Aug 2014 23rd Aug`14 Annual Conference 2014

Report
THE COMPANIES ACT, 2013
ACCOUNTS & AUDIT
ACAE STUDY CIRCLE - EIRC
KOLKATA, AUGUST 23, 2014
CA. P. R. RAMESH
Contents
Background
Key Definitions
Holding and Subsidiary Company
Books of Accounts
Schedule III
Depreciation
Accounting Standards
Financial Statements
Revision of Financial Statements
Board’s Report
Audit and Auditors
Class Action Suits
Impact on Professionals
Challenges Ahead
BACKGROUND
Background
Companies Act,
2013
Presidential Assent – August 29, 2013
Act contains 470 Sections, 29 Chapters, 7 schedules
Total – 283 Sections have been notified
‘Government regulated’ regime to a new regime of self
regulation.
New Concepts








Background…
Introduction of One Person Company & Small Company
Corporate Social Responsibility (CSR)
Internal Audit & Secretarial audit
Rotation of auditor
Woman director
Resident director
Class Action
Prohibition on forward dealings in securities of Company by directors and
KMP & Insider Trading of Securities
 New Regulators (NFRA, SFIO, NCLT)
 New Committees - Nomination and Remuneration Committee and
Stakeholders Relationship Committee, Vigil Mechanism
 New definition for Associate company, Control, Small company, Key
managerial personnel, Related party, etc.
Background…
The Changed Approach:
• Shift from Shareholders Protection to stakeholders protection
• Corporate Governance /Investor Protection is Mantra
• Widened disclosure requirements
• Stricter penalties and Prosecution
• Liability of Directors / Professionals increased
• Increased coverage of the Act
Background…
Powers vested with MCA – Delegated Legislation
Power to exempt class or classes of Complete / partial exemption to class /
companies from the provisions of this classes of companies
Act (S.462)
Proposed notification to be approved
by both Houses of Parliament
Power to amend schedules (S.467)
Approval by both Houses of Parliament
required after notification
Power to make rules (S.469)
Approval by both Houses of Parliament
required after notification
Power to remove difficulties (S.470)
Provisions necessary or expedient to
remove difficulties
• 5 years from the commencement of
section 1 of the 2013 Act
Background…
The Ministry of Corporate Affairs (MCA) has laid down a draft notification
under sec.462 containing exemptions/ modifications for Private Companies
before the Parliament, the following are the proposed modifications, inter
alia:
Relevant Provision
Modification
Sec.185 – Loans to Directors
Shall not apply to Private Companies:
• Which have borrowings from banks or financial
institutions or any bodies corporate not more
than twice of their paid up share capital or ` 50
crore, whichever is lower
• In whose share capital no other body corporate
has invested any money
• Not defaulted in repayment of borrowings
Proviso to Sec.188(1) – Related Party Transactions
Shall not apply
Sec. 196(4) and Sec.196(5) – Appointment of MD, Shall not apply
WTD or manager
Sec.141(3)(g) - Auditor holding appointment in Shall not apply in respect of appointment by private
more than 20 companies
companies
Sec.180 - Restriction on Powers of the Board
Shall not apply to private companies having 50 or
less number of members
KEY
DEFINITIONS
Key Definitions
“Financial Statement” in relation to a company, includes—
(i) a balance sheet as at the end of the financial year
(ii) a profit and loss account, or in the case of a company carrying on any
activity not for profit, an income and expenditure account for the financial
year
(iii) cash flow statement for the financial year
(iv) a statement of changes in equity, if applicable and
(v) any explanatory note annexed to, or forming part of, any document
referred to in sub-clause (i) to sub-clause (iv):
Provided that the financial statement, with respect to One Person Company,
small company and dormant company, may not include the cash flow
statement;
Sec. 2(40)
Key Definitions…
Sec. 2(41)
“Financial Year”, in relation to any company or body corporate, means the
period ending on the 31st day of March every year, and where it has been
incorporated on or after the 1st day of January of a year, the period ending on
the 31st day of March of the following year, in respect whereof financial
statement of the company or body corporate is made up:
Provided that on an application made by a company or body corporate, which
is a holding company or a subsidiary of a company incorporated outside
India and is required to follow a different financial year for consolidation of
its accounts outside India, the Tribunal may, if it is satisfied, allow any period
as its financial year, whether or not that period is a year:
Provided further that a company or body corporate, existing on the
commencement of this Act, shall, within a period of two years from such
commencement, align its financial year as per the provisions of this clause
• As this provision is effective from April 1, 2014, companies shall align their
financial years as per this provision within April 1, 2016.
• The exemption has not been provided for an associate or joint venture.
