanism of the company. As per the above provision said service is strictly prohibited.
In case the Statutory Auditors accept the assignment, following penal provisions as specified in section 147 of the Companies Act, 2013 will be levied:
Consequences as regards to Audit firm
Liability of Audit firm [Section 147(5)]
Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in the Companies Act, 2013, or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally and shall also be liable under section 447.
Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, May 2023, 2(b) (Old Scheme).

May 20225(a)5 marksOld Scheme

(a)HD Software Private Limited is engaged in the business of providing software services. The company appointed its statutory auditors. The engagement letter was signed with a clause that fee to be mutually decided. However, the remuneration was not finalized. Directors of the company seeks your advice for, provisions related to remuneration of directors 1 as per the provisions of the Companies Act, 2013.

1 To be read as ‘ auditors ’ ABC & Co., Chartered Accountants, are statutory auditors of Moon Exports Limited. In an inquiry, it is proved that 'A', one of the partners of the firm has acted in fraudulent manner and colluded in fraud to its partners. Explain the consequences of such act under the provisions of the Companies Act, 2013. (5 Marks)

(a)Section 142 of the Companies Act, 2013, provides for remuneration of auditors. According to this section the remuneration of the auditors of a company shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine.

The remuneration shall, in addition to the fee payable to an auditor, include the expenses, if any, incurred by the auditor in connection with the audit of the company and any facility extended to him but does not include any remuneration paid to him for any other service rendered by him at the request of the company.

As per the facts of the question and stated provision, remuneration of the appointed statutory auditors of a company shall be fixed by the HD Software Private Limited in general meeting or in such manner as the company in general meeting may determine.

According to section 147(5) of the Companies Act, 2013, where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally.

Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable.

Here, ‘A’ the partner of ABC & Co. on inquiry was fo und that he acted in a fraudulent manner or colluded in fraud to its partners.

A ccordingly, ‘A’ the partner, partners concerned and the firm ‘ABC & Co.’ jointly and severally liable for the fine.

With respect to criminal liability of the firm ‘ABC & Co.’, the concerned partner or partners, who acted in a fraudulent manner or colluded in any fraud, shall only be liable.

Source⁠‌‌‌‌⁠: ICAI Suggested Answers, May 2022, 5(a) (Old Scheme).

December 20213(b)5 marksOld Scheme

(b)Referring the provisions of the Companies Act, 2013, regarding appointment of auditors, answer the following:

(i)XYZ Ltd. is a newly established company owned by the Central Government. State the provisions regarding appointment of its first auditor.

(ii)Mr. Kamal is the auditor of XYZ Limited, which is a Government company. He has resigned on 31st December, 2020 while the financial year of the company ends on 31st March, 2021. Explain the provisions regarding filling or such vacancy. Would your answer differ if it is other than a Government company? (5 Marks)

(b)(i) First auditor
(1)According to section 139(7) 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 first auditor shall be appointed by the Comptroller and Auditor General of India (CAG) within 60 days from the date of registration of the company.
(2)In case the CAG does not appoint first auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next 30 days.
(3)Further, in the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform the members of the company who shall appoint such auditor within the 60 days at an Extraordinary General Meeting, who shall hold office till the conclusion of the first annual general meeting.
XYZ Ltd. can follow the above provisions for appointment of its first auditor.
(ii)Casual vacancy
According to section 139(8) of the Companies Act, 2013,
(1)In the case of a company whose accounts are subject to audit by an auditor appointed by the CAG, casual vacancy of an auditor shall be filled by the CAG within 30 days.
(2)In case the CAG does not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next 30 days.
XYZ Ltd. can follow the above provisions for filling of its casual vacancy of its auditor.
In case, XYZ Ltd. would have been a company other than a government company, the following provisions would be applicable for filling of its casual vacancy:
(a)The Board may fill any casual vacancy in the office of an auditor within 30 days but where such vacancy is caused by 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.
(b)Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next annual general meeting.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2021, 3(b) (Old Scheme).

November 20235(a) OR5 marksOld Scheme

(a)What are the requirements outlined in the Companies Act, 2013 regarding the appointment of a 'Debenture Trustee' by a company? Can the following entities be designated as a 'Debenture Trustee':

(i)An investor who holds advantageous stake.

(ii)A lender to whom the company has a debt of only ₹ 1,000.

