Chapter 10: Audit and Auditors - Test 2: answer key

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

Scenario. Anekta Garments Ltd (AGL), a listed company, appointed Disha & Associates, Chartered Accountants, as its statutory auditor for FY 2025-26. One partner of the firm, Mr. Dev, holds 8,000 equity shares of AGL of face value ₹10 each. Another partner’s wife, Mrs. R, holds AGL equity shares of face value ₹1,20,000. AGL has a wholly owned subsidiary, Stitch Processing Ltd. During FY 2025-26, Disha & Associates accepted an engagement to conduct the internal audit of Stitch Processing Ltd. While auditing AGL, the firm found that two employees had misappropriated ₹1.40 crore. On 2 June 2026, the firm reported the matter to AGL’s Audit Committee and sought its reply within 45 days. The Audit Committee replied on 25 July 2026. The firm also accepted a tax representation assignment for AGL before the income-tax authorities, after obtaining the Board’s approval. AGL contends that the firm suffers no disqualification because Mr. Dev’s shareholding is below ₹1 lakh and the internal audit assignment is with a separate subsidiary company. It further contends that the fraud was reported to the Audit Committee, so no further reporting is required.

Does Mr. Dev’s holding of AGL shares disqualify Disha & Associates from being statutory auditor?

1. No, because the face value of his holding is below the ₹1 lakh threshold applicable to a partner.
2. Yes, because a partner holding any security of the audit client disqualifies the firm, irrespective of face value. (correct answer)
3. Yes, only because Mrs. R, the wife of another partner, holds shares above ₹1 lakh.
4. No, because the shares are held by a partner and not by the audit firm in its own name.

Answer: B — Yes, because a partner holding any security of the audit client disqualifies the firm, irrespective of face value.

Explanation. Section 141(3)(d)(i) disqualifies a person if he, his relative or his partner holds any security or interest in the company, its subsidiary, holding or associate company. The ₹1 lakh relaxation applies only to a relative and not to a partner. Therefore, Mr. Dev holding shares of even ₹80,000 face value disqualifies the firm. Mrs. R’s holding above ₹1 lakh is an additional disqualification, not the only one.

Where it goes wrong. Students wrongly apply the ₹1 lakh relative threshold to a partner’s own shareholding.

Authority. Section 141(3)(d)(i) of the Companies Act, 2013; Rule 10 of the Companies (Audit and Auditors) Rules, 2014

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

What is the legal effect of Disha & Associates accepting the internal audit engagement of Stitch Processing Ltd, AGL’s wholly owned subsidiary?

1. It is valid because the subsidiary is a separate legal entity and Section 144 applies only to the audit client.
2. It is valid because internal audit may be accepted with the approval of the Board or Audit Committee.
3. It is invalid because Section 144 prohibits the statutory auditor from rendering internal audit to the company, its holding or its subsidiary. (correct answer)
4. It is invalid only if Stitch Processing Ltd is a listed company.

Answer: C — It is invalid because Section 144 prohibits the statutory auditor from rendering internal audit to the company, its holding or its subsidiary.

Explanation. Section 144 prohibits an auditor from rendering specified non-audit services, including internal audit, directly or indirectly to the company or its holding company or subsidiary company. Stitch Processing Ltd is AGL’s wholly owned subsidiary, so accepting its internal audit is prohibited. Board or Audit Committee approval cannot cure a statutory prohibition.

Where it goes wrong. Students think a subsidiary is outside Section 144 or that Board approval validates any non-audit service.

Authority. Section 144 of the Companies Act, 2013

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

In respect of the ₹1.40 crore fraud, what should Disha & Associates have done after the Audit Committee failed to reply within 45 days?

1. Forward its report to the Central Government with a note, since no reply was received within 45 days; the late reply does not postpone this obligation. (correct answer)
2. Wait for the Audit Committee’s reply and then forward the report within 15 days from 25 July 2026.
3. Report the matter only in the Board’s report, because the fraud was detected by the statutory auditor.
4. Report the matter to the Central Government within 2 days of detection in Form ADT-4.

