CHAPTER 1A.

AUDIT OF LIMITED COMPANIES

What to Study ?
I] Appointment of Auditors -> Sec 139(1), (5), (6), (7)
II] Rotation of Auditors -> Sec 139(2), (3), (4)
III] Casual Vacancy -> Sec 139(8)
IV] Removal of Auditor -> Sec 140
V] Eligibility, Qualification and Disqualification of Auditor -> Sec 141
VI] Auditor not to Render Certain Services -> Sec 144
VII] Remuneration of Auditor -> Sec 142
VIII] Rights and Duties of Auditor -> Sec 143
IX] Penalty for Contravening Provisions -> Sec 147
X] Cost Audit. -> Sec 148
XI] Declaration of Dividend -> Sec 123
XII] Unpaid Dividend Account -> Sec 124
XIII] Investor Education & Protection Fund
XIV] Right of Dividend, Rights Shares and Bonus Shares to be held in Abeyance Pending
Registration of Transfer of Shares -> Sec 126
XV] Punishment For Failure to Distribute Dividend -> Sec 127
XVI] Books of Account -> Sec 128
XVII] Financial Statement -> Sec 129
XVIII]Re-Opening of Accounts on Court’s or Tribunal Orders -> Sec 130
XIX] Voluntary Revision of FS or Boards Report -> Sec 131
XX] Constitution of NFRA -> Sec 132
XXI] Financial Statement, Board’s Report, Etc. -> Sec 134
XXII] Board’s Report
XXIII] Director’s Responsibility Statement -> Sec 134 (5)
XXIV] Corporate Social Responsibility -> Sec 135
XXV] Right of member to copies of Audited Financial Statement -> Sec 136
XXVI] Copy of financial statement to be filed with Registrar -> Sec 137
XXVII] AGM not held
XXVIII] Audit of LLP

Audit सार 1A.1

 Companies Act 2013

Contain
s

29 Chapters 470 Sections 7 Schedule

I] APPOINTMENT OF AUDITORS (Section 139)

Appointment of Auditors

A. Government Companies B. Other than government companies

(PEQ)

Section 2(45)
If stake of ≥ 51% of PUSC to be construed as Voting Powers where shares with differential
voting rights have been issued. is held by CG or SG or Jointly by both.  Appointed by
Comptroller and Auditor General of India (CAG)
E.g. In SAIL, 55% stake is of government, hence the auditor is appointed by CAG of India.

 A. Appointment of Auditors in Government Company (PEQ)

First Auditor Section 139(7) Subsequent Auditor Section 139(5)

Appointed by CAG of India Appointed by CAG of India

Within 60 days from the date of Within 180 days from the commencement
registration of the financial year.

If it fails then within next 30 days The Board of Directors will appoint.

If the Board fails then

Members will appoint within 60 days at EGM by passing an ordinary resolution.

Audit सार 1A.2

 B. Appointment of Auditors in other than Government Companies

First Auditor Section 139(6) Subsequent Auditor Section 139(1)

BOD will appoint within Appointed by the members

30 days from the date of at AGM by passing an
Registration of the company ordinary resolution

If BOD fails within the 90 days, the members will appoint

at EGM by passing ordinary resolution
Company to file ADT - 1 with ROC within 15 days of appointment

II] ROTATION OF AUDITORS Section 139(2), (3), (4)

 Applicability
L – Listed Public Company
U – Unlisted Public Company  PUSC  ₹ 10 Crores
P – Private Company  PUSC  ₹ 50 Crores
A – Any Company
 whose PUSC requirement is below limit
 but Borrowings (Public Borrowings + Public Deposits)  ₹ 50 Crores
 Tenure
Tenure for Individuals  1 term of 5 years  Cooling period (5 Years)

Firms  2 terms of 5 years = 10 years  Cooling period (5 Years)

 In case of an Audit firm, Partners of the firm may be internally rotated.
(if such resolution is passed by SHS)
Author’s Note:-
1. Auditor appointed at 1st AGM (i.e. subsequent auditor) can hold the office till 6th AGM,
i.e. if a Practicing CA appointed as first auditor by BOD can be re-appointed as
subsequent auditor and can continue till conclusion of 6th year and not till 5th AGM.
Tenure of such subsequent auditor will be of 5 years and not 4 years
in case of Re-appointment of first Auditor.
2. Audit firm shall include other firms whose name or trade mark or brand is used by the
firm or any of its partners. There should be no common partners between retiring firm &

new incoming firm as on the date of appointment.

3. Consecutive years shall mean all the preceding financial years for which the
individual auditor has been the auditor until there has been a break by 5 years or
more.

Audit सार 1A.3

 Manner & Procedure for selection and Appointment of Auditor. [Section 139(1) & Rules]

Does Audit Yes AC will give Does BOD

committee recommendation to BOD agree
(AC) Exist
No
Yes

No
BOD will record reason in writing & ask BOD will forward
BOD will give own audit committee to recommend again to SHS who will
recommendation pass OR
to SHS

Shareholder will appoint Yes

an Auditor by passing No Whether such
OR recommendations
are proper ?

PUSC – Paid Up Share Capital

SHS – Shareholders
OR – Ordinary Resolution

Sec 177:- Constitution of Audit Committee

Auditor’s Note : - Public Company

Refer Chapter 4 –
Audit Committee
& Corporate Listed Unlisted
Governance for
detailed PUSC ≥ ₹ 10 Cr or
Always
understanding BORR. > ₹ 50 Cr or
T/O ≥ ₹ 100 Cr

139(9) - RETIRING AUDITOR SHALL NOT BE REAPPOINTED IF –

1. He is disqualified.
2. He has given notice in writing of his unwillingness to be reappointed.
3. SR has been passed at AGM appointing another auditor or that retiring auditor shall not
be reappointed.