Key Definitions…
“Foreign Company” means any company or body corporate incorporated
outside India which—
(a) has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.
Sec. 2(42)
Key Definitions…
“Electronic mode”, means carrying out electronically based, whether main
server is installed in India or not, including, but not limited to business to business and business to consumer transactions, data
interchange and other digital supply transactions
 offering to accept deposits or inviting deposits or accepting deposits or
subscriptions in securities, in India or from citizens of India
 financial settlements, web based marketing, advisory and transactional
services, database services and products, supply chain management
 online services such as telemarketing, telecommuting, telemedicine,
education and information research and
 all related data communication services,
whether conducted by e-mail, mobile devices, social media, cloud
computing, document management, voice or data transmission or otherwise.
Rule 2(1)(h) of Companies (Specification of Definition Details) Rules, 2014
Key Definitions…
Sec. 2(43)
“Free Reserves” means such reserves which, as per the latest audited
balance sheet of a company, are available for distribution as dividend:
Provided that—
(i) any amount representing unrealised gains, notional gains or revaluation
of assets, whether shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognised in
equity, including surplus in profit and loss account on measurement of the
asset or the liability at fair value,
shall not be treated as free reserves
Key Points
 Definition excludes securities premium
 Instances of provisions where the definition of free reserves is referred:
•
•
•
•
•
Sec.63 for Issue of Bonus Shares
Sec.68 for purchase of its own shares or specified securities by companies
Sec.123 for declaration of dividend.
Sec.180(1)(c) restriction on powers of the Board
Sec.186 Loans and investment by a company
Key Definitions…
“Net Worth” means the aggregate value of the paid-up share capital and all
reserves created out of the profits and securities premium account, after
deducting the aggregate value of the accumulated losses, deferred
expenditure and miscellaneous expenditure not written off, as per the
audited balance sheet, but does not include reserves created out of
revaluation of assets, write-back of depreciation and amalgamation.
Instances of provisions where the definition of net worth is referred:
 Sec.76(1) relating to Acceptance of deposits by Companies, for
determination of eligible company.
 Sec.135 determining criteria for Corporate Social Responsibility
 Sec.148 where the Central Government shall specify audit of items of
cost in respect of certain Companies.
 Limits for the purposes of approval by Special resolution – Related Party
transactions
Sec. 2(57)
Key Definitions…
Sec. 2(76)
Related party with reference to a company means:
• Director or his relative
• KMP or his relative
• a firm, in which a director, manager or his relative is a partner
• a private company in which a director or manager or his relative is a member or
director
• public company in which a director or manager is a director and holds along
with his relatives, more than 2% of its paid-up share capital
• any body corporate whose Board of Directors, managing director or manager is
accustomed to act in accordance with the advice, directions or instructions of a
director or manager (excluding advice given in professional capacity)
• any person on whose advice, directions or instructions a director or manager is
accustomed to act (excluding advice given in professional capacity)
• any company which is—
– a holding, subsidiary or an associate company of such company or
– a subsidiary of a holding company to which it is also a subsidiary
• a director other than an independent director or KMP of the holding company or his
relative with reference to a company, shall be deemed to be a related party.
Key Definitions…
‘‘Relative’’, with reference to any person, means any one who is related to
another, if—
• they are members of a Hindu Undivided Family
• they are husband and wife or
• one person is related to the other in such manner as may be prescribed
–
–
–
–
–
–
–
–
Father (including Step Father)
Mother (including Step Mother)
Son (including Step Son)
Son’s wife
Daughter
Daughter’s husband
Brother (including Step Brother)
Sister (including Step Sister)
Sec. 2(77)
HOLDING
&
SUBSIDIARY
COMPANIES
Holding & Subsidiary Companies
“Holding company”, in relation to one or more other companies, means a
company of which such companies are subsidiary companies (Sec. 2(46))
A Company shall make investments through not more than two layers of
investment companies. (Sec.186 (1))
The provisions of this section shall not effect the following:
 a company from acquiring any other company incorporated in a country
outside India if such other company has investment subsidiaries beyond
two layers as per the laws of such country
 a subsidiary company from having any investment subsidiary for the
purposes of meeting the requirements under any law or under any rule
or regulation framed under any law for the time being in force
Holding & Subsidiary Companies…
Subsidiary Company
“Subsidiary Company” or “Subsidiary”, in relation to any other company
(holding company), means a company in which the holding company—
(i) controls the composition of the Board of Directors or
(ii) exercises or controls more than one-half of the total share capital either at
its own or together with one or more of its subsidiary companies
Provided that such class or classes of holding companies as may be prescribed
shall not have layers of subsidiaries beyond such numbers as may be
prescribed. (This proviso is not notified)
As per the Companies (Specification of definitions details) Rules, 2014,
Total share capital = paid up equity share capital + convertible preference
share capital.
