Chapter 10: Audit and Auditors - Test 1: answer key

Question 1 · 2 marks · Chapter 10: Audit and Auditors · hard

Scenario. Vayushakti Components Ltd (VCL) was incorporated on 18 April 2026 as an unlisted public company with paid-up equity share capital of ₹18 crore. In May 2026 it borrowed ₹62 crore from a scheduled bank. At its Board meeting held on 9 May 2026, the Board appointed M/s Dheera & Associates, Chartered Accountants, as the first auditor for a period of five years, subject to approval of members at the first AGM. The company filed Form ADT-1 with the Registrar on 20 May 2026. The first AGM was held on 30 September 2027. On the Audit Committee’s recommendation, the members appointed Dheera & Associates as statutory auditor for a term of five consecutive years. In August 2032, after the firm had completed that term, the Board proposed its re-appointment for a second term of five consecutive years. In July 2033, the Board received a report alleging professional misconduct by the firm. The Board passed a resolution on 10 July 2033 to remove the firm before expiry of its term and applied to the Central Government in Form ADT-2 on 5 August 2033. The Central Government approved the proposal on 20 September 2033. A general meeting was convened on 5 November 2033 and a special resolution for removal was passed. The auditor was not given any opportunity of being heard before the resolution. In December 2033, the firm resigned and filed Form ADT-3 with the company and the Registrar on 10 January 2034.

In respect of VCL’s first auditor and Form ADT-1, which statement is correct?

1. The Board’s appointment was valid for five years, but Form ADT-1 was filed beyond the prescribed 15 days.
2. The Board’s appointment was valid only until the first AGM, and Form ADT-1 was filed within the prescribed 15 days. (correct answer)
3. The Board’s appointment was invalid, because only members can appoint the first auditor of a public company.
4. The Board’s appointment was valid for five years, and no Form ADT-1 was required for a first auditor.

Answer: B — The Board’s appointment was valid only until the first AGM, and Form ADT-1 was filed within the prescribed 15 days.

Explanation. Under Section 139(6), the first auditor of a non-Government company is appointed by the Board within 30 days of incorporation and holds office till the conclusion of the first AGM. Form ADT-1 must be filed within 15 days of the meeting. The Board meeting was on 9 May 2026 and ADT-1 was filed on 20 May 2026, i.e. within 15 days. The five-year tenure is impermissible for a first auditor.

Where it goes wrong. Students treat the first auditor’s tenure as a normal five-year term and ignore that it ends at the first AGM.

Authority. Section 139(6) of the Companies Act, 2013; Rule 4 of the Companies (Audit and Auditors) Rules, 2014

Question 2 · 2 marks · Chapter 10: Audit and Auditors · medium

Is VCL required to rotate its auditor, and was the proposed second-term re-appointment of Dheera & Associates permissible?

1. Rotation does not apply to an unlisted public company; therefore, any number of re-appointments is permissible.
2. Rotation applies only to listed companies; therefore, the proposed re-appointment is invalid.
3. Rotation applies because VCL is an unlisted public company with paid-up capital of ₹10 crore or more, and an audit firm may have two terms of five consecutive years. (correct answer)
4. Rotation applies, but an audit firm can be appointed only for one term of five consecutive years.

Answer: C — Rotation applies because VCL is an unlisted public company with paid-up capital of ₹10 crore or more, and an audit firm may have two terms of five consecutive years.

Explanation. Section 139(2) applies to listed companies and prescribed classes of companies, including unlisted public companies having paid-up share capital of ₹10 crore or more. VCL’s paid-up capital is ₹18 crore, so rotation applies. An audit firm may be appointed for two terms of five consecutive years, followed by a five-year cooling-off. Hence, the second-term proposal is permissible, subject to other conditions.

Where it goes wrong. Students either exempt all unlisted public companies from rotation or apply the individual auditor’s one-term limit to a firm.

Authority. Section 139(2) of the Companies Act, 2013; Rule 5 of the Companies (Audit and Auditors) Rules, 2014

Question 3 · 2 marks · Chapter 10: Audit and Auditors · hard

Was the removal of Dheera & Associates before expiry of its term valid?

