CS Executive Company Law Study Material of Chapter-8 (Accounts and Audit)

CS Executive Company Law Study Material of Chapter-8 (Accounts and Audit)

Chapter 8 – ACCOUNTS

According to Section 2(13), “Books of Account” includes records maintained in respect of—

  • all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;
  • all sales and purchases of goods and services by the company;
  • the assets and liabilities of the company; and
  • the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section.

Books of Account, etc., to be kept by Company [Section 128]

Requirement related to preparation and maintenance of books of account [Section 128(1)]

Every company shall prepare

  • books of account and other relevant books and papers and
  • financial statement for every financial year

which give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any.

The above stated books of accounts

  • shall explain the transactions effected both at the registered office and its branches and
  • shall be kept on accrual basis and
  • shall be kept according to the double entry system of accounting.

Place of keeping the books
The above stated books/statement/documents shall be kept at the registered office of the company.

Exception:
All or any of the books of account aforesaid and other relevant papers may be kept at such other place in India as the BODs may decide and where such a decision is taken, the company shall, within 7 days thereof, file with the Registrar a notice in writing (in Form AOC 5) giving the full address of that other place.

Maintenance of books of accounts in electronic form
The company may keep such books of account or other relevant papers in electronic mode in the manner prescribed in Rule 3 of Companies (Accounts) Rules, 2014.

Rule 3 of Companies (Accounts) Rules, 2014
Manner of Books of Account to be kept in Electronic Mode

  1. The books of account and other relevant books and papers maintained in electronic mode shall remain accessible in India so as to be usable for subsequent reference.
  2. The books of account and other relevant books and papers referred to in sub-rule (1) shall be retained completely in the format in which they were originally generated, sent or received, or in a format which shall present accurately the information generated, sent or received and the information contained in the electronic records shall remain complete and unaltered.
  3. The information received from branch offices shall not be altered and shall be kept in a manner where it shall depict what was originally received from the branches.
  4. The information in the electronic record of the document shall be capable of being displayed in a legible form.
  5. There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law.
    The back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a periodic basis.
  6. The company shall intimate to the Registrar on an annual basis at the time of filing of financial statement-
    • the name of the service provider;
    • the internet protocol address of service provider;
    • the location of the service provider (wherever applicable);
    • where the books of account and other books and papers are maintained on cloud, such address as provided by the service provider.

Note:
For the financial year commencing on or after the 1st day of April, 2022, every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled.

Books of account of branch office [Section 128(2)]
Where a company has a branch office in India or outside India, it shall be deemed to have complied with the provisions of sub-section (1), if

  • proper books of account relating to the transactions effected at the branch office are kept at that office and
  • proper summarised returns periodically are sent by the branch office to the company at its registered office or the other place referred to in sub-section (1).

Inspection of Books of Accounts [Section 128(3)]
The books of account and other books and papers maintained by the company within India shall be open for inspection at the registered office of the company or at such other place in India by any director during business hours.

In the case of financial information, if any, maintained outside the country, copies of such financial information shall be maintained and produced for inspection by any director subject to such conditions as prescribed in Rule 4 of Companies (Accounts) Rules, 2014.

Rule 4 of Companies (Accounts) Rules, 2014
Conditions Regarding Maintenance and Inspection of Certain Financial Information by Directors

  1. The summarised returns of the books of account of the company kept and maintained outside India shall be sent to the registered office at quarterly intervals, which shall be kept and maintained at the registered office of the company and kept open to directors for inspection.
  2. Where any other financial information maintained outside the country is required by a director, the director shall furnish a request to the company setting out the full details of the financial information sought, the period for which such information is sought.
  3. The company shall produce such financial information to the director within 15 days of the date of receipt of the written request.
  4. The financial information required under sub-rules (2) and (3) shall be sought for by the director himself and not by or through his power of attorney holder or agent or representative.

Inspection of books in respect of any subsidiary of the company
The inspection in respect of any subsidiary of the company shall be done only by the person authorised in this behalf by a resolution of the Board of Directors.

 Period for which books shall be preserved [Section 128(5)]
Every company shall keep in good order for atleast 8 years following documents:

  • the books of account
  • vouchers relevant to any entry in such books of account

But where an investigation has been ordered in respect of the company under Chapter XIV (Inspection, Inquiry, Investigation), the Central Government may direct that the books of account may be kept for such longer period as it may deem fit.

Penalty [Section 128(6)]
If

  • the managing director,
  • the whole-time director in charge of finance,
  • the Chief Financial Officer or
  • any other person of a company charged by the Board with the duty of complying with the provisions of this section,

contravenes such provisions,

  • such managing director, whole-time director in charge of finance, Chief Financial officer or such other person of the company shall be punishable

Financial Statement [Section 129]

What is financial statement? [Section 2(40)],
Financial Statement includes –

  • Balance Sheet
  • Profit and Loss account or Income and Expenditure account
  • Cash flow Statement
  • Statement of change in equity, if applicable
  • any explanatory notes annexed to or forming part of financial statements, giving information required to be given and allowed to be given in the form of notes.

However, the financial statement with respect to OPC, small company and dormant company, may not include the cash flow statement.

Requirements w.r.t Financial Statement [Section 129(1)]
The financial statements

  • shall give a true and fair view of the state of affairs of the company or companies,
  • shall comply with the accounting standards notified under section133 and
  • shall be in the form or forms as may be provided for different class or classes of companies in Schedule III.

The items contained in such financial statements shall be in accordance with the accounting standards.