Sec. 2(87)
Holding & Subsidiary Companies…
Subsidiary Company…
Explanation—For the purposes of this clause,
(a) a company shall be deemed to be a subsidiary company of the holding
company even if the control referred to above is of another subsidiary
company of the holding company
(b) the composition of a company’s Board of Directors shall be deemed to be
controlled by another company if that other company by exercise of some
power exercisable by it at its discretion can appoint or remove all or a
majority of the directors
(c) the expression “company” includes any body corporate
(d) “layer” in relation to a holding company means its subsidiary or
subsidiaries
Sec. 2(87)
Holding & Subsidiary Companies…
As per Sec 2(27) of the Act, “control”
“shall include the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting
individually or in concert, directly or indirectly, including by virtue of their
shareholding or management rights or shareholders agreements or voting
agreements or in any other manner.”
As per AS-21, Control is defined as:
(a) the ownership, directly or indirectly through subsidiary(ies), of more than
one-half of the voting power of an enterprise or
(b) control of the composition of the board of directors in the case of a
company or of the composition of the corresponding governing body in case of
any other enterprise so as to obtain economic benefits from its activities.
BOOKS OF
ACCOUNTS
Books of Accounts
• Company shall prepare and keep at its registered office books of account
and other relevant books and papers and financial statement for every
financial year which give a true and fair view of the state of the affairs of
the company.
• Such books shall be kept on accrual basis and according to the double entry
system of accounting
• All or any of the books of account aforesaid and other relevant papers may
be kept at such other place in India as the Board of Directors may decide
and where such a decision is taken, the company shall, within 7 days
thereof, file with the Registrar a notice in writing giving the full address of
that other place
• Company may keep such books of account or other relevant papers in
electronic mode in such manner as may be prescribed.
Sec. 128
Books of Accounts…
• The books of account and other relevant books and papers maintained in
electronic mode shall remain accessible in India so as to be usable for
subsequent reference.
• The books of account and other relevant books and papers shall be retained
completely in the format in which they were originally generated, sent or
received, or in a format which shall present accurately the information
generated, sent or received and the information contained in the electronic
records shall remain complete and unaltered.
• The information received from branch offices shall not be altered and shall
be kept in a manner where it shall depict what was originally received from
the branches.
• The information in the electronic record of the document shall be capable of
being displayed in a legible form.
Rule 3 of Companies (Accounts) Rules, 2014
Books of Accounts…
• There shall be a proper system for storage, retrieval, display or printout of
the electronic records as the Audit Committee, if any, or the Board may
deem appropriate and such records shall not be disposed of or rendered
unusable, unless permitted by law.
• The back-up of the books of account and other books and papers of the
company maintained in electronic mode, including at a place outside India,
if any, shall be kept in servers physically located in India on a periodic
basis.
• The company shall intimate to the Registrar on an annual basis at the time
of filing of financial statement– the name of the service provider
– the internet protocol address of service provider
– the location of the service provider (wherever applicable)
– where the books of account and other books and papers are maintained
on cloud, such address as provided by the service provider.
Rule 3 of Companies (Accounts) Rules, 2014
Books of Accounts…
• If a company has a branch office in India or outside India proper books of
account relating to the transactions effected at the branch office shall be
kept at that office and proper summarised returns shall be periodically sent
by the branch office to the company at its registered office.
• The books of account and other books and papers maintained by the
company within India shall be open for inspection at the registered office of
the company or at such other place in India by any director during business
hours, and in the case of financial information, if any, maintained outside
the country, copies of such financial information shall be maintained and
produced for inspection by any director subject to such conditions as may
be prescribed.
• Inspection in respect of any subsidiary of the company shall be done only
by the person authorised in this behalf by a resolution of the Board of
Directors.
Sec. 128
Books of Accounts…
• The books of account of every company relating to a period of not less than
8 FY’s immediately preceding a FY, or where the company had been in
existence for a period less than 8 years, in respect of all the preceding years
together with the vouchers relevant to any entry in such books of account
shall be kept in good order.
• If the MD, the WTD in charge of finance, the CFO or any other person of a
company charged by the Board with the duty of complying with the
provisions of this section, contravenes such provisions, such MD, WTD in
charge of finance, CFO or such other person of the company shall be
punishable with imprisonment for a term which may extend to one year or
with fine which shall not be less than ` 50,000 but which may extend to ` 5
lakh or with both.
Sec. 128
SCHEDULE III
Schedule III
 Schedule III of the Companies Act 2013, is the same as Revised Schedule
VI of the Companies Act, 1956 except that it contains general instructions
for preparation of CFS of Company and its subsidiaries, as the same has
been mandated by the new Act.