Audit सार 1A.4

III] CASUAL VACANCY [SECTION 139(8)]
Casual vacancy means: - Vacation of the office before expiry of the term

 Reasons for Casual Vacancy (RTP)

Resignation Death Disqualification

 Filling of Casual Vacancy {u/s 139(8)} (RTP)

Other Companies Govt. Companies

To be filled by BOD within 30 days To be filled by C&AG within

to 30 days
In case of resignation, appointment by BOD
In case of failure BOD shall
should be approved by Co. at AGM (max.
fill within 30 days
within 3 months)

IV] REMOVAL OF AUDITOR (Section 140)

A) Removal of Auditor

140(1) 140(4)
By Members By Members
Before term  At EGM/ AGM Special Notice (SN) u/s 115  Special resolution at AGM

Initiated by BOD Initiated by members

Special Resolution in BOD Retiring auditor should not be re-appointed

Apply to CG in form ADT-2 to seek prior Copy of SN to the Retiring Auditor

approval & general meeting should be
held within 60 days of such approval. Representation
(Unsubstantiated/ Derogatory remarks
Special resolution in general meeting against the management with the view
to gain attention or solicity)
OOBH Circulate Representation

Audit सार 1A.5

 Company must circulate unless received late & file with ROC (+) Read out at GM

w/o prejudice – Oral Representation

If Abused the right  Tribunal

Circulate X X Read

B) Resignation/ Removal of Auditor

Resignation Tribunal or CG

Within 30 Days from the Suo Moto Application

date of Resignation file ADT-3
CG Other
Auditor has to file

ROC ROC NCLT IS SATISFIED

+ +
CO CO That the auditor of the Co. have acted in
+ fraudulent manner or has abated or colluded

for other CAG in fraud direct the Co. to change its Auditors
Company
For Govt. Co. Cannot be appointed as auditor of any Co. for 5 years.

Penalty for If application is received from CG then order is passed within 15

Non-compliance days & CG will appoint new auditor
Fine - 50K or Audit Fees (whichever is less)
+ ₹ 500/day if failure continues Maximum 5 Lakhs Firm will be Liable for penalty u/s 447Firm
will

V] ELIGIBILITY, QUALIFICATION AND DISQUALIFICATION OF AUDITOR (Section 141)

[A] Qualification of Auditors [Section 141 (1), (2)]

Individual Practising CA OR Firm whose majority partners

are practising in India

(Including LLP)

Audit सार 1A.6

[B] Disqualification of Auditors [Section 141 (3), (4) and Rules]
a) Any Body Corporate (except LLP)
b) An officer or employee of the company. (Directly Related)
c) A person who is partner, or who is in the employment of an officer or employee of the company.
(Indirectly Related)
Partner Office
of
OR OR Of company
Employee Employee

Important

d) A person who, or his relative* or partner- (PEQ)

PPR CHASS
(i) (ii) (iii)

P – Person C – Company H – Holding Co.

P – Partner A – Associate Co. S – Subsidiary Co.
R – Relative S – Subsidiary of Holding

i. Holds security, however relative/(s) can hold security up to ₹ 1 Lakh face value in the
company. In case, if holding of securities exceeds ₹ 1 Lakh, auditor should take corrective
actions within 60 days (RTP).
ii. Is indebted for an amount exceeding ₹ 5 Lakhs (> 5 Lakhs) (RTP) (PEQ).
iii. Has given a guarantee or provided any security in connection with the indebtness of any
third person for an amount exceeding of ₹ 1 Lakh (> 1 Lakh).

*Definition of Relative
Mother Father Including all
step relative

Spouse
Sister Brother

Excluding
Son + Spouse Daughter + Spouse Step Daughter

PP Having commercial business transaction C H A S S S*

e)
S* - Subsidiary of Associate Co.
Exception: - Transactions which are in ordinary course of business & are at Arms Length Price
e.g. transactions by companies engaged in telecommunication, airlines, hospitals, hotels or other
similar business. (PEQ)
f) A person whose relative is a director or is in employment of the company as a director or KMP.

Audit सार 1A.7

 g) Ceiling limit – 20 companies (as on the date of appointment) {Excluding OPC, Dormant
company, small company or Private company – PUSC <₹ 100 cr. (PEQ).
[ Private company which has not committed default in filing its financial statement u/s 137
or Annual returns u/s 92 of the Act.]
h) A person who has been convicted by a court, of an offence involving fraud, and a period of
10 years has not elapsed from the date of such conviction.
i) A person who, directly or indirectly, renders any service referred to in section 144 to the CHS.

[C] Subsequent Disqualification = Casual Vacancy.

If auditor is disqualified u/s 141 (3), then he must immediately vacate the office. Such vacation
shall be treated as a casual vacancy.

VI] AUDITOR NOT TO RENDER CERTAIN SERVICES [Section 144] (PEQ) (RTP)
The following services shall not be provided by an Auditor directly or indirectly :-
(Key - AAMIR In2 Dangal O)
A - Accounting and Book keeping services.
A - Actuarial Services.
M - Management Services.

I - Internal Audit.
R - Rendering of Outsourced Financial Services.
In1 - Investment Advisory Services.
In2 - Investment Banking Services.
D - Design and Implementation of any Financial Information System.
O - Any Other kind of services as prescribed.

VII] REMUNERATION OF AUDITOR [Section 142]

Remuneration to be decided by

OR Members may decide manner in which

Members
For 1st auditor – BOD remuneration may be decided.

For Govt Co. – Individual Co.

on the basis of guidelines given
by CAG

Audit सार 1A.8

 Remuneration will include

Fees AND Expenses incurred

Note: - It does not include any amount paid for any other services (other than those specified
u/s 144)

VIII] RIGHTS AND DUTIES OF AUDITOR [Section 143]

[A] Rights of Auditor

i. Right to access BOA
ii Right to obtain information & explanation
iii. Right to lien BOA (lien = Holding lawful possession) (PEQ)
Auditor can exercise lien only if his fees remains unpaid. Such lien can be exercised over BOA
for the year for which fees is unpaid and on which he has worked.
However, exercising this right is not practically possible because of: -
 Virtue of section 128 which states that BOA are required to be kept at Registered Office &
 In the opinion of council exercising lien attracts disrepute to ICAI and it’s a Professional
misconduct under clause 2 of Part IV of the First Schedule.
iv. Right to read out qualification at general meeting.
v. Right to receive notice and to attend AGM.