Nothing contained in this sub-section shall apply to

  • any insurance or banking company or
  • any company engaged in the generation supply of electricity, or
  • any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company.

True and Fair View
The financial statements shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose –

  • in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999;
  • in the case of a banking company, any matters which are not required to be disclosed by the Banking Regulation Act, 1949;
  • in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by the Electricity Act, 2003;
  • in the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that law.

 

Laying financial statements at AGM [Section 129(2)/(3)]
At every AGM of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year.

Where a company has one or more subsidiaries and associate companies, it shall, in addition to its own financial statements, prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies.

Company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries and associate companies in such form (AOC 1) as prescribed in Rule 5 of Companies (Accounts) Rules, 2014.

The Central Government may provide for the consolidation of accounts of companies in the manner prescribed in Rule 6 of Companies (Accounts) Rules, 2014.

Where financial statements of a company do not comply with the accounting standards [Section 129(5)]
Where the financial statements of a company do not comply with the accounting standards referred to in sub-section (1), the company shall disclose in its financial statements,

  • the deviation from the accounting standards,
  • the reasons for such deviation and
  • the financial effects, if any, arising out of such deviation.

Penalty [Section 129(7)]
If a company contravenes the provisions of this section,

  • the managing director,
  • the whole-time director in charge of finance,
  • the Chief Financial Officer or
  • any other person charged by the Board with the duty of complying with the requirements of this section and
  • in the absence of any of the officers mentioned above, all the directors

shall be punishable

  • with imprisonment for a term which may extend to 1 year or
  • with fine which shall not be less than Rs. 50,000 but which may extend to 5 lakh rupees, or
  • with both.

Rule 5 of Companies (Accounts) Rules, 2014
Form of Statement Containing Salient Features of Financial Statements of Subsidiaries

The statement containing the salient feature of the financial statement of a company’s subsidiary or subsidiaries, associate company or companies and joint venture or ventures under the first proviso to sub-section (3) of section 129 shall be in Form AOC-1.

 

Rule 6 of Companies (Accounts) Rules, 2014
Manner of Consolidation of Accounts

The consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards.

In case of a company which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.

Case where subsidiary company is not required to prepare consolidated financial statements
Nothing in this rule shall apply in respect of preparation of consolidated financial statements by a company if it meets the following conditions:-

  •  it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its other members, including those not otherwise entitled to vote, having been intimated in writing and for which the proof of delivery of such intimation is available with the company, do not object to the company not presenting consolidated financial statements;
  • it is a company whose securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India; and
  • its ultimate or any intermediate holding company files consolidated financial statements with the Registrar which are in compliance with the applicable Accounting Standards.

Non applicability of this rule in case of foreign subsidiary
Nothing in this rule shall apply in respect of consolidation of financial statement by a company having subsidiary or subsidiaries incorporated outside India only for the financial year commencing on or after 1″ April, 2014.

Re-opening of Accounts on Court’s or Tribunal’s Orders [Section 130]

A company shall not re-open its books of account and not recast its financial statements, unless an application in this regard is made by

  • the Central Government,
  • the Income-tax authorities,
  • the Securities and Exchange Board,
  • any other statutory regulatory body or authority or any person concerned

and an order is made by a court of competent jurisdiction or the Tribunal to the effect that—

  • the relevant earlier accounts were prepared in a fraudulent manner; or
  • the affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements

The court or the Tribunal, as the case may be, shall give notice to the Central Government, the Income-tax authorities, the Securities and Exchange Board or any other statutory regulatory body or authority concerned [or any other person concerned] and shall take into consideration the representations, if any, made by that Government or the authorities, Securities and Exchange Board or the body or authority concerned [or any other person concerned] before passing any order under this section.

The accounts so revised or re-cast shall be final.

No order shall be made under this section in respect of re-opening of books of account relating to a period earlier than 8 financial years immediately preceding the current financial year:

Provided that where a direction has been issued by the Central Government under the proviso to sub-section (5) of section 128 for keeping of books of account for a period longer than eight years, the books of account may be ordered to be re-opened within such longer period.

Voluntary Revision of Financial Statements or Board’s Report [Section 131]

If it appears to the directors of a company that—

  • the financial statement of the company; or
  • the report of the Board,

do not comply with the provisions of section 129 or section 134, they may prepare revised financial statement or a revised report in respect of any of the 3 preceding financial years after obtaining approval of the Tribunal on an application made by the company and a copy of the order passed by the Tribunal shall be filed with the Registrar.

The Tribunal shall give notice to the Central Government and the Income tax authorities and shall take into consideration the representations, if any, made by that Government or the authorities before passing any order under this section.

Such revised financial statement or report shall not be prepared or filed more than once in a financial year.

The detailed reasons for revision of such financial statement or report shall also be disclosed in the Board’s report in the relevant financial year in which such revision is being made.

National Financial Reporting Authority [Section 132]

The Central Government has constituted a National Financial Reporting Authority (NFRA) to provide for matters relating to accounting and auditing standards under this Act.

Functions/Objective of NFRA
The National Financial Reporting Authority shall—

  • make recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors, as the case may be;
  • monitor and enforce the compliance with accounting standards and auditing standards;
  • oversee the quality of service of the professions associated with ensuring compliance with such standards, and suggest measures required for improvement in quality of service; and
  • perform such other functions relating to clauses (a), (b) and (c) as may be prescribed.

Powers of NFRA
The National Financial Reporting Authority shall—

  • have the power to investigate,
  • either suo motu
  • or on a reference made to it by the Central Government,

bodies corporate or persons into the matters of professional or other misconduct committed by any member or firm of chartered accountants.