(iii)An individual who has provided a guarantee for the repayment of the debenture amount issued by the company. (5 Marks)

(a)Appointment of Debenture Trustee: As per section 71 (5) of the Companies Act, 2013, no company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding 500 for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees.
Rule 18 (2) of the Companies (Share Capital and Debentures) Rules, 2014, provides that no person shall be appointed as a debenture trustee, if he:
(i)beneficially holds shares in the company;
(ii)is a promoter, director or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary or associate company;
(iii)is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee;
(iv)is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;
(v)has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;
(vi)has any pecuniary relationship with the company amounting to 2% or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
(vii)is a relative of any promoter or any person who is in the employment of the company as a director or key managerial personnel.
Thus, based on the above provisions answers to the given questions are as follows:
(i)An investor who holds advantageous stake cannot be appointed as a debenture trustee.
(ii)A lender to whom company has a debt of only ₹ 1000 cannot be appointed as a debenture trustee. The amount here is immaterial.
(iii)An individual who has provided a guarantee for repayment of debenture amount issued by the company also cannot be appointed as a debenture trustee.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, November 2023, 5(a) OR (Old Scheme).

November 20235(b)6 marksOld Scheme

(b)Assess the eligibility of the following individuals for appointment as Auditors in accordance with the regulations outlined in the Companies Act, 2013:

(i)‘ Ms. Rekha ’ , a practicing Chartered Accountant, and ‘ Mr. Alok ’ , who is the spouse of ‘ Ms. Rekha ’ , holds securities of ‘ Charcoal Ltd. ’ valued at a face value amount of ₹ 85,000 (with a market value of ₹ 75,000). The directors of Charcoal Ltd. are considering the appointment of ‘ Ms. Rekha ’ as an auditor for the company.

(ii)‘ Mr. Puri ’ , a practicing Chartered Accountant, has a debt of ₹ 7 lakh owed to RAI Ltd. The directors of RAI Ltd. are considering the appointment of ‘ Mr. Puri ’ as an auditor for the company.

(iii)‘ Ms. Komal ’ , the real sister of ‘ Mr. Sharad', a Chartered Accountant, holds the position of CFO at Biotech Ltd. The directors of Biotech Ltd. are considering the appointment of ‘ Mr. Sharad ’ as an auditor for the company. (6 Marks)

November 20221(b)6 marksOld Scheme

(b)P Limited appointed "XYZ & Co.", an audit firm, as Auditor of the company at the Annual General Meeting held on 30th September, 2021. Mr. X, Y and Z are partners in XYZ & Co.

With reference to the Companies Act, 2013, examine, the validity of appointment of the XYZ & Co. in each of the following cases separately:

(i)Mrs. Q, wife of Mr. X has invested in the equity shares of P Limited having face value of ₹ 1 lakh.

(ii)Mrs. Q, wife of Mr. X has given guarantee in relation to a loan taken by G from P Limited of an amount worth ₹ 1,50,000.

(iii)Mrs. Q, wife of Mr. X is indebted to Z Limited for ₹ 10,00,000 (P Limited holds one fourth of the paid-up Equity Share Capital of Z Ltd.) (6 Marks)

(b)(i) As per Section 141(3)(d)(i) of the Companies Act, 2013, a person who, or his relative or partner 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, such person cannot be appointed as auditor of the company. However, the relative of such person may hold security or interest in the company of face value not exceeding 1 lakh rupees as prescribed under Rule 10 of the Company (Audit and Auditors) Rules, 2014.

Here, in the given case, Mrs. Q, wife of Mr. X has invested in the equity shares of P Limited having face value of ₹ 1 lakh which is within the prescribed limit. Therefore XYZ & Co. can be appointed as an auditor for P Limited.

(ii)As per Section 141(3)(d)(iii) of the Companies Act, 2013, a person who, or his relative or partner who 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 ₹ 1 Lakh. such person cannot be appointed as auditor of the company.

In the said case, Mrs. Q, wife of Mr. X, has given guarantee in relation to a loan taken by G from P Limited which is in excess of ₹ 1 Lakh i.e. of an amount worth ₹ 1,50,000. Therefore, XYZ & Co. cannot be appointed as an auditor for P Limited.

(iii)As per Section 141(3)(d)(ii) of the Companies Act, 2013, a person who, or his relative or partner is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ₹ 5 Lakh, shall not be appointed as an auditor.

