Chapter 3 of 5

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CMA Final Corporate and Economic Laws★ Chapters 9 and 10 of ICAI Paper 2 — together roughly 14 marks. The chapter a CA student should know best, because it governs the profession they are entering, and it is examined heavily on auditor appointment, rotation, disqualification and the duty to report fraud.

Accounts of Companies, Audit and Auditors

Books of account and financial statements, the Board's report and corporate social responsibility, and the appointment, rotation, removal, powers, duties and disqualifications of auditors.

⏱ 32 min readModerate difficulty✓ Free · exam-pattern aligned

Timed practiceMCQs from this chapter with instant scoring

FlashcardsFormulas & traps on spaced repetition

CMA Final PYQsSolved previous-year questions

By the end of this chapter you'll be able to…

1State where books of account must be kept, for how long, who may inspect them, and the notice required for keeping them elsewhere
2Identify what constitutes a financial statement, who is exempt from the cash flow statement, and who signs
3Distinguish reopening of accounts on Tribunal or court order from voluntary revision by the directors
4Set out the contents of the directors' responsibility statement
5Apply the CSR applicability thresholds, compute the two per cent obligation and deal with unspent and excess amounts
6Appoint a first, subsequent and casual vacancy auditor with the correct authority and time limits
7Apply the rotation rules including the classes covered, the five and ten year terms, cooling off and the common partner restriction
8State the procedure for removal and resignation, and the consequences of a Tribunal finding of fraud
9Apply the section 141 disqualifications, including the relative's security threshold and the twenty company ceiling
10State the auditor's powers, the contents of the report, and the two-tier duty to report fraud

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Why this chapter matters in CMA Final

This is the accountability half of a company's life, and it works in two stages that the chapter follows. The company must produce a true account of itself, keeping books and preparing statements in prescribed form. Then an independent professional must check it — appointed by the members rather than the directors, protected from removal, given statutory powers of access, and disqualified from any relationship that would compromise independence. Almost every provision here answers a specific way that accountability could otherwise be defeated, and the dual requirement for removing an auditor, needing both a special resolution and Central Government approval, is the clearest example: an auditor dismissible at will by the people whose accounts he audits is not independent at all.

Before you start — revise these

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Management, Administration and Dividend

Auditor appointment is ordinary business at the annual general meeting, and removal requires a special resolution and special notice.

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Preliminary and Incorporation of Companies

The listed, public, private, small and one-person classifications determine rotation, consolidation and cash flow statement obligations.

Accounts of Companies, Audit and Auditors

Weightage: Chapters 9 and 10 of ICAI's Paper 2 syllabus, together roughly 14 marks. The chapter a CA student should know best, because it governs the profession they are entering.

The accountability half of a company's life

The company has been formed, has raised capital, has borrowed, and is governed by its members and directors. This chapter is what the law does to ensure the people in control account to those who are not.

It works in two stages, and the structure of the chapter follows them.

Stage one — the company must produce a true account of itself. It keeps books, prepares financial statements in a prescribed form, and its Board reports on the year.

Stage two — an independent professional must check it. An auditor is appointed by the members rather than by the directors, is protected from removal, is given statutory powers of access, and is disqualified from any relationship that would compromise independence.

Almost every provision in the chapter is an answer to a way that accountability could otherwise be defeated.

Books of account

Every company must prepare and keep at its registered office books of account and other relevant books and papers and financial statements for every financial year, which give a true and fair view of the state of the affairs of the company, including that of any branch office, and which explain the transactions effected both at the registered office and at its branches, and are kept on an accrual basis and according to the double entry system.

Other place in India. The Board may decide to keep all or any of the books at any other place in India, and the company must file with the Registrar a notice in writing giving the full address of that other place within seven days.

Electronic form. Books may be kept in electronic mode in the prescribed manner.

Branch offices. Where a company has a branch office in India or outside India, it is deemed to have complied if proper books of account relating to the transactions effected at the branch are kept at that office and proper summarised returns are sent periodically to the registered office or other place.

Inspection. The books of account and other books and papers are open to inspection at the registered office by any director during business hours. In the case of a financial statement of a subsidiary, inspection may be done only by a person authorised by a resolution of the Board.

Preservation. Books of account together with vouchers relevant to any entry must be kept in good order for not less than eight financial years immediately preceding a financial year, or where the company had been in existence for a period less than eight years, for all preceding years. Where an investigation has been ordered, the Central Government may direct that books be kept for a longer period.