[B] Duties of Auditor

(i) ENQUIRE 143(1) (PEQ) (RTP) (ii) REPORT 143 (3) (PEQ) (RTP)
If any transactions give Negative results Whether the examination of transactions
then such transactions are required to give positive or negative results. In both the
to be REPORTED. circumstances, the auditor Needs to REPORT.
The transactions to be enquired are: - a) Sought and obtained all information
a) Advances: Terms & conditions should not and explanations.
be prejudicial. b) Proper Books of Accounts.
b) Book entries: Should not be prejudicial. c) Report on accounts of Branch office.
c) Companies not being Investment Company d) Financial statements are in agreement
& sold securities at a price < cost (i.e. loss). with the Books of Accounts.
d) Loans and Advances shown as Deposits e) Financial statements comply with
Company. Accounting Standards.
e) Personal Expenses charged to revenue. f) The observations or comments of the
f) FOR CASH auditor on financial matters which
Where any shares have been allotted have adverse effect on functioning of.
for cash, whether it has been received g) Any director attracts any disqualifications

Audit सार 1A.9

 or not and the same has been. u/s 164(2).
accounted for. h) Modifications relating to maintenance of
Books of Accounts.
i) Internal Financial controls with respect to
Financial statements.

NOTE:- Auditor of public company This is exempt to OPC, Small Company &

should make a statement u/s 143(3) Private Company whose -

as to whether the Remunerations Turnover < ₹ 50 crores, &

Paid by the company are in Borrowings < ₹ 25 crores &
accordance worth sec 197 of has not defaulted in return filing
Companies Act, 2013 will be reported (sec 92 or 137)
u/s 143(3). j) Any other matter as prescribed.
 Pending Litigations on its financial

position in its financial statement.

 Foreseeable losses, if any, on long term
contracts Including derivative.
 Investor Education and Protection Fund
by the company.

(iii) Reporting as to true and fair [Section 143(2)]

 Report that the financial statement are free from RMM either due to fraud or error.
(True & Fair view = FS made as per AFRF & Schedule III)
 The report shall be made after taking into account the following: -
- Provision of the Act
- Accounting and Auditing standards
- Matters required to be including in the report

(iv) Reasons For Negative qualification [Section 143(4)]

 If the auditors has issued opinion as per SA 705, then he has to give reasons for such
qualified, adverse or disclaimer of opinion.
 Qualification, Observations or comments on the Financial Transactions or matters mentioned
in the Auditor’s Report shall be –
Read before the company in its general meeting ● Open for inspection by any member of the company

(v) Duties w.r.t. Audit of Government Companies [Section 143(5), (6), (7)]
 Duty to follow directions given by CAG
 Statutory Auditor must include the following in his report: -
a) Directions b) Actions c) Impact
 Supplementary Audit – within 60 days from the receipt of above Audit report the C&AG
Audit सार 1A.10
 have right to conduct a supplementary audit.
 Comments of C&AG – Comments are given by C&AG, such comments and supplementary
audit is then given to the company.
The company shall forward the same to every person entitled to copies of Financial
statement u/s 136(1).

(vi) Compliance With Auditing Standards [Section 143(9), (10)]

The Auditor has to comply with all the relevant Standards on Auditing (SA).

(vii) Additional Matters of Reporting [Section 143(11)]

The CG may order for inclusion of a statement on specified matters in auditor’s report for
specified class of companies (CARO, 2016).

(viii) Reporting of Fraud [Section 143(12]

If auditor has reason to believe that an offence involving fraud is being or has been
committed against the company by officer or employees of the company then auditor must
Report such matter to Central Government in following manner:

Fraud

Amount < ₹1 crore Amount  ₹1 crore

Report within Company to disclose in Within 2 days report to the Board/

2 days Board’s Report Audit Committee.

To Board/ a. Nature 45 days  seek reply

Audit committee b. Amount
c. Parties involved if reply received Reply not received
 Nature remedial action is not taken within time within time
 Amount (or)
 Parties involved d. Remedial action taken Report to CG Report to CG

within 15 days. within 15 days of

expiry on 45 days.

In Form ADT - 4
Applicable to: Statutory, Cost, Branch & Compliance Auditor (PEQ)

 Penalty for non-compliance =₹ 1 lakh to ₹ 25 lakhs

 Also refer clause (x) of para 3 of CARO,2016.
 Manner of Report:-

Audit सार 1A.11

  i. Report shall be Sent to Secretary, MCA.
ii. In a Sealed cover by Registered past acknowledgement due followed by email.
iii. It should be on letter head containing
a) Address b) Telephone no.
c) E-mail d) Membership no.
Analysis By Author :-

Particular CARO,2016- 3 (x) 143 (12)

1) Fraud committed BY whom Company Officer/ Employee Officer/ Employee

against against against

2) Fraud committed ON whom Third Party Company Company

3) Amount No Limit ≥ ₹ 1 Crore

4) Reporting to Member of the Company Central Government

5) Grounds Notice/Reported Reasons to Believe

6) Reporting By Whom ? Statutory Auditor Statutory Auditor, Branch

Auditor, Compliance
Auditor, Cost Auditor
(ix) Audit of Branches. [Section 143(8)] (RTP)

1. Main Auditor can audit financial statement of branches.

2. However, separate branch auditor may be appointed if required

Indian Branch Foreign Branch

Individual or firm qualified u/s 141(1), (2) An accountant or a person eligible to act as an
may be appointed auditor as per the requirement of that country’s law

Signing of Audit Report Section 145

Section 145 :- As per Section 145 of the Companies Act, 2013, the person appointed as an
auditor of the company shall sign the auditor’s report or sign or certify any other document
of the auditor company, in accordance with the provision of sub-section (2) of section 141 and
the qualifications, observations or comments on financial transaction or matters, which have
any adverse effect on the functioning of the company mentioned in the auditors’ report shall
be in read before the company general meeting and shall be open to inspection by any
member of the company, indicating name of the firm along with firm registration number &
name of member with membership number.

Audit सार 1A.12

 Note :- An engagement partner of the firm can sign all the audit report on behalf of the firm.

