Accounts and Audit: A Brief View under Companies Act 2013

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Meaning of Accounts: Section 128 of the Companies Act 2013

Section 128 of Companies act 2013 stated that every company need to maintain its registered office books of accounts and other relevant papers and books for every financial year which states the true and fair view  of state of affair of company including its all branches .

According to section 2 [13] of books of account it includes the record which should be mentioned, they are as follows-

  • All the money received by company and matters in respect of which receipts and expenditure takes place.
  • All the purchases and sales of goods by the company.
  • All the liabilities and assets of the company.
  • All the items of cost given under section 148 in case of company which belongs to any class of companies given under that section.

As it is mentioned that section 128 requires books of account to be kept , however the proviso to section 128[1] allows the company to keep its book of account to any other place in India but it should be decided by board of directors. In this case , company need to give the notice to registrar in writing within seven days of decision mentioning the address of other place.

It is required that all the branch offices periodically summarized the returns of company and sent it to the registered office or any other place referred to section 128[1]. Proviso of section 128[1] states that company can also maintain the books of account in electronic mode. In this case Rule 3 of companies accounts rules 2014 says that such book of account to remain accessible in India.  They must be maintain in that manner in which they were originally generated, sent or received. The information which was received from branch office need to be original, there will be no alteration. Company should have proper system where storage, display and other relevant things are there and as considered by audit board. If the company is using the service of a third party  service provider for maintaining the books and records in the electronic format, the company shall intimate to registrar , name of service provider and location of service provider.

There must be an inspection of books of account

Section 128[3] says that During business hours any director can inspect the books of account and other papers.

Section 206[1] says that registrar can call for books of accounts, papers, explanation by giving written notice. Registrar shall write his reason in writing for giving the notice under section 206. In any special circumstances, central government can appoint an inspector under section 206[5] for an inspection of books of accounts, papers.

It is the duty of officers, directors and employees to produce all the documents, statements, information which was asked by the registrar or inspector during inspection.

The registrar and inspector can take the copies of books of account as a token of inspection having been made.

Directors have also the Right of inspection- Section 128 [3] says that director can inspect the accounts of books. Right of inspection is a statutory right , If a director has been prevented from this right , he may enforce it from the court. Also this Right is not an absolute in nature.

Shareholder has no statutory right of inspection books of accounts, he can only inspect when this right is given through the article which is very rare.

Financial Statements: Section 129 of the Companies act 2013

Section 129 [1] says that every company need to maintain financial statement at the end of financial year for the purpose of fair view of state of affairs of company. Section 2[ 40 ] defines the financial statements , according to which financial statements include-

  • Balance sheet
  • Profit and loss
  • Statement of changes in equity
  • Cash flow statement

Financial statement should be presented by board of directors before the Annual general meeting of members, under section 129[2]. Financial statement need to be ready within six months of close of financial year. Financial statement should be prepared for every financial year. Section 2[41] says that financial year is 31st March every year. Also the income tax act 1961 says that all companies need to submit their income tax returns on 31st March every year.

Reserves and Dividends

It may be cited that the recommendations of the board of directors with regard to the amount of income to be paid as dividend, and the amount to be transferred to it can also reserves do no longer lend finality to the matters in these regards. The shareholder are free to reject the suggestions of the directors as regards the quantity to be declared as dividend. They cannot, however make bigger the amount of dividend endorsed by using the directors.

Circulation of financial statements

Section 134[7] says that a signed replica of every financial statements which includes consolidated monetary statements shall be issued, circulated or published with a reproduction of any notes annexed to or forming section of such financial statements, the auditor’s record and the board’s report.

A copy of the financial statement such as consolidated financial statement, auditor’s document and each and every different report required by way of regulation to be annexed or connected to the monetary statements which are to be laid before the annual general meeting of the company, shall be sent not less than 21 days before the meeting to each and every member of company.

Adoption and filing of financial statement- One of the company to be transacted at an AGM is consideration and adoption of the monetary statements and the reviews of the board of directors and auditors consisting of the stability sheet and the profit and loss account [ section 102[2]. Every AGM other than the first AGM is required to be held within six months of the close of financial year[ section 96 [1].

It may be additionally referred to that the financial statement are required to be placed solely at an AGM, and now not at any different customary meeting . The blended studying of section 96[1] and section 102[2] shows that the financial statements shall be ready for placing before the AGM within 6 months of close of financial year. In case the monetary statements are now not geared up for laying at the appropriate annual general meeting, the company may adjourn the said annual widespread meeting to a subsequent date when the annual debts are expected to be equipped for laying .

Accounting standards

Section 129[1] says that financial statement shall comply with accounting standards given under section 133.

Concept of Audit under Companies Act 2013

 Business enterprise carries on commercial enterprise with capital provided by persons who are now not in control of the use of money supplied by them. They would therefore like to see that their investment are safe are being used for meant purpose and the annual account of the company to know the fair view of state of affairs of company. For this purpose the debt of the company need to be checked and audited by way of duly qualified and unbiased individual who is neither employed in the organisation nor is in any way indebted or in any other case obliged to the company. Originally the audit characteristic was primarily a public function. Its objective was to become aware of fraud and error. There are some objectives of audit, they are –

  • Detection of fraud
  • Detection of technical error
  • Detection of error of principles.

The ability for success of such an goal was a unique analysis of transactions.