Financial statements

Financial statement in relation to a company includes a balance sheet as at the end of the financial year, a profit and loss account or, in the case of a company carrying on any activity not for profit, an income and expenditure account, a cash flow statement, a statement of changes in equity if applicable, and any explanatory note annexed to or forming part of any of these.

One Person Company, small company, dormant company and private company that is a start-up need not include the cash flow statement.

Form. Financial statements must give a true and fair view of the state of affairs, comply with the accounting standards notified under section 133, and be in the form or forms provided for different classes of companies in Schedule III. Where a financial statement does not comply with the accounting standards, the company must disclose the deviation, the reasons for it and the financial effects arising out of it.

Consolidation. Where a company has one or more subsidiaries, or one or more associate companies, it must in addition to its own financial statements prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies, in the same form and manner as its own, and lay it before the annual general meeting along with its own.

Signing. Financial statements are approved by the Board and signed on behalf of the Board at least by the chairperson of the company where authorised by the Board, or by two directors, of whom one shall be the managing director, and the chief executive officer if he is a director, the chief financial officer and the company secretary where they are appointed. In the case of a One Person Company, by one director.

Reopening of accounts. A company may not reopen its books of account or recast its financial statements unless an application is made by the Central Government, the Income-tax authorities, SEBI, any other statutory regulatory body or authority or any person concerned, and an order is made by a court of competent jurisdiction or the Tribunal, to the effect that the relevant earlier accounts were prepared in a fraudulent manner or that the affairs of the company were mismanaged casting a doubt on the reliability of financial statements.

Voluntary revision. If it appears to the directors that the financial statement or the Board's report do not comply with the requirements, they may prepare a revised financial statement or a revised report in respect of any of the three preceding financial years, after obtaining approval of the Tribunal, and such revision may be made only once in a financial year.

The Board's report

The Board's report must be attached to the financial statements laid before members, and includes, among other matters, the web address of the annual return, the number of board meetings, the directors' responsibility statement, details of fraud reported by auditors, comments of the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor and by the company secretary in practice in the secretarial audit report, particulars of loans, guarantees or investments, particulars of related party contracts, the state of the company's affairs, amounts transferred to reserves, dividend recommended, material changes and commitments after the financial year affecting the financial position, conservation of energy, technology absorption and foreign exchange earnings and outgo, a statement on risk management policy, and details about the corporate social responsibility policy and its implementation.

The directors' responsibility statement

A short statement carrying real content, and examinable. It states that in the preparation of the annual accounts the applicable accounting standards had been followed with proper explanation relating to material departures; that the directors selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view; that the directors took proper and sufficient care for the maintenance of adequate accounting records for safeguarding the assets and for preventing and detecting fraud and other irregularities; that the directors prepared the annual accounts on a going concern basis; that in the case of a listed company, the directors had laid down internal financial controls to be followed and that such controls are adequate and operating effectively; and that the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

Applicability

Every company having, during the immediately preceding financial year:

net worth of rupees five hundred crore or more, or
turnover of rupees one thousand crore or more, or
net profit of rupees five crore or more,

must constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, of whom at least one shall be an independent director.

Where a company is not required to appoint an independent director, it constitutes the committee with two or more directors.

The obligation

The Board must ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its corporate social responsibility policy.

Where the company has not completed three financial years, the average is taken over such immediately preceding financial years as it has been in existence.

Preference to local area. The company must give preference to the local area and areas around it where it operates.

Failure to spend. If the company fails to spend the required amount, the Board must specify the reasons in its report. Any unspent amount must, unless it relates to an ongoing project, be transferred within six months of the end of the financial year to a Fund specified in Schedule VII. Where it relates to an ongoing project, it must be transferred within thirty days of the end of the financial year to a special account called the Unspent Corporate Social Responsibility Account, and spent within three financial years, failing which it is transferred to a Schedule VII Fund within thirty days of the end of the third financial year.

Excess spent in a financial year may be set off against the requirement to spend for up to the three succeeding financial years, subject to conditions.

Exemption. Where the amount to be spent does not exceed fifty lakh rupees, the requirement to constitute a CSR Committee is not applicable and the functions are discharged by the Board.

