Rights, Duties & Liabilities of Company Auditor

1. Statutory Rights & Powers of an Auditor (Section 143)

The statutory rights of an auditor are conferred directly by parliament under the Companies Act 2013 and cannot be curtailed, restricted, or overridden by the company’s Articles of Association, board resolutions, or shareholder agreements:

Statutory Powers and Rights of the Company Auditor

Right of Access to Books (Sec 143(1))

Unconditional right of access at all times to books, accounts, and vouchers, whether kept at the registered office or elsewhere, including records of subsidiaries.

Right to Explanations (Sec 143(1))

Right to require from officers of the company such information and explanations as the auditor may consider necessary for the performance of their duties.

Right Regarding Branch Accounts (Sec 143(8))

Right to visit branches, inspect branch books, and receive branch audit reports prepared by authorized branch auditors.

Right to Attend General Meetings (Sec 146)

Right to receive all notices of general meetings and be heard on any part of the business that concerns them as an auditor.

2. Statutory Duties of Inquiry (Section 143(1))

Under Section 143(1), the auditor is legally bound to conduct specific inquiries into six critical areas. The auditor does not need to report on these matters in the audit report unless they find an adverse, prejudicial, or unsatisfactory answer:

Six Mandatory Areas of Inquiry under Section 143(1)

Inquiry (a) Secured Loans & Advances:

Whether loans and advances made on security are properly secured and whether the terms are prejudicial to the interests of the company or its members.

Inquiry (b) Book Entry Transactions:

Whether transactions represented merely by book entries are prejudicial to the interests of the company.

Inquiry (c) Sale of Investments at Loss:

Whether assets (shares, debentures) have been sold at a price lower than purchase price (excluding banking and investment companies).

Inquiry (d) Loans Shown as Deposits:

Whether loans and advances made by the company have been improperly shown as deposits.

Inquiry (e) Personal Expenses in Revenue:

Whether personal expenses of directors or officers have been improperly charged to the revenue / P&L account.

Inquiry (f) Cash for Shares Allotted:

Where shares have been allotted for cash, whether cash has actually been received and correctly reflected in the books.

3. Statutory Reporting Duties (Section 143(2) & 143(3))

Under Section 143(2), the auditor must report to members on the accounts examined and whether, to the best of their information and knowledge, the financial statements give a true and fair view:

In the case of the Balance Sheet, of the state of the company’s affairs at the end of its financial year.
In the case of the Statement of Profit and Loss, of the profit or loss for the year.
In the case of the Cash Flow Statement, of the cash flows for the year.

Matters Required to be Explicitly Stated in Audit Report (Section 143(3)):

Whether they sought and obtained all necessary information and explanations.
Whether proper books of account as required by law have been kept.
Whether the report on branch accounts has been received and dealt with.
Whether the Balance Sheet and P&L Account agree with the books of account.
Whether the financial statements comply with the Accounting Standards (AS / Ind AS).
Observations on financial transactions having adverse effect on functioning of company.
Whether any director is disqualified under Section 164(2).
Any qualification, reservation, or adverse remark relating to maintenance of accounts.
Internal Financial Controls (IFC): Whether the company has adequate internal financial controls with reference to financial statements and their operating effectiveness (Sec 143(3)(i)).

4. Duty to Report Fraud to Central Government (Section 143(12))

Under Section 143(12) read with Rule 13 of the Companies (Audit and Auditors) Rules 2014:

If the auditor has reason to believe that an offence involving fraud of INR 1 Crore or more is being committed against the company by its officers or employees, the auditor must report to the Central Government (MCA).
Reporting Timeline:
1. Report to Board/Audit Committee within 2 days seeking their reply within 45 days.
2. On receipt of reply (or failure to reply), forward report to the Secretary, MCA within 15 days in Form ADT-4.
Failure to report attracts severe penalties under Section 143(15) (fine up to INR 25 Lakhs for listed companies).

5. Liabilities of a Company Auditor

An auditor operates under substantial legal accountability across three dimensions:

Tripartite Classification of Auditor Liabilities

1. Civil Liability

Liability for Negligence: Sued under common law of tort/contract for failing to exercise reasonable care and skill, causing financial loss to the client.
Misfeasance (Sec 340): In winding up, damages can be assessed against an auditor guilty of breach of trust or misfeasance.

2. Criminal Liability

Section 447 (Punishment for Fraud): Imprisonment from 6 months up to 10 years and fine up to 3 times the amount involved.
Section 448 (False Statement): Making materially false statements or intentionally omitting material facts knowingly in audit reports.

3. Professional Liability

Action by the Disciplinary Committee of the ICAI or National Financial Reporting Authority (NFRA) under the Chartered Accountants Act 1949: reprimand, monetary fine, or permanent cancellation of Certificate of Practice (CoP).

6. Key Exam Review Questions

Enumerate the statutory rights of a company auditor under Section 143 of the Companies Act 2013. Can these rights be restricted by the Articles of Association?
What are the specific matters into which an auditor is bound to inquire under Section 143(1)?
Explain the statutory duties and procedural steps for reporting fraud to the Central Government under Section 143(12).

Rights, Duties & Liabilities of Company Auditor | B.Com Notes