1. Yes, because Central Government approval was obtained and a special resolution was passed within the prescribed timelines.
2. No, only because the application in Form ADT-2 was filed after 30 days from the Board resolution.
3. No, only because the general meeting was held beyond 60 days from the Central Government approval.
4. No, because the auditor was not given a reasonable opportunity of being heard before the removal resolution. (correct answer)

Answer: D — No, because the auditor was not given a reasonable opportunity of being heard before the removal resolution.

Explanation. The Board resolution was on 10 July 2033 and Form ADT-2 was filed on 5 August 2033, within 30 days. Central Government approval was on 20 September 2033 and the general meeting was on 5 November 2033, within 60 days. However, Section 140(1) mandates that the auditor be given a reasonable opportunity of being heard. Its denial makes the removal invalid despite compliance with the other timelines.

Where it goes wrong. Students focus only on ADT-2 and special resolution timelines and overlook the mandatory audi alteram partem requirement.

Authority. Section 140(1) of the Companies Act, 2013; Rule 7 of the Companies (Audit and Auditors) Rules, 2014

Question 4 · 2 marks · Chapter 10: Audit and Auditors · hard

Assuming Dheera & Associates resigned on 1 December 2033 and filed Form ADT-3 on 10 January 2034, which statement is correct?

1. The filing was delayed; the auditor is liable to a penalty of ₹50,000 or remuneration, whichever is less, and a further continuing penalty. (correct answer)
2. The filing was within time because the 30-day period automatically excludes public holidays and weekends.
3. The filing was valid because Form ADT-3 may be filed within 60 days from the date of resignation.
4. No Form ADT-3 was required, because ADT-3 applies only to the resignation of an auditor of a listed company.

Answer: A — The filing was delayed; the auditor is liable to a penalty of ₹50,000 or remuneration, whichever is less, and a further continuing penalty.

Explanation. Under Section 140(2), an auditor who resigns must file Form ADT-3 with the company and the Registrar within 30 days of resignation. From 1 December 2033 to 10 January 2034 is beyond 30 days. Under Section 140(3), the auditor is liable to a penalty of ₹50,000 or the auditor’s remuneration, whichever is less, and a further ₹500 per day of continuing failure, subject to a maximum of ₹2 lakh.

Where it goes wrong. Students assume a 60-day filing period for ADT-3 or incorrectly believe the 30-day period extends automatically for holidays.

Authority. Section 140(2) of the Companies Act, 2013; Section 140(3) of the Companies Act, 2013; Rule 8 of the Companies (Audit and Auditors) Rules, 2014

Question 5 · 2 marks · Chapter 10: Audit and Auditors · hard

Scenario. Himgiri Defence Systems Ltd (HDSL) was incorporated on 5 May 2026 as a Government company, with 60% of its paid-up equity held by the Central Government. At its Board meeting on 1 June 2026, the Board appointed M/s Kavach & Co., Chartered Accountants, as the first auditor for five years. On 25 June 2026, the Comptroller and Auditor General of India (CAG) appointed M/s Nirmaan & Associates as the first auditor. The first AGM was held on 30 September 2027. For the financial year 2027-28, the CAG appointed Nirmaan & Associates as statutory auditor on 20 June 2027. In January 2029, Nirmaan & Associates resigned. It filed Form ADT-3 with HDSL and the Registrar of Companies on 20 February 2029 but did not file it with the CAG. The CAG did not fill the resulting casual vacancy within 30 days. The Board appointed M/s Suraksha & Co. on the 45th day after the vacancy arose. In March 2030, before Suraksha’s term expired, the Board decided to remove it and sought the Central Government’s approval. The Central Government approved the removal and a special resolution was passed. Suraksha was given a copy of the proposed resolution and a reasonable opportunity of being heard.

Who was validly appointed as the first auditor of HDSL?