Administrative overheads must not exceed five per cent of total CSR expenditure for the financial year.

Auditors

Appointment — section 139

First auditor. The first auditor of a company, other than a government company, is appointed by the Board within thirty days from the date of registration. If the Board fails, it must inform the members, who must appoint within ninety days at an extraordinary general meeting. The first auditor holds office until the conclusion of the first annual general meeting.

Subsequent auditor. Every company must, at the first annual general meeting, appoint an individual or a firm as auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting.

Before such appointment, the written consent of the auditor and a certificate that the appointment, if made, shall be in accordance with the conditions prescribed and that the auditor satisfies the eligibility criteria, must be obtained.

The company must inform the auditor of the appointment and file a notice with the Registrar within fifteen days of the meeting.

Government company. The auditor of a government company, or of a company owned or controlled directly or indirectly by the Central Government or by a State Government or partly by both, is appointed by the Comptroller and Auditor-General of India within one hundred and eighty days from the commencement of the financial year.

Casual vacancy. A casual vacancy in the office of auditor is filled by the Board within thirty days. But where the vacancy is the result of the resignation of an auditor, the appointment must also be approved by the company at a general meeting convened within three months of the recommendation of the Board, and the auditor so appointed holds office till the conclusion of the next annual general meeting.

Rotation of auditors

Applicability. Rotation applies to every listed company and to prescribed classes of companies, which include every unlisted public company having paid-up share capital of rupees ten crore or more; every private limited company having paid-up share capital of rupees fifty crore or more; and every company having public borrowings from financial institutions, banks or public deposits of rupees fifty crore or more.

The terms. Such a company may not appoint or reappoint an individual as auditor for more than one term of five consecutive years, or an audit firm as auditor for more than two terms of five consecutive years.

Cooling off. An individual auditor who has completed his term is not eligible for reappointment in the same company for five years from the completion of the term. An audit firm which has completed two terms is likewise not eligible for five years.

Common partners. As on the date of appointment, no audit firm having a common partner or partners to the outgoing audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years.

Removal and resignation — section 140

Removal before expiry of term requires a special resolution of the company and the previous approval of the Central Government, and the auditor must be given a reasonable opportunity of being heard.

The dual requirement is the point. Removal is deliberately difficult, because an auditor who can be dismissed at will by the people whose accounts he is auditing is not independent.

Resignation. The auditor who has resigned must file a statement in the prescribed form with the company and the Registrar within thirty days of resignation, indicating the reasons and other facts relevant to the resignation. In the case of a government company, the statement also goes to the Comptroller and Auditor-General.

Removal by the Tribunal. If the Tribunal is satisfied, on an application by the Central Government or by any person concerned, that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by or in relation to the company or its directors or officers, it may direct the company to change its auditors. Where the application is made by the Central Government and the Tribunal is satisfied that a change is required, it shall within fifteen days of receipt of the application make an order that the auditor shall not function as such and the Central Government may appoint another auditor. An auditor against whom a final order has been passed is not eligible to be appointed as an auditor of any company for five years, and is liable for action under section 447.

Special notice for a different auditor. Special notice is required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be reappointed. On receipt of such notice the company must send a copy to the retiring auditor, who is entitled to make a representation in writing and to require it to be notified to members.

Eligibility and disqualification — section 141

Only a chartered accountant may be appointed as auditor of a company. Where a firm is appointed, only the partners who are chartered accountants are authorised to act and sign on behalf of the firm.

The following are not eligible for appointment:

a body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008;
an officer or employee of the company;
a person who is a partner, or who is in the employment, of an officer or employee of the company;
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 — provided that a relative may hold security or interest in the company of face value not exceeding one thousand rupees or such sum as may be prescribed;
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 the prescribed amount;
a person who, or his relative or partner, has given a guarantee or provided any security in connection with the indebtedness of any third person to the company or those related companies, in excess of the prescribed amount;
a person or a firm who, whether directly or indirectly, has a business relationship with the company or its subsidiary, holding or associate company or subsidiary of such holding company, of such nature as may be prescribed;
a person whose relative is a director or is in the employment of the company as a director or key managerial personnel;
a person who is in full time employment elsewhere, or a person or a partner of a firm holding appointment as auditor of more than twenty companies;
a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction;
any person whose subsidiary or associate company or any other form of entity is engaged as on the date of appointment in consulting and specialised services referred to in section 144.