Answer: A — Forward its report to the Central Government with a note, since no reply was received within 45 days; the late reply does not postpone this obligation.

Explanation. For fraud of ₹1 crore or more, the auditor must first report to the Board or Audit Committee within 2 days and seek its reply within 45 days. If no reply is received within 45 days, the auditor must forward the report to the Central Government with a note. A belated reply does not extend or postpone this obligation.

Where it goes wrong. Students believe the auditor must wait indefinitely for the Board/Audit Committee or restart the 15-day period from a late reply.

Authority. Section 143(12) of the Companies Act, 2013; Rule 13(2) of the Companies (Audit and Auditors) Rules, 2014

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

Can Disha & Associates accept the tax representation assignment for AGL after Board approval?

1. No, because tax representation is a management service prohibited under Section 144.
2. No, because any non-audit service is prohibited for a statutory auditor of a listed company.
3. Yes, because tax representation is not listed as a prohibited service under Section 144 and is approved by the Board. (correct answer)
4. No, because tax representation amounts to investment advisory services under Section 144.

Answer: C — Yes, because tax representation is not listed as a prohibited service under Section 144 and is approved by the Board.

Explanation. Section 144 permits an auditor to provide other services approved by the Board or Audit Committee, but prohibits specified services such as accounting, internal audit, actuarial, investment advisory and management services. Tax representation is not among the prohibited services and can be accepted after the prescribed approval. It is neither management services nor investment advisory services.

Where it goes wrong. Students treat every non-audit service as prohibited or misclassify tax representation as management services.

Authority. Section 144 of the Companies Act, 2013

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

Scenario. Vayu Renewables Ltd (VRL), an unlisted public company engaged in the manufacture of specified goods, has turnover of ₹42 crore. For FY 2025-26, VRL appointed Nova & Co., Chartered Accountants, as its statutory auditor and also as its cost auditor. The cost auditor submitted its report to the Board on 20 September 2026. VRL furnished the cost audit report to the Central Government on 25 November 2026. During the cost audit, Nova & Co. found that a manager had misappropriated ₹40 lakh. The firm reported the matter to VRL’s Audit Committee on 22 September 2026. The statutory auditor also accepted a management services engagement from VRL’s holding company, GreenGrid Ltd. VRL’s Board approved the management services engagement. The company argues that the cost audit report may be furnished to the Central Government within 60 days of receipt, that a fraud below ₹1 crore need not be reported to anyone, and that management services to a holding company are outside the scope of prohibited services under Section 144.

Is Nova & Co.’s appointment as both statutory auditor and cost auditor of VRL valid?

1. No, because the proviso to Section 148(3) prohibits the statutory auditor from being appointed as cost auditor. (correct answer)
2. Yes, because cost audit is in addition to statutory audit and can be conducted by the same firm.
3. Yes, because the Board approved the dual appointment and the company’s turnover is above ₹35 crore.
4. No, only because Nova & Co. is a firm and not an individual cost accountant.

Answer: A — No, because the proviso to Section 148(3) prohibits the statutory auditor from being appointed as cost auditor.

Explanation. The proviso to Section 148(3) expressly states that a person or firm appointed as statutory auditor under Section 139 cannot be appointed to conduct cost audit, and vice versa. Nova & Co. cannot simultaneously hold both positions. Board approval or turnover thresholds do not override this prohibition.

Where it goes wrong. Students think cost audit is merely additional work and can be assigned to the statutory auditor.

Authority. Section 148(3) of the Companies Act, 2013

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

VRL received the cost audit report on 20 September 2026 and furnished it to the Central Government on 25 November 2026. Is the filing valid?