1. M/s Kavach & Co., because the Board’s appointment was earlier in time and the CAG’s later appointment is void.
2. Both M/s Kavach & Co. and M/s Nirmaan & Associates, because both appointments can operate concurrently.
3. M/s Nirmaan & Associates, because the CAG validly appointed the first auditor within 60 days of incorporation. (correct answer)
4. M/s Kavach & Co., because the Board may appoint the first auditor of a Government company if it acts before the CAG.

Answer: C — M/s Nirmaan & Associates, because the CAG validly appointed the first auditor within 60 days of incorporation.

Explanation. HDSL is a Government company because 60% of its paid-up equity is held by the Central Government. Under Section 139(7), the first auditor of a Government company must be appointed by the CAG within 60 days of registration. The CAG appointed Nirmaan & Associates on 25 June 2026, within 60 days of incorporation on 5 May 2026. The Board’s earlier appointment of Kavach & Co. is not valid.

Where it goes wrong. Students apply the ordinary non-Government company rule and treat the Board’s earlier appointment as valid.

Authority. Section 139(7) of the Companies Act, 2013; Section 2(45) of the Companies Act, 2013

Question 6 · 2 marks · Chapter 10: Audit and Auditors · medium

For how long does M/s Nirmaan & Associates hold office as statutory auditor appointed by the CAG on 20 June 2027 for FY 2027-28?

1. For a fixed term of five consecutive years from the date of appointment.
2. Till the conclusion of the annual general meeting of the company. (correct answer)
3. Till the conclusion of the sixth annual general meeting after its appointment.
4. For a fixed term of three consecutive years from the date of appointment.

Answer: B — Till the conclusion of the annual general meeting of the company.

Explanation. In the case of a Government company, Section 139(5) requires the CAG to appoint a duly qualified auditor within 180 days from the commencement of the financial year. The auditor so appointed holds office till the conclusion of the annual general meeting. The five-year or two-term rotation pattern under Section 139(2) does not determine the CAG-appointed auditor’s stated tenure in this manner.

Where it goes wrong. Students apply the ordinary company five-year term or the sixth-AGM rule to a CAG-appointed auditor of a Government company.

Authority. Section 139(5) of the Companies Act, 2013

Question 7 · 2 marks · Chapter 10: Audit and Auditors · medium

What is the legal effect of Nirmaan & Associates filing Form ADT-3 with HDSL and the Registrar but not with the CAG?

1. It is valid, because the CAG is not entitled to receive any intimation of resignation by an auditor.
2. It is invalid only if the resignation occurred within 30 days from the end of a financial year.
3. It is valid, because filing with the Registrar of Companies is sufficient compliance in all cases.
4. It is non-compliant; ADT-3 must be filed with the company, the Registrar and the CAG within 30 days of resignation. (correct answer)

Answer: D — It is non-compliant; ADT-3 must be filed with the company, the Registrar and the CAG within 30 days of resignation.

Explanation. Section 140(2) requires a resigning auditor to file a statement in Form ADT-3 with the company and the Registrar within 30 days. Where the auditor is of a Government company, the statement must also be filed with the CAG. Filing only with the company and the Registrar is therefore incomplete compliance.

Where it goes wrong. Students remember the company and ROC filings but forget the additional CAG filing requirement for Government companies.

Authority. Section 140(2) of the Companies Act, 2013; Rule 8 of the Companies (Audit and Auditors) Rules, 2014

Question 8 · 2 marks · Chapter 10: Audit and Auditors · hard

After Nirmaan & Associates resigned, the CAG did not fill the casual vacancy within 30 days. The Board appointed M/s Suraksha & Co. on the 45th day after the vacancy arose. Is the Board’s appointment valid?

1. Yes, because after the CAG’s 30-day period, the Board may fill the vacancy within the next 30 days. (correct answer)
2. No, because a casual vacancy in a Government company can only be filled by the CAG.
3. No, because the members must appoint the auditor at an extraordinary general meeting in every case.
4. Yes, but only if the CAG subsequently ratifies the Board’s appointment in writing.