It should be noted that no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the National Financial Reporting Authority has initiated an investigation under this section;

  • have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:—
  • discovery and production of books of account and other documents, at such place and at such time as may be specified by the National Financial Reporting Authority;
  • summoning and enforcing the attendance of persons and examining them on oath;
  • inspection of any books, registers and other documents of any person referred to in clause (b) at any place;
  • issuing commissions for examination of witnesses or documents;
  • where professional or other misconduct is proved, have the power to make order for—
  • imposing penalty of—
  • not less than one lakh rupees, but which may extend to 5 times of the fees received, in case of individuals; and
  • not less than ten lakh rupees [five lakh rupees], but which may extend to 10 times of the fees received, in case of firms;
  • debarring the member or the firm from—
    1. being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or
    2. performing any valuation as provided under section 247,

for a minimum period of 6 months or such higher period not exceeding 10 years as may be determined by the National Financial Reporting Authority. Substituted by The Companies (Amendment) Act,2019

Appeal against the order of NFRA
Any person aggrieved by any order of the National Financial Reporting Authority may prefer appeal to Appellate Authority, in such manner and on payment of such fee as may be prescribed.

Central Government to Prescribe Accounting Standards [Section 133]

Under Section 133, Central Government has given power to prescribe the standards of accounting or any addendum thereto, as recommended by the ICAI, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.

Accounting Standards prescribed by Central Government
On 6th Feb. 2015 the Ministry of Corporate Affairs (MCA) notified the Companies (Indian Accounting Standards) Rules, 2015. These rules came into force on 1st April 2015.

Two Accounting Standards at present

  • Indian accounting Standards (Ind AS) as specified in the Annexure to Companies (Indian Accounting Standards) Rules, 2015
  • Accounting standards as specified in Annexure to the Companies (Accounting Standards) Rules, 2006

Which Accounting Standard is applicable on which company?
According to Rule 3 of the Companies (Indian Accounting Standards) Rules, 2015

  • Indian Accounting Standards (Ind AS) shall be applicable to classes of company specified in Rule 4(1) of the Companies (Indian Accounting Standards) Rules, 2015; and
  • Accounting standards as specified in Annexure to the Companies (Accounting Standards) Rules, 2006 shall applicable to other companies.

Classes of company specified in Rule 4(1) of the Companies (Indian Accounting Standards) Rules, 2015

(i)Ind AS applicable on voluntary basis
Any company and its holding, subsidiary, joint venture or associate company may comply with the Indian Accounting Standards (Ind AS) for financial statements for accounting periods beginning on or after 1st April, 2015, with the comparatives for the periods ending on 31st March, 2015, or thereafter on voluntary basis.
(ii)

Ind AS applicable on mandatory basis for the accounting periods beginning on or after April 1, 2016
The following companies shall mandatorily comply with the Indian Accounting Standards (Ind AS) for the accounting periods beginning on or after 1st April, 2016, with the comparatives for the periods ending on  31st March, 2016, or thereafter, namely:-
o   Companies whose equity or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of rupees 500 crore or more;o   Unlisted companies having net worth of rupees 500 crore or more;

o   holding, subsidiary, joint venture or associate companies of companies covered above.

(iii)

Ind AS applicable on mandatory basis for the accounting periods beginning on or after April 1, 2017
The following companies shall comply with the Indian Accounting Standards (Ind AS) for the accounting periods beginning on or after 1st April, 2017, with the comparatives for the periods ending on 31st March, 2017, or thereafter, namely:-o   Companies whose equity or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of less than rupees 500 crore;o   Unlisted companies having net worth of rupees 250 crore or more but less than rupees 500 crore.

o   holding, subsidiary, joint venture or associate companies of companies covered above.

(iv)In case of NBFC
 (a)The following NBFCs shall comply with the Indian Accounting Standards (Ind AS) for accounting periods beginning on or after the 1st April, 2018, with comparatives for the periods ending on 31st March, 2018, or thereafter—
 NBFCs having net worth of Rs. 500 crore or more, and holding, subsidiary, joint venture or associate companies of such companies.
(b)The following NBFCs shall comply with the Indian Accounting Standards (Ind AS) for accounting periods beginning on or after the 1st April, 2019, with comparatives for the periods ending on 31stMarch, 2019, or thereafter—
 (A)NBFCs whose equity or debt securities are listed or in the process of listing on any stock exchange in India or outside India and having net worth less than Rs. 500 crore;
 (B)NBFCs, that are unlisted companies, having net worth of Rs. 250 crore or more but less than Rs. 500 crore; and
 (C)holding, subsidiary, joint venture or associate companies of companies covered above.

Note:

  • The companies whose securities are listed or in the process of listing on SME exchanges shall not be required to apply Ind AS. Such companies shall continue to comply with the existing Accounting Standards unless they choose otherwise.
  • “Comparatives” means comparative figures for the preceding accounting period.
     

Companies exempted under Rule 5 of the Companies (Indian Accounting Standards) Rules, 2015
The Banking Companies and Insurance Companies shall apply the Ind ASs as notified by the Reserve Bank of India (RBI) and Insurance Regulatory Development Authority (IRDA) respectively.

An insurer or insurance company shall however, provide Ind AS compliant financial statement data for the purposes of preparation of consolidated financial statements by its parent or investor or venturer, as required by the parent or investor or venturer to comply with the requirements of these rules.