Vacation on subsequent disqualification. Where a person appointed as an auditor incurs any of these disqualifications after his appointment, he shall vacate his office and such vacation shall be deemed to be a casual vacancy.

Services not to be rendered — section 144

An auditor may not, directly or indirectly, render to the company or its holding or subsidiary company any of the following services: accounting and book keeping services; internal audit; design and implementation of any financial information system; actuarial services; investment advisory services; investment banking services; rendering of outsourced financial services; management services; and any other service as may be prescribed.

The prohibition exists because each of these services would put the auditor in the position of auditing his own work or of advocating the company's interests, and independence is destroyed by either.

Powers and duties — section 143

Right of access. Every auditor has a right of access at all times to the books of account and vouchers of the company, whether kept at the registered office or elsewhere, and is entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties. In respect of a subsidiary and associate company, the auditor of the holding company has a right of access to their records for the purposes of consolidation.

The report. The auditor makes a report to the members on the accounts examined and on every financial statement laid before the company in general meeting, and the report states whether in his opinion and to the best of his information and according to the explanations given to him, the accounts give a true and fair view of the state of the company's affairs as at the end of its financial year and of the profit or loss and cash flow for the year, and such other matters as may be prescribed.

Matters to be stated in the report include whether he has sought and obtained all the information and explanations necessary; whether proper books of account as required by law have been kept and proper returns adequate for audit have been received from branches not visited; whether the balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns; whether the financial statements comply with the accounting standards; observations or comments on financial transactions which have any adverse effect on the functioning of the company; whether any director is disqualified from being appointed; any qualification, reservation or adverse remark relating to the maintenance of accounts; whether the company has adequate internal financial controls with reference to financial statements in place and their operating effectiveness; and such other matters as may be prescribed.

Negative statement. Where any of the matters required to be included in the report is answered in the negative or with a qualification, the report shall state the reason for it.

Reporting fraud. If an auditor, in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount as may be prescribed is being or has been committed in the company by its officers or employees, he must report the matter to the Central Government within the prescribed time and manner. In the case of a fraud involving an amount less than the prescribed threshold, the auditor must report the matter to the audit committee or to the Board within the prescribed time and manner, and the details must be disclosed in the Board's report.

No duty to which an auditor may be subject shall be regarded as having been contravened by reason of his reporting a fraud in good faith.

Right to attend general meetings. The auditor is entitled to attend any general meeting, to receive all notices of and other communications relating to any general meeting, and to be heard at any such meeting on any part of the business which concerns him as auditor. Attendance is by right; he may attend either himself or through his authorised representative, who must also be qualified to be an auditor.

Branch audit

The accounts of a branch office may be audited by the company's auditor, or by any other person qualified for appointment as auditor, or where the branch is in a country outside India, by the company's auditor or by an accountant or by any other person duly qualified to act as auditor under the laws of that country. The branch auditor prepares a report on the accounts of the branch and sends it to the company's auditor, who deals with it in his report in such manner as he considers necessary.

Signing and reading of the report

The person appointed as auditor signs the auditor's report or signs or certifies any other document of the company in accordance with the provisions, and the qualifications, observations or comments on financial transactions or matters which have any adverse effect on the functioning of the company mentioned in the auditor's report must be read before the company in general meeting and be open to inspection by any member.

Key formulas & results

Everything to memorise for the exam hall, in one card. Screenshot this for revision.

Books kept at the registered office; notice to the Registrar within 7 days if kept elsewhere in India; preserved for not less than 8 financial years

First auditor appointed by the Board within 30 days of registration; failing which by members within 90 days at an EGM; holds office till the first AGM

Subsequent auditor appointed at the first AGM to hold office till the conclusion of the sixth AGM

Casual vacancy filled by the Board within 30 days; if caused by resignation, also approved at a general meeting within 3 months

Government company auditor appointed by the CAG within 180 days of the commencement of the financial year

Rotation: individual one term of five consecutive years; firm two terms of five consecutive years; five-year cooling off for both

Rotation applies to listed companies, unlisted public companies with paid-up capital 10 crore or more, private companies with paid-up capital 50 crore or more, and companies with public borrowings or deposits of 50 crore or more

CSR applicability: net worth 500 crore or more, OR turnover 1,000 crore or more, OR net profit 5 crore or more in the immediately preceding financial year

CSR spend: at least 2% of the average net profits of the three immediately preceding financial years

CSR Committee: three or more directors including at least one independent director; not required where the amount to spend does not exceed 50 lakh

Unspent CSR: to a Schedule VII Fund within 6 months, or for an ongoing project to the Unspent CSR Account within 30 days and spent within 3 financial years

Auditor disqualification: relative may hold securities of face value not exceeding 1,000 rupees; ceiling of 20 companies per person or partner

CMA Final test series

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Accounts of Companies, Audit and Auditors shows up in every CMA Final paper — sit a timed one and find out where you actually stand.

