Audit under Companies Act, 2013

It is essential for companies to prepare their financial statements accurately and disclose them in a standardized manner that can be easily understood by stakeholders. This is crucial for maintaining the credibility of the company and ensuring sound investment decisions by investors. The audit process under the Companies Act of 2013 plays a key role in this process.

“Audit” is an independent form of examining any company’s financial position. Companies act 2013 has made the audit of accounts of companies’ compulsory

Regulations Around Audit Under Companies Act, 2013

As required for Audit under Companies Act, 2013, every company shall prepare a financial statement ending 31st March every year. Such financial statements must be given an accurate and fair view of the company’s financial affairs and comply with the accounting standards notified by the central government under Section 133 of the Companies Act. The company’s financial statement must also be prepared in the form and format that may be laid down for a specific type of company mostly bases on Schedule-III of the Companies Act.

The expression financial statement to be Audited under Companies Act, 2013 shall include-

• Profit & loss account, or in the case of Non-profit organization, and income & expenditure account Balance sheet
• Cash flow statement (not mandatory for small company)
• A statement for changes in shares, if applicable. &
• An explanatory note attached to, or constituting part of, any document referred.

Need for appointment of an Auditor

In any company, there are various stakeholders involved, including bankers, investors, creditors, and the government. Therefore Companies Act 2013 has made it mandatory to appoint an auditor to safeguard stakeholders interest. Auditors are trained to analyze financial statements and ensure they accurately reflect the company’s financial status. The Auditors conduct their audit in manner to reveal that financial statement show true financial position of the company which in turn helps the stakeholder like investors, creditors, shareholders, bankers and directors of a company to take right decisions about the expected future outcomes of a company.

Different types of Auditor Appointment in a Company

STATUTORY AUDIT

A statutory audit is an external audit of a company’s financial statements, conducted by a qualified auditor. The purpose of a statutory audit is to provide assurance to the stakeholders that its financial statements are accurate and reliable.

Every company is required to appoint a statutory auditor to audit its financial statements. However, the threshold limit for appointing a statutory auditor varies based on the type and size of the company. The statutory auditor is required to prepare an audit report that provides an opinion on the accuracy and reliability of the company’s financial statements. The audit report must be submitted to the shareholders of the company, along with the financial statements. Companies are required to comply with the audit report’s findings and rectify any errors or discrepancies that are identified.

INTERNAL AUDIT

Internal audit is a process by which a company’s internal controls, accounting procedures, and financial statements are reviewed by an independent auditor. The purpose of internal audit is to identify and evaluate the company’s internal control systems and make recommendations for improvements.
Every company that meets the threshold limit of paid-up share capital of Rs. 50 crore or more, or turnover of Rs. 250 crore or more, is required to have an internal audit system.

A company can either appoint an independent internal auditor or set up an internal audit department. The internal auditor or department must be independent of the company’s management and must report directly to the audit committee.

COST AUDIT

Cost audit is a process by which a company’s cost accounting records and cost statements are audited by a qualified cost accountant. The purpose of cost audit is to ensure that the company’s cost accounting records and statements are accurate and in compliance with the Cost Accounting Standards (CAS) issued by the Institute of Cost Accountants of India (ICAI).

Under the Companies Act 2013, every company engaged in the production, processing, manufacturing, or mining of goods or services is required to conduct a cost audit.

A company is required to appoint a qualified cost accountant as its cost auditor. The cost auditor must be independent, and not have any direct or indirect financial interest in the company. The appointment of the cost auditor is approved by the shareholders of the company. The cost auditor is required to prepare an audit report that provides an opinion on the accuracy and reliability of the company’s cost accounting records and statements. The audit report must be submit to the shareholders of the company, along with the cost statements.

SECRETARIAL AUDIT

Secretarial audit is a process by which a company’s compliance with various laws and regulations is reviewed by a qualified company secretary. The purpose of secretarial audit is to ensure that the company is complying with all the applicable laws and regulations.

All companies with a paid-up share capital of Rs. 50 crore or more, or a turnover of Rs. 250 crore or more, must carry out a secretarial audit.

Procedure for Appointment of Auditors

First Auditor

• As per Section 139(6) of the Companies Act, 2013,  the Board of Directors of every newly registered company shall appoint its first statutory auditor within a period of 30 days of its registration.
• In case board of directors fails to appoint first auditor within 30 days then the first statutory auditor shall be appointed in Extraordinary General Meeting by the members within 90 days of registration.
• The first auditor so appointed shall hold the position till the conclusion of 1^st Annual General Meeting.

Subsequent Auditor Appointment

• Every company including small/OPC 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 6th annual general meeting and thereafter till the conclusion of every 6th meeting and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed.
• Provided further that before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor.
• The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141.
• After obtaining the consent from auditor the company shall, inform the auditor concerned of his or its appointment, and also file a notice of such appointment in form ADT-1 with the Registrar within 15 days of the meeting in which the auditor is appointed.
  

Casual vacancy in the office of an auditor

• in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the CAG of India, be filled by the Board of Directors within 30 days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting

• (ii) in the case of a company whose accounts are subject to audit by an auditor appointed by the CAG of India, be filled by the CAG of India within 30 days:

Provided that in case the CAG of India does not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next 30 days.

• 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

 (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.

Note: 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.

Eligibility and Ineligibility For Appointment as Statutory Auditor

• Only a firm whether proprietorship , partnership or LLP wherein partners are chartered accountants are only eligible to be appointed as statutory auditors of a company.
• Where a firm including a limited liability partnership 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.
  

Ineligibility to be appointed as an statutory auditor:

1. A body corporate other than an LLP registered under the Limited Liability Partnership Act, 2008.
2. An employee or officer from the company.
3. A person who is a partner or employed of an employee or director of the company.
4. a person (auditor) or a firm who, whether directly or indirectly (through agent/relation), has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company;
5. A person who is a family member or friend.
6. 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.
7. A person who directly or indirectly rendered any service referred to in section 144 to the company, its holding or its subsidiary.
8. A person who, or his relative or partner
   • 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;
   • is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ` 5 Lacs; OR
   • 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, in excess of ` 1 Lac;

Powers And Duties Of Auditor

1. Every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor, 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 member;

(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 , debenture  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.

2. The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statement or other document which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made there under or under any order made under sub-section (11) and to the best of his information and knowledge, the said accounts, financial statement or other document give a true and fair view of the state of the company’s affairs as at the end of its financial year  and such other matters as may be prescribed.
3. Every auditor shall comply with the auditing standards.

4. The auditor’s report shall also state—

(a)  whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit;

(b)  whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him;

(c)  whether the report on the accounts of any  branch office  of the company audited under sub-section (8) by a person other than the company auditor has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;

(d)  whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;

(e)  whether, in his opinion, the financial statements comply with the   accounting standards;

(f)  the observations or comments of the auditors on financial transactions or matters  which have any adverse effect on the functioning of the company;

(g)  whether any director is disqualified from being appointed as a director under sub-section (2) of section 164;

(h)  any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;

(i) whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls;

(j) such other matters as may be prescribed.

In conclusion, the Companies Act 2013 mandates various forms of audit to ensure transparency, accountability, and corporate governance in companies. Companies must ensure that they comply with the applicable audit requirements to avoid any penalties. By conducting these audits, companies can strengthen their internal control systems, improve their financial and operational performance, and enhance their credibility with stakeholders.