Lecture – Chapter – 6

28A “Company Audit”

(xv) Accounts of Companies (Sec. 128, 129, 130, 131 and 133):

(a) Place of keeping Books of Accounts [Sec. 128(1)]:

(i) Every company shall prepare and keep at its registered office books of a/c

& F.S. for every financial year which gives a true and fair view of the

state of the affairs of the company, including that of its branch office.

(ii) Such books shall be kept on accrual basis and double entry system.

(iii) Books of a/c may be kept at such other place in India as BOD may decide.

(b) Keeping Books of Account at Branch [Sec. 128(2)]:

(i) Where a company has a branch office, the books of account relating to the

the transactions effected at the branch office may be kept at that office.

(ii) Proper summarized returns periodically are required to be sent by the

branch office to the company.

(c) Preservation of Books of Accounts [Sec. 128(5)]:

(i) The books of account relating to a period of not less than 8 financial years

immediately preceding a financial year, or where the company had been in

existence for a period less than 8 years, in respect of all the preceding

years shall be kept in good order.

(ii) Where an investigation has been ordered, the C.G. may direct that the

books of account may be kept for such longer period as it may deem fit.

(d) Form of Financial Statements [Sec. 129(1)]:

The financial statements shall

(i) give a true and fair view of the state of affairs of the company,

(ii) comply with the AS notified u/s 133 and

(iii) shall be in the form as provided in Schedule III.

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(e) Laying F.S. in AGM [Sec. 129(2)]:
At every AGM of a company, the Board of Directors of the company shall lay
before such meeting, financial statements for the financial year.

(f) Consolidated Financial Statements [Sec. 129(3) & 129(4)]

--- Will be covered in Chapter 9 “Audit of Consolidated FS” ---

(g) Non-compliance with Accounting Standards [Sec. 129(5)]:

Where the financial statements of a company do not comply with the accounting

standards, the company shall disclose in its financial statements the following:

(i) the deviation from the accounting standards,

(ii) the reasons for such deviation and

(iii) the financial effects, if any, arising out of such deviation.

(h) Reopening of Accounts on Court’s or Tribunal Order (Section 130)

(1) Order by Court or Tribunal [Sec. 130(1)]:

A company shall not re-open its books of account & not recast its F.S.

unless

(i) an application in this regard is made by the C.G., the Income-tax

authorities, the SEBI, any other statutory regulatory body or

authority or any person concerned

AND

(ii) an order is made by a court of competent jurisdiction or Tribunal.

(2) Nature of order made by Court or Tribunal [Sec. 130(1)]:

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.

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(3) Requirement before passing the order [Proviso to Sec. 130(1)]:

(i) The court or the Tribunal, shall give notice to the C.G., the

Income-tax authorities, the SEBI or any other statutory regulatory

body or authority concerned or any other person concerned

AND

(ii) shall take into consideration the representations, if any, made by

the persons to whom notice was given.

(4) Status of Revised a/c [Sec. 130(2)]:

The accounts so revised or re-cast u/s 130(1) shall be final.

(5) Limitation to revision [Sec. 130(3)]:

No order shall be made u/s 130(1) in respect of re-opening of books of

account relating to a period earlier than 8 financial years immediately

preceding the current financial year (except when books of account are kept

for a longer period).

(i) Voluntary revision of financial statements or Board’s report [Sec. 131]

 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 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 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.

(j) Central government to prescribe accounting standards [Sec. 133]:

The CG may 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 NFRA.

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(k) Signing of Financial Statements [Sec. 134(1)]:

F.S. including Consolidated F.S. before submission to the auditor for his report

thereon, shall be signed, on behalf of the Board at least

- 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, if he is a director in the company,

- the Chief Financial Officer and

- the company secretary of the company, wherever they are appointed.

- in the case of a One Person Company, only by one director,

(l) Attachment of Auditor’s report [Sec. 134(2)]:

The auditors’ report shall be attached to every financial statement.

(m) Director’s responsibility Statement [Sec. 134(5)]:

The Directors’ Responsibility Statement shall state the following:

(a) That in the preparation of the annual accounts, the applicable AS had been

followed along with proper explanation relating to material departures;

(b) That the directors had selected such accounting policies and applied them

consistently and made judgments and estimates that are reasonable and

prudent so as to give a true and fair view of the state of affairs and profit

and loss of the company.