Financial Statement, Board’s Report, etc. [Section 134]

Approval of Financial Statement and signing thereof [Section 134(1)]
The financial statement (including consolidated financial statement) shall be approved by the Board of Directors before they are signed on behalf of the Board

  • by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director and
  • the Chief Executive Officer,
  • the Chief Financial Officer and the company secretary of the company, wherever they are appointed

for submission to the auditor for his report thereon.

In the case of a One Person Company, it shall be signed by only by one director.

The auditors’ report shall be attached to every financial statement. [Section 134(2)]

Attachments to Financial Statements [Section 134(3)]
There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include—

  • the web address, if any, where annual return referred to in sub-section (3) of section 92 has been placed;
  • number of meetings of the Board;
  • Directors’ Responsibility Statement;
  • details in respect of frauds reported by auditors (other than those which are reportable to the Central Government);
  • a statement on declaration given by independent directors under of section 149(6) [in respect of his/her Independence];
  • in case of a company required to constitute the Nomination and Remuneration Committee, company’s policy on directors’ appointment and remuneration;
  • explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made—
     – by the auditor in his report; and
     – by the company secretary in practice in his secretarial audit report;
  • particulars of loans, guarantees or investments under section 186;
  • particulars of contracts or arrangements with related parties;
  • the state of the company’s affairs;
  • the amounts, if any, which it proposes to carry to any reserves;
  • the amount, if any, which it recommends should be paid by way of dividend;
  • material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the financial statements relate and the date of the report;
  • the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed;
  • a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company;
  • the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year;
  • in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement indicating the manner in which formal annual evaluation of the performance of the Board, its Committees and of individual directors has been made;

Provided that where disclosures referred to in this sub-section have been included in the financial statements, such disclosures shall be referred to instead of being repeated in the Board’s report.

The Central Government may prescribe an abridged Board’s report, for the purpose of compliance with this section by One Person Company or small company [Section 134(3A)]

Report of the Board of Directors in case of OPC [Section 134(4)]
The report of the Board of Directors to be attached to the financial statement under this section shall, in case of a One Person Company, mean a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.

Issuance/Circulation/Publication of financial statement [Section 134(7)]
A signed copy of every financial statement, including consolidated financial statement, if any, shall be issued, circulated or published along with a copy each of—

  • any notes annexed to or forming part of such financial statement;
  • the auditor’s report; and
  • the Board’s report referred to in sub-section (3).

Penalty [Section 134(8)]
If a company is in default in complying with the provisions of this section, 

Right of members to receive copies of financial statements, board’s report, etc. [Section 136]

Time by which copy of financial statements and other documents should be sent by company
A copy of the financial statements, including consolidated financial statements, if any, auditor’s report and every other document required by law to be annexed or attached to the financial statements, which are to be laid before a company in its general meeting, shall be sent to

  • every member of the company,
  • every trustee for the debenture holder of any debentures issued by the company, and
  • all persons other than such member or trustee, being the person so entitled,

not less than 21 clear days (14 days in case of Section 8 Companies) before the date of the meeting.

Sending of copy of financial statements and other documents by company at shorter duration
If the copies of the documents are sent less than 21 days before the date of the meeting, they shall, notwithstanding that fact, be deemed to have been duly sent if it is so agreed by members—

  • holding, if the company has a share capital, majority in number entitled to vote and who represent not less than 95% of such part of the paid-up share capital of the company as gives a right to vote at the meeting; or
  • having, if the company has no share capital, not less than 95% of the total voting power exercisable at the meeting

In the case of a listed company,
The provisions of this Section shall be deemed to be complied with,

  • if the copies of the documents are made available for inspection at its registered office during working hours for a period of 21 days before the date of the meeting and
  • a statement containing the salient features of such documents is sent to every member of the company and to every trustee for the holders of any debentures issued by the company not less than 21 days before the date of the meeting unless the shareholders ask for full financial statements.

Provided also that a listed company shall also place its financial statements including consolidated financial statements, if any, and all other documents required to be attached thereto, on its website, which is maintained by or on behalf of the company.

Provided also that every listed company having a subsidiary or subsidiaries shall place separate audited accounts in respect of each of subsidiary on its website, if any:

Provided also that a listed company which has a subsidiary incorporated outside India (herein referred to as “foreign subsidiary”)—

  • where such foreign subsidiary is statutorily required to prepare consolidated financial statement under any law of the country of its incorporation, the requirement of this proviso shall be met if consolidated financial statement of such foreign subsidiary is placed on the website of the listed company;
  • where such foreign subsidiary is not required to get its financial statement audited under any law of the country of its incorporation and which does not get such financial statement audited, the holding Indian listed company may place such unaudited financial statement on its website and where such financial statement is in a language other than English, a translated copy of the financial statement in English shall also be placed on the website.

Subsection 2
A company shall allow every member or trustee of the holder of any debentures issued by the company to inspect the documents stated under sub-section (1) at its registered office during business hours.

Provided that every company having a subsidiary or subsidiaries shall provide a copy of separate audited or unaudited financial statements, as the case may be, as prepared in respect of each of its subsidiary to any member of the company who asks for it.

Subsection 3
If any default is made in complying with the provisions of this section,

  • the company shall be liable to a penalty of Rs. 25,000 and
  • every officer of the company who is in default shall be liable to a penalty of Rs. 5000.