Answer: A — Yes, because after the CAG’s 30-day period, the Board may fill the vacancy within the next 30 days.

Explanation. For a Government company, a casual vacancy in the office of auditor is to be filled by the CAG within 30 days. If the CAG does not fill it within that period, the Board of Directors must fill the vacancy within the next 30 days. The Board appointed Suraksha & Co. on the 45th day from the vacancy, i.e. within the next 30 days after the CAG’s 30-day period expired.

Where it goes wrong. Students stop at the CAG’s 30-day period and do not recall the Board’s fallback power for the next 30 days.

Authority. Section 139(8) of the Companies Act, 2013

Question 9 · 2 marks · Chapter 10: Audit and Auditors · medium

Scenario. Zenith Agro Tech Pvt Ltd has paid-up equity share capital of ₹48 crore, outstanding bank borrowings of ₹120 crore throughout FY 2025-26, and public deposits of ₹5 crore. For FY 2026-27, it appointed an auditor for five years without applying the rotation provisions. Is rotation applicable to Zenith Agro Tech Pvt Ltd?

Zenith Agro Tech Pvt Ltd has paid-up equity share capital of ₹48 crore, outstanding bank borrowings of ₹120 crore throughout FY 2025-26, and public deposits of ₹5 crore. For FY 2026-27, it appointed an auditor for five years without applying the rotation provisions. Is rotation applicable to Zenith Agro Tech Pvt Ltd?

1. No, because a private company with paid-up capital below ₹50 crore is always exempt from rotation.
2. Yes, because its outstanding borrowings from banks exceed the prescribed threshold of ₹50 crore. (correct answer)
3. No, because its public deposits are below the prescribed threshold of ₹50 crore.
4. Yes, but only if the company is subsequently converted into a listed company.

Answer: B — Yes, because its outstanding borrowings from banks exceed the prescribed threshold of ₹50 crore.

Explanation. Section 139(2) applies to private companies having paid-up share capital of ₹50 crore or more. It also applies to companies having public borrowings from financial institutions, banks or public deposits of ₹50 crore or more. Zenith’s bank borrowings of ₹120 crore exceed this threshold, so rotation applies even though its paid-up capital is below ₹50 crore.

Where it goes wrong. Students check only the private company paid-up capital threshold and ignore the alternative public borrowings threshold.

Authority. Section 139(2) of the Companies Act, 2013; Rule 5 of the Companies (Audit and Auditors) Rules, 2014

Question 10 · 2 marks · Chapter 10: Audit and Auditors · hard

Scenario. Sahaj Components Ltd was incorporated on 1 July 2026. Its Board failed to appoint the first auditor within 30 days of incorporation. By when and by whom must the first auditor be appointed?

Sahaj Components Ltd was incorporated on 1 July 2026. Its Board failed to appoint the first auditor within 30 days of incorporation. By when and by whom must the first auditor be appointed?

1. By the Board within 60 days from the date of incorporation.
2. By the CAG within 60 days from the date of incorporation.
3. By the members at the first annual general meeting within 90 days from incorporation.
4. By the members at an extraordinary general meeting within 90 days from incorporation. (correct answer)

Answer: D — By the members at an extraordinary general meeting within 90 days from incorporation.

Explanation. Under Section 139(6), if the Board fails to appoint the first auditor within 30 days of incorporation, it must inform the members. The members must then appoint the first auditor within 90 days at an extraordinary general meeting. The auditor so appointed holds office till the conclusion of the first AGM.

Where it goes wrong. Students choose the annual general meeting or the CAG route instead of the extraordinary general meeting route for a non-Government company.

Authority. Section 139(6) of the Companies Act, 2013

Question 11 · 2 marks · Chapter 10: Audit and Auditors · medium

Scenario. Nirvaan Ltd appointed a statutory auditor at its AGM held on 30 September 2026. The company filed Form ADT-1 with the Registrar on 20 October 2026. Which statement is correct?