(c) That the directors had taken proper and sufficient care for the

maintenance of adequate accounting records in accordance with the

provisions of this Act for safeguarding the assets of the company and for

preventing and detecting fraud and other irregularities;

(d) That the directors had prepared annual accounts on a going concern basis;

(e) That the directors, in the case of a listed company, had laid down internal

financial controls to be followed by the company and that such internal

financial controls are adequate and were operating effectively.

(f) That the directors had devised proper systems to ensure compliance with

the provisions of all applicable laws and that such systems were adequate

and operating effectively.

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(xvi) Salient Features of Audit of Limited Liability Partnerships (LLP Audit)

[Not Relevant for Students of Old Syllabus]

(I) Maintenance of books of account, other records and audit, etc:

(Sec. 34 of LLP Act, 2008)

(i) Books of Accounts:

 LLP shall maintain such proper books of account as may be prescribed.

 Books may be maintained on cash basis or accrual basis and according to

double entry system of accounting.

 Books shall be maintained at registered office for prescribed period.

Rule 24 of LLP Rules, 2009:

The books of account shall contain:

(a) particulars of all sums of money received and expended and the

matters in respect of which receipt and expenditure takes place;

(b) a record of the assets and liabilities of the LLP;

(c) statements of cost of goods purchased, inventories, WIP, finished

goods and cost of goods sold; and

(d) any other particulars which the partners may decide.

The books of account which a LLP is required to keep shall be preserved for

8 years from the date on which they are made.

(ii) Statement of Account and Solvency:

(i) Every LLP shall, within a period of six months from the end of each

financial year, prepare a Statement of Account and Solvency for the

said financial year. in prescribed form, and such statement shall be

signed by the designated partners of the LLP.

(ii) Statement of Account and Solvency shall be filed with the Registrar

every year in such form and manner and accompanied by prescribed

fees.

Rule 24 of LLP Rules, 2009:

Statement of Account and Solvency shall be filed in Form 8 with the

Registrar, within a period of 30 days from the end of 6 months of the

financial year to which the Statement of Account and Solvency relates.

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(iii) Audit of Accounts:

Accounts of LLP shall be audited in accordance with such rules as may be

prescribed.

Rule 24 of LLP Rules, 2009:

(i) Requirement of Audit:

A LLP whose turnover does not exceed, in any financial year, ₹40

Lacs, or whose contribution does not exceed ₹25 Lacs shall not be

required to get its accounts audited.

(ii) Eligibility for auditor:

A person shall not be qualified for appointment as an auditor of a

LLP unless he is a Chartered Accountant in practice.

(iii) Period of Appointment:

Auditor of a LLP shall be appointed for each financial year of the

LLP for auditing its accounts.

(iv) Appointment of auditor by designated partner:

The designated partners may appoint an auditor:

(i) at any time for the first financial year but before the end of

the first financial year,

(ii) at least 30 days prior to the end of each financial year

(other than the first financial year),

(iii) to fill a casual vacancy in the office of auditor, including in

the case when the turnover or contribution of a LLP exceeds

the limits, or

(iv) to fill up the vacancy caused by removal of an auditor.

(v) Appointment of auditor by partner:

Partners may appoint an auditor where the designated partners have
power to appoint and have failed to appoint.
(vi) Tenure of Auditor:
Auditor shall hold office in accordance with the terms of his or their
appointment and shall continue to hold such office till the period
(a) the new auditors are appointed, or
(b) they are re-appointed.

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(II) Advantage/Purpose/Need of Audit:

(a) Detection of errors & frauds

(b) Verification of financial statements

(c) Resolving disputed among the partners in relation to accounting matters.
(d) Arranging finance from banks & financial institutions.

(e) Improved management of the LLP

(f) Settlement of accounts between partners at the time of admission, death,
retirement, insolvency, insanity, etc

(III) Auditor’s duty regarding Audit of LLP:

(a) Auditor should obtain instructions in writing as to the work to be performed

by him.
(b) Auditor should read the LLP agreement & note the following provisions
 Nature of the business of LLP
 Capital contributed by each partner
 Interest in respect of capital contributions

 Duration of partnership
 Drawings allowed to the partners

 Salaries, commission etc payable to partners

 Rights & duties of partners
 Method of settlement of accounts between partners at the time of

admission, retirement, admission etc.

 Any loans advanced by the partners
 Profit sharing ratio
(c) Auditor should report (a) Whether the records reflects true and fair view

(b) Whether he obtains all information & explanation (c) whether any

restriction /limitation imposed upon him.

