Company auditor: rights, powers and duties, the audit report, CARO 2020 and NFRA

1. Rights and powers

1. Right of access to books and vouchers (s.143(1)): every auditor has a right of access at all times to the books of account and vouchers of the company, wherever kept, including at branches.
2. Right to information and explanations (s.143(1)) from the officers of the company as he thinks necessary. The auditor of a holding company has the right of access to the records of its subsidiaries and associate companies so far as needed for consolidation (proviso to s.143(1)).
3. Right to visit branches and access branch accounts; where the branch is audited by a branch auditor, the branch auditor reports to the company auditor, who deals with it in his report (s.143(8)).
4. Right to receive notices of, and to attend, every general meeting, and to be heard on any part of the business that concerns him as auditor (s.146). He may attend through an authorised representative who is qualified to be an auditor.
5. Right to make representations on his proposed removal and to have them sent to members or read out (s.140(4)).
6. Right to remuneration as fixed under section 142.
7. Right to sign the report (s.145): only the auditor (or the partner on behalf of the firm) signs; any qualifications, observations or comments that have an adverse effect on the functioning of the company must be read before the company in general meeting and are open to inspection by members.
8. Right to seek legal and technical advice and rely on experts, with due care.
9. Lien: he may retain books delivered to him until his fees are paid, if he has been given possession of them in his professional capacity, and subject to the contract.

2. Duties

(a) Duty to inquire (s.143(1)): the auditor must inquire into:

• whether loans and advances made by the company on security are properly secured, and whether the terms are prejudicial to the company or its members;
• whether transactions represented merely by book entries are prejudicial to the company;
• where the company is not an investment or banking company, whether its shares, debentures and other securities have been sold at a price less than their cost;
• whether loans and advances have been shown as deposits;
• whether personal expenses have been charged to revenue account;
• where shares have been allotted for cash, whether cash has actually been received, and if not, whether the position stated in the books and balance sheet is correct.

(b) Duty to report (s.143(2) and (3)): to the members, on whether the accounts give a true and fair view of the state of affairs and of the profit or loss and cash flow. The report must also state whether:

• he has obtained all the information and explanations necessary for the audit;
• proper books of account have been kept and proper returns received from branches not visited;
• the branch auditor’s report has been dealt with;
• the balance sheet and profit and loss account agree with the books;
• the financial statements comply with the accounting standards;
• any observations or comments have an adverse effect on the functioning of the company;
• any director is disqualified under section 164(2);
• there are qualifications or reservations relating to the maintenance of accounts;
• the company has adequate internal financial controls with reference to the financial statements and their operating effectiveness;
• other matters prescribed by Rule 11 of the Companies (Audit and Auditors) Rules 2014 (pending litigations, foreseeable losses on long-term contracts, transfers to the Investor Education and Protection Fund, dividends, and the audit trail in accounting software).

Where any of these is answered in the negative or with a qualification, the report must state the reasons (s.143(4)).

(c) Duty to comply with auditing standards (s.143(9) and (10)): the Standards on Auditing are prescribed by the Central Government on the recommendation of ICAI in consultation with NFRA.

(d) Duty to report on CARO (s.143(11)): see section 4.

(e) Duty to report fraud (s.143(12)): if, in the course of audit, the auditor has reason to believe that an offence of fraud involving the prescribed amount (Rs. 1 crore or more) is being or has been committed by officers or employees, he must report it to the Central Government in the manner prescribed (first to the Board or audit committee for its reply, then to the Government in Form ADT-4). Frauds below Rs. 1 crore are reported to the audit committee or Board, and disclosed in the Board’s report. Failure attracts a penalty (s.143(15)).

(f) Duty to attend general meetings (s.146) unless exempted, and to sign the report (s.145).

(g) Duty of care and skill: the common-law duty to use reasonable care and skill (London and General Bank, Kingston Cotton Mill); and the duty of confidentiality.

(h) Duty not to render prohibited services (s.144): the auditor must not provide to the company, its holding or subsidiary company, directly or indirectly: accounting and book keeping; internal audit; design and implementation of any financial information system; actuarial services; investment advisory services; investment banking services; outsourced financial services; management services; or other prescribed services. Other services need the approval of the Board or audit committee.

3. The audit report and kinds of opinion

An emphasis of matter paragraph (SA 706) draws attention to a matter properly disclosed, without modifying the opinion. Listed companies’ reports also contain key audit matters (SA 701).

4. CARO 2020

The Companies (Auditor’s Report) Order 2020, issued under section 143(11), applies from the financial year 2021-22. It does not apply to banking companies, insurance companies, section 8 companies, one-person companies, small companies, and private companies (not a holding or subsidiary of a public company) with paid-up capital and reserves not above Rs. 1 crore, borrowings from banks or financial institutions not above Rs. 1 crore and revenue not above Rs. 10 crore. Paragraph 3 lists 21 matters, including:

• records and physical verification of property, plant and equipment; title deeds of immovable property; revaluation; proceedings under the benami property law;
• physical verification of inventory; and agreement of quarterly returns to banks where working capital limits exceed Rs. 5 crore;
• loans, guarantees and investments, and compliance with sections 185 and 186;
• deposits; maintenance of cost records; deposit of statutory dues;
• income surrendered in tax assessments but not recorded in the books;
• defaults in repayment of loans; whether the company is a wilful defaulter; use of term loans and of money raised by public offers;
• fraud and whistle-blower complaints; related party transactions; internal audit system;
• cash losses; resignation of statutory auditors; material uncertainty on meeting liabilities; unspent CSR amounts; and qualifications in CARO reports of group companies.

5. National Financial Reporting Authority (section 132)

NFRA was constituted by the Central Government in 2018. It recommends accounting and auditing standards, monitors and enforces compliance with them, oversees the quality of service of the professions, and investigates professional or other misconduct of chartered accountants and firms in respect of prescribed classes of companies (listed companies and large unlisted companies). Where misconduct is proved it may impose monetary penalties and debar the member or firm from practice for between six months and ten years. For these companies NFRA’s jurisdiction replaces that of ICAI in disciplinary matters.

How this is examined

“What are the rights and powers of a company auditor?” (2022, April 2023, August 2024); “powers and duties” (2019 as rights and duties, October 2023); “duties and liabilities” (June 2025, with the next note); short note on powers of an auditor (2019). Write sections 1 and 2 with section numbers; add section 144 and CARO 2020 to show current law.