[FAQs] on Significance of Accounts | Audit | Auditors in Business Operations

• Every financial statement of the company must give true and fair view of the state of affairs of the company at the end of financial year.
• True and Fair view in respect of financial statement means–

1. 1. financial statements and items contained should comply with accounting standards notified under section 133;
   2. financial statement shall be in form or forms as provided for different class or classes of companies in Schedule III;
   3. In case of any insurance or banking company or any company engaged in the generation or supply of electricity or to 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, not treated to be disclosing a true and fair view of the state of affairs of the company, merely by the 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.

• Appointment of Cost Auditor [Section 148(3)]:
  The cost audit shall be conducted by Practising Cost Accountant who shall be appointed by the Board on such remuneration as may be determined by the members.

• Further Rule 14 of Companies(Audit & Auditors), Rules, 2014 provides that:

(a) in the case of companies which are required to constitute an audit committee-

(i) the Board shall appoint an individual, who is a cost accountant, or a firm of cost accountants in practice, as cost auditor on the recommendations of the Audit Committee, which shall also recommend remuneration for such cost auditor;

(ii) the remuneration recommended by the Audit Committee shall be considered and approved by the Board of Directors and ratified subsequently by the shareholders;

(b) in the case of other companies which are not required to constitute an audit committee, the Board shall appoint an individual who is a cost accountant or a firm of cost accountants in practice as cost auditor and the remuneration of such cost auditor shall be ratified by shareholders subsequently.

• No person appointed under Section 139 (i.e. statutory auditor) as an auditor of the Company shall be appointed for conducting the audit of cost records.
• The cost auditor shall comply with the cost auditing standards. Cost audit shall be in addition to the audit conducted under Section 143 of Companies Act, 2013.

• Intangible assets are those fixed assets, which cannot be seen or touched or felt.
• They appear in balance sheet under the head “Fixed Assets”.
• They are amortized over their useful life.
• Example of Intangible assets:

1. 1. Goodwill
   2. Patent
   3. Copyrights
   4. Trademarks
   5. Design rights

• Approval and signing of financial statement [Section 134(1)]:
  The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before signing.

• The financial statements are signed on behalf of the Board by the following persons:

1. 1. The Chairperson (where he is authorized by the Board) or
   2. Two directors out of which one shall be Managing Director and the Chief Executive Officer
   3. The Chief Financial Officer (CFO) and the Company Secretary (if they are appointed)

• In case of One Person Company, the financial statements are signed by only one director, for submission to the auditor for his report.
• The auditors’ report shall be attached to every financial statement. A report by its Board of Directors shall also be attached to statements laid before a company in general meeting.

Qualifications:

Section 141(1) & (2) of the Companies Act prescribed the following eligibility and qualifications of auditor which are as under:-

(i) Only a Chartered Accountant (individual) or a firm where majority of partners practicing in India are Chartered Accountants can be appointed as auditor.

(ii) Where a firm including a limited liability partnership (LLP) is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorized to act and sign on behalf of the firm.

Disqualification:

Section 141(3) of the Companies Act, 2013, read with Rule 10 prescribed the following persons shall not be eligible for appointment as an auditor of a company, namely:

• A body corporate, except LLP;
• An officer or employee of the company;
• Any partner/employee or officer or employee of company;
• A person who himself or his relative/partner is holding any security or interest in the company, or any company which is its holding, subsidiary, associate;

1. 1. A person whose relative is holding any security or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company, may hold security or interest in the company of face value not exceeding one thousand rupees or such sum not exceeding Rs. 1,00,000. This shall wherever relevant be also applicable in the case of a company not having share capital or other securities.
   2. In the event of acquiring any security or interest by a relative, above the threshold prescribed, the corrective action to maintain the limits as specified above shall be taken by the auditor within sixty days of such acquisition or interest.
   3. A person who or whose relative or partner is indebted to the company or its subsidiary or its holding or associate company or a subsidiary of such holding company, in excess of rupees five lakh shall not be eligible for appointment;

• 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;
• A person whose relative is a director or is in the employment of the company as a director or KMP;
• A person who is in full time employment elsewhere; Person who is auditor of more than 20 companies; In case of private company -a person is ineligible if such person or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies other than one person companies, dormant companies, small companies and private companies having paid-up share capital less than one hundred crore rupee;
• A person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction;
• 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.

Approval and signing of financial statement [Section 134(1)]

The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before signing.

Thus, to approve the same the financial statement cannot be delegated to a committee of directors or some of the Directors.

Preservation of Books of Account [Section 128(5)]:

Every Company is required to preserve books of account along with vouchers of last 8 financial years.

