If you have ever wondered how companies ensure their financial statements are trustworthy, the answer often lies in the work of an auditor. Under the Companies Act, 2013, auditors are given specific powers and responsibilities so they can properly examine a company’s accounts.
Section 143 of the Act explains what auditors are allowed to do and what they must report to the company’s members.
In this guide, we will understand these powers and duties of auditors, using practical examples from real business situations in India.
Powers and Duties of Auditors under Section 143 (Companies Act 2013)
Imagine a situation where a company shows strong profits in its annual report. Investors, shareholders, and even banks rely on that report. But how do they know those numbers are correct?
This is where an independent auditor steps in. The law gives auditors certain powers so they can verify the truth of the company’s financial records.
Let’s understand these powers and duties step by step.
Powers of Auditors
1. Right to Access Books of Accounts and Vouchers
Let’s start with a simple situation.
Suppose a manufacturing company in Delhi reports that it spent ₹40 lakh on raw materials during the year. An auditor needs proof that this expense actually happened. To verify this, the law allows the auditor to inspect the company’s books of accounts and supporting documents.
This means the auditor can examine:
- Accounting records
- Bills and invoices
- Payment receipts
- Bank statements
- Supporting vouchers
Importantly, this access is not limited to one office. If the records are kept in a different location or branch, the auditor still has the right to review them. In practice, this power ensures that companies cannot hide records or restrict access during an audit.
2. Right to Ask for Information and Explanations
Numbers in accounts often raise questions. For example:
- Why did advertising expenses suddenly increase from ₹5 lakh to ₹18 lakh in one year?
- Why was a loan given to another company?
When such situations arise, the auditor can ask company officers for explanations. Company officers may include:
- Directors
- Finance managers
- Accountants
- Other responsible employees
They must provide the information required so the auditor can complete the audit properly. From practical experience, many audit discussions happen around these explanations because numbers alone rarely tell the full story.
3. Access to Records of Subsidiaries and Associate Companies
Some companies control other companies. For example, a large listed company in Mumbai might own smaller companies in different cities. These smaller companies are called subsidiaries.
When a parent company prepares its consolidated financial statements (combined financial report of all companies), the auditor must verify data from these subsidiaries.
So the law allows the auditor to examine relevant records of subsidiary and associate companies whenever required for consolidation.
This helps ensure the final group financial statements are accurate.
Duties of Auditors
Having powers is only half the responsibility. Auditors also have several duties under the law. Let’s look at them one by one.
Matters the Auditor Must Investigate
During an audit, the auditor must carefully check certain situations that could harm the company or its shareholders. Here are some common areas they review.
Loans and Advances
If a company gives a loan of ₹50 lakh to another business against some security, the auditor must examine:
- Whether the security is valid
- Whether the loan terms are fair to the company
If the arrangement appears risky or harmful to the company’s interests, the auditor must investigate further.
Suspicious Book Entries
Sometimes companies record transactions only as book entries, meaning no actual cash movement occurs. Auditors must examine whether such entries could harm the company.
For example, shifting expenses between accounts just to show higher profits.
Sale of Investments Below Purchase Price
If a company sells shares or securities for less than the price it originally paid, the auditor needs to check whether this was done properly. For instance:
- Purchased shares for ₹10 lakh
- Sold them later for ₹7 lakh
The auditor must understand the reason behind the loss.
Loans Shown as Deposits
Sometimes a loan may be incorrectly recorded as a deposit. This can change how the transaction appears in the financial statements. Auditors must verify that such classifications are correct.
Personal Expenses Charged to Business
One common issue auditors look for is personal expenses recorded as company expenses. For example, if a director’s ₹2 lakh family vacation is booked as “business travel”, it must be identified and corrected.
Share Allotment for Cash
When a company issues shares and claims it received money in return, auditors must check that the cash was actually received. If the books say cash was received but no money came in, the financial statements would be misleading.
Auditor’s Report to Members
At the end of the audit process, the auditor prepares a report for the members (shareholders) of the company. This report mainly explains:
- Whether the financial statements were properly examined
- Whether the accounts present a true and fair view of the company’s financial position
For example, the auditor checks if the balance sheet correctly reflects:
- Assets
- Liabilities
- Profit or loss
- Cash flow during the year
The opinion in this report is extremely important because investors rely on it when making decisions.
Key Statements Required in the Auditor’s Report
The auditor’s report must also confirm several important points. Some of the main ones include:
- Information and Explanations: The auditor must state whether the company provided all required information for the audit. If important information was not provided, the auditor must mention this in the report.
- Proper Books of Accounts: The auditor must confirm whether the company maintained proper accounting records as required by law. If records are incomplete or poorly maintained, the report must say so.
- Agreement with Financial Statements: The auditor checks whether the financial statements match the underlying books of accounts. If the numbers do not match, this must be reported.
- Compliance with Accounting Standards: Companies must follow accounting standards issued under Indian law. The auditor must confirm whether these standards were followed while preparing financial statements.
- Impact on Company Operations: If the auditor finds any financial issue that could negatively affect the company’s functioning, it must be mentioned in the report.
- Director Disqualification: The auditor must state whether any director is disqualified from being a director under the Companies Act.
