CA Inter P2 · Chapter 9
Audit and Auditors MCQs with Answers
11 multiple-choice questions on Audit and Auditors for CA Inter P2 Corporate and Other Laws. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under section 139(1), the auditor appointed at the first annual general meeting holds office:
- A) For a fixed period of three financial years
- B) Till the conclusion of the next annual general meeting only
- C) From the conclusion of that meeting till the conclusion of its sixth annual general meeting
- D) Till the auditor resigns or is removed, without any time limit
Show answer & explanation
Answer: C) From the conclusion of that meeting till the conclusion of its sixth annual general meeting
Section 139(1) requires every company, at its first AGM, to appoint an individual or a firm as auditor to hold office from the conclusion of that meeting till the conclusion of its sixth AGM. Thereafter, the same applies at every sixth meeting. The auditor's written consent and eligibility certificate must be obtained, and the company must inform the Registrar.
Question 2
An audit firm has been the auditor of Vertex Ltd, a listed company, for two consecutive terms of five years each. Under section 139(2), the firm:
- A) Can never again be appointed as auditor of Vertex Ltd
- B) Cannot be reappointed as auditor of Vertex Ltd for five years from the completion of its second term
- C) Can be reappointed immediately for one more term of five years by special resolution
- D) Can be reappointed after a cooling-off period of three years
Show answer & explanation
Answer: B) Cannot be reappointed as auditor of Vertex Ltd for five years from the completion of its second term
Section 139(2)(b) prohibits a listed company, and other prescribed companies, from appointing an audit firm for more than two terms of five consecutive years. The firm is not eligible for reappointment for five years from the completion of its term. An individual auditor is limited to one term of five consecutive years, with the same five-year cooling-off period.
Question 3
Fern Ltd is a non-government company. Under section 139(6), its first auditor must be appointed by the Board within thirty days of registration. If the Board fails to do so, the members must appoint the first auditor:
- A) Within ninety days at an extraordinary general meeting
- B) Within thirty days at an extraordinary general meeting
- C) At the first annual general meeting
- D) Within sixty days, after the Comptroller and Auditor-General is consulted
Show answer & explanation
Answer: A) Within ninety days at an extraordinary general meeting
Under section 139(6), the first auditor of a non-government company is appointed by the Board within thirty days of registration. If the Board fails, it must inform the members, who appoint the auditor within ninety days at an extraordinary general meeting. The first auditor holds office till the conclusion of the first AGM.
Question 4
The auditor of Willow Ltd (not audited by the CAG) resigned mid-term. Under section 139(8), the casual vacancy:
- A) Is filled by the Registrar within thirty days
- B) Is filled by the Board within thirty days, and the appointment must also be approved by the company at a general meeting convened within three months of the Board's recommendation
- C) Is filled by the Board, and no approval of members is required
- D) Must be filled by members at the next AGM only
Show answer & explanation
Answer: B) Is filled by the Board within thirty days, and the appointment must also be approved by the company at a general meeting convened within three months of the Board's recommendation
Section 139(8)(i) provides that a casual vacancy in a company not audited by the CAG is filled by the Board within thirty days. If the vacancy arises from the auditor's resignation, the appointment must also be approved by the company at a general meeting convened within three months of the Board's recommendation. The auditor holds office till the conclusion of the next AGM.
Question 5
Under section 140(1), an auditor appointed under section 139 may be removed from office before the expiry of his term only by:
- A) An order of the Registrar on a complaint by members
- B) An ordinary resolution of the company passed with special notice
- C) A resolution of the Board of directors
- D) A special resolution of the company, after obtaining the previous approval of the Central Government
Show answer & explanation
Answer: D) A special resolution of the company, after obtaining the previous approval of the Central Government
Section 140(1) requires a special resolution of the company after obtaining the previous approval of the Central Government before an auditor can be removed during his term. The auditor must be given a reasonable opportunity of being heard. Removing an auditor at the end of the term, by not reappointing him, needs special notice under section 140(4).
Question 6
Which of the following is eligible for appointment as auditor of a company under section 141?