Here in this case, Mrs. Q, wife of Mr. X is indebted to Z Limited for ₹ 10,00,000. Whereas P Limited holds one fourth of the paid up equity share capital of Z Ltd. Being an associate company to P Limited, and indebted in excess of ₹ 5 Lakh, therefore XYZ & Co. cannot be appointed as an auditor for P Limited.

Source⁠‌‌‌‌⁠: ICAI Suggested Answers, November 2022, 1(b) (Old Scheme).

December 20211(b)6 marksOld Scheme

(b)(i) Mr. Raman, a Chartered Accountant, was appointed as an auditor of Surya Distributors Ltd., in the AGM of the company held in August, 2020, in which he accepted the assignment. Later on, in November, 2020, he joined as a partner in the Consultancy firm where Mr. Som is also a partner. Mr. Som is also working as a Finance executive of Surya Distributors Ltd. Explaining the provisions of the Companies Act, 2013, decide whether Mr. Raman is required to vacate the office as an auditor. (2 Marks)

(ii)Managing Director of ABC Ltd. himself appointed Mr. Aakash, a practicing chartered accountant as first auditor of the company. Is it a valid appointment? Also explain the provisions of the Companies Act, 2013, in this regard? (2 Marks)

(iii)The Board of Directors of ABC Limited at its board meeting declared dividend on its paid-up equity share capital which was later o n approved by the company’s Ann ual General Meeting. In the meantime, the directors diverted the amount of total dividend to be paid to shareholders for purchase of investments for the company. Due to this dividend was paid to shareholders after 45 days declaration.

Examining the provisions of the Companies Act, 2013, state whether the act of directors is in violation of the provisions of the Companies Act, 2013. Also explain what are the consequences of the above act of directors. (2 Marks)

(b)(i) Section 141(3)(c) of the Companies Act, 2013, prescribes that any person who is a partner or in employment of an officer or employee of the company will be disqualified to act as an auditor of a company. Sub-section (4) of section 141 provides that an auditor who becomes subject, after his appointment, to any of the disqualifications specified in sub-sections (3) of section 141, he shall be deemed to have vacated his office as an auditor.
In the present case, Mr. Raman, an auditor of Surya Distributors Ltd., joined as partner with consultancy firm where Mr. Som is also a partner and Mr. Som is also the Finance executive of Surya Distributors Ltd. Hence, Mr. Raman has attracted clause (3)(c) of section 141 and, therefore, he shall be deemed to have vacated office of the auditor of Surya Distributors Ltd.
(ii)Section 139(6) of the Companies Act, 2013 provides that “the first auditor or auditors of a company shall be appointed by the Board of directors within 30 days from the date of registration of the company”.
In the instant case, the appointment of Mr. Aakash, a practicing Chartered Accountant as first auditor by the Managing Director of ABC Ltd. by himself is in violation of section 139(6) of the Companies Act, 2013, which requires the Board of Directors to appoint the first auditor of the company.
In view of the above, the Managing Director of ABC Ltd. cannot appoint the first auditor of the company himself.
(iii)According to section 124 of the Companies Act, 2013, where a dividend has been declared by a company but has not been paid or claimed within 30 days from the date of the declaration, the company shall, within 7 days from the date of expiry of the said period of 30 days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in any scheduled bank to be called the Unpaid Dividend Account.
Further, according to section 127 of the Companies Act, 2013, where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within 30 days from the date of declaration to any entitled shareholder, every director of the company shall, if he is knowingly a party to the default, be liable for punishment.
The Board of Directors of ABC Limited at its meeting recommended a dividend on its paid-up equity share capital which was later on approved by the shareholders at the Annual General Meeting. In the meantime, the directors diverted the total dividend to be paid to the shareholders for purchase of investments in the name of the company. As a result, dividend was paid to shareholders after 45 days.
1.Since, declared dividend has not been paid within 30 days from the date of the declaration to any shareholder entitled to the payment of dividend, the company shall, within 7 days from the date of expiry of the said period of 30 days, transfer the total amount of dividend which remains unpaid or unclaimed to the Unpaid Dividend Account.
2.The Board of Directors of ABC Limited has violated section 127 of the Companies Act, 2013 as it failed to pay dividend to shareholders within 30 days due to its decision to divert the total dividend to be paid to shareholders for purchase of investments in the name of the company.
Consequences: The following are the consequences for violation of the above provisions:
(a)Every director of the company shall, if he is knowingly a party to the default, be punishable with maximum imprisonment of two years and shall also be liable for a minimum fine rupees one thousand for every day during which such default continues.
(b)The company shall also be liable to pay simple interest at the rate of 18% p.a. during the period for which such default continues.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, December 2021, 1(b) (Old Scheme).