However, if an investigation has been ordered in respect of the Company, the Central Government may direct to keep the books of account for longer period.

Regulation 9 of the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 provides following for preservation of documents:

The listed entity shall have a policy for preservation of documents, approved by its Board of Directors, classifying them in at least two categories as follows:-

(a) Documents whose preservation shall be permanent in nature;

(b) Documents with preservation period of not less than eight years after completion of the relevant transactions:

However, the listed entity required to maintain documents in electronic mode.

Thus, it is obligatory for every company to preserve its books of account.

• As per Section 128(1) of the Companies Act, 2013, in case of branch, books of account can be kept at Branch.
  However, proper summarized returns are required to be sent periodically by the branch office to the Company at its registered office or the other place where books of account are kept.
• The branch office will maintain original books of account, records, etc. It is the primary responsibility of the Branch.
• As per Rule 4(1) of the Rules, the branches of the company, if any, in India or outside India shall keep the books of account for the transaction effected at the branch office.

• Further the branch offices are required to send the proper summarized return at quarterly intervals to the company at its registered office and kept open to directors for inspection.

Thus, it is incorrect to say that the original books of account, records, etc of the branch office will have to be maintained in the registered office of the Company.

Inspection of books of account [Section 128(3)]:

• The books of account and other books and paper shall be open for inspection at the registered office of the company house at such other place in India by any director during business hours.
• In the case of financial information maintained outside the country, copies of such financial information shall be maintained and produced for inspection by any director subject to prescribed conditions.
• In respect of subsidiaries of the company, inspection shall be done only by the person authorized interest in this behalf by a resolution of the Board of director of holding company. The officers and other employees of the company shall give to a person making inspection all assistance in connection with the inspection which the company may reasonably be expected to give.
• As per decided case law, a director is entitled to take inspection of accounts personally or through an agent provided that there is no reasonable objection to the person chosen and the agent undertakes not to utilize the information obtained by him for any purpose other than the purpose of his principal.

As per section 128(1) of the Companies Act, 2013, every company to prepare and keep the books of account and other relevant books and papers and financial statements at its registered office. However, all or any of the books of account may be kept at such other place in India as the Board of directors may decide. When the Board so decides, the company is required within seven days of such decision to file with the Registrar of Companies, a notice in writing giving full address of that other place. Such intimation is to be made in e-form AOC 5 to the ROC.

• “Notes on Account” provides necessary explanation and communication of some of the vital information provided in the Annual Accounts of a Company.
• It provides explanation on the figures of the annual accounts and their significance.
• They are clarificatory to meet the requirements of law.
• Notes on accounts are intended to clarify and elucidate the financial position of the Company as disclosed in its balance sheet and profit and loss account. Generally, the note on accounts dwell on the following matters:

1. 1. Basis of Accounting.
   2. Significant accounting policies.
   3. Method of valuation of fixed assets.
   4. Method of providing depreciation
   5. Valuation of Inventories.
   6. Treatment of any income and expenditure on cash basis as against accrual basis.

• As per Section 204 of the Companies Act, 2013, every listed company and a company belonging to prescribed class shall annex with its Board’s report, a secretarial audit report, given by Practising Company Secretary (PCS) in prescribed form.
• As per Rule 8 of the Companies (Meeting of Board & its Powers) Rules, 2014, secretarial auditor is required to be appointed by means of resolution at a duly convened board meeting.
• It shall be the duty of the Company to give all assistance and facilities to the Practising Company Secretary, for auditing the secretarial and related records of the Company.
• The Board of Directors in their report shall explain in full any qualification or observation or other remarks made by the PCS.
• If a company or any officer or PCS, contravenes the provisions of this Section, they shall be punishable with fine which shall not less than INR 1,00,000 but which may extend to INR 5,00,000.
• As per Rule 9 of the Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014:
  For the purposes of Section 204(1) of the Companies Act, 2013, the other class of companies shall be as under:

(a) Every public company having a paid-up share capital of INR 50 crore or more; or

(b) Every public company having a turnover of INR 200 crore or more; or

(c) every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.
Explanation: For the purposes of this sub-rule, it is hereby clarified that the paid up share capital, turnover, or outstanding loans or borrowings as the case may be, existing on the last date of latest audited financial statement shall be taken into account.

Note: Inserted by Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2020 Dated 03rd January, 2020 Amendment effective from on or after 1st April, 2020.

• •  The format of the Secretarial Audit Report shall be in Form MR-3.

As per Rule 13 of the Companies (Accounts) Rules, 2014, makes following provisions relating to internal audit:

The following class of companies shall be required to appoint an internal auditor or a firm of internal auditors, namely:

(a) Every Listed Company.