1. Yes, because the company has 60 days from the date of the cost auditor’s submission to furnish the report.
2. Yes, because the Central Government may automatically condone delay in cost audit filings.
3. No, because the report must be furnished to the Central Government within 30 days from the date of receipt of the report. (correct answer)
4. No, because the cost audit report must be filed in Form ADT-4 within 15 days.

Answer: C — No, because the report must be furnished to the Central Government within 30 days from the date of receipt of the report.

Explanation. Section 148(6) requires the company to furnish the cost audit report to the Central Government within 30 days from the date of receipt of a copy of the report. The report was received on 20 September 2026, so filing on 25 November 2026 is delayed. There is no automatic 60-day period or automatic condonation.

Where it goes wrong. Students confuse the 30-day company filing period with the 60-day period associated with fraud reporting or other filings.

Authority. Section 148(6) of the Companies Act, 2013

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

How should Nova & Co. deal with the ₹40 lakh fraud detected during the cost audit?

1. Report to the Central Government within 2 days in Form ADT-4 because the cost auditor is covered by Section 143(12).
2. Report to the Audit Committee or Board within 2 days; reporting to the Central Government is not required as the amount is below ₹1 crore. (correct answer)
3. No reporting is required because Section 143(12) does not apply to a cost auditor.
4. Report only in the Board’s report after the financial year ends, without any immediate intimation.

Answer: B — Report to the Audit Committee or Board within 2 days; reporting to the Central Government is not required as the amount is below ₹1 crore.

Explanation. The fraud reporting provisions of Section 143(12) apply mutatis mutandis to a cost auditor. Where the fraud involves less than ₹1 crore, the auditor must report to the Audit Committee or Board within 2 days. Reporting to the Central Government in Form ADT-4 is required only where the fraud involves ₹1 crore or more.

Where it goes wrong. Students either exempt cost auditors from fraud reporting or send every fraud to the Central Government.

Authority. Section 148(5) of the Companies Act, 2013; Section 143(12) of the Companies Act, 2013

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

Nova & Co. accepted management services from VRL’s holding company, GreenGrid Ltd. Is this permissible under Section 144?

1. Yes, because Section 144 applies only to the audit client and not to its holding company.
2. Yes, because management services are prohibited only if rendered directly to the company.
3. Yes, because the holding company’s Board approved the engagement.
4. No, because Section 144 prohibits management services to the company, its holding company and its subsidiary. (correct answer)

Answer: D — No, because Section 144 prohibits management services to the company, its holding company and its subsidiary.

Explanation. Section 144 prohibits specified services, including management services, whether rendered directly or indirectly to the company or its holding company or subsidiary company. GreenGrid Ltd is VRL’s holding company, so accepting management services from it is prohibited. Approval by the holding company’s Board does not cure the prohibition.

Where it goes wrong. Students restrict Section 144 to the audit client only and forget that holding and subsidiary companies are expressly covered.

Authority. Section 144 of the Companies Act, 2013

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

Scenario. CA Meera is proposed as auditor of Suhana Ltd. Her husband is a storekeeper in Suhana Ltd, not a director or key managerial personnel. Her brother owes ₹6 lakh to Suhana Ltd. Is CA Meera disqualified?

CA Meera is proposed as auditor of Suhana Ltd. Her husband is a storekeeper in Suhana Ltd, not a director or key managerial personnel. Her brother owes ₹6 lakh to Suhana Ltd. Is CA Meera disqualified?

1. No, because relative indebtedness above ₹5 lakh applies only to the auditor’s spouse.
2. No, because her husband is only a storekeeper and not a director or key managerial personnel.
3. Yes, because her brother, a relative, is indebted to the company for more than ₹5 lakh. (correct answer)
4. No, because a brother is not a relative for the purpose of Section 141(3).

Answer: C — Yes, because her brother, a relative, is indebted to the company for more than ₹5 lakh.