Manner of Circulation of Financial Statements in Certain Cases
Rule 11 of Companies (Accounts) Rules, 2014

In case of all listed companies and such public companies which have a net worth of more than one crore rupees and turnover of more than ten crore rupees, the financial statements may be sent-

  • by electronic mode to such members whose shareholding is in dematerialised format and whose email Ids are registered with Depository for communication purposes;
  • where Shareholding is held otherwise than by dematerialised format, to such members who have positively consented in writing for receiving by electronic mode; and

(c) by despatch of physical copies through any recognised mode of delivery as specified under section 20 of the Act, in all other cases.

Filing of Financial Statement with ROC [Section 137]

A copy of the financial statements, including consolidated financial statement, if any, along with all the documents which are required to be or attached to such financial statements under this Act, duly adopted at the annual general meeting of the company, shall be filed with the Registrar within 30 days of the date of AGM.

Where financial statements are not adopted at annual general meeting
Where the financial statements are not adopted at annual general meeting or adjourned annual general meeting, such unadopted financial statements along with the other required documents shall be filed with the Registrar within 30 days of the date of annual general meeting and the Registrar shall take them in his records as provisional till the financial statements are filed with him after their adoption in the adjourned annual general meeting for that purpose:

Where financial statements are adopted at adjourned annual general meeting
Financial statements adopted in the adjourned annual general meeting shall be filed with the Registrar within 30 days of the date of such adjourned AGM.

In case of OPC
A One Person Company shall file a copy of the financial statements duly adopted by its member, along with all the documents which are required to be attached to such financial statements, within 180 days from the closure of the financial year:

Accounts of Foreign Subsidiary or Subsidiaries
A company shall, along with its financial statements to be filed with the Registrar, attach the accounts of its subsidiary or subsidiaries which have been incorporated outside India and which have not established their place of business in India.

Further, in the case of a subsidiary which has been incorporated outside India (herein referred to as “foreign subsidiary”), which is not required to get its financial statement audited under any law of the country of its incorporation and which does not get such financial statement audited, the holding Indian company shall file such unaudited financial statement along with a declaration to this effect and where such financial statement is in a language other than English, along with a translated copy of the financial statement in English.

Filing of Financial Statements and Fees to be Paid Thereon
Rule 12 of Companies (Accounts) Rules, 2014

(1) Every company shall file the financial statements with Registrar together with Form AOC-4 and the consolidated financial statements, if any, with form AOC-4 CFS.

(1A) Every Non-Banking Financial Company (NBFC) that is required to comply with Indian Accounting Standards (Ind AS) shall file the financial statements with Registrar together with Form AOC-4 NBFC (Ind AS) and the consolidated financial statement, if any, with Form AOC-4 CFS NBFC (Ind AS).

(2) The class of companies as may be notified by the Central Government from time to time, shall mandatorily file their financial statement in Extensible Business Reporting Language (XBRL) format and the Central Government may specify the manner of such filing under such notification for such class of companies.

Where the annual general meeting of a company for any year has not been held
Where the annual general meeting of a company for any year has not been held, the financial statements along with the documents required to be attached under sub-section (1), duly signed along with the statement of facts and reasons for not holding the annual general meeting shall be filed with the Registrar within 30 days of the last date before which the annual general meeting should have been held.

Penalty
If a company fails to file the copy of the financial statements under sub-section (1) or sub-section (2), as the case may be, before the expiry of the period specified therein, 

  • the company shall be liable to a penaltyof  10,000 and in case of continuing failure, with a further penalty of Rs. 100 for each day during which such failure continues, subject to a maximum of 2 lakh rupees, and
  • the managing director and the Chief Financial Officer of the company, if any, and, in the absence of the managing director and the Chief Financial Officer, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the directors of the company, shall be liable to a penalty of Rs. 10,000 and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 50,000.

Internal Audit [Section 138]

Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company.

Rule 13 of Company (Accounts) Rules, 2014
Companies Required to Appoint Internal Auditor

The following class of companies shall be required to appoint an internal auditor which may be either an individual or a partnership firm or a body corporate, namely:-

(a) every listed company;

(b) every unlisted public company having-

  • paid up share capital of 50 crore rupees or more during the preceding financial year; or
  • turnover of 200 crore rupees or more during the preceding financial year; or
  • outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year; or
  • outstanding deposits of 25 crore rupees or more at any point of time during the preceding financial year; and

(c) every private company having-

  • turnover of 200 crore rupees or more during the preceding financial year; or
  • outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year:

The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit.

AUDIT AND AUDITORS

Appointment of Auditors [Section 139]

  • Appointment of 1st Auditor in case of non-government companies [Section 139(6)]
  • Appointment of 1st Auditor in case of government companies [Section 139(7)]
  • Appointment of Subsequent Auditor in case of non-government companies [Section 139(1)]
  • Appointment of Subsequent Auditor in case of government companies [Section 139(5)]
  • Rotation of Auditor/Maximum tenure of Auditor [Section 139(2) to Section 139(4)]
  • Filling of Casual Vacancy [Section 139(8)]
  • Reappointment of Retiring Auditor [Section 139(9)/(10)]
  • Consideration of recommendation made by Audit Committee [Section 139(11)]

Appointment of 1st Auditor

Appointment of 1st Auditor in case of Non-government Companies [Section 139(6)]

  • The first auditor of a company, other than a Government company, shall be appointed by the BOD within 30 days from the date of registration of the company
  • In the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall within 90 days at an EGM appoint such auditor
  • First auditor shall hold office till the conclusion of the 1st

Appointment of 1st Auditor in case of Government Companies [Section 139(7)]

  • In the case of
    • a Government company or
    • any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments,

the first auditor shall be appointed by the Comptroller and Auditor-General of India (CAG) within 60 days from the date of registration of the company.