(d) If minute book is being maintained, auditor shall refer it for any

resolution passed regarding the accounts.

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(IV) Annual Return [Sec. 35]

 Every LLP shall file an annual return duly authenticated with the Registrar

within 60 days of closure of its financial year in prescribed form and manner.

 Annual return with the Registrar shall be filed in Form 11.

(III) Inspection of documents kept by Registrar [Sec. 36]

(i) Documents to be made available for inspection:

(a) Incorporation document,

(b) Names of partners and changes, if any, made therein,

(b) Statement of Account and Solvency and

(d) Annual return filed with the Registrar

(ii) Who can inspect

Any Person

(iii) Fees of inspection

Rs. 50

(iv) Power of Registrar to obtain information [Sec. 38]:

(a) In order to obtain any information as the Registrar may consider necessary

for the purposes of carrying out the provisions of this Act, the Registrar

may require any person including any present or former partner or

designated partner or employee of a limited liability partnership to answer

any question or make any declaration or supply any details or particulars in

writing to him within a reasonable period.

(b) In case such persons does not answer such question or make such

declaration or supply such details or particulars asked for by the Registrar

within a reasonable time or time given by the Registrar or when the

Registrar is not satisfied with the reply or declaration or details or

particulars provided by such person; the Registrar shall have power to

summon that person to appear before him or an inspector or any other

public officer whom the Registrar may designate, to answer any such

question or make such declaration or supply such details, as the case may

be.

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(xvii) Guidance Note on Internal Financial Control over Financial Reporting:

(I) Meaning of Internal Financial Control (IFC) – Sec. 134 of Companies Act, 2013:

The term IFC means the policies and procedures adopted by company for ensuring:

(i) Orderly and efficient conduct of its business, including adherence to

Company’s policies,

(ii) Safeguarding of its assets,

(iii) Prevention and detection of frauds and errors,

(iv) Accuracy and completeness of the accounting records, and

(v) Timely preparation of reliable financial information.

(II) Meaning and concept of Internal Controls over financial Reporting (ICFR):

(i) A Process designed to provide reasonable assurance regarding the reliability

of financial reporting and the preparation of F.S. for external purposes in

accordance with generally accepted accounting principles.

(ii) A Company’s ICFR includes those policies and procedures which pertain to

the maintenance of the records that, in reasonable detail, accurately and

fairly reflect the transactions and dispositions of assets of the company.

(iii) It provides reasonable assurance that transactions are recorded as

necessary to permit preparation of F.S. in accordance with generally

accepted accounting principles, and those receipts and expenditures of the

company are being made only in accordance with proper authorizations.

(iv) It provides reasonable assurance regarding prevention or timely detection of

unauthorized acquisition, use or disposition of the company’s assets that

could have a material effects of the financial statement.

(III) Reporting Requirements:

Section 134: In the case of a listed company, the Directors’ Responsibility states

that directors, have laid down IFC to be followed by the company

and that such controls are adequate and operating effectively.

Section 143: The auditor’s report should also state whether the company has

adequate IFC system in place and the operating effectiveness of

such controls.

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Section 177: Audit committee may call for comments of auditors about internal

control systems before their submission to the Board and may also

discuss any related issues with the internal and statutory auditors

and the management of the company.

Schedule IV: The independent directors should satisfy themselves on the integrity

of financial information and ensure that financial controls and

systems of risk management are robust and defensible.

Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014: The director’s report

should contain details in respect of adequacy of internal financial

controls with reference to the financial reporting.

(IV) Applicability of Reporting:

(i) The guidance note clarifies that reporting on ICFR by auditors will be

applicable to both listed and unlisted companies.

(iii) It states that auditors will have to report on ICFR in respect

of both stand alone and consolidated financial statements.

(iv) Auditors will have to report whether a company has an adequate ICFR

system in place and whether the same was operating effectively as at the

balance sheet date. It implies that when forming audit opinion on ICFR, the

auditor will surely test transactions during the financial year just ended

and not just as at the balance sheet date, though the extent of testing at

or near the balance sheet date may be higher.

(V) Extent of reporting:

(i) The auditor needs to obtain reasonable assurance to state whether an

adequate internal financial controls system was maintained and whether such

internal financial controls system operated effectively in the company in all

material respects with respect to financial reporting only.

(ii) The auditor’s opinion therefore does not assure, for example, the future

viability of the entity nor the efficiency or effectiveness with which

management has conducted the affairs of the entity.

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