~16Marks

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Full CMA Final mocks, real clock
Corporate and Economic Laws-only sectionals & chapter tests
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Traps CMA Final sets — and how to dodge them

These are the exact option-traps and misreads that cost marks under negative marking.

WATCH OUT

✗ Saying the first auditor holds office for five years; the first auditor holds office only until the conclusion of the first annual general meeting

✓

WATCH OUT

✗ Treating the appointment at the first AGM as annual; the auditor holds office till the conclusion of the sixth AGM

✓

WATCH OUT

✗ Filling a casual vacancy caused by resignation by Board action alone, without members' approval at a general meeting within three months

✓

WATCH OUT

✗ Saying an auditor can be removed by an ordinary resolution; removal needs a special resolution AND Central Government approval AND a hearing

✓

WATCH OUT

✗ Applying rotation only to listed companies, when prescribed unlisted public and private companies and borrowing thresholds are also covered

✓

WATCH OUT

✗ Forgetting the common partner restriction, which bars a firm sharing a partner with the outgoing firm for five years

✓

WATCH OUT

✗ Saying no relative of an auditor may hold any security, when a relative may hold securities of face value not exceeding one thousand rupees

✓

WATCH OUT

✗ Applying the CSR thresholds cumulatively; any one of net worth, turnover or net profit triggers the obligation

✓

WATCH OUT

✗ Computing the CSR spend on the current year's profit instead of the average of the three immediately preceding financial years

✓

WATCH OUT

✗ Reporting all frauds to the Central Government; only frauds above the prescribed amount go there, smaller ones to the audit committee or Board

✓

WATCH OUT

✗ Confusing reopening of accounts, which needs a court or Tribunal order on an application by specified authorities, with voluntary revision by the directors with Tribunal approval

✓

Exam-pattern practice

PYQ-style questions with full solutions. Work through them as a readiness check — mark yourself honestly and get your gap report at the end.

Readiness check

Are you exam-ready for Accounts of Companies, Audit and Auditors?

15 problems from this chapter. Try each one, reveal the worked solution, mark yourself honestly — get your gap report at the end.

15 questions~11 min

5-minute revision

The whole chapter, distilled. Read this the night before the exam.

•The chapter has two stages: the company accounts for itself, then an independent professional checks it
•Books at the registered office, notice to the Registrar within 7 days if elsewhere, preserved 8 financial years, inspected by any director
•OPC, small, dormant and start-up private companies need no cash flow statement
•Consolidation is required wherever there is a subsidiary OR an associate company
•First auditor: Board within 30 days, else members within 90 days; holds office only till the first AGM
•Subsequent auditor holds office from the first AGM till the conclusion of the sixth AGM
•Casual vacancy: Board within 30 days; if by resignation, also members' approval within 3 months
•Rotation: individual one five-year term, firm two; five-year cooling off; no firm with a common partner for five years
•Removal needs a special resolution AND prior Central Government approval AND a hearing
•A body corporate cannot be auditor, but an LLP can; a relative may hold securities of face value up to 1,000 rupees
•Ceiling of 20 companies per person or partner; relative as director or KMP disqualifies
•Section 144 bars accounting, internal audit, financial system design, actuarial, investment advisory, investment banking, outsourced financial and management services
•Fraud above the prescribed amount goes to the Central Government; below it, to the audit committee or Board
•CSR triggers on any one of net worth 500 crore, turnover 1,000 crore or net profit 5 crore
•CSR spend is 2% of the average net profits of the three immediately preceding financial years
•No CSR Committee needed where the spend does not exceed 50 lakh; administrative overheads capped at 5%

CMA Final question blueprint

How this topic is asked, tier by tier — so you can prep to the pattern.