  • In case the CAG does not appoint such auditor within the said period, the BOD of the company shall appoint such auditor within the next 30 days

In the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform the members of the company who shall appoint such auditor within the 60 days at an EGM, who shall hold office till the conclusion of the 1st AGM.

Appointment of Subsequent Auditor

Appointment of Subsequent Auditor in case of non-government companies [Section 139(1)]
Every company shall, at the 1st AGM, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its 6th AGM and thereafter till the conclusion of every 6th meeting.

Appointment of Subsequent Auditor in case of government companies [Section 139(5)]
In the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, the Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within a period of 180 days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting.

Manner and Procedure of Selection and Appointment of Auditors

Rule 3 of The Companies (Audit and Auditors) Rules, 2014
Manner and Procedure of Selection and Appointment of Auditors

(1)    In case of a company that is required to constitute an Audit Committee under section 177, the committee, and, in cases where such a committee is not required to be constituted, the Board, shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and whether such qualifications and experience are commensurate with the size and requirements of the company.
Provided that while considering the appointment, the Audit Committee or the Board, as the case may be, shall have regard to any order or pending proceeding relating to professional matters of conduct against the proposed auditor before the ICAI or any competent authority or any Court.

(2)    The Audit Committee or the Board, as the case may be, may call for such other information from the proposed auditor as it may deem fit.

(3)    Subject to the provisions of sub-rule (1), where a company is required to constitute the Audit Committee, the committee shall recommend the name of an individual or a firm as auditor to the Board for consideration and in other cases, the Board shall consider and recommend an individual or a firm as auditor to the members in the AGM for appointment.

(4)    If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the appointment of an individual or a firm as auditor to the members in the AGM.

(5)    If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the recommendation to the committee for reconsideration citing reasons for such disagreement.

(6)    If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider its original recommendation, the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration of the members in the annual general meeting; and if the Board agrees with the recommendations of the Audit Committee, it shall place the matter for consideration by members in the AGM.

(7)    The auditor appointed in the annual general meeting shall hold office from the conclusion of that meeting till the conclusion of the 6th AGM, with the meeting wherein such appointment has been made being counted as the first meeting.
Provided that such appointment shall be subject to ratification in every AGM till the 6th such meeting by way of passing of an ordinary resolution.

 Explanation.- For the purposes of this rule, it is hereby clarified that, if the appointment is not ratified by the members of the company, the Board of Directors shall appoint another individual or firm as its auditor or auditors after following the procedure laid down in this behalf under the Act.

 Omited by The Companies (Audit and Auditors) Amendment Rules, 2018.

 

Written Consent and Certificate by Auditor before Appointment

Before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor.

The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141.

Rule 4 of The Companies (Audit and Auditors) Rules, 2014
Conditions for Appointment and Notice to Registrar

The auditor appointed under rule 3 shall submit a certificate that –

(a)    the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder;

(b)   the proposed appointment is as per the term provided under the Act;

(c)    the proposed appointment is within the limits laid down by or under the authority of the Act;

(d)   the list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.

Notice of appointment of Auditor to ROC
The company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar in Form No. ADT-1 within 15 days of the meeting in which the auditor is appointed.

Mandatory Rotation of Auditors [Section 139(2)]

No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or re-appoint—

  • an individual as auditor for more than one term of five consecutive years; and
  • an audit firm as auditor for more than two terms of five consecutive years:

 

Rule 5 of The Companies (Audit and Auditors) Rules, 2014
Class of Companies referred in Section 139(2)

For the purposes of sub-section (2) of section 139, the class of companies shall mean the following classes of companies excluding one person companies and small companies:-

(a)    all unlisted public companies having paid up share capital of Rs. 10 crore or more;

(b)   all private limited companies having paid up share capital of Rs. 50 crore or more;

(c)    all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of Rs. 50 crores or more.

Note: Tenure for which auditor shall not be reappointed:

  • an individual auditor who has completed his term under clause (a) shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of his term;
  • an audit firm which has completed its term under clause (b), shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of such term.

Note: No associated firm shall be appointed:

  • As on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years.

Note:

  • Company may remove an auditor or auditor can resign from such office of the company before the expiry of the term of appointment.

Members’ Right [Section 139(3)]
Subject to the provisions of this Act, members of a company may resolve to provide that—

  • in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or
  • the audit shall be conducted by more than one auditor.

Filling of Casual Vacancy [Section 139(8)]

Any casual vacancy in the office of an auditor shall—

  • in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within 30 days and he shall hold the office till the conclusion of the next annual general meeting. But if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the Board;
  • in the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within 30 days.

Provided that in case the Comptroller and Auditor-General of India does not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next 30 days.

Reappointment of Retiring Auditor [Section 139(9)/(10)]

A retiring auditor may be re-appointed at an annual general meeting, if—

  • he is not disqualified for re-appointment;
  • he has not given the company a notice in writing of his unwillingness to be re-appointed; and
  • a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed.

Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.

Where a company is required to constitute an Audit Committee under section 177, all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee.

Removal, Resignation of Auditor and Giving of Special Notice [Section 140]

Removal of Auditor [Subsection 1]
The auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government (Power delegated to RD) in that behalf in the prescribed manner (Refer Rule 7)

Before taking any action under this sub-section, the auditor concerned shall be given a reasonable opportunity of being heard.

Rule 7 of The Companies (Audit and Auditors) Rules, 2014
Removal of the Auditor Before Expiry of his Term

(1)    The application to the Central Government for removal of auditor shall be made in Form ADT-2 and shall be accompanied with fees as provided for this purpose under the Companies (Registration Offices and Fees) Rules, 2014.

