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Unit 3 of 4 · M.Com Sem 4

Unit 3: Statutory and cost audit

Corporate Accounting and Auditing notes · PTU syllabus (MCOP403-18)

3 min read4 topics10 exam questions
On this page
  1. Unit summary
  2. Statutory auditors: appointment, qualifications, rights and duties
  3. Liabilities of auditors
  4. Code of conduct and professional misconduct
  5. Cost audit
  6. Key terms
  7. Quick revision
  8. Important questions

Unit summary

The statutory auditor and the cost auditor are appointed and regulated by law. This unit covers the appointment, qualifications and removal of statutory auditors, their duties and liabilities, the code of conduct and professional misconduct, and cost audit — meaning, objectives, scope, appointment, duties and liabilities of the cost auditor and the cost audit report.

After this unit you can

  • Explain appointment, qualifications, disqualifications and removal of statutory auditors
  • Explain rights, duties and liabilities of auditors
  • Explain the code of conduct and professional misconduct
  • Explain cost audit, the cost auditor and the cost audit report

PTU syllabus topics

  • Statutory auditor appointment
  • qualifications and removal
  • duties and liabilities
  • code of conduct and professional misconduct
  • cost audit meaning/objectives/scope
  • cost auditor appointment/duties/liabilities
  • cost audit report
ProcessStatutory auditor: appointment to report
  1. 1First auditor

    By the Board within 30 days

  2. 2Subsequent auditors

    At the AGM, for 5 years

  3. 3Conduct the audit

    Evidence, vouching, verification

  4. 4Audit report

    Unmodified or modified opinion

  5. 5Removal

    Special resolution and government approval

1

Topic 1

Statutory auditors: appointment, qualifications, rights and duties

ProcessAppointment of auditors
  1. 1First auditor

    Board within 30 days of registration (for non-government companies)

  2. 2Subsequent auditor

    Shareholders at the AGM for 5 years (from one AGM to the sixth)

  3. 3Casual vacancy

    Board fills within 30 days; by resignation needs general meeting approval within 3 months

  4. 4Government companies

    Appointed by the Comptroller and Auditor General (CAG)

Rotation of auditors (Section 139(2))

  • Applies to listed companies and specified classes (unlisted public companies with paid-up capital ₹10 crore+, private companies with paid-up capital ₹50 crore+, companies with public borrowings ₹50 crore+).
  • An individual auditor — not more than one term of 5 years; an audit firm — not more than two terms of 5 years (10 years).
  • Cooling-off period of 5 years before re-appointment.

Qualifications, rights and duties

  • Only a chartered accountant or a firm of CAs (majority partners CAs) can be appointed; disqualifications include body corporates, officers/employees of the company, those indebted beyond limits, relatives holding securities.
  • Rights: access to books and vouchers at all times, information and explanations, attend general meetings, receive notices.
  • Duties: report to members whether accounts give a true and fair view, adequacy of internal financial controls, comply with auditing standards, report fraud to the Central Government (Section 143(12)), comply with CARO (Companies Auditor's Report Order).
  • Removal before term: special resolution + prior Central Government approval; auditor has a right to be heard.
  • Cost audit (Section 148): for specified industries by a cost accountant.
  • Internal audit (Section 138): for listed and specified companies.
2

Topic 2

Liabilities of auditors

ClassificationAuditor's liabilities
Liabilities

  • Civil liability for negligence

    To the client — London and General Bank case, Kingston Cotton Mill (watchdog, not bloodhound)

  • Liability for misfeasance

    Breach of trust in winding up (Section 340)

  • Criminal liability

    Untrue statements in prospectus (Section 34), fraud (Section 447), contravention of Section 143

  • Liability to third parties

    If negligence and reliance are established

  • Regulatory

    NFRA penalties, debarment (Section 132); SEBI actions

  • Section 147: punishment for contravention — fine ₹25,000 to ₹5 lakh; if wilful to deceive — imprisonment up to 1 year and fine up to ₹25 lakh; refund of remuneration and damages.
3

Topic 3

Code of conduct and professional misconduct

  • Chartered Accountants Act, 1949 — First and Second Schedules list professional and other misconduct; ICAI Code of Ethics (based on IESBA).
ClassificationExamples of professional misconduct
Misconduct

  • First Schedule (Board of Discipline)

    Allowing non-members to practise in his name, sharing fees with non-members, advertising, accepting appointment without communicating with the previous auditor, certifying without examination

  • Second Schedule (Disciplinary Committee)

    Disclosing client information, failing to report material misstatements, gross negligence, failing to obtain sufficient information, certifying reports without due care

  • Fundamental principles: integrity, objectivity, professional competence and due care, confidentiality, professional behaviour.
4

Topic 4

Cost audit

  • Cost audit: verification of the correctness of cost accounts and adherence to the cost accounting plan (ICWA).
  • Objectives: verify cost records, check adherence to Cost Accounting Standards (CAS), detect wastage and inefficiency, help price fixation, protect consumers and government interests.
  • Scope: material, labour, overheads, production, inventory, cost of sales, pricing, capacity utilisation.
ProcessCost audit under the Companies Act
  1. 1

    Applicability

    Companies (Cost Records and Audit) Rules, 2014 — specified industries above turnover thresholds

  2. 2

    Appointment

    Board appoints a cost accountant on audit committee recommendation within 180 days of FY start (CRA-2)

  3. 3

    Remuneration

    Ratified by shareholders

  4. 4

    Audit

    Examination of cost records

  5. 5

    Report

    Form CRA-3 to the board within 180 days of FY end

  6. 6

    Filing

    Company files with the Central Government in CRA-4 within 30 days

  • Duties of cost auditor: examine cost records, comply with Cost Auditing Standards, report in prescribed form, report fraud (Section 143(12) applies).
  • Liabilities: similar to statutory auditors — penalties under Sections 147 and 148(8).

Key terms

Statutory auditor
Auditor appointed under the Companies Act
Professional misconduct
Breach of professional standards under the CA Act
Misfeasance
Breach of duty causing loss to the company
Cost audit
Verification of cost records and adherence to cost standards
CRA-3
Cost audit report form

Quick revision

  • Appointment: first by board, then AGM for 5 years; rotation; cooling-off.
  • Rights and duties under Section 143; CARO; fraud reporting.
  • Liabilities: civil, criminal, misfeasance, NFRA.
  • Misconduct: First and Second Schedules of the CA Act.
  • Cost audit: Section 148, CRA-2/3/4, Cost Auditing Standards.

Important exam questions

Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).

Short-answer questions

  1. Q1.Who appoints the first auditor of a company?
  2. Q2.State two rights of an auditor.
  3. Q3.What is "watchdog, not bloodhound"?
  4. Q4.Give two examples of professional misconduct.
  5. Q5.What are the objectives of cost audit?
  6. Q6.What is Form CRA-3?

Long-answer questions

  1. Q1.Explain the appointment, qualifications and removal of a statutory auditor.
  2. Q2.Explain the duties and liabilities of an auditor.
  3. Q3.Explain the code of conduct and professional misconduct of auditors.
  4. Q4.Explain cost audit, the appointment and duties of the cost auditor and the cost audit report.

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