Roles & Responsibilities of the Auditor under Companies Act 2013 (February 2016)

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Companies Act 2013 has been enacted on 30th August 2013 and earlier 98 Sections were made effective from 12th September 2013 and now around 185 Sections are made effective from 1st April 2014. Moreover, numbers of rules have also been notified and therefore it is important to get updated on the same.

Chapter X read with Section 139 to Section 148 deals with provisions relating to Audit & Auditors as given below:

  • Section 139 – Appointment of auditors
  • Section 140 – Removal, resignation of auditor and giving of special notice
  • Section 141 – Eligibility, Qualifications and disqualifications of auditors
  • Section 142 – Remuneration of auditors
  • Section 143 – Powers and duties of auditors and auditing standards
  • Section 144 – Auditor not to render certain services
  • Section 145 – Auditor to sign audit reports, etc.
  • Section 146 – Auditors to attend general meeting
  • Section 147 – Punishment for contravention
  • Section 148 – Central Government to specify audit of items of cost in respect of certain companies.

Section 143 deals with “Powers & duties of auditors and Auditing Standards” of auditors and therefore it needs to be carefully examined. Provisions of Section 143 are reproduced below:

  • Every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor and amongst other matters inquire into the following matters, namely:—
    1. whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members;
    2. whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;
    3. where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;
    4. whether loans and advances made by the company have been shown as deposits;
    5. whether personal expenses have been charged to revenue account;
    6. where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading:

Provided that the auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries.

  • The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made thereunder or under any order made under sub-section (11) and to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company’s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.
  • The auditor’s report shall also state :
    1. whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements;
    2. whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;
    3. whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;
    4. whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;
    5. whether, in his opinion, the financial statements comply with the accounting standards;
    6. the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;
    7. whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;
    8. any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;
    9. whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls;
    10. such other matters as may be prescribed.
  • Where any of the matters required to be included in the audit report under this section is answered in the negative or with a qualification, the report shall state the reasons therefor.
  • In the case of a Government company, the Comptroller and Auditor-General of India shall appoint the auditor under sub-section (5) or sub-section (7) of section 139 and direct such auditor the manner in which the accounts of the Government company are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller and Auditor-General of India which, among other things, include the directions, if any, issued by the Comptroller and Auditor-General of India, the action taken thereon and its impact on the accounts and financial statement of the company.
  • The Comptroller and Auditor-General of India shall within sixty days from the date of receipt of the audit report under sub-section (5) have a right to:
  1. conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorized in this behalf; and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorized, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General of India may direct; and
  2. comment upon or supplement such audit report: Provided that any comments given by the Comptroller and Auditor-General of India upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements under sub section (1) of section 136 and also be placed before the annual general meeting of the company at the same time and in the same manner as the audit report.
  • Without prejudice to the provisions of this Chapter, the Comptroller and Auditor- General of India may, in case of any company covered under sub-section (5) or sub-section (7) of section 139, if he considers necessary, by an order, cause test audit to be conducted of the accounts of such company and the provisions of section 19A of the Comptroller and Auditor-General’s (Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of such test audit.
  • Where a company has a branch office, the accounts of that office shall be audited either by the auditor appointed for the company (herein referred to as the company’s auditor) under this Act or by any other person qualified for appointment as an auditor of the company under this Act and appointed as such under section 139, or where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company’s auditor or by an accountant or by any other person duly qualified to act asan auditor of the accounts of the branch office in accordance with the laws of that country and the duties and powers of the company’s auditor with reference to the audit of the branch and the branch auditor, if any, shall be such as may be prescribed:

Provided that the branch auditor shall prepare a report on the accounts of the branch examined by him and send it to the auditor of the company who shall deal with it in his report in such manner as he considers necessary.

  • Every auditor shall comply with the auditing standards.
  • The Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority:

Provided that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards.

  • The Central Government may, in consultation with the National Financial Reporting Authority, by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor’s report shall also include a statement on such matters as may be specified therein.
  • Notwithstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.
  • No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter referred to in sub-section (12) if it is done in good faith.
  • The provisions of this section shall mutatis mutandis apply to—
  1. the cost accountant in practice conducting cost audit under section 148; or
  2. the company secretary in practice conducting secretarial audit under section 204.
  • If any auditor, cost accountant or company secretary in practice do not comply with the provisions of sub-section (12), he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

Moreover, provisions of Section 147 (2) stipulates that, If an auditor of a company contravenes any of the provisions of section 139,section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees:

Provided that if an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

Each Auditor have to comply with the auditing standards and Cost Accountant have to comply with Cost Auditing Standards and Company Secretary needs to comply with secretarial standards. Otherwise, provisions of Section 143(15) read with Section 147(2) will be applicable.