- A) A private company whose directors are all chartered accountants
- B) A chartered accountant who is in full-time employment with another company
- C) A chartered accountant who is a full-time employee of the company
- D) A limited liability partnership registered under the LLP Act, 2008, in which the partners who sign are chartered accountants
Show answer & explanation
Answer: D) A limited liability partnership registered under the LLP Act, 2008, in which the partners who sign are chartered accountants
Section 141(1) allows a firm, including an LLP, to be appointed by its name if a majority of its partners practising in India are qualified; only chartered accountant partners may act and sign. Section 141(3)(a) disqualifies a body corporate other than an LLP. An officer or employee of the company, and a person in full-time employment elsewhere, are disqualified under section 141(3)(b) and (g).
Question 7
Under section 141(3)(g), a chartered accountant is disqualified from being appointed auditor of a company if, at the date of appointment, he is:
- A) Holding a certificate of practice for less than five years
- B) Holding appointment as auditor of more than twenty companies, not counting one person companies, dormant companies, small companies and private companies having paid-up share capital below the limit specified in that clause
- C) Auditor of any other company in the same industry
- D) Holding appointment as auditor of more than ten companies of any kind
Show answer & explanation
Answer: B) Holding appointment as auditor of more than twenty companies, not counting one person companies, dormant companies, small companies and private companies having paid-up share capital below the limit specified in that clause
Section 141(3)(g) disqualifies a person who is in full-time employment elsewhere, or a person or partner of a firm who, at the date of appointment or reappointment, holds appointment as auditor of more than twenty companies. One person companies, dormant companies, small companies and private companies with paid-up share capital below the limit stated in the clause are not counted towards the twenty. There is no limit of ten companies, no prohibition on auditing competitors and no minimum years of practice under the Act.
Question 8
Under section 144, which of the following services can a company's statutory auditor provide to it, with approval of the Board or audit committee?
- A) Representation of the company in income-tax assessment proceedings
- B) Investment advisory services
- C) Internal audit
- D) Design and implementation of a financial information system
Show answer & explanation
Answer: A) Representation of the company in income-tax assessment proceedings
Section 144 lists services an auditor cannot provide directly or indirectly to the company, its holding company or subsidiary. These are accounting and book-keeping, internal audit, design and implementation of financial information systems, actuarial services, investment advisory, investment banking, outsourced financial services, management services and other prescribed services. Taxation representation is not in the list, so it is permitted with the approval of the Board or audit committee.
Question 9
Under section 143(1), the auditor of a company has the right of access to the books of account and vouchers of the company:
- A) Only on giving seven days' written notice to the company
- B) At all times, whether kept at the registered office or elsewhere
- C) Only with the permission of the Board
- D) Only during the period of the statutory audit
Show answer & explanation
Answer: B) At all times, whether kept at the registered office or elsewhere
Section 143(1) gives every auditor a right of access at all times to the books of account and vouchers of the company, wherever kept. The auditor may also require from the officers such information and explanations as he considers necessary for his duties.
Question 10
Under section 148(3), which of the following persons cannot be appointed to conduct the cost audit of a company?
- A) The statutory auditor of the company appointed under section 139
- B) A cost accountant in practice who is not otherwise disqualified
- C) A cost accountant who audited the cost records of the company in the previous year
- D) A firm of cost accountants
Show answer & explanation
Answer: A) The statutory auditor of the company appointed under section 139
Section 148(3) requires the cost audit to be conducted by a cost accountant appointed by the Board. It expressly provides that no person appointed under section 139 as the company's auditor shall be appointed to audit its cost records. This keeps the financial and cost audits independent.
Question 11
During the audit of Maple Ltd, the auditor has reason to believe that an offence of fraud involving an amount above the threshold prescribed under section 143(12) is being committed by its employees. The auditor must report the matter to:
- A) The Registrar of Companies only
- B) The Central Government, within the prescribed time and manner
- C) The police, with a copy to the Board
- D) The members at the next annual general meeting only
Show answer & explanation
Answer: B) The Central Government, within the prescribed time and manner
Section 143(12) requires an auditor who has reason to believe that an offence of fraud is being or has been committed by the company's officers or employees to report it. For fraud above the prescribed amount, the report goes to the Central Government. Smaller frauds are reported to the audit committee or Board and disclosed in the Board's report.