 If a company is required to prepare CFS, i.e., consolidated balance sheet
and consolidated statement of profit and loss, the company shall mutatis
mutandis follow the requirements of Schedule III.
 In addition, the CFS shall disclose the information as per the requirements
specified in the applicable Accounting Standards including:
– Profit or loss attributable to “minority interest” and to owners of the
parent in the statement of profit and loss shall be presented as allocation
for the period.
– “Minority interests” in the balance sheet within equity shall be presented
separately from the equity of the owners of the parent
Schedule III…
 All subsidiaries, associates and joint ventures (whether Indian or foreign)
will be covered under CFS.
 An entity shall disclose the list of subsidiaries or associates or joint ventures
which have not been consolidated in the CFS along with the reasons of not
consolidating.
 Schedule III of the Act, does not have format for the Cash Flow Statement
and Statement for Changes in Equity.
DEPRECIATION
Depreciation
Depreciation on tangible fixed assets based on estimated useful life
 From a Rates regime to Useful Lives
 Useful life of an asset is the period over which the asset is expected to be
available for use by the entity or the number of production or similar units
expected to be obtained from the asset
Depreciation of plant & machinery based on industry category. Specified
industries:
Production and exhibition of motion picture films
Steel
Glass manufacturing
Non-ferrous metals
Mines & quarries
Medical & surgical operations
Telecommunication
Pharmaceuticals and Chemicals
Exploration, production and refining of oil & gas
Civil construction
Generation, transmission and distribution of power
Salt works
Schedule II
Depreciation…
 Componentisation of assets mandated
• Separate capitalisation and depreciation of a part of an asset if its cost is
significant to the total cost of the asset and its estimated life is different
from the remaining asset.
 Where a company uses a useful life other than prescribed by
Schedule II or residual value other than 5% of the original cost of the asset,
justification for the difference shall be disclosed in financial statement.
 Depreciation / amortisation of intangible assets should be as per the
Accounting Standards.
• Intangible assets (toll roads) can continue to be amortised based on the
expected revenue from operating such assets.
Schedule II
Depreciation…
Nature of asset - illustrative
The Companies Act,
2013
Useful
Deemed
Life
Rate
The
Companies
Act, 1956
Increase /
(Decrease)
%
Change
General Plant and Machinery other
than continuous process plant
Continuous process plant *
General furniture and fittings
Office equipment
Desktops, laptops, etc.
15
25
10
5
3
6.33%
3.80%
9.50%
19.00%
31.67%
4.75%
5.28%
6.33%
4.75%
16.21%
1.58%
-1.48%
3.17%
14.25%
15.46%
33.33%
-28.03%
50.08%
300.00%
95.35%
Electrical Installations and
Equipment
10
9.50%
4.75%
4.75%
100.00%
*Useful life of CPP have been increased from 18 years to 25 years.
Schedule II
Depreciation…
Transitional Provisions
 Carrying value (net of residual value) to be depreciated over the remaining
revised useful life of the asset.
 If the remaining revised useful life is nil, the carrying value net of residual
value should be recognised in the opening balance of retained earnings.
 Incremental depreciation relating to surplus on revaluation of assets would
need to be charged to the Statement of Profit & Loss and will impact
Profits.
• Depreciable amount is the cost of an asset or other amount substituted
for its cost less residual value.
Schedule II
ACCOUNTING
STANDARDS
Accounting Standards
• The Central Government may prescribe the standards of accounting or any
addendum thereto, as recommended by the ICAI, constituted under section
3 of the Chartered Accountants Act, 1949, in consultation with and after
examination of the recommendations made by the NFRA.
Transitional provisions with respect to Accounting Standards (Rule 7 of
Companies (Accounts) Rules, 2014• The standards of accounting as specified under the Companies Act, 1956
shall be deemed to be the accounting standards until accounting standards
are specified by the Central Government under section 133.
• Till the NFRA is constituted under section 132 of the Act, the Central
Government 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 National Advisory
Committee on Accounting Standards constituted under section 210A of the
Companies Act, 1956.
Sec. 133
FINANCIAL STATEMENTS
Financial Statements
• The financial statements shall give a true and fair view of the state of affairs
of the company or companies, 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.
• The items contained in such financial statements shall be in accordance with
the accounting standards.
• These provisions shall not apply to any insurance or banking company or
any company engaged in the generation or supply of electricity, or to any
other class of company for which a form of financial statement has been
specified in or under the Act governing such class of company:
Sec. 129
Financial Statements…
• At every AGM of a company, the Board of Directors of the company shall
lay before such meeting financial statements for the financial year.
• Where