September 20254(a)5 marksNew Scheme

(a)Sharp Surgical Ltd. is a public limited listed company engaged in the manufacture of surgical instruments with a nation-wide chain of dealers and retailers to facilitate the trade. It was incorporated in the year 2020. It has a paid-up capital of ₹ 350.10 crore with free reserves worth ₹ 156.70 crore with a secured business term loan of ₹ 56 crore from GHL Bank Pvt. Ltd. as at 31.03.2025.

Lamp bell & Associates Chartered Accountants were appointed to conduct Statutory Audit for F.Y. 2024-25 of the aforesaid company. During the audit of accounts Mr. Lamp bell the senior partner of the auditing firm shared the following observations with Mr. Sharp one of the promoter directors of the aforesaid company:

	No.		Observation
1.		Out of the above term loan, ₹ 3.15 crore were suspected to be used for purposes other than business, in providing unsecured loan to private individuals in the company.
2.		Mr. Reet one of the officers in the company was suspected to have siphoned an amount of ₹ 0.15 crore.

Mr. Lamp bell having reasons to believe for the above frauds, within 2 days of such detection, informed the Audit Committee and asked it for its reply so that the central government can be informed of the suspected fraud of ₹ 3.15 crore. Further he emphasized to mention the case of suspected siphoning of ₹ 0.15 crore to the audit committee.

Mr. Sharp requested the auditors not to report any matter to the central government, rather they can mention both above matters in the Director's Report to be prepared under section 134(3) of the Companies Act, 2013. The above request of Mr. Sharp was based on the reasoning that it was only a case of suspected fraud and the same is a matter of investigation on part of the company.

Considering the applicable provisions under the Companies Act, 2013, decide upon the following:

(i)Whether Lamp bell & Associates Chartered Accountants should restrict the reporting of the above suspected fraud of ₹ 3.15 crore as requested by Mr. Sharp? What is the correct procedure to be followed by the auditor in such cases?

(ii)What would be the correct procedure for the suspected siphoning of ₹ 0.15 crore by the auditor of the company? (5 Marks)

(a)(i) As per section 143(12) of the Companies Act, 2013, read with Rule 13(1) of the Companies (Audit and Auditors) Rules, 2014, if an auditor in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving or is expected to involve individually an amount of ₹ 1 crore or above, is being or has been
committed against the company by its officers or employees, the auditor shall report the matter to the Central Government within the stipulated time.
In the given question, since the amount involved in fraud is more than rupees one crore hence, Lamp bell & Associates Chartered Accountants should not restrict the reporting of the suspected fraud as requested by Mr. Sharp. The auditor must inform the same to the Central Government and should follow the following procedure.
(a)the auditor shall report the matter to the Board or the Audit Committee, as the case may be immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within forty-five days;
(b)on receipt of such reply or observations, the auditor shall forward his report and 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 Central Government within fifteen days from the date of receipt of such reply or observations;
(c)in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations;
(d)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. The report shall be filed electronically in form ADT-4.
(ii)As per the proviso to section 143(12) of the Companies Act, 2013, read with Rule 13(1) of the Companies (Audit and Auditors) Rules, 2014, in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases not later than 2 days from the date of his knowledge of the fraud.
The companies, whose auditors have reported frauds under this subsection to the audit committee or the Board but not reported to the Central Government, shall disclose the following details about such frauds in the Board's report:
(a)Nature of Fraud with description;
(b)Approximate Amount involved;
(c)Parties involved, if remedial action not taken; and
(d)Remedial actions taken.
Under Rule 13(4), the company must disclose in the Board’s Report all such frauds reported during the year.
Source⁠​‌​‌‌​‌​⁠: ICAI Suggested Answers, September 2025, 4(a) (New Scheme).

Also relevant to this chapter

May 2024, 6(b) - (i) Who will sign the audit report in case of a proprietorship concern or the firm of the auditors and how the qualification/s in the audit ... (Ch. 11)