Audit and Accounts
- Tenor of Auditor [Sec 139(1)]:
Auditor shall hold office from the conclusion of that meeting (counted as first meeting) till the conclusion of its sixth AGM.
Though an annual ratification is required, it is implied that there must be genuine reasons for not ratifying the same egs. undue hike in audit fee, undue delay in finalization of audit etc.
Notice of appointment of auditor shall be filed with ROC within 15 days of the meeting in Form No. ADT-1.
- Rotation of Auditor [Sec 139(2)]:
All private limited companies having paid up share capital of Rs 20 crores or more or borrowings of Rs 50 crores of more, shall rotate an individual auditor in 5 years and a firm of auditors in two 5 year terms with different partners in each term.
- New Auditor [Sec 139(9)]:
A retiring auditor may be re-appointed at an AGM, unless a special resolution has not been passed at that meeting appointing some other auditor.
- Re-appointment of Auditor [Sec 139(10)]:
Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company (i.e. it shall be automatic).
5 . Removal of Auditor [Sec 140(1)]:
The auditor appointed u/s 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 in that behalf in the prescribed manner.
Form ADT-2 to be sent to Govt. which specifically wants following information: grounds for seeking removal of auditor; whether accounts have been qualified during last 3 years (if yes, give details); details of opportunity given to auditor concerned for being heard.
- Limit on number of auditee companies [Sec 141(3)]:
The limit prescribed is 20 including private limited companies.
- Auditing Standards [Sec 143(9)]:
Every auditor shall comply with the auditing standards.
- Penalty for company [Sec 147]:
If any of the provisions of Sec 139 to 146 is contravened, the company shall be punishable with fine ranging from Rs 25,000 to Rs 0.5 million & every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine ranging from Rs 10,000 to Rs 0.1 million or both.
Similarly fine & punishment specified for auditor in case of contravention of provisions.
- Joint liability of auditors
If a partner of an audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud, the liability whether civil or criminal (as provided in this act or any other law for the time being in force), for such act shall be of the partners & of the firm jointly & severally.
- New Inclusions in Auditor report
Rule 11 specifically wants auditor to include in their report, their views & comments on the following matters: (i) whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statements. (ii) Whether the company has made provision for material foreseeable losses on long term contracts including derivative contracts.
- Auditor Responsibility to report Fraud to Central Govt.
Rule 13: If the auditor has knowledge of any fraud in the company, he has been caste with the responsibility to report the matter to the Central Government in Form No. ADT 4 within 60 days of his knowledge.
- Internal Auditor
Every private company having turnover of Rs 200 crores or more during the preceding financial year shall be required to appoint an internal auditor or a firm of internal auditors. The Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit. Note: Internal auditor must necessarily be appointed only by a Board resolution.
- Cost Auditor
New rules have taken out textiles, automobiles, engineering and electronics out of Cost audit and added companies involved in health, education and construction. Such companies are required to keep cost records if their turnover is Rs 25 crores or more & also do cost audit if their turnover is Rs 100 crores or more. Cost records to be maintained in Form CRA-1 and in such manner as to facilitate calculation of per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly or quarterly or half-yearly or annual basis.
- Declaration of Dividend [Sec 123]:
No dividend can be declared unless carried over previous & current year losses as well as depreciation are provided for.
There is no compulsion to transfer surplus profits to reserves. But once transferred the same cannot be used for declaring dividends unless following conditions are satisfied: –
- i) Rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the 3 years immediately preceding that year. However this condition shall not apply where no dividend has been declared in each of the three preceding FY.
- ii) Amount to be withdrawn from reserves not to exceed 10% of paid up capital & free reserves.
iii) Balance of reserves after withdrawal shall not fall below 15% of paid up capital.
The amount of dividend shall be deposited in a scheduled bank in a separate account within 5 days from the date of declaration of such dividend.
- Books of accounts to be kept at registered office [Sec 128]:
If Board of Directors decides to keep books of account at any place in India other than the registered office, the company shall within 7 days thereof, file with Registrar a notice in writing. Further all books of account together with all corresponding vouchers shall be kept for 8 years. If books of accounts are maintained in electronic mode, a backup of the same shall be kept in servers physically located in India on a periodic basis.
- Financial Statements [Sec 129]:
Law provides for uniform financial year (April-March) for all companies. Further there is no provision for extension of Financial Year.
The financial statements shall give a true & fair view of the state of affairs of the company and comply with prescribed accounting standards and prepared in form Specified in Schedule III. It has now become compulsory to make consolidated financial statements of all subsidiaries, associate companies & joint venture companies along with the company. Further preparation of cash flow statement & statement of changes in equity has now become compulsory under the new Act.
Maximum useful life of various assets is specified in Schedule II. Residual value of an asset cannot be more than 5% of the cost of asset. Provided that were a company uses a useful life or residual value of the asset which is different from the above limits, justification for the difference shall be disclosed in its financial statements.
- Contents of report by Board of Directors [Sec 134]:
Board of Directors to provide a report along with annual financial statements containing following particulars: extract of annual return u/s 92; Director’s Responsibility Statement (which shall include a statement on compliance of all applicable laws); comments on adverse remarks by auditors, if any; number of meetings of the Board; state of company affairs; details on adequacy of internal financial controls in case of a listed company; particulars of related party transactions in Form No. AOC-2; risk management policy; corporate social responsibility; steps taken for conservation of energy; details of imported technology & efforts put in to absorb the same; expenditure incurred on R&D; foreign exchange earnings & outgo. Penalty for contravention: Rs 50,000 – Rs 25,00,000; an officer in default: Rs 50,000 – Rs 500,000 or 3 years imprisonment or both.
- Copy of Financial Statement to be filed with registrar [Sec 137]:
A copy of financial statements along with auditor report & director’s report, duly adopted at AGM shall be filed with Registrar together with Form AOC-4 within 30 days. The class of companies as may be notified by the CG, shall mandatorily file their financial statement in XBRL format.
Penalty for contravention: Rs 1,000 per day, max upto Rs 10 lakhs; an officer in default: Rs 100,000 – Rs 500,000 or 6 months imprisonment or both.
20. Audit Committee: A Private limited company is neither required to constitute an Audit Committee nor an appointment & remuneration committee.
Audit and Accounts
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