(2)    The application shall be made to the Central Government within 30 days of the resolution passed by the Board.

(3)    The company shall hold the general meeting within 60 days of receipt of approval of the Central Government for passing the special resolution.

Resignation by Auditor [Subsection 2]
The auditor who has resigned from the company shall file, within a period of 30 days from the date of resignation, a statement in Form No. ADT-3

  • with the company and the Registrar, and

in case of government companies,

  • the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation.

If the auditor does not comply with the provisions of sub-section (2), he or it shall be liable to a penalty of Rs. 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 2 lakh.
Substituted by the Companies (Amendment) Act, 2020
Special Notice for appointment of Auditor other than a retiring auditor [Subsection 4]

  • Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed, except where the retiring auditor has completed a consecutive tenure of five years or, as the case may be, ten years, as provided under sub-section (2) of section 139.
  • On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.
  • Where notice is given of such a resolution and the retiring auditor makes with respect thereto representation in writing to the company (not exceeding a reasonable length) and requests its notification to members of the company, the company shall, unless the representation is received by it too late for it to do so,—
  • in any notice of the resolution given to members of the company, state the fact of the representation having been made; and
  • send a copy of the representation to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representation by the company,

and if a copy of the representation is not sent as aforesaid because it was received too late or because of the company’s default, the auditor may (without prejudice to his right to be heard orally) require that the representation shall be read out at the meeting:

Note:

  • If a copy of representation is not sent as aforesaid, a copy thereof shall be filed with the Registrar
  • If the Tribunal is satisfied on an application either of the company or of any other aggrieved person that the rights conferred by this sub-section are being abused by the auditor, then, the copy of the representation may not be sent and the representation need not be read out at the meeting.

Power of Tribunal to direct the company to change its auditors [Subsection 5]
The Tribunal

  • either suo motu or
  • on an application made to it
    • by the Central Government or
    • by any person concerned,

if it is satisfied that

  • the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers,

it may, by order, direct the company to change its auditors.

If the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within 15 days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place.

Further an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of 5 years from the date of passing of the order and the auditor shall also be liable for action under section 447.

Eligibility, Qualifications and Disqualifications of Auditors [Section 141]

1. A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant. Provided that a firm whereof majority of partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company.
2. Where a firm including a LLP is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.
3 The following persons shall not be eligible for appointment as an auditor of a company, namely:—
  a. a body corporate other than a LLP registered under the LLP Act, 2008;
b. an officer or employee of the company;
c. a person who is a partner, or who is in the employment, of an officer or employee of the company;
d. a person who, or his relative or partner—
  (i) is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company: Provided that the relative may hold security or interest in the company of face value not exceeding Rs. 1000 or such sum as may be prescribed (Rule 10 – in excess of Rs. 1 Lakh);
(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of such amount as may be prescribed (Rule 10 – in excess of Rs. 5 Lakh); or
(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for such amount as may be prescribed (Rule 10 – in excess of Rs. 1 Lakh);
e. a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed;
f. a person whose relative is a director or is in the employment of the company as a director or key managerial personnel;
g. a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 companies In case of Private Company, while reckoning the no. of companies following shall be excluded: One person companies, dormant companies, small companies and private companies having paid-up share capital less than Rs. 100 crore.
h. 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 such conviction;
i. any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided in section 144. a person who, directly or indirectly, renders any service referred to in section 144 to the company or its holding company or its subsidiary company. * .Substituted by the Companies (Amendment) Act,2017
4. Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-section (3) after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.

Remuneration of Auditors [Section 142]

Remuneration of First Auditor
Board may fix remuneration of the first auditor appointed by it.

Remuneration of Subsequent Auditor
The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined in the meeting.

The remuneration so fixed,

  • in addition to the fee payable to an auditor,
  • shall include the expenses, if any, incurred by the auditor in connection with the audit of the company and any facility extended to him
  • but does not include any remuneration paid to him for any other service rendered by him at the request of the company.

Powers and Duties of Auditors and Auditing Standards [Section 143]

Right of access to the books of account and vouchers of the company [Subsection 1]
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:—

  • Loans and Advances: 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;
  • Transactions represented by book entries: Whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;
  • Sale of Investments: 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;
  • Loans and advances as deposits: Whether loans and advances made by the company have been shown as deposits;
  • Personal expenses: Whether personal expenses have been charged to revenue account;
  • Allotment of shares for cash: 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.

Right of access to the books of account and vouchers of the subsidiary company
Auditor of holding company shall also have the right of access to the records of all its subsidiaries and associate companies in so far as it relates to the consolidation of its financial statements with that of its subsidiaries and associate companies.

 

Audit Report [Subsection 2]
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

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,

state that the said accounts and 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.

Rule 11 of Audit & Auditors Rules
Other Matters to be Included in Auditors Report

The auditor’s report shall also include their views and comments on the following matters, namely:-

(a)    Pending litigations: Whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement;

(b)   Material foreseeable losses: Whether the company has made provision, as required under any law or accounting standards, for material foreseeable losses, if any, on long term contracts including derivative contracts;

(c)    Investor Education and Protection Fund: Whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company.