In view of the same, it is important to understand such standards. The comparison of relevant auditing standards is given below:

S.No. IAASB ICAI ICAI-CMA
1 ISA 300, Planning an Audit of Financial Statements SA 300 (Revised), Planning an Audit of Financial Statements CAS-101, Planning an Audit of Cost Statement – effective 11.09.2015
2 ISA 230, Audit Documentation SA 230 (Revised), Audit Documentation CAS-102, Cost Audit Documentation – effective 11.09.2015
3 ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing SA 200 (Revised), Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing CAS-103, Overall Objectives of the Independent Cost Auditor and the Conduct of an Audit in Accordance with Standards on Auditing – effective 11.09.2015
4 ISA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment SA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment CAS-104, Knowledge of Business, its Processes and Business Environment – effective 11.09.2015
5 ISA 210, Agreeing the Terms of Audit Engagements SA 210 (Revised), Agreeing the Terms of Audit Engagements SCA-105 Finalized by the Board, approved by the Council and sent to MCA for approval
6 ISA 530, Audit Sampling SA 530 (Revised), Audit Sampling SCA-106 Finalized by the Board, approved by the Council and sent to MCA for approval
7 ISA 500, Audit Evidence ISA 501, Audit Evidence-Specific Considerations for Selected Items SA 500 (Revised), Audit Evidence SA 501 (Revised), Audit Evidence—Specific Considerations for Selected Items Approved by Board in 23rd meeting held on 10.12.2015; sent to Council for approval
8 ISA 320, Materiality in Planning and Performing an Audit SA 320 (Revised), Materiality in Planning and Performing an Audit Approved by Board in 23rd meeting held on 10.12.2015; sent to Council for approval
9 ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements SA 240 (Revised), The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements Approved by Board in 21stmeeting dated 5/6.10.2015; ED issued on 16.11.2015; Being placed before Board in 24th meeting to be held on 24.12.2015
10 ISA 450, Evaluation of Misstatements Identified during the Audit SA 450, Evaluation of Misstatements Identified During the Audit Approved by Board in 22ndmeeting dated 6.11.2015; ED issued on 27.11.2015; to be placed in 25th meeting
11 ISA 580, Written Representations SA 580 (Revised), Written Representations Approved by Board in 22ndmeeting dated 6.11.2015; ED issued on 27.11.2015; to be placed in 25th meeting
12 ISA 610, Using the Work of Internal Auditors SA 610 (Revised), Using The Work of Internal Auditors Approved by Board in 23rd meeting held on 10.12.2015; ED being issued.
13 ISA 620, Using the Work of an Auditor’s Expert SA 620 (Revised), Using the Work of an Auditor’s Expert Approved by Board in 23rd meeting held on 10.12.2015; ED being issued.
14 ISA 260, Communication with Those Charged with Governance ISA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management SA 260 (Revised), Communication with Those Charged with Governance SA 265, Communicating Deficiencies in Internal Control to Those Charged With Governance and Management Under preparation
15 ISA 520, Analytical Procedures SA 520 (Revised), Analytical Procedures Under preparation
16 ISA 330, The Auditor’s Responses to Assessed Risks SA 330, The Auditor’s Responses to Assessed Risks Under preparation
17 ISA 600, Special Considerations-Audits of Group Financial Statements (Including the Work of Component Auditors) SA 600 (AAS 10), Using the Work of Another Auditor Under preparation
18 ISA 550, Related Parties SA 550 (Revised), Related Parties Under preparation
19 ISA 250, Consideration of Laws and Regulations in an Audit of Financial Statements SA 250 (Revised), Consideration of Laws and Regulations in an Audit of Financial Statements Under preparation
20 ISA 402, Audit Considerations Relating to an Entity Using a Service Organization SA 402 (Revised), Audit Considerations Relating to an Entity Using a Service Organization Under preparation
21 ISA 505, External Confirmations SA 505 (Revised), External Confirmations Under preparation
22 ISA 700, Forming an Opinion and Reporting on Financial Statements ISA 705, Modifications to the Opinion in the Independent Auditor’s Report SA 700 (Revised), Forming an Opinion and Reporting on Financial Statements SA 705, Modifications to the Opinion in the Independent Auditor’s Report Under preparation
23 ISA 720, The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements SA 720,The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements Under preparation
24 ISA 560, Subsequent Events SA 560 (Revised), Subsequent Events Under preparation
25 ISA 800, Special Considerations-Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks SA 800, Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks Under preparation
26 ISA 710, Comparative Information-Corresponding Figures and Comparative Financial Statements SA 710 (Revised), Comparative Information—Corresponding Figures and Comparative Financial Statements Under preparation
27 International Standard on Quality Control (ISQC) 1, Quality Controls for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements SQC 1, Quality Control for Firms that Perform Audit and Reviews of Historical Financial Information, and other Assurance and Related Services Engagements Guidance Manual for Audit Quality, prepared by the Quality Review Board (QRB); Audit Standard to be issued
28 ISA 510, Initial Audit Engagements-Opening Balances SA 510 (Revised), Initial Audit Engagements – Opening Balances Not relevant
29 ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures SA 540 (Revised), Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures Not relevant
30 ISA 570, Going Concern SA 570 (Revised), Going Concern Not relevant
31 ISA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report Not Relevant
32 ISA 805, Special Considerations-Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement SA 805, Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement Not relevant
33 ISA 810, Engagements to Report on Summary Financial Statements SA 810, Engagements to Report on Summary Financial Statements Not relevant

