Audit and Accounts in Companies

Dr. Mohit Sharma

Symbiosis Law School, NOIDA
 • Books of account, etc., to be kept by company.—

(1) Every company shall prepare and keep at its registered office 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, and explain the transactions effected both at the registered office and its branches and such
books shall be kept on accrual basis and according to the double entry system of accounting:
Provided that all or any of the books of account aforesaid and other relevant papers may be kept at such other place in India as
the Board of Directors may decide and where such a decision is taken, the company shall, within seven days thereof, file with the
Registrar a notice in writing giving the full address of that other place:
Provided further that the company may keep such books of account or other relevant papers in electronic mode in such manner
as may be prescribed.
(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
summarized 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).
(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, and 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 may be prescribed:
Provided that 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.
(4) Where an inspection is made under sub-section (3), the officers and other employees of the company shall give to the person
making such inspection all assistance in connection with the inspection which the company may reasonably be expected to give.
• (5) The books of account of every company relating to a period of not less
than eight financial years immediately preceding a financial year, or where
the company had been in existence for a period less than eight years, in
respect of all the preceding years together with the vouchers relevant to
any entry in such books of account shall be kept in good order:
• Provided that where an investigation has been ordered in respect of the
company under Chapter XIV, the Central Government may direct that the
books of account may be kept for such longer period as it may deem fit.
• (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 with imprisonment for a term which may
extend to one year or with fine which shall not be less than fifty thousand
rupees but which may extend to five lakh rupees or with both.
Sec 2(13) ―books of account‖ includes records maintained in respect
of—
(i) all sums of money received and expended by a company and matters
in relation to which the receipts and expenditure take place;
(ii) all sales and purchases of goods and services by the company;
(iii) the assets and liabilities of the company; and
(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;

Sec 2(12) ―book and paper‖ and ―book or paper‖ include books of
account, deeds, vouchers, writings, documents, minutes and registers
maintained on paper or in electronic form;
 • Financial statement.—

(1) The financial statements shall give a true and fair view of the state of affairs of the company or companies,
comply with the accounting standards notified under section 133 and shall be in the form or forms as may be
provided for different class or classes of companies in Schedule III:
Provided that the items contained in such financial statements shall be in accordance with the accounting
standards:
Provided further that nothing contained in this sub-section shall apply to 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:
Provided also that 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—
(a) in the case of an insurance company, any matters which are not required to be disclosed by the Insurance
Act, 1938 (4 of 1938), or the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999);
(b) in the case of a banking company, any matters which are not required to be disclosed by the Banking
Regulation Act, 1949 (10 of 1949);
(c) 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 (36 of 2003);
(d) 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.
(2) At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial
statements for the financial year.
(3) Where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-section (2), prepare a
consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall
also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):
Provided that the 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 in such form as may be prescribed:
Provided further that the Central Government may provide for the consolidation of accounts of companies in such manner as may be
prescribed.
Explanation.—For the purposes of this sub-section, the word ―subsidiary‖ shall include associate company and joint venture.
(4) The provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall,
mutatis mutandis, apply to the consolidated financial statements referred to in sub-section (3).
(5) Without prejudice to sub-section (1), 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.
(6) The Central Government may, on its own or on an application by a class or classes of companies, by notification, exempt any class or
classes of companies from complying with any of the requirements of this section or the rules made thereunder, if it is considered
necessary to grant such exemption in the public interest and any such exemption may be granted either unconditionally or subject to
such conditions as may be specified in the notification.
(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 one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with
both.
The Central Government may prescribe the standards of accounting, as recommended
by the Institute of Chartered Accountants of India, in consultation with and after
examination of the recommendations made by the National Financial Reporting
Authority.

Sec 2(40) ―financial statement‖ in relation to a company, includes—

(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not
for profit, an income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in
sub-clause (i) to sub-clause (iv):
Provided that the financial statement, with respect to One Person Company, small
company and dormant company, may not include the cash flow statement;
 Right of member to copies of audited financial statement.—

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, to every trustee for the debenture-

holder of any debentures issued by the company, and to all persons
other than such member or trustee, being the person so entitled, not
less than twenty-one days before the date of the meeting
 Copy of financial statement to be filed with Registrar.—

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

duly adopted
at the annual general meeting of the company,

shall be filed with the Registrar

within thirty days of the date of annual general meeting in such
manner, with such fees or additional fees as may be prescribed
 Re-opening of accounts on court‘s or Tribunal‘s orders

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—
(i) the relevant earlier accounts were prepared in a fraudulent manner; or
(ii) the affairs of the company were mismanaged during the relevant
period, casting a doubt on the reliability of financial statements:
 Voluntary revision of financial statements or Board‘s report.—