(b) Every unlisted public company having:

(i) Paid up share capital of fifty crore rupees or more during the preceding financial year; or

(ii) Turnover of two hundred crore rupees or more during the preceding financial year; or

(iii) Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or

(iv) Outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year.

(c) Every Private Company having—

(i) Turnover of two hundred crore rupees or more during the preceding financial year; or

(ii) Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year.

(d) Keeping in view of the above provisions:

(i) It is not mandatory for every private company to appoint an internal auditor. A private company is required to appoint internal auditor only if its turnover exceeds INR 200 crore or its borrowing exceeds INR 100 crore.

(ii) As per Section 138 of the Companies Act, 2013:

(a) A Chartered Accountant or;

(b) A Cost Accountant or;

(c) Such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the Company.

shall be required to appoint an internal auditor.

Thus, Practising Company Secretary (PCS) can be appointed as an internal auditor.

As per Section 138 of the Companies Act, 2013,

(a) A Chartered Accountant or;

(b) A Cost Accountant or;

(c) Such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the Company;

shall be required to appoint an internal auditor.

Thus, A company can appoint Secretary as an internal auditor of the Company.

As per Section 138 of the Companies Act, 2013, 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, be appointed as an internal auditor.

Thus, the observations are in accordance with Section 138 of Companies Act, 2013 except the observation that existing employee of the Company who is Chartered Accountant having experience of doing internal audit in past, cannot be appointed as Internal Auditor.

• Constitution of Audit Committee [Section 177(1)]:
  The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.
• As per Rule 6 of the Companies (Meetings of Board & Its Powers) Rules, 2014, the Board of Directors of every listed company and the following classes of companies shall constitute an Audit Committee and a Nomination and Remuneration Committee of the Board

i. All public companies with a paid-up capital of INR 10 Crore or more;

ii. All public companies having turnover of INR 100 crore or more;

iii. All public companies having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding INR 50 crore or more.

• Composition of Audit Committee [Section 177(2)]:
  The Audit committee shall consist of a minimum three directors with Independent directors forming a majority.
  The majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statement.

• Role of an Audit Committee:

1. 1. Section 177(5): Interaction with internal and statutory auditors.
   2. Section 177(6): Power to investigate and obtains professional advice.
   3. Section 177(7): Auditor and KMP right to be heard in the Meetings of the Audit Committee.

• In light of provisions of Section 177 of Companies Act, 2013 read with Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014, the audit committee is mandatorily required to be constituted by A Ltd., B Ltd. and D Ltd.

• Section 177(1) of the Companies Act, 2013 read with rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014, provides that the Board of directors of following companies are required to constitute a Audit Committee of the Board-

1. 1. Every listed Public companies;
   2. All public companies with a paid-up capital of 10 crore rupees or more;
   3. All public companies having turnover of 100 crore rupees or more;
   4. All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.

• The paid-up share capital or turnover or outstanding loans or borrowings or debentures or deposits, as the case may be, as existing on the date of last audited financial statements shall be taken into account for the purposes of this rule.
• Number of Meetings and Quorum :

1. 1. In case of unlisted public companies, audit committee may meet number of times as desirable to serve its purpose. In such companies quorum, minimum number of meetings and quorum may be decide by the Board of directors.
   2. For listed companies, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides for the minimum number of meetings and quorum of the audit committee.

i. The Audit Committee of a listed entity shall meet at least four (4) times in a year and not more than 120 days shall elapse between two meetings.

ii. The quorum for audit committee meeting shall either be 2 members, or 1/3rd of the members of the audit committee, whichever is greater; with at least 2 independent directors.

• In reference to above mentioned provisions of Section 177 of the Companies Act, 2013:

(i) Yes Audit Committee is Applicable.

(ii) If its Listed then also Audit Committee is Applicable.

(iii) The Audit Committee shall meet at least four (4) times in a year and not more than 120 days shall elapse between two meetings.

(iv) The quorum for audit committee meeting shall either be two members or one third of the members of the audit committee, whichever is greater, with at least two independent directors.

Audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to the following conditions namely—

•  the audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on related party transactions of the listed entity and such approval shall be applicable in respect of transactions which are repetitive in nature;
• the audit committee shall satisfy itself regarding the need for such omnibus approval and that such approval is in the interest of the listed entity;
• the omnibus approval shall specify:

i. the name(s) of the related party, nature of transaction, period of transaction, maximum amount of transactions that shall be entered into;

ii. the indicative base price/current contracted price and the formula for variation in the price if any; and

iii. such other conditions as the audit committee may deem fit. However, where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may grant omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.

Thus, the approval of Audit Committee to a related party transaction can be granted by passing omnibus approval.