Sharp Surgical Ltd. is a public limited listed company engaged in the manufacture of surgical instruments with a nation-wide chain of dealers and…
CA Intermediate · Corporate and Other Laws · PYQS · September 2025
Sharp Surgical Ltd. is a public limited listed company engaged in the manufacture of surgical instruments with a nation-wide chain of dealers and retailers to facilitate the trade. It was incorporated in the year 2020. It has a paid-up capital of 350.10 crore with free reserves worth - 156.70 crore with a secured business term loan of 56 crore from GHL Bank Pvt. Ltd. as at 31.03.2025. Lamp bell & Associates Chartered Accountants were appointed to conduct Statutory Audit for F.Y. 2024-25 of the aforesaid company. During the audit of accounts Mr. Lamp bell the senior partner of the auditing firm shared the following observations with Mr. Sharp one of the promoter directors of the aforesaid company: No. Observation 1. Out of the above term loan, 3.15 crore were suspected to be used for purposes other than business, in providing unsecured loan to private individuals in the company. 2. Mr. Reet one of the officers in the company was suspected to have siphoned an amount of 0.15 crore. Mr. Lamp bell having reasons to believe for the above frauds, within 2 days of such detection, informed the Audit Committee and asked it for its reply so that the central government can be informed of the suspected fraud of 3.15 crore. Further he emphasized to mention the case of suspected siphoning of 0.15 crore to the audit committee. Mr. Sharp requested the auditors not to report any matter to the central government, rather they can mention both above matters in the Director's Report to be prepared under section 134(3) of the Companies Act, 2013. The above request of Mr. Sharp was based on the reasoning that it was only a case of suspected fraud and the same is a matter of investigation on part of the company. Considering the applicable provisions under the Companies Act, 2013, decide upon the following: (i) Whether Lamp bell & Associates Chartered Accountants should restrict the reporting of the above suspected fraud of 3.15 crore as requested by Mr. Sharp? What is the correct procedure to be followed by the auditor in such cases? (ii) What would be the correct procedure for the suspected siphoning of 0.15 crore by the auditor of the company?
Suggested Answer and Working Notes:
(a) (i) As per section 143 (12) of the Companies Act, 2013, read with Rule 13 (1) of the Companies (Audit and Auditors) Rules, 2014, if an auditor in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving or is expected to involve individually an amount of 1 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 within the stipulated time. In the given question, since the amount involved in fraud is more than rupees one crore hence, Lamp bell & Associates Chartered Accountants should not restrict the reporting of the suspected fraud as requested by Mr. Sharp. The auditor must inform the same to the Central Government and should follow the following procedure. (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 from the date 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. The report shall be filed electronically in form ADT-4. (ii) As per the proviso to section 143 (12) of the Companies Act, 2013, read with Rule 13 (1) of the Companies (Audit and Auditors) Rules, 2014, in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases not later than 2 days from the date of his knowledge of the fraud. The companies, whose auditors have reported frauds under this sub-section to the audit committee or the Board but not reported to the Central Government, shall disclose the following details about such frauds 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. Under Rule 13 (4) , the company must disclose in the Board's Report all such frauds reported during the year.
Topics: Audit and Auditors
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