Explanation. Under Section 141(3)(e), a person is disqualified if he, his relative or partner is indebted to the company in excess of ₹5 lakh. A brother is a relative under Section 2(77). The husband being a storekeeper is not a disqualification because he is neither a director nor KMP, but the brother’s ₹6 lakh indebtedness independently disqualifies CA Meera.

Where it goes wrong. Students focus on the husband’s employment status and overlook the brother’s indebtedness threshold.

Authority. Section 141(3)(e) of the Companies Act, 2013; Section 2(77) of the Companies Act, 2013

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

Scenario. CA Rohan has given a guarantee of ₹1.50 lakh for a loan taken by his friend from Neelam Ltd, an audit client. Is CA Rohan disqualified from being auditor of Neelam Ltd?

CA Rohan has given a guarantee of ₹1.50 lakh for a loan taken by his friend from Neelam Ltd, an audit client. Is CA Rohan disqualified from being auditor of Neelam Ltd?

1. Yes, because he has given a guarantee exceeding ₹1 lakh for a third person’s indebtedness to the company. (correct answer)
2. No, because the guarantee amount is below the ₹5 lakh indebtedness threshold.
3. No, because a guarantee for a friend is not treated as a security for the purpose of Section 141(3).
4. Yes, only if the friend has actually defaulted in repaying the loan.

Answer: A — Yes, because he has given a guarantee exceeding ₹1 lakh for a third person’s indebtedness to the company.

Explanation. Section 141(3)(f) disqualifies a person who, or whose relative or partner, has given a guarantee or provided security in connection with the indebtedness of a third person to the company in excess of ₹1 lakh. The guarantee is ₹1.50 lakh, which exceeds the threshold. Actual default by the friend is not required for disqualification.

Where it goes wrong. Students apply the ₹5 lakh indebtedness threshold instead of the separate ₹1 lakh guarantee threshold.

Authority. Section 141(3)(f) of the Companies Act, 2013

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

Scenario. CA Nisha, statutory auditor of Udaan Airlines Ltd, purchased 10 air tickets from Udaan Airlines at arm’s length in the ordinary course of the airline’s business. Does this create a disqualifying business relationship?

CA Nisha, statutory auditor of Udaan Airlines Ltd, purchased 10 air tickets from Udaan Airlines at arm’s length in the ordinary course of the airline’s business. Does this create a disqualifying business relationship?

1. Yes, because any purchase from the audit client creates a business relationship.
2. Yes, because the transaction exceeds the ₹1 lakh relative-shareholding threshold.
3. Yes, unless the Audit Committee specifically approves the purchase.
4. No, because commercial transactions in the ordinary course of business at arm’s length are excluded from the business relationship disqualification. (correct answer)

Answer: D — No, because commercial transactions in the ordinary course of business at arm’s length are excluded from the business relationship disqualification.

Explanation. The business relationship disqualification excludes commercial transactions in the ordinary course of business of the company at arm’s length price, such as sale of products or services to the auditor as a customer by airlines, hospitals, hotels and similar businesses. CA Nisha’s arm’s-length ticket purchase from an airline does not disqualify her.

Where it goes wrong. Students treat every commercial dealing with the audit client as a disqualifying business relationship.

Authority. Section 141(3)(i) of the Companies Act, 2013; Rule 10 of the Companies (Audit and Auditors) Rules, 2014

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

Scenario. CA Sarthak was convicted for an offence involving fraud eight years ago. He is now proposed as auditor of Dhruv Ltd. Is he eligible?

CA Sarthak was convicted for an offence involving fraud eight years ago. He is now proposed as auditor of Dhruv Ltd. Is he eligible?

1. Yes, because the disqualification ends after five years from conviction.
2. No, because a person convicted of fraud is disqualified until ten years have elapsed from the date of conviction. (correct answer)
3. Yes, because the conviction was not in connection with Dhruv Ltd.
4. No, because a fraud conviction is a permanent disqualification.