It means, auditors / cost auditors have to maintain audit trends and such documents / records as prescribed in respective auditing standards.

Further, it is important to note the meaning of Fraud defined under :

Indian Penal Code, 1860

1.3 Indian Penal Code, which is the mother law concerning frauds has, as such, not defined the term ‘fraud’. However, it has defined other related terms such as ‘wrongful gain’, ‘wrongful loss’, ‘dishonestly’, ‘fraudulently’, and ‘reason to believe’. These are as under:

Section 23 “Wrongful gain”

“Wrongful gain” is gain by unlawful means of property which the person gaining is not legally entitled.

“Wrongful loss” is the loss by unlawful means of property to which the person losing it is legally entitled.

Gaining wrongfully, losing wrongfully- A person is said to gain wrongfully when suchperson retains wrongfully, as well as when such person acquires wrongfully. A person is said to lose wrongfully when such person is wrongfully kept out of any property as well as when such person is wrongfully deprived of property.

Section 24 “Dishonestly”– Whoever does anything with the intention of causing wrongful gain to one person or wrongful loss to another person, is said to do that thing “dishonestly”.

Section 25 “Fraudulently” – A person is said to do a thing fraudulently if he does that thing with intent to defraud but not otherwise.

Section 26 “Reason to believe”– A person is said to have “reason to believe” a thing, if he has sufficient cause to believe that thing but not otherwise.

Indian Contract Act, 1872 – Section 17 states as follows

1.4 “Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his agent, or to induce him to enter into the contract;

  • the suggestion as a fact, of that which is not true, by one who does not believe it to be true;
  • the active concealment of a fact by one having knowledge or belief of the fact;
  • a promise made without any intention of performing it;
  • any other act fitted to deceive;
  • any such act or omission as the law specially declares to be fraudulent.

Explanation—Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence, is, in itself, equivalent to speech.

Reserve Bank of India

1.5 RBI had, per se, not defined the term ‘fraud’ in its guidelines on Frauds. A definition of fraud was, however, suggested in the context of electronic banking in the Report of RBI Working Group on Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds, which reads as under:-

“‘A deliberate act of omission or commission by any person, carried out in the course of a banking transaction or in the books of accounts maintained manually or under computer system in banks, resulting into wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss to the bank.”

The Insurance Fraud Monitoring Framework

1.6 In the context of insurance business, Insurance Regulatory and Development Authority (IRDA)has defined fraud as:

“an act or omission intended to gain dishonest or unlawful advantage for a party committing the fraud or for other related parties.”

The Companies Act, 2013

 1.7 With reference to the provisions for punishment for fraud, Section 447 of the Act has explained the terms fraud, wrongful gain and wrongful loss as under:

“fraud” in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;

“wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled;

“wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.

1.8 The above definition of fraud is so broad that it conceivably includes any act committed by anyone with wrongful intent.

1.9 Section 447 provides punishment for fraud, as below:

  • Criminal Liability (Imprisonment)–Minimum of6 months (3 years in case public interest is involved) and Maximum of 10 years
  • Civil Liability (Fine/Penalty)–Minimum amount equivalent to the amount involved in the fraud and Maximum upto 3 times of the amount involved in fraud. Further, the penalty is non-compoundable

In other words, the definition of fraud is not restricted to fraud committed by employee to the Management but it also includes any act, omission, concealment of fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.”

When the definition of “Fraud” is so large then it becomes imperative to read the proviso to Section 147(2), which clearly mentioned that :

Quote :

Provisions to Section 147 (2) clearly mentions that

Provided that if an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

Each Auditor have to comply with the auditing standards and Cost Accountant have to comply with Cost Auditing Standards and Company Secretary needs to comply with secretarial standards. Otherwise, provisions of Section 143(15) read with Section 147(2) will be applicable.