Who can be appointed as an auditor

Section 141[1] says that what are the qualifications and disqualification for being appointed as company auditor. An Auditor of business enterprise possessing the qualifications prescribed in section 141 of the act is commonly regarded as the statutory auditor of the company, as he derives his duties, energy and authority from the statue that is the companies act. It is mentioned in section 141[1]  that ‘ Any person can only be appointed as auditor if that person is chartered accountant. Section 2[17] defines Chartered accountant as a CA who holds a valid certificates of exercise under sub section [1] of section 6 of chartered accountant act 1949.

Accordingly only a chartered accountant holding a certificate of practice is eligible to be appointed as an auditor of a company. It is further supplied that a firm. Including a confined liability partnership, whereof majority of the partners practising India are certified for appointment as auditor , may also be appointed through its company name be the auditor of a company. In this regard, it might also be referred to that underneath the chartered accountant act 1949, only a chartered accountants conserving a certificate of practice can be engaged in the public exercise of accountancy. However the chartered accountants act 1949 additionally lets in the chartered accountants to enter into partnership with other professionals. In such a case the section 141[2] of the act states that if a company[ including a restricted liability partnership] is appointed as an auditor solely these companions who are chartered accountants are approved to sign on behalf of the firm.

Appointment of first auditors

 Section 139[6] lays down that the first auditor or auditors of a employer shall be appointed by using the board of directors within thirty days of the date of registration of the company. The auditor or auditors so appointed shall keep workplace till the conclusion of the first annual general meeting . If the board of directors fails to exercising its power , it shall inform the individuals of the company. In such a case the first auditors are appointed through the members in an extraordinary general meeting within ninety days.

Generally it is observed that the first auditors of a company are named in the articles of association. Such appointment of auditors cannot be held valid because the act grants it no recognition. The first auditors would validly appointed only by a resolution of the board of directors or that of company in general meeting.

Auditor’s lien

In the general principles of law, any person having the lawful possession of somebody else’ property, on which he has worked may retain the property for non payment of the remaining dues on account of the work that is done on the property. On this premise, auditor can exercise lien on books and files positioned at his possession by the client for non price of charges for the work has been done on the related books and documents. The Institute of chartered accountants in England and Wales also says some similar things on regard on this following situations-

  • Document retained must belong to the client who owes the money.
  • Documents need to be in possession of the auditor on the authority which was of client. It should not been received through any irregular or illegal means. In case of company client they must be received on the authority of the board of directors.
  • The auditor can retain the documents only if he has done work on the documents assigned to him.
  • Such of the documents can be retained which are connected with the work on which fees have not been paid.

Limitation of auditor’s duties

No limitation can be placed upon rights or responsibilities of the auditor given under section 143 either done by any articles of company or done by any other resolution of the members. Where the articles of company provided:

  • Directors shall have power to form an internal reserve which was once no longer to be disclosed in the balance sheet and which must be utilised in a way that directors thought fit.
  • Auditors shall have access to accounts to relating to such reserve fund and that it was once utilised to the functions of the company as mentioned in the special articles , however that they should no longer disclose any data with regard to the shareholders or otherwise; such provisions in the articles had been held to be invalid as being hassle of the statutory responsibilities of the auditors.

Appointment of auditors

In case of a government employer or a company, without delay or not directly owned or managed  by using the central government, state government or partly with the aid of central government and partly by means of one or greater state government , the first auditor shall be appointed by using the comptroller and auditor general that is [ CAG ] it should be done within sixty days from the date in which  registration of the company has been done. If the CAG fails to exercise his powers ,the board is approved to appoint the first auditors within the subsequent thirty days. In case of a failure by the board , the contributors have to be knowledgeable who shall appoint the first auditor in an extraordinary general meeting within the sixty days[ Section 139 [7] ].

The subsequent auditor for the company given under section 139[7] shall also be appointed with the aid of CAG for every financial year. The auditor so appointed shall meet the qualification standards laid down by the act. The auditor shall be appointed within 180 days of the graduation of financial year and shall preserve office till the conclusion of annual general meeting. The power to fill any casual vacancy in the company is vested with the CAG. In case of failure by the CAG to fill the casual vacancy within a period of thirty days, the board of directors is required to fill the same within the next thirty days.

Joint Audit

The practice of appointing chartered accountant as joint auditors has come to be widespread, particularly in huge business and corporations. With a view to imparting clear idea of the professional accountability undertaken by way of the joint auditors, the ICAI had issued a statement on standard auditing and assurance practices on the responsibility of joint auditors. According to the statement it would no longer be correct to hold an auditor responsible for the work of every other and every joint auditor will be accountable solely for the work dispensed to him. In coming to these conclusions, the council regarded that the extent of work to be carried out is a matter of expert judgment and that no two firms, whatever be their standing and competence, will always exercise their judgment in an same manner so as to function in the identical volume of work in the same manner. Where joint auditors are appointed, they need to divide the work of audit between them by mutual discussion. Such division of work would generally be in terms of identifiable operating gadgets or targeted areas of work and in such a case, it is good practice to communicate to the client, wherever possible, the genuine division of work.

Cost Audit

It is an audit process for verifying the charges of manufacture or manufacturing of an article on the basis of accounts as regards utilisation of material or labour or other items of charges maintained by using the company. Under the provision of section 148[3] of the Act, such an audit shall be performed by means of a cost accountant in exercise inside that means of the cost accountant act 1959. The expression cost accountant skill a price accountant as defined in clause [b] of sub section 1 of section 2 of the cost and works accountants act 1959 and who holds a valid certificates of practice under sub section 1 of section 6 of that act. [ section 2[28] ].

About the Author: Shreya Shukla is a student at Galgotias University

Note: The views in this article are personal only.


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