Essence: Section 128 of the Companies Act, 2013 contains the provisions for books of

account etc. to be kept by company. As per this section every company shall prepare and
keep at its registered office the book of accounts and financial statement for every financial
year.

“books of account” as defined in Section 2(13) includes records

maintained in respect of—

1. (i) all sums of money received and expended by a company and matters in relation to
which the receipts and expenditure take place;
2. (ii) all sales and purchases of goods and services by the company;
3. (iii) the assets and liabilities of the company; and
4. (iv) 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.

Financial Statement is defined under Section 2 (40), to include -

 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.

So basically four financial statements Balance sheet, Cash flow statement, Statement of
change in equity and Income statement

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

As per S.2(9) of the Income Tax Act, 1961, unless the context otherwise requires, the term
“assessment year” means the period of twelve months commencing on the 1st day of April
every year.
Section 3 of Income Tax Act, 1961, which defines the term previous year as under: ‘For the
purposes of this Act, the term “previous year” means the financial year immediately
preceding the assessment year.

So basically AY always comes after FY. Eg FY 2017-18 and AY 2018-19 are same.

DUE DATE FOR FINANCIAL STATEMENT

Annual return of the company must be filed after conducing the Annual General Meeting of
the company. Newly incorporated Companies can conduct the first Annual General Meeting
within 18 months from date of incorporation or 9 months from the date of closing of financial
year, whichever is earlier. Subsequent Annual General Meetings should be held within 6
months from the end of that financial year.

Section 128 requires you to maintain a ‘True and fair view of accounts’
True and fair view in auditing means that the financial statements are free from material
misstatements and faithfully represent the financial performance and position of the entity.

Where a company has a branch office in India or outside, summarized returns must be sent
periodically by the branch office to the company at its registered office.
128(5)- Accounts maintained for minimum of 8 financial years
 Under Income tax Act, Assessees are required to preserve the specified books of
account for a period of 8 years

section 129 Financial statements

The financial statement shall be laid in the annual general meeting of that financial year. In
case of subsidiary companies, the company shall prepare a consolidated financial statement
of the Company and all subsidiaries and lay before the annual general meeting.

Standards of accounting:

o financial statements and items contained should comply with accounting

standards notified under section 133;
o financial statement shall be in form or forms as provided for different class or
classes of company
o Financial statements shall lay before the board of the directors in every annual
general meeting of a company.
o Where a company has one or more subsidiaries, in additional to financial
statement provided in sub-section 2, it shall prepare a consolidated financial
statement of the company with salient features of financial statements of
subsidiary and subsidiaries in such form as prescribed and the same shall be
laid before board in annual general meeting.
o Central Government may prescribe for the consolidation of accounts of
companies.
o Where financial statements of the company do not comply with the applicable
accounting standards, the company shall disclose the following:

i) the deviation from the accounting standards

ii) the reason for such deviation and

iii) financial effects arising out of such deviation

Simply put, equity is nowhere to be found on the income statement.

Instead it includes paid up capital
Called-up capital:
Called up capital is a part of subscribed capital which has been called up by the company
for payment. For example, if 1,000 shares of Rs. 10 each have been subscribed by the
public and of which Rs. 5 per share has been called up. Then the subscribed capital of the
Company works out to Rs. 10,000 of which the called up capital of the Company is Rs.
5,000.

Paid-up capital
Paid-up capital refers to that part of the called up capital which has been actually paid by
the shareholders. Some of the shareholders might have defaulted in paying the called up
money. Such defaulted amount is called arrears. From the called up capital, calls-in-arrears
is deducted to obtain the paid-up capital.

What is Balance Sheet?

A Balance Sheet or Statement of financial position is a summary of the financial balances
of a sole proprietorship, a business partnership or a company. Assets, liabilities, and
ownership equity are listed as of a specific date, such as the end of its financial year. A
balance sheet is often described as a “snapshot of a company’s financial condition“.
Equity is an asset, debenture is a liability
Convertible loan - Loan that entitles the lender (or the holder of loan debenture) to convert
the loan to common or preferred stock (ordinary or preference shares) at a specified
conversion rate and within a specified timeframe.

Reserve- The proprietorship reserves, which are set up to alert investors that a certain part of
the shareholder equity cannot be paid out as cash dividends since they have another purpose.

SECTION 138: INTERNAL AUDIT

Classes of companies requiring Internal Audit

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

(a) every listed company;

(b) every unlisted public company having –

1. (i) paid up share capital of fifty crore rupees or more during the preceding financial
year; or
2. (ii) turnover of two hundred crore rupees or more during the preceding financial year;
or
3. (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
4. (iv) outstanding deposits of twenty five crore rupees or more at any point of time
during the preceding financial year; and

(c) every private company having –

1. (i) turnover of two hundred crore rupees or more during the preceding financial year;
or
 2. (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.