Nirvaan Ltd appointed a statutory auditor at its AGM held on 30 September 2026. The company filed Form ADT-1 with the Registrar on 20 October 2026. Which statement is correct?

1. The filing was delayed; it contravenes Section 139, attracting penalty under Section 147 on the company and every officer in default. (correct answer)
2. The filing was valid because Form ADT-1 may be filed within 30 days of the AGM.
3. The appointment itself becomes invalid because Form ADT-1 was not filed within 15 days.
4. Only the auditor is liable, because the company has no obligation to file Form ADT-1.

Answer: A — The filing was delayed; it contravenes Section 139, attracting penalty under Section 147 on the company and every officer in default.

Explanation. Rule 4 requires the company to file Form ADT-1 with the Registrar within 15 days of the meeting in which the auditor is appointed. The AGM was on 30 September 2026, so the due date was 15 October 2026. Filing on 20 October 2026 is delayed. Contravention of Section 139 attracts penalty under Section 147 on the company and every officer in default.

Where it goes wrong. Students confuse the 15-day ADT-1 period with a 30-day period and wrongly think only the auditor is penalised.

Authority. Section 139(1) of the Companies Act, 2013; Rule 4 of the Companies (Audit and Auditors) Rules, 2014; Section 147 of the Companies Act, 2013

Question 12 · 2 marks · Chapter 10: Audit and Auditors · hard

Scenario. The Board of Aadya Ltd passed a resolution on 1 April 2026 to remove its auditor before expiry of term. It applied to the Central Government in Form ADT-2 on 25 April 2026. Approval was received on 1 June 2026, and the general meeting passed a special resolution on 30 July 2026. The auditor was given a hearing. Is the removal valid?

The Board of Aadya Ltd passed a resolution on 1 April 2026 to remove its auditor before expiry of term. It applied to the Central Government in Form ADT-2 on 25 April 2026. Approval was received on 1 June 2026, and the general meeting passed a special resolution on 30 July 2026. The auditor was given a hearing. Is the removal valid?

1. No, because the application in Form ADT-2 was filed beyond 30 days from the Board resolution.
2. No, because the general meeting was held beyond 60 days from the Central Government approval.
3. Yes, because all prescribed timelines were met and the auditor was given a reasonable opportunity of being heard. (correct answer)
4. No, because an auditor appointed under Section 139 cannot be removed before expiry of term under any circumstances.

Answer: C — Yes, because all prescribed timelines were met and the auditor was given a reasonable opportunity of being heard.

Explanation. The Board resolution was on 1 April 2026 and Form ADT-2 was filed on 25 April 2026, within 30 days. Central Government approval was on 1 June 2026 and the general meeting was held on 30 July 2026, within 60 days. A special resolution was passed and the auditor was heard. All requirements of Section 140(1) and Rule 7 are satisfied.

Where it goes wrong. Students miscalculate the 60-day period from approval or overlook that the 30-day ADT-2 period runs from the Board resolution.

Authority. Section 140(1) of the Companies Act, 2013; Rule 7 of the Companies (Audit and Auditors) Rules, 2014

Question 13 · 2 marks · Chapter 10: Audit and Auditors · hard

Scenario. M/s Ravi & Co. completed two consecutive terms of five years as auditor of Ekta Ltd. Its partner, Mr. R, then joined M/s Shyam & Co. Ekta Ltd proposed to appoint M/s Shyam & Co. immediately as its auditor. Is the appointment valid?

M/s Ravi & Co. completed two consecutive terms of five years as auditor of Ekta Ltd. Its partner, Mr. R, then joined M/s Shyam & Co. Ekta Ltd proposed to appoint M/s Shyam & Co. immediately as its auditor. Is the appointment valid?

1. Yes, because the outgoing firm and the incoming firm are different legal entities.
2. No, because the incoming firm has a common partner with the outgoing firm and is ineligible during the five-year cooling-off period. (correct answer)
3. Yes, because a common partner disqualifies the incoming firm only for one year after the outgoing firm’s term.
4. No, because an audit firm can never be re-appointed after completing one term of five years.