(d)   *DELETED

(e)      (i) Whether the management has represented that, to the best of it’s knowledge and belief, no funds have been advanced or loaned or invested by the company to or in any other person(s) or entity(ies), (“Intermediaries”), with the understanding that the Intermediary shall, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the company (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries;

(ii) Whether the management has represented, that, to the best of it’s knowledge and belief, no funds have been received by the company from any person(s) or entity(ies), including foreign entities (“Funding Parties”), with the understanding that the company shall, whether, directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries; and

(iii) Based on such audit procedures that the auditor has considered reasonable and appropriate in the circumstances, nothing has come to their notice that has caused them to believe that the representations under sub-clause (i) and (ii) contain any material misstatement.

(f)   Whether the dividend declared or paid during the year by the company is in compliance with section 123 of the Companies Act, 2013.

(g)  Whether the company, in respect of financial years commencing on or after the 1st April, 2022, has used such accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has been operated throughout the year for all transactions recorded in the software and the audit trail feature has not been tampered with and the audit trail has been preserved by the company as per the statutory requirements for record retention.

Subsection 3
Further, the auditor’s report shall also state—

  • 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;
  • 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;
  • 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;
  • 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;
  • whether, in his opinion, the financial statements comply with the accounting standards;
  • the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;
  • whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;
  • any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;
  • whether the company has adequate internal financial controls system internal financial controls with reference to financial statements in place and the operating effectiveness of such controls (Rule 10A);
  • such other matters as may be prescribed.

Rule 10A of Audit & Auditors Rules
For the purposes of clause (i) of sub-section (3) of sectlon 143, for the financial years commencing on or after 1st April, 2015, the report of the auditor shall state about existence of adequate internal financial controls with reference to financial statements and its operating effectiveness.

Reasons for Qualifications [Subsection 4]
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.

Powers of Comptroller and Auditor–General of India in Case Government Company [Section143 (5) To 143 (7)]

Subsection 5
In the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Govemment, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Govemments,

  • 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 company are required to be audited

and thereupon the auditor so appointed shall submit

  • a copy of the audit report to the CAG of India which, among other things, include
    • the directions, if any, issued by the CAG,
    • the action taken thereon and
    • its impact on the accounts and financial statement of the company.

Subsection 6
The CAG of India shall within 60 days from the date of receipt of the audit report have a right to,—

  • conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorise in this behalf; and
  • comment upon or supplement such audit report

Provided that any comments given by the CAG upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements 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.

Branch Audit [Subsection 8]
Where a company has a branch office,

If such branch office is in India

  • the accounts of that office shall be audited either by the auditor appointed for the company 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

If such branch office is 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 as an auditor of the accounts of the branch office in accordance with the laws of that country.

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.

Mandatory compliance of auditing standards [Subsection 9]
Every auditor shall comply with the auditing standards.

Standards of auditing by Central Government [Subsection 10/11]
The Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by the ICAI, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.

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.

Report to Central Government or Audit Committee/BOD in case of Fraud [Subsection 12]

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 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.
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 2 days of his knowledge of the fraud, seeking their reply or observations within 45 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 15 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 45 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, e-mail 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 2 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.

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 1 lakh rupees
  • but which may extend to 25 lakh rupees.

Section 143(15)
If any auditor, cost accountant, or company secretary in practice does not comply with the provisions of sub-section (12), he shall,—

(a) in case of a listed company, be liable to a penalty of five lakh rupees; and

(b) in case of any other company, be liable to a penalty of one lakh rupees.

Substituted by the Companies (Amendment) Act, 2020

Auditor not to Render Certain Services [Section 144]

An auditor appointed under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee, as the case may be, but which shall not include any of the following services (whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company, namely:—

  • accounting and book keeping services;
  • internal audit;
  • design and implementation of any financial information system;
  • actuarial services;
  • investment advisory services;
  • investment banking services;
  • rendering of outsourced financial services;
  • management services; and
  • any other kind of services as may be prescribed

Auditor to Sign Audit Reports, etc. [Section 145]

The person appointed as an auditor of the company shall sign the auditor’s report or sign or certify any other document of the company in accordance with the provisions of sub-section (2) of section 141, and the qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company mentioned in the auditor’s report shall be read before the company in general meeting and shall be open to inspection by any member of the company.

Auditors to Attend General Meeting [Section 146]

All notices of, and other communications relating to, any general meeting shall be forwarded to the auditor of the company, and the auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorised representative, who shall also be qualified to be an auditor, any general meeting and shall have right to be heard at such meeting on any part of the business which concerns him as the auditor.

Punishment for Contravention [Section 147]

Punishment for company and officer in default
If any of the provisions of sections 139 to 146 (both inclusive) is contravened,

  • the company shall be punishable
    • with fine which shall not be less than Rs. 25,000 but which may extend to 5 lakh rupees and
  • every officer of the company who is in default shall be punishable
    • with fine which shall not be less than Rs. 10,000 but which may extend to 1 lakh rupees

Punishment for Auditor
If an auditor of a company contravenes any of the provisions of section 139, section 144 or section 145, the auditor shall be punishable

  • with fine which shall not be less than Rs. 25,000 but which may extend to 5 lakh rupees or four times the remuneration of the auditor, whichever is less

In case of wilful default by Auditor
If an auditor has contravened such provisions knowingly or wilfully 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 1 year and
  • with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees or eight times the remuneration of the auditor, whichever is less

Where an auditor has been convicted as stated above, he shall be liable to—

  • refund the remuneration received by him to the company; and
  • pay for damages to the company, statutory bodies or authorities or to any other persons or to members or creditors of the company for loss arising out of incorrect or misleading statements of particulars made in his audit report.

Where audit is being conducted by an audit firm
Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally.

Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable.

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