If it appears to the directors of a company that—

(a) the financial statement of the company; or (b) the report of the Board,

do not comply with the provisions,

they may prepare revised financial statement or a revised report
in respect of any of the three preceding financial years
after obtaining approval of the Tribunal
on an application made by the company
in such form and manner as may be prescribed and a copy of the order passed by
the Tribunal shall be filed with the Registrar:
 Financial statement, Board‘s report
the extract of the annual return
number of meetings of the Board
Directors‘ Responsibility Statement
a statement on declaration given by independent directors
particulars of loans, guarantees or investments
particulars of contracts or arrangements
the state of the company‘s affairs
the amounts, proposes to carry to any reserves
the amount, recommends for dividend
material changes and commitments
policy on corporate social responsibility
Constitution of National Financial Reporting Authority –
• The National Financial Reporting Authority shall consist of a chairperson,
who shall be a person of eminence and having expertise in accountancy,
auditing, finance or law to be appointed by the Central Government and
such other members not exceeding fifteen consisting of part-time and full-
time members as may be prescribed:
• Provided that the terms and conditions and the manner of appointment of
the chairperson and members shall be such as may be prescribed:
• Provided further that the chairperson and members shall make a declaration
to the Central Government in the prescribed form regarding no conflict of
interest or lack of independence in respect of his or their appointment:
• Provided also that the chairperson and members, who are in full-time
employment with National Financial Reporting Authority shall not be
associated with any audit firm (including related consultancy firms) during
the course of their appointment and two years after ceasing to hold such
appointment.
Duties
• 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 in such manner as may be prescribed
• 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 such other related matters as may be prescribed
Powers
• have the power to investigate, either suo motu or on a reference made to it by the Central Government, for such class of bodies
corporate or persons, in such manner as may be prescribed into the matters of professional or other misconduct committed by any
member or firm of chartered accountants
• have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 ( 5 of 1908), while trying a suit, in respect of
the following matters, namely:—
• (i) 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;
• (ii) summoning and enforcing the attendance of persons and examining them on oath;
• (iii) inspection of any books, registers and other documents of any person referred to in clause (b) at any place;
• (iv) 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—
• (I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and
• (II) not less than ten lakh rupees, but which may extend to ten times of the fees received, in case of firms;
• debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountant of
India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949) for a minimum period of
six months or for such higher period not exceeding ten years
 Audit
• Once we complete preparing the final statements and accounts for
the year the accounting process is over. However, we still cannot be
completely certain of the accuracy of these accounts. This is when the
concept of auditing comes in.
• The word “audit” is a very generic word, it essentially means to
examine something thoroughly. But we will be learning about auditing
as it relates to accounting and the finance world. So audit meaning is
the thorough inspection of the books of accounts of the organization.
• This involves the examination of vouchers and the verification of
various assets of the organization. And the person who carries out
such an audit is known as the auditor.
 Audit

Internal External

chartered accountant / chartered accountant /

cost accountant/ Firm including LLP
professional decided by the Board
• Not be eligible for appointment as an auditor of a company, namely:—
• (a) a body corporate other than a limited liability partnership registered under the Limited
Liability Partnership Act, 2008 (6 of 2009);
• (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 one thousand rupees or such sum as may be prescribed;
• (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; 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;
• (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 twenty
companies;
• (h) 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;
• (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.
• Where a person appointed as an auditor of a company incurs any of the disqualifications
mentioned, 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.
• Auditor not to render certain services.—
• (a) accounting and book keeping services;
• (b) internal audit;
• (c) design and implementation of any financial information system;
• (d) actuarial services;
• (e) investment advisory services;
• (f) investment banking services;
• (g) rendering of outsourced financial services;
• (h) management services; and
• (i) any other kind of services as may be prescribed:
 Appointment / Reappointment

First Subsequent

Company Company

Government Company Government Company

• Reappointment
• A retiring auditor may be re-appointed at an annual general meeting, if—
• (a) he is not disqualified for re-appointment;
• (b) he has not given the company a notice in writing of his unwillingness to
be re-appointed; and
• (c) 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.
• Powers and duties
• right of access at all times to the books of account and vouchers
• inquire into the following matters, namely:—
• (a) 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;
• (b) whether transactions of the company which are represented merely by book entries are prejudicial to the
interests of the company;
• (c) 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;
• (d) whether loans and advances made by the company have been shown as deposits;
• (e) whether personal expenses have been charged to revenue account;
• (f) 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:
• make a report on the accounts examined by him and on every financial statements
• to sign audit reports
• to attend general meeting
• Punishment for contravention
 Removal, resignation

file a statement
company Tribunal

special resolution suo motu application

previous approval of
the Central Government