IX] PENALTY FOR CONTRAVENING PROVISIONS U/S 139-146 & 148. [Section 147]

 Penalty

Company Officer in default Auditor

Min: ₹ 25K Min: ₹ 10K Intentional Unintentional

Max: ₹5 Lacs Max: ₹1 Lac ₹ 50K to ₹ 25 Lacs ₹ 25K to

(or) (or) 8 times the amount ₹ 5 Lacs (or)
1 year of Imprisonment of remuneration 4 times the

(or) (or) 1 year of Imprisonment amount of

Both (or) Both remuneration

 If acted fraudulently or abetted or colluded in fraud with Directors or officers then Penalty
u/s 447 shall be levied.

 Penalty

Civil Criminal imprisonment

Fine imposed on Firm of Partner involved in crime

X] COST AUDIT. (Section 148)

[A] Sec 148(1) & Rule 3 - Maintaining Cost Record (in FORM CRA 1)
CG may order Companies including foreign company engaged in: -
1. Production of goods and 2. Rendering of services
To maintain cost record relating to utilisation of material, labour or other item.

Companies

Regulated Sector Non - Regulated Sector

Telecom, Electricity, Petroleum, Sugar, Iron Steel, Rubber, Cement etc.

Drugs, Pharmaceutical & Fertilizers.

AND
T/O > ₹ 35 crores during PY to include cost record in BOA

Audit सार 1A.13

[B] Sec 148(2) & Rule 4 - Audit of Cost Records
CG may order to conduct cost audit, if,

 Overall annual turnover from all the products and services PY in case of

Regulated sector = > ₹ 50 Cr Non-regulated sector = > ₹ 100 Cr

AND

 Aggregate T/O of individual product or service in PY in case of :

Regulated sector = > ₹ 25 Cr Non-regulated sector = > ₹ 35 Cr

Except: -
 Whose revenue from exports in foreign exchange > 75% of its total revenue
OR
 Which in case of operating from SEZ
OR
 Engaged in generation of electricity for captive consumption

Note: - PY = Immediately Preceding Previous Year

[C] Sec 148(1) & Rule 3 – Cost Auditor:

i. Cost audit shall be conducted by a Cost Accountant (AMENDMENT) (either individual/ Firm.)
ii. Statutory auditor of a company u/s 139 cannot be a cost auditor of the company.
iii. Cost auditor to be conducted appointed in 180 days of commencement of every financial year.
iv. Obtain written consent from auditor.
v. Company to inform cost auditor of his appointment.
vi. Company to file a notice with CG in form CRA-2 in 30 days of board meeting OR In 180
days of commencement of FY (whichever earlier).
vii. Cost auditor appointed as such will continue till expiry of 180 days of closure of FY or till
submission of his Cost Audit Report.[auditor to submit his report FORM CRA 3].
viii. Company in 30 days of date of receipt = furnish such report to CG along with full info &
Explanation on every reservation or qualification in form CRA-3 in XBRL Format.

Audit सार 1A.14

[D] Appointment & Remuneration of Cost Accountant

Audit committee is required u/s 177 No requirement as to Audit committee

Appointment by the Board on Appointment by the Board on

Recommendation of the committee. its own.

Remuneration Remuneration

* Recommended by Audit Committee Fixed by Board of directors and

* Approved by Board of Directors Ratified by the Shareholders.

* Ratified by Shareholders
[E] Letter/ Certificate to be obtained from Cost Auditor certifying that:
(a) The individual or the firm, as the case may be, is eligible for appointment and is not
disqualified for appointment under the Companies Act, 2013, the Cost and Works
Accountants Act, 1959 and the rules or regulations made thereunder;
(b) The individual or the firm, as the case may be, satisfies the criteria provided in section
141 of the Companies Act, 2013 so far as may be applicable;
(c) The proposed appointment is within the limits laid down by or under the authority of
the Companies Act, 2013; and
(d) The list of proceedings against the cost auditor or audit firm or any partner of the
audit firm pending with respect to professional matters of conduct, as disclosed in the
certificate, is true and correct.
(F) Removal of Cost Auditor:
He can be removed by BOD through board resolution & by providing reasonable
opportunity of being heard.
About appointment of
Intimate in new cost auditor
BOD CRA - 2 Central Government
(G) Casual Vacancy:
In case of casual vacancy due to death, resignation or removal, BOD shall fill such vacancy
within 30 Days & inform CG regarding appointment of Cost Auditor in form CRA - 2 (As
depicted above)
Author’s Note :- Refer 3(vi) of CARO,2016

 Forms
Note: -
CRA 1  Maintenance of Cost Records CRA 3  Cost Audit Report (Format)
CRA 2  Appointment of Cost Auditor CRA 4  Filing Cost Audit Report with C.G.

Audit सार 1A.15

 DECLARATION AND PAYMENT OF DIVIDEND
DEFINITION OF DIVIDEND It is share of profit distributed arrange shareholders.
It includes interim dividend

XI] DECLARATION OF DIVIDEND [Section 123]

1) Company can declare dividend for any FY

a) Current Years Profit b) Previous Year Profit c) Both a & b d) Money

after depreciation after depreciation Provided by
CG & SG

2) Transfer of Reserves : A Co. may before declaration of any dividend transfer such % of
profit to reserves. Such transfer is NOT MANDATORY.

3) Declaration of dividend out of accumulated profits [Rule 3

of Companies (Declaration & Payment of Dividend) Rules]

a) The rate of dividend b) The total amount d) The balance of

c) The amount so reserves after such
declared shall not to be drawn from
drawn shall first
exceed the average of such accumulated withdrawal shall
be utilised to set
the rates at which not fall below 15% of
profits shall not off the losses
its paid up share
dividend was declared exceed one-tenth of incurred in the
capital as appearing
by it in the 3 years the sum of its paid- financial year
in the latest audited
immediately preceding up share capital in which
dividend is financial statement.
that year. However, this and free reserves as
declared before
rule will not apply if a appearing in the
any dividend in
Company has not latest audited
respect of equity
declared any dividend financial statement. shares is declared.
in each of the three
preceding financial
year.

Note :- (i) Such dividend shall be declared from free Reserves only.
(ii) Co. can declare dividend only after providing previous year losses and depreciation.
4) Dividend including interim dividend shall be deposited to a Separate A/c within 5 days

Audit सार 1A.16

 from declaration.
Note :- It is not applicable to wholly owned government Co. i.e. Co. in which entire Share
Capital is held by Central Government, State Government or Both.
5) Dividend can be paid in cash, cheque or warrant.
6) If the company fails to comply provision of sections 73 & 74, then such Co. shall be
prohibited from declaring dividend.