Internal Financial Controls
The auditor must check whether the company has proper internal financial controls. In simple terms, these are systems that prevent fraud, errors, and misuse of funds. For example:
- Approval systems for payments
- Segregation of duties
- Proper documentation
The auditor also reviews whether these controls are working effectively. However, this requirement does not apply to certain small private companies that meet specific size and borrowing limits.
Additional Matters Required in the Auditor’s Report
The auditor’s report must also address certain additional issues. Some important ones include:
- Pending Legal Cases: If the company is involved in court cases that may affect its finances, the financial statements should disclose their possible impact.
- Expected Losses on Long-Term Contracts: If the company expects losses on long-term contracts or derivative contracts, provisions should be made in the accounts.
- Transfer to Investor Education and Protection Fund (IEPF): Certain amounts like unpaid dividends must be transferred to the Investor Education and Protection Fund. The auditor checks whether this transfer happened on time.
- Fund Routing Through Intermediaries: Auditors must also examine whether company funds were routed through other entities to benefit unknown final recipients. This check helps prevent money laundering or misuse of company funds.
- Dividend Compliance: If the company declared dividends, auditors must verify that the declaration followed legal rules.
- Use of Accounting Software with Audit Trail: From financial years starting 1 April 2022, companies must use accounting software that records an audit trail. An audit trail is simply a system that records every change made in accounting entries. Auditors must check whether this feature was active during the year and whether records were preserved properly.
- Compliance with Auditing Standards: Auditors must follow auditing standards issued in India. These standards are recommended by the Institute of Chartered Accountants of India (ICAI) and approved by the government. Until the government formally issues new standards, the auditing standards prescribed by ICAI continue to apply. These standards guide how audits should be conducted professionally.
Additional Reporting for Certain Companies (CARO 2020)
For certain companies, auditors must provide additional reporting under the Companies Auditor’s Report Order (CARO 2020). This includes reporting on matters such as:
- Fixed assets
- Inventory
- Loans and guarantees
- Statutory dues
- Fraud detection
CARO applies mainly to larger companies and adds extra transparency to audit reports.
Conclusion
Section 143 of the Companies Act gives auditors the authority and responsibility to examine company finances carefully.
Their powers allow them to access records, ask questions, and review transactions. At the same time, their duties ensure that financial statements present a true and fair picture of the company’s financial health.
Frequently Asked Questions (FAQs) on Powers and Duties of Auditors (Section 143)
When people first learn about company audits, many doubts naturally arise. Let’s answer some common questions beginners often ask about Section 143 of the Companies Act, 2013.
What are the powers of auditors under Section 143?
Auditors are allowed to examine the company’s accounting records, invoices, and financial documents at any time. They can also ask company officers for explanations about transactions. If the company has subsidiaries, auditors may review their records when preparing consolidated financial statements.
What are the duties of auditors in a company audit?
The main duty of an auditor is to examine financial statements and confirm whether they present a true and fair view of the company’s financial position. Auditors also investigate certain transactions like loans, unusual book entries, and expenses that may harm the company.
Why do auditors need access to company books of accounts?
Financial statements are prepared using accounting records. To verify whether these statements are accurate, auditors must check the original documents like invoices, receipts, bank statements, and vouchers.
What does “true and fair view” mean in an audit report?
This phrase means that the financial statements present the company’s financial position honestly and accurately. It does not mean the company is profitable; it simply means the numbers are correct and not misleading.
Can auditors ask questions to company employees?
Yes. Auditors can request explanations from directors, accountants, and other company officers. These explanations help auditors understand the reasons behind certain transactions or accounting entries.
What happens if the auditor does not receive required information?
If important information is not provided, the auditor must mention this in the audit report. This alerts shareholders that the audit could not fully verify certain aspects of the accounts.
What are internal financial controls in a company?
Internal financial controls are systems that help prevent mistakes, fraud, and misuse of funds. For example, one employee may prepare payments while another approves them. This separation reduces the risk of errors or fraud.
Do small private companies need to report on internal financial controls?
Some smaller private companies are exempt from this requirement if they meet certain size and borrowing limits and have complied with their filing obligations.
What is CARO 2020 in auditing?
CARO 2020 stands for Companies Auditor’s Report Order 2020. It requires auditors of certain companies to provide additional detailed reporting on areas like loans, assets, and statutory dues.
Why must auditors check share allotment for cash?
If a company claims it issued shares and received money from investors, auditors must verify that the money was actually received. Otherwise, the financial statements could be misleading.
What is an audit trail in accounting software?
An audit trail is a feature in accounting software that records every change made to accounting entries. It helps auditors track who made changes and when those changes were made.
Why must companies disclose pending legal cases in financial statements?
Some court cases may lead to financial losses in the future. Disclosing them helps investors understand possible risks affecting the company.
Can auditors review records of subsidiary companies?
Yes. If a company controls other companies and prepares consolidated financial statements, the auditor can review relevant records of those subsidiaries.
Do auditors guarantee that a company is financially safe?
No. Auditors do not guarantee profitability or financial safety. Their role is only to verify whether financial statements present accurate information based on available records.
Why is the auditor’s report important for investors?
Investors often rely on financial statements when deciding whether to invest in a company. The auditor’s report provides independent confirmation that the financial information can be trusted.