An existing company covered under any of the above criteria shall comply with the
requirements of section 138 and this rule within six months of commencement of such
section.

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.

The company board shall be free to appoint by means of resolution passed at a meeting any
practicing Chartered Accountant or a Cost Accountant or any other person whom it deems fit
to be appointed as its internal auditor. For this purpose, company board may consider the
nature and volume of business of company; qualifications, experience and capabilities of
such person being appointed as auditor and scope of internal audit.

The following persons can be appointed as internal auditor:

It is further prescribed under the explanation to rule 13 that term “Chartered Accountant”
shall mean a Chartered Accountant whether engaged in practice or not. Further, the internal
auditor may or may not be an employee of the company. As provided in section 144, an
auditor of the company cannot provide the internal audit service to the company or its
holding company or its subsidiary.

The objects given under section 581B, 1956 are as follows:

“The objects of the Producer Company shall relate to all or any of the following matters,
namely: (as given in the law)

a. Production, harvesting, procurement, grading, pooling, handling, marketing, selling,

export of primary production of the Members or import of goods or services for their
benefit, provided that the Producer Company may carry on any of the activities
specified in this clause either by itself or through other institution

Section 139 Appointment of Auditors

 Every Company shall, at the first annual general meeting, appoint an individual or a
firm as an auditor who shall hold office from the conclusion of that meeting till the
conclusion of its sixth annual general meeting and thereafter till the conclusion of
every sixth meeting.
  If audit committee is constituted, then such committee otherwise Board shall take into
consideration the qualifications and experience of the individual or the firm proposed
to be considered for appointment as auditor
 At every annual general meeting, Company shall place the matter relating to such
appointment for ratification by members through ordinary resolution
 Written consent and a certificate that the appointment shall be made in accordance
with the prescribed conditions, be obtained from the auditor
 Certificate shall also indicate whether the auditor satisfies the criteria provided in
section 141
 Company shall inform the auditor of his or its appointment and also file a notice of
such appointment with the Registrar within fifteen days of the meeting in Form ADT
– 1.

Section 141 Eligibility for an auditor

Persons not eligible for appointing as an Auditor:

 Body Corporate other than LLP

 An officer or employee of Company
 Person who is a partner or in employment of an officer or employee of Company
 A person or firm who has business relationship of such prescribed nature with
Company or its subsidiary or its holding or subsidiary of such holding Company or
associate Company
 A person whose relative is a director or is in the employment of the Company as a
director or key managerial personnel
 A person who is in full time employment elsewhere or a person or a partner holding
appointment as auditor of more than 20 Companies
 Person who has been convicted by a court of an offence involving fraud and a period
of ten years has not elapsed
 Any person whose subsidiary or associate company or any other form of entity, is
engaged as on the date of appointment in consulting and specialized services as
provided in section 144
Section 143 Power and duties of Auditors

Auditor shall have a right of access at all times to the books of accounts and vouchers of the
Company, entitled to require such information for the performance of his duties and amongst
other matters inquire into following :

 Whether loans and advances have been properly secured and the terms are prejudicial
to the interests of the company or its members
 Transactions represented by mere book entries are prejudicial to the Company.
 Whether 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
(company not being an investment or banking company)
 Whether loans and advances made by the company are shown as deposits
 Whether personal expenses are charged to revenue account
 Where it is stated in the books and documents that shares have been allotted for cash,
whether cash received or not, if not the position as stated in the account books and
balance sheet is correct and not misleading

Auditor shall make a report to the members regarding the accounts and financial statements
of the Company and that they are prepared according to the Auditing Standards and shall give
a true and fair view

STATUTORY AUDITOR V INTERNAL AUDITOR

Statutory Audit is conducted to ensure that all the financial details of the company are perfect
without any scam. Reports regarding this audit will be submitted to the shareholders. Internal
Audit is conducted by the management itself to ensure that they are following the specified
rules and regulations. Statutory Auditor performs the statutory audit while Internal Auditor is
responsible for doing the internal audit.

Statutory Auditors are appointed by the shareholders of the concerned company while the
Internal Auditors are appointed by the company itself.

Statutory Auditors must be a chartered accountant while no such qualifications are prescribed
for an Internal Auditor

Even though both of them do the same job, objectives specified for them are different.
Statutory Auditors work for the shareholders and give their audit reports to them. Internal
Auditors submit their audit reports to the company as they work for the sake of the company.
Statutory Auditors can be removed only with the consent of the government while Internal
Auditors can be removed by the company.