XII] UNPAID DIVIDEND ACCOUNT [Section 124]

1) Dividend declared and not a paid or claimed within 30 days shall be deposited to a
Separate Bank A/c within 7 days from the expiry of such 30 days.
2) Co. shall prepare a statement containing last known names, address & unpaid dividend
Paid to each person & place it on website within 90 days of making such transfer to
unpaid dividend A/c.
3) If default is made in transferring the amount to unpaid dividend A/c, then interest
@ 12% p.a. shall be paid to the benefit of Shareholders. (RTP May 21)
4) Amount which remains in unpaid dividend A/c of the co. for the period of 7 years shall
be transferred to IEPF along with interest.

5) No transfer to IEPF if :-

There is any specific order Shares are pledged/ Any year during 7 years
hypothecated dividend is paid or claimed

6) Right to claim the shares transferred to IEPF is available to the owner.

7) Penalty for contravening provision u/s 124

Comp. :- ₹ 5 lakhs – ₹ 25 lakhs OID :- ₹ 1 Lakh – ₹ 5 Lakhs

OID = Office in Default

Audit सार 1A.17

XIII] INVESTOR EDUCATION & PROTECTION FUND

1) Established By CG

Amounts must be credited to IEPF Funds to be utilized for :

a) Grants & Donation by CG a) The refund in respect of unclaimed

b) Unpaid Dividend Account dividends, matured deposits, matured
c) General revenue account of the CG debentures, the application money due for
d) Income from Investments refund & interest thereon.
e) Income from Disgorgement (Seizure) or b) Promotion of investors’ education,
disposal of securities awareness and protection.
f) Application Money c) Distribution of any disgorged amount
g) Matured Deposits & Debentures d) As per courts order reimbursement of
h) Interest accrued legal expenses incurred in pursuing class
i) Amount received from Sale proceeds action as sanctioned by the NCLT and
j) Redemption amount etc. e) Any other purpose incident thereto.

2) To claim any amount from the funds, application is required to be done to AUTHORITY
[Authority to administer : 1 Chairperson + 7 Members (Max.) + 1 CEO].
3) Relevant records & documents are required by CG in consultation with CAG.
4) The authority shall be competent to spend the money out of the fund.
5) Audit of such fund shall be done by CAG and audit report along with audited accounts
shall be forwarded to CG.

XIV] RIGHT OF DIVIDEND, RIGHTS SHARES AND BONUS SHARES TO BE HELD IN

ABEYANCE PENDING REGISTRATION OF TRANSFER OF SHARES [Section 126]

1) For the shares dividend pending transfer

S
Shall be transferred to Unpaid Dividend A/c (Unless the registered SHS
has authorized the company in writing to pay such dividend to transferee)

2) Bonus & Right Shares for Shares Pending Transfer

Such Offer shall be kept in abeyance

Audit सार 1A.18

XV] PUNISHEMENT FOR FAILURE TO DISTRIBUTE DIVIDEND (SEC 127)
1) Dividend declared shall be paid within 30 days of declaration.

2) Penalty for Contravening - 127

Company Every OID

Simple Interest @ 18% p.a.  Imprisonment upto 2 years AND

 Fine: Min ₹ 1000/- every day till

defaults continues

3) No Offence shall be deemed to have been committed if :

a) Dividend was not paid because of operation of law
b) SHS gave directions & such direction cannot be compiled & same was communicated
c) There is a dispute regarding right to receive
d) Due were adjusted lawfully
e) There is no default of Co.

* Quick Recall Time Line

30 Days 7 Years

7 Days
5 Days

Date of Transfer to Compulsory Unpaid Transfer to

Declaration Separate A/c Payment Dividend IEPF

Penalty Penalty Penalty

Co. – 18 % p.a. Co. – 12 % p.a. Co. – ₹ 5- 25 Lakhs

OID – 2 Years + ₹ 1000/- Per day OID - ₹ 1 – 5 Lakhs

Audit सार 1A.19

 IMPORTANT SECTION OF AUDITING & ACCOUNTS
XVI] BOOKS OF ACCOUNT [SECTION 128]

(a) Company shall prepare

Books of accounts (BOA) Books and papers Financial Statement

Keep at its registered office or any other place in India

as the BOD may decide, if BOA are kept at any other place written notice is
to be given to ROC within 7 days giving full address of that place (open for
inspection by directors)

Preserved for 8 years, CG may direct to preserve BOA for

longer period as it may deem fit.

Failure in compliance

Imprisonment (upto 1 year) OR Fine (₹ 50,000 – 5 lacs) OR Both

(b) BOA can be maintained in Electronic format and it shall :-

 Remain accessible in India
 Be retained completely in the original format and unaltered
 Include the information received from Branch office without any alternation
 Be displayed in legible form
 Be stored in a proper system and able to retrieve, display or take print out & such
records shall not be disposed or rendered unusable unless permitted by law
 Be kept in servers physically located in India on a periodic basis & proper
back-up of BOA shall be maintained

XVII] SECTION 129 – FINANCIAL STATEMENT

(a) As per Section 2(40) of Companies Act, 2013
FS Includes :-
Balance Sheet as on 31st March 20XX (B/S);

Audit सार 1A.20

 Statement of Profit & Loss for the Y/E 20XX (P/L); Note :- The Financial Statement with
Cash Flow statement for the Y/E 20XX (C/F); respect to One Person Company, Small
Note to accounts and (Disclosures) Company and Dormant Company, may
Statements of changes in equity if any. not include the Cash Flow Statement.
(b) True and Fair View -
 FS shall give a true and fair view of the state of affairs of the company or companies.
 It shall 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.. ( Not Applicable To :- Insurance Co., Banking Co. or Co. engaged in
Electricity Generation or Supply or Any Co. under Special Statue)
(c) Consolidation of financial statements :

 Where a company has one or more subsidiaries/ Associate Co.’s , it shall , in addition
to its financial statements, prepare a CFS of the company and which shall also be
laid before the AGM of the company along with its own Financial Statements.
 The company shall also attach a separate statement containing the salient feature

of the financial statement of its subsidiary or subsidiaries or Associate Co.’s in the

form AOC - 1
 The Central Government may provide for the consolidation of accounts of companies
in such manner as may be prescribed.
(d) Manner of Consolidation of Accounts:
 The consolidation of financial statements of the company shall be made in accordance with
the provisions of Schedule III of the Act & the applicable accounting standards
 The provisions applicable to the preparation, adoption and audit of the financial statements
of a holding company shall mutatis mutandis and apply to the consolidated financial
statements.
(e) In Case of deviation from AS, Co. shall disclose reason & effects arising from such deviation.