Answer: B — No, because a person convicted of fraud is disqualified until ten years have elapsed from the date of conviction.

Explanation. Section 141(3)(k) disqualifies a person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of conviction. Eight years have elapsed, so the 10-year period is not over. The conviction need not relate to the same company.

Where it goes wrong. Students assume a five-year disqualification or require the fraud to relate to the audit client.

Authority. Section 141(3)(k) of the Companies Act, 2013

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

Scenario. CA Tarun is in full-time employment as a finance manager with Meghna Ltd. He is proposed as auditor of another company, Prakash Ltd. Is he eligible?

CA Tarun is in full-time employment as a finance manager with Meghna Ltd. He is proposed as auditor of another company, Prakash Ltd. Is he eligible?

1. Yes, because the full-time employment is with a company other than the audit client.
2. Yes, if he obtains a no-objection certificate from Meghna Ltd.
3. No, because a person in full-time employment elsewhere is disqualified from being appointed as auditor. (correct answer)
4. No, only if Meghna Ltd is in the same business as Prakash Ltd.

Answer: C — No, because a person in full-time employment elsewhere is disqualified from being appointed as auditor.

Explanation. Section 141(3)(j) disqualifies a person who is in full-time employment elsewhere from being appointed as auditor. The disqualification is not limited to employment with the audit client. A no-objection certificate or the nature of the employer’s business does not remove the statutory disqualification.

Where it goes wrong. Students think part-time or outside employment is acceptable if the employer is unrelated to the audit client.

Authority. Section 141(3)(j) of the Companies Act, 2013

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

Scenario. The statutory auditor of a listed company failed to report a fraud of ₹2 crore to the Central Government as required by Section 143(12). What is the penalty under Section 143(15)?

The statutory auditor of a listed company failed to report a fraud of ₹2 crore to the Central Government as required by Section 143(12). What is the penalty under Section 143(15)?

1. ₹5 lakh in the case of a listed company. (correct answer)
2. ₹1 lakh in the case of a listed company.
3. ₹50,000 or the auditor’s remuneration, whichever is less.
4. ₹500 per day of continuing failure, subject to a maximum of ₹2 lakh.

Answer: A — ₹5 lakh in the case of a listed company.

Explanation. Section 143(15) provides that an auditor who fails to comply with Section 143(12) is liable to a penalty of ₹5 lakh in the case of a listed company and ₹1 lakh in the case of any other company. The continuing ₹500 per day penalty belongs to the separate ADT-3 resignation filing default, not to Section 143(12).

Where it goes wrong. Students mix up the Section 143(15) penalty with the Section 140(3) continuing penalty for ADT-3 default.

Authority. Section 143(15) of the Companies Act, 2013

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

Scenario. Mr. P, a cost accountant holding a certificate of practice, is in part-time practice. He is proposed as cost auditor of Sunrise Cements Ltd. Is he eligible?

Mr. P, a cost accountant holding a certificate of practice, is in part-time practice. He is proposed as cost auditor of Sunrise Cements Ltd. Is he eligible?

1. Yes, because a certificate of practice is sufficient for appointment as cost auditor.
2. No, because a cost auditor must be a cost accountant in whole-time practice. (correct answer)
3. Yes, because cost auditors may be in part-time practice if the company’s turnover exceeds ₹35 crore.
4. No, because only a firm of cost accountants can be appointed as cost auditor.

Answer: B — No, because a cost auditor must be a cost accountant in whole-time practice.

Explanation. Section 148(3) permits only a cost accountant as defined under Section 2(28) to be appointed as cost auditor. The definition requires a cost accountant who holds a valid certificate of practice and is in whole-time practice. Part-time practice is insufficient. An individual cost accountant, not only a firm, can be appointed.

Where it goes wrong. Students remember the certificate of practice but overlook the whole-time practice requirement.

Authority. Section 148(3) of the Companies Act, 2013; Section 2(28) of the Companies Act, 2013