Answer: B — No, because the incoming firm has a common partner with the outgoing firm and is ineligible during the five-year cooling-off period.

Explanation. Under the rotation provisions, an audit firm that has completed two terms of five consecutive years is subject to a five-year cooling-off. Rule 6(3) further provides that if a partner who was in charge of the outgoing audit firm joins another firm, that other firm is also ineligible for five years. M/s Shyam & Co. has a common partner with the outgoing firm, so it cannot be appointed immediately.

Where it goes wrong. Students think a change of firm name is sufficient and ignore the common-partner restriction under Rule 6(3).

Authority. Section 139(2) of the Companies Act, 2013; Rule 6(3) of the Companies (Audit and Auditors) Rules, 2014

Question 14 · 2 marks · Chapter 10: Audit and Auditors · medium

Scenario. A listed company’s Audit Committee recommended CA X for appointment as statutory auditor. The Board disagreed, referred the recommendation back with reasons, and the Audit Committee refused to reconsider its original recommendation. What should the Board do?

A listed company’s Audit Committee recommended CA X for appointment as statutory auditor. The Board disagreed, referred the recommendation back with reasons, and the Audit Committee refused to reconsider its original recommendation. What should the Board do?

1. Appoint CA X, because the Audit Committee’s recommendation is binding on the Board.
2. Reject CA X and appoint another auditor without placing the matter before members.
3. Refer the disagreement to the Central Government for final approval.
4. Record its reasons for disagreement and send its own recommendation to the members in the annual general meeting. (correct answer)

Answer: D — Record its reasons for disagreement and send its own recommendation to the members in the annual general meeting.

Explanation. Where a company is required to constitute an Audit Committee, the Committee recommends an auditor to the Board. If the Board disagrees, it must refer the recommendation back with reasons. If the Committee does not reconsider, the Board must record its reasons and send its own recommendation for consideration of the members in the AGM. The Committee’s recommendation is not binding.

Where it goes wrong. Students treat the Audit Committee’s recommendation as final or believe the Central Government resolves Board-Committee disagreements.

Authority. Rule 3(1) of the Companies (Audit and Auditors) Rules, 2014; Section 177 of the Companies Act, 2013

Question 15 · 2 marks · Chapter 10: Audit and Auditors · hard

Scenario. M/s V & Co. is statutory auditor of a listed company for a five-year term starting from the AGM held on 30 September 2022. In June 2025, the Board passed a resolution to remove it before expiry. The application in Form ADT-2 was filed with the Central Government on 20 July 2025, approval was received on 1 September 2025, and a special resolution was passed on 20 October 2025. The auditor was heard. Which statement is correct?

M/s V & Co. is statutory auditor of a listed company for a five-year term starting from the AGM held on 30 September 2022. In June 2025, the Board passed a resolution to remove it before expiry. The application in Form ADT-2 was filed with the Central Government on 20 July 2025, approval was received on 1 September 2025, and a special resolution was passed on 20 October 2025. The auditor was heard. Which statement is correct?

1. The removal is valid because the application, approval and special resolution were all within prescribed timelines.
2. The removal is invalid only because the general meeting was held beyond 60 days from the Central Government approval.
3. The removal is invalid because Form ADT-2 was filed beyond 30 days from the Board resolution. (correct answer)
4. The removal is valid because the auditor was given a hearing and a special resolution was passed.

Answer: C — The removal is invalid because Form ADT-2 was filed beyond 30 days from the Board resolution.

Explanation. Rule 7 requires the application in Form ADT-2 to be made to the Central Government within 30 days of the Board resolution. The Board resolution was in June 2025 and the application was filed on 20 July 2025, beyond 30 days. This defect invalidates the removal procedure, even though the meeting was held within 60 days of approval and the auditor was heard.

Where it goes wrong. Students check the 60-day general meeting timeline and the hearing requirement but miss the 30-day limit for filing ADT-2.

Authority. Section 140(1) of the Companies Act, 2013; Rule 7 of the Companies (Audit and Auditors) Rules, 2014