(f) Penalty for contravening Sec 129

Whether MD. WTD in charge of Finance, CFO, Any other person are present

Yes No

Mentioned Officers All Directors

Imprisonment upto 1 yr. or Fine ₹ 50,000 to ₹ 5 Lacs, or Both

Audit सार 1A.21

XVIII] SECTION 130 – RE-OPENING OF ACCOUNTS ON COURT’S OR TRIBUNAL
ORDERS (PEQ July 21)
 This section seeks to provide for the opening of books of account and recasting its
Statements.
 No order shall be made under in respect of re-opening of books of account relating
to a period earlier than 8 FY’s immediately preceding the current financial year.
Exception – CG may order to maintain / re-open beyond 8 years
Application to be made by :

SEBI Any other person

Central Govt.

Income Tax Authorities Statutory regulatory body

Application made to Court/ Tribunal passes an order to the effect that

Earlier accounts prepared Affairs of company were mis-

in fraudulent manner managed related to accounts

Notice to be served to applicants

Take Representation into consideration, if any

Pass order to revise/ recast the accounts

XIX] SECTION 131 – Voluntary Revision of FS or Boards Report

If it appears to the Directors that

FS do not comply with provision of OR Boards Report do not comply with

Sec 129 Sec 134

Then they may prepare revised FS or Boards report in respect of any of the 3 preceding FY’s
after obtaining approval from NCLT on an application made by the company in such
form & manner as prescribed.

Audit सार 1A.22

 Copy of order passed by NCLT shall be filled with ROC

XX] SECTION 132 – Constitution of NFRA

a) As per NFRA rules, NFRA shall have power to monitor & enforce compliance with AS
& SAs oversee the quality of service u/s 132(2) or undertake investigation u/s 132(4) of
the following class of companies & bodies corporate:
As per NFRA Rules, companies as corporate bodies covered are (PEQ Nov 20)

Listed Unlisted Companies covered Any other on reference

Companies PUSC > ₹ 500 cr under Special Act made by CG.
Or T/O > ₹ 1000 cr Eg. Banking, Insurance,
Or O/S Loan, Deposits & Electricity generation.
debentures > ₹ 500 cr
(as on 31/3 of
immediately price PY)

A body corporate registered O/S India which is Associate/Subsidiary of any company mentioned

above provided income or net-worth of such subsidiary in > 20% of consolidated income or networth.

Every existing body corporate other than a company governed by these rules, shall inform
the NFRA within 30 days of the commencement of NFRA rules, in Form NFRA-1 , the
particulars of the auditor as on the date of commencement of these rules.
Every body corporate, other than a company as defined in section 20 of the
Act, formed in India & governed under NFRA Rules shall, within 15 days of appointment
of an auditor u/s 139(1), inform the NFRA in Form NFRA-1, the particulars of the auditor
appointed by such body corporate. Provided that a body corporate governed under clause (e)
of sub-rule (1) of NFRA Rules shall provide details of appointment of its auditor in Form
NFRA-1.
A company or a body corporate other than a company governed under NFRA Rules shall
continue to be governed by the NFRA for a period of 3 years after it ceases to be listed or
its paid-up capital or turnover or aggregate of loans, debentures & deposits falls below the
limit stated therein (i.e. mentioned in points (a) to (e) above).
Every auditor referred to in Rule 3 shall file a return with the NFRA on or before
30th November every year in Form NFRA-2.

Audit सार 1A.23

b) Function of NFRA

(i) Make (ii) Monitor & (iii) Oversee the (iv) Perform such
Recommendation to Enforce the quality of service of other function
CG on formation & compliance of AS the professional & relating to (i), (ii) &
laying down of and SA’s. suggest measures (iii).
accounting & required for
auditing policies & improvement.
standards for
adoption by
companies or
auditors.

(i) Recommending Accounting Standards (AS) & Auditing Standards (AS) :

For the purpose of recommending AS or SA for approval by the CG, the NFRA-

(a) shall receive recommendations from (b) may seek additional information from
the ICAI on proposals for new AS or SA the ICAI on the recommendations received
or for amendments to existing AS or SA; under clause (a), if required.

The NFRA shall consider the recommendations & additional information in such manner
as it deems fit before making recommendations to the CG.

(ii) For Monitoring & Enforcing Compliance with AS & SA, NFRA may :

(a) review working papers (b) evaluate the sufficiency of (c) perform such other testing of
(including audit plan & the quality control system of the audit, supervisory &
other audit documents) & the auditor & the manner of quality control procedures of
communications related documentation of the system the auditor as may be
to the audit; by the auditor; & considered necessary or
appropriate.

Audit सार 1A.24

(iii) Overseeing the Quality of Service & Suggesting Measures for Improvement :

(a) On the basis

(b) It shall be the (c) The NFRA (d) The NFRA may (e) The NFRA
of its review, the
duty of the shall monitor refer cases with may take the
NFRA may
auditor to make the regard to overseeing assistance of
direct an auditor
the required improvements the quality of experts for its
to take measures
improvements & made by the service of auditors oversight &
for improvement
send a report to auditor & take of companies or monitoring
of audit quality
the NFRA such action as bodies corporate activities.
including
explaining how it it deems fit referred to in rule 3
changes in their
has compiled with depending on to the Quality
audit processes,
the directions the progress Review Board
quality control,
made by the made by the constituted under
& audit reports
NFRA. auditor. the CA Act, 1949 or
& specify a
call for any report
detailed plan
or information in
with time-limits.
respect of such
auditors or
companies or
bodies corporate
from such Board as
it may deem.
appropriate.
(iv) Punishment in Case of Non-Compliance :

(A) imposing penalty of - (B) debarring the member or the firm from:

INDIVIDUALS FIRMS being appointed as an performing any

> ₹ 1 lakh, but > ₹ 5 lakhs, but auditor or internal valuation as provided
which may which may auditor or undertaking u/s 247, for a
extend to 5 times extend to 10 any audit in respect of minimum period of 6
of the fees times of the fees financial statements or months or such higher
received, received, internal audit of the period not exceeding 10
functions & activities of years as may be
any company or body determined by the
corporate; or NFRA.