 Un-Quote :

 Rule 13 of the Companies (Audit and Auditors) Rules, 2014

 2.6 The Central Government, through the Ministry of Corporate Affairs, vide GSR 246(E) dated 31.03.2014, has notified the Companies (Audit and Auditors) Rules, 2014.

Rule 13 of the said Rules relates to reporting of frauds by auditor. Further, Ministry of Corporate Affairs, vide G.S.R. 972(E) dated 14.12.2015 has amended the Companies (Audit and Auditors) Rules, 2014 and completely substituted Rule 13 in the Companies (Audit and Auditors) Amendment Rules, 2015. The amended version of Rule 13 is reproduced below:

“13. Reporting of frauds by auditor and other matters.-

 (1) if an auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of rupees one crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government.

(2) The auditor shall report the matter to the Central Government as under;-

(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within forty-five days;

(b) on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days of receipt of such reply or observations

(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations

(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same.

(e) the report shall be on the letter-head of the auditor containing postal address, email address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; and

(f) the report shall be in the form of a statement as specified in Form ADT-4.

(3) In case of a fraud involving lesser than the amount specified in sub-rule (1), the auditor shall report the matter to Audit Committee constituted under Section 177 or to the Board immediately but not later than two days of his knowledge of the fraud and he shall report the matter specifying the following:-

(a) Nature of Fraud with description;

(b) Approximate amount involved; and

(c) Parties involved.

(4) The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during the year shall be disclosed in the Board’s Report:-

(a) Nature of Fraud with description;

(b) Approximate amount involved;

(c) Parties involved, if remedial action not taken; and

(d) Remedial actions taken.

(5) The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a Secretarial Auditor during the performance of his duties under section 148 and section 204 respectively.”;

2.7 The significant provisions made in the aforesaid rules that, mutatis mutandis, apply to cost auditor and secretarial auditor performing audit under section 148 and 204 respectively, are summarized as under. Detailed interpretation and applicability of these provisions, in different circumstances, is made in the subsequent chapters.

  • Each fraud involving amount of rupees one crore or above is required to be reported to the Central Government.
  • Each fraud involving amount less than rupees one crore is required to be reported to the Board or the Audit Committee, as the case may be.
  • All frauds reported to the Board or the Audit Committee is required to be disclosed in the Board’s Report.
  • Maximum time to make a report to the Central Government is sixty two days [2+45+15] of the auditor’s knowledge of the fraud.
  • First reporting is immediate but not later than two days of the auditor’s knowledge of fraud.
  • Board or the Audit Committee is required to reply or make observations to the auditor within forty-five days.
  • The auditor is required to forward his report to the Central Government within fifteen days of receipt of reply or observations of the Board or Audit Committee.
  • In case no reply or observations are received from the Board or Audit Committee within forty-five days, the auditor is required to forward his report to the Central Government.
  • The report is required to be sent to the Secretary, Ministry of Corporate Affairs.

Key points to be noted are:

  • The report must be in the specified Form ADT-4;
  • It must be on the letter-head of the auditor containing postal address, email address and contact number;
  • It must be signed by the auditor with his seal and Membership Number;
  • It must be sent in a sealed cover;
  • It must be sent by Registered Post with Acknowledgement Due or by Speed post; and
  • Each such communication must be followed by an e-mail in confirmation.

In the context of cost accounting, Fraud & Misconduct, together fall into the following categories of risk that can undermine public trust and damage a company’s reputation for integrity:

  • Fraudulent Cost Reporting(e.g. overstatement of cost of goods sold, last minute adjustment that significantly affect cost results, missing inventory or physical assets of significant magnitude)
  • Misappropriation of assets (e.g. embezzlement, payroll fraud, theft, procurement fraud, counterfeiting, wrong product mix)
  • Revenue or assets gained by fraudulent or illegal acts (e.g. over-billing customer, deceptive sales practices, accelerated revenue, bogus revenue)
  • Cost accounting policies that appear to be at variance with industry norms
  • Tolerance of violation of the company’s Code of Conduct
  • Other misconduct (e.g. conflicts of interest, denial of access to records, facilities, certain employee, customer / vendor or other from whom cost audit evidence might be sought)
  • Even wrongly certifying Indirect Tax reconciliation that tax payable, tax paid , tax collected is the same and thereafter subsequently detected by any revenue authorities of evasion of duties and agreed by the company, may also get classified under the heading of “Fraud” provided proper care has not been taken.
  • Not furnishing the reasons for difference between the turnover as per financial accounts and as per excise & /or service tax turnover.

The cost auditor has got more responsibility than that of auditors under Companies Act 2013, since auditors are not certifying tax payable, tax paid and tax collected, as also are not required to give the reconciliation between the turnover as per financial account and turnover as per excise / service tax.

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