Typical weightage: 14

Exam-hall strategy

Battle-tested tips from mentors and toppers for this topic under the sectional clock.

In auditor appointment questions, identify the type of appointment first — first, subsequent, casual vacancy, government company — because each has its own authority and deadline
Say expressly how long the auditor so appointed holds office; that sentence is frequently a separate mark
For rotation, state the class the company falls into before applying the terms, and check the common partner restriction on any replacement
For disqualification questions, take each candidate separately and name the specific limb of section 141 relied on
In CSR questions, test applicability on the preceding year and compute the spend on the three-year average, and say expressly that these are different bases
For fraud reporting, state the two tiers and identify which applies before giving the recipient
Keep the auditor numbers in the threshold table: 30, 90, 15, 180 days, 5 and 10 years, 20 companies, 1,000 rupees

Beyond the exam

Where this skill shows up in the job you're competing for — and in life.

Every audit engagement begins with an eligibility and ind…

Every audit engagement begins with an eligibility and independence check against section 141 and section 144, and the relative shareholding and indebtedness limits are tested for every partner

Rotation planning is a standing item for audit firms

Rotation planning is a standing item for audit firms, since a firm approaching the end of its second term must plan the handover and cannot place a firm sharing partners

The fraud reporting threshold determines whether an audit…

The fraud reporting threshold determines whether an auditor's finding goes to the Central Government or stays with the audit committee, and getting it wrong exposes the auditor personally

CSR computation and the unspent account mechanics are ann…

CSR computation and the unspent account mechanics are annual compliance work for every company crossing the thresholds

Where else this topic is tested

Prepare once, score in every exam that asks it.

CA Inter Paper 5 — Auditing and Ethics, where the same appointment and independence provisions are examined from the auditor's side

CS Executive — Company Law

CMA Intermediate — Corporate Laws and Compliance

CA Final Paper 3 — Advanced Auditing, Assurance and Professional Ethics

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Questions aspirants ask

Pulled from the Q&A community and mentor sessions.

Because an auditor exists to report independently on accounts prepared by the very people who would otherwise control his tenure. If a Board could dismiss an auditor by simple majority, the auditor's willingness to qualify a report would depend on his willingness to lose the engagement, and the qualification is precisely what the members need to see. The Act therefore requires three things together: a special resolution, the previous approval of the Central Government, and a reasonable opportunity for the auditor to be heard. The Central Government's involvement is what makes the protection real, since a controlling shareholder could otherwise muster the special resolution without difficulty.

Yes, to some. Rotation covers every listed company and prescribed classes, which include every private limited company having paid-up share capital of rupees fifty crore or more, alongside unlisted public companies with paid-up capital of ten crore or more and any company with public borrowings from financial institutions or banks or public deposits of fifty crore or more. So a large private company is caught while a small unlisted public company may not be. The threshold is on paid-up capital or borrowings, not turnover, which candidates often assume.

They are two separate calculations on different bases, and mixing them is the commonest error. Applicability is tested on the immediately preceding financial year and on any one of three alternative figures: net worth of 500 crore or more, turnover of 1,000 crore or more, or net profit of 5 crore or more. The amount to be spent is then two per cent of the average net profits of the three immediately preceding financial years, which is a different base and a different period. So a company can be caught by a turnover test and then compute its obligation on profits, and a company whose profit spiked in one year averages that spike over three.

Section 144 lists the services that are prohibited, and taxation services are not among them; the prohibited list covers accounting and book keeping, internal audit, design and implementation of financial information systems, actuarial, investment advisory, investment banking, outsourced financial services, management services and any other prescribed service. Any other service the auditor provides must be approved by the Board or the audit committee. Beyond the Act, the ICAI Code of Ethics and, for listed entities, further regulation may impose additional restrictions, but at Intermediate level the examinable rule is the section 144 list plus the approval requirement.

They are separate obligations serving different audiences. Qualification is part of the audit report addressed to the members: where any matter required to be stated is answered in the negative or with a qualification, the report states the reason, and any qualification, observation or comment having an adverse effect on the functioning of the company is read before the company in general meeting. Reporting fraud is a duty owed outside the company, to the Central Government where the amount exceeds the prescribed threshold and to the audit committee or Board where it does not, and it arises on a reasonable belief that an offence of fraud is being or has been committed. An auditor may have to do both on the same facts.