Audit सार 1A.25

XXI] SECTION 134 – Financial Statement, Board’s report, etc.

 Section 134(1) – Authentication of FS

1) FS including CFS If any, shall be approved by BOD before they are signed
on behalf of board by -

A. Chairperson, If OR B. Two Directors of which 1 & C. CEO, D. CFO,

authorised by BOD shall be MD (If any) E. CS

2) If OPC – signed by only 1 Director – Section 134(2)

*Auditor’s Report shall be Attached to Every FS Section 134(7)
*Signed Copy of FS, Including CFS, If any, shall be issued, *Circulated
or Published along with copy of -
(i) Notes (ii) Annexed to OR Forming Part of FS
(iii) Auditor’s Report & (iv) Board’s Report

XXII] Board’s Report

Section 134(3) – Contents of Board Report
1) Web address where Annual Return has been placed.
2) No. of Board meetings.
3) Director’s Responsibility Statement.
4) Details in respect of frauds reported by auditors under section 143(12) other than those
which are responsible to CG.
5) Declaration by Independent Director.
6) Director’s Appointment & Remuneration Policy (Not applicable to Government Company).
7) Explanations/ Comments by Board on every qualification, reservation or adverse
remark/ disclaimer made by -
a) Auditor & b) CS
8) Particulars of Loans, Guarantees or Investments u/s 186.
9) Particulars of contracts/ arrangements with related parties.
10) State of company’s affairs.
11) Material changes & commitments, if any, affecting financial position
12) Conservation of Energy, Technology Absorption, Foreign Exchange Earnings & Outgo
(Not Applicable to Government Co. engaged in producing Defence equipment).
13) Risk Management.
14) Policy on CSR.
15) Listed Co. & Public Co. having PUSC as may be prescribed, shall include manner in
which formal Annual Evaluation has been made by Board of its own performance &
Audit सार 1A.26
 that of its Committees & individual directors of the performance of the Board, its
Committees and of Individual directors has been made.
Note :- Not applicable to Government Co. in case directors are evaluated by Ministry or
Department of CG which is in charge of Co. or SG, as per its own evaluation methodology.
16) Other prescribed matters.
Note :-
1) Where disclosures referred to in this sub-section have been included in the financial
statements, such disclosures shall be referred to instead of being repeated in the Board’s
report.
2) Where the policy referred to in point (6) and (15) is made available on company’s
website, if any, it shall be sufficient compliance of the requirements under such clauses.
If the salient features of the policy and any change therein are specified in brief in the
Board’s report and the web-address is indicated therein at which the complete policy is
available.
3) (3A) The CG may prescribe an abridged Board’s report, for the purpose of compliance
with this section by OPC or Small Company.

XXIII] Section 134(5) – Director’s Responsibility Statement

DRS shall state that -
a) In preparation of annual accounts, applicable AS had been followed alongwith explanation
to material departures.
b) Directors had selected such accounting policies & applied them consistently & made
judgements & estimates that are reasonable & prudent so as to give true & fair view of state
of affairs of Co. at end of FY & of profit & loss of Co. for that period.
c) Directors had taken proper & sufficient care for maintenance of adequate accounting records
for safeguarding assets of Co. & for preventing & detecting fraud & other Irregularities.
d) Directors had prepared annual accounts on going concern basis.
e) Directors, in case of listed Co., had laid down internal financial controls to be followed, are
adequate & were operating effectively.
f) Directors had devised proper systems to ensure compliance with provisions of all applicable
laws & that systems were adequate & operating effectively.

XXIV] SECTION 135 – CORPORATE SOCIAL RESPONSIBILITY

(i) Which Company is required to constitute CSR committee:
(a) Every company including its holding or subsidiary, and a foreign company defined under
section 2(42) of the Companies Act, 2013 having its branch office or project office in India,
having : (1) net worth of ₹ 500 crore or more, or ( ≥ ₹ 500 Cr)

Audit सार 1A.27

 (2) turnover of ₹ 1000 crore or more or ( ≥ ₹ 1000 Cr)
(3) a net profit of ₹ 5 crore or more during any Immediately preceding financial ( ≥ ₹ 5 Cr)
year shall constitute a Corporate Social Responsibility Committee of the Board.
Exclusion of Companies :
Every company which ceases to be a company covered under sub section (1) of section 135
of the Act for 3 consecutive financial years –
(1) shall not be required to constitute a CSR Committee, and
(2) is not required to comply with the provisions as per section 135

Amount of contribution towards CSR :

(a) The Board of every company shall ensure that the company spends, in every financial
year, atleast 2% of the average NP of the company made during the three immediately
preceding financial years or lesser period if 3 yrs. not expired since incorporated, in
pursuance of its CSR Policy.
(b) The company shall give preference to the local area and areas around it where it operates,
for spending the amount kept aside for CSR activities.
(c) In Co. fails to spends such amount, then it shall transfer such unspent amount to a fund
Specified under Schedule VII

Note : Any amount remaining unspent w.r.t. to any ongoing project shall be transferred
by the company within 30 days from the end of the financial year to a special account
in any scheduled bank to be called the Unspent Corporate Social Responsibility Account
and such amount shall be spent by the company for its obligation towards the Corporate
Social Responsibility Policy within a period of 3 FYs from the date of such transfer,
failing which,the company shall transfer the same to a Fund specified in Schedule VII,
within a period of 30 days from the date of completion of the third financial year.

XXV] Section 136 – Right of member to copies of Audited Financial Statement

Who are entitled for audited financial statement ?
1) CFS, Auditor’s Report & Other document required by law shall be annexed with FS which
are to be laid in its GM
2) It shall be sent to - a) Member, b) Trustee for debenture-holder of any debentures issued by
Co. & c) Persons Entitled, Other than Member/ Trustee at least 21 days before meeting
3) In case of Listed Co. – Above provisions shall be deemed to be compiled with -
a) If copies of documents are made available for inspection at its registered office during
working hours for 21 days before meeting.
For section & companies, “21 days” shall be substituted by “14 days”

Audit सार 1A.28

 b) Statement of Salient Features in Form AOC-3 or copies of documents, as Co. may
deem fit is sent to every member & trustee for holders of any debentures issued by
Co. At least 21 days before meeting unless shareholders ask for full FS.
4) Co. allow member or trustee of debenture holder to inspect audited FS at its registered
office during business hrs also the company shall provide copies of FS of its subsidiary/
subsidiaries if any member asks for it.
5) Shorter Notice :If the copies of the documents are sent less than 21 days before the date
of the meeting, they shall be deemed to have been duly sent if it is so agreed by members.
a) Company having Share Capital – Min 51% in No. + Min 95% in Value(PUSC)
of members entitled to vote or
b) Company NOT having Share Capital - Min 95% in Value (PUSC) of members
entitled to vote.

Manner of circulation
1) In case of Listed Co. & Public Co. having net worth of more than ₹ 1 crore & turnover
of more than ₹ 10 crore,
FS may be sent –
a) by electronic mode to
(i) members whose shareholding is in demat format
(ii) members shareholding is held otherwise than by demat format but positively
consented in writing for receiving by electronic mode.
b) by dispatch of physical copies in all other cases
2) Listed Co. shall also place its FS including CFS, if any, & other documents on its website.

Subsidiary Companies :
Co. having subsidiaries shall –
a) place separate audited accounts in respect of each of its subsidiary on its website (if any)
b) provide copy of separate audited FS in respect of each subsidiary to any shareholder who
asks for it.
c) Every listed company having a subsidiary or subsidiaries shall place separate audited
accounts in respect of each of subsidiary on its website, if any.
d) Also that a listed company which has a foreign subsidiary—
(i) where such foreign subsidiary is statutorily required to prepare CFS under any law of
the country of its incorporation, the requirement of this proviso shall be met if CFS of
such foreign subsidiary is placed on the website of the listed company.
(ii) where such foreign subsidiary is not required to get its financial statement audited
under any law of the country of its incorporation and which does not get such

Audit सार 1A.29

 financial statement audited, the holding Indian listed company may place a
translated copy of the financial statement in English of unaudited financial statement
on its website.

Section 136(3) – Contravention

1) Co. liable to penalty of ₹ 25,000/-
2) Officer in default liable to penalty of ₹ 5,000/-

XXVI] Section 137 – Copy of financial statement to be filed with Registrar

1) Filing of FS
Copy of FS, including CFS, if any, along with all documents which are required to be
or attached to such FS under this Act, duly adapted at AGM of Co. shall be filed with
Registrar within 30 days of AGM in such manner, with fees or additional fees within
time specified u/s 403
2) If FS are not adopted
 Unadopted FS along with required documents be filed with Registrar within 30 days of
AGM
 Registrar shall take them as provisional till FS filed with him after their adoption in
adjourned AGM
 FS adopted in adjourned AGM shall be filed with Registrar within 30 days of adjourned
AGM with less or additional fees within time specified u/s 403
3) Filing by OPC
OPC shall file copy of FS duly adopted by its member, along with all documents
which are required to be attached to such FS, within 180 days from closure of FY.
4) Section 137(1) Co. having subsidiaries
Co. shall, along with its FS to be filed with Registrar, attach accounts of its subsidiaries
which have been incorporated outside India whether audited or unaudited ,translated
in English along with a declaration to that effect.

XXVII] AGM not held

Where AGM has not been held for any FY, FS along with documents required to be attached,
duly signed, with Statement of Facts & reasons for not holding AGM shall be filed with
Registrar within 30 days of last date before which AGM should have been held & with fees
or additional fees within time specified u/s 403

Audit सार 1A.30

  Penalty
Penalty

Company MD & CFO

₹ 1,000/- for everyday during which In absence director charged by Board
failure continues but upto punishable with –
₹ 10,00,000/- a) Imprisonment – Upto 6 Months OR
b) ₹ 1,00,00/- + ₹ 100/day until the
default continues to ₹ 5,00,000/- OR
c) Both

XXVIII]
Audit of LLP
1) LLP shall be under obligation to maintain annual accounts reflecting True & Fair view
of its state of affair.

A statement of Accounts & solvency in Form 8 shall be filled

by LLP with ROC every year.
2) The accounts of every LLP

 Shall be audited in accordance with Rule 24 of LLP Rules, 2009

 It provides following LLP shall not get it account audited whose (in any FY)


T/o ≤ ₹ 40 Lakhs OR Contribution ≤ ₹ 25 Lakhs

3a) As its difficult to assess insurance requirements of different types

of sizes of LLP’s, there is no mandatory requirement of
insurance under this Act.

Audit सार 1A.31

 Every LLP to file

Annual Return Statement of Account &

In Form 11 within 60 Solvency in Form 8 within a
days from closer of FY. 30 days from the end of 6
months of FY>

3b) Default in filling

Upto 300 days More than 300 days

Normal + Additional Late Fees Normal + Additional Late
Fees also liable for
prosecution

4) Appointment of Auditor by Designated Partner

1st Auditor Casual Vacancy Subsequent Auditor

Including Removal
Any time before the Atleast 30 days prior to the
end of the 1st FY end of each financial year

In case designated partner fails, other partner may appoint.

5) Duty of Auditor :- a) To obtain definite instruction in writing
b) To refer Minutes Book
c) To read LLP agreement

Nature Interest Drawings Borrowing Method of Profit

Settlement Sharing
Ratio

Amount of Duration Salaries, Right & Any loans

Capital Commission etc. Duties Advanced

Audit सार 1A.32

6) Reporting :- Auditor should mention

Records are Correct & Able to Obtain All Whether Any

Reliable Information Restriction

7) Power of Registrar

Obtain such information Summon designated Call for documents for

as considered necessary partner inspection

Space for Student Notes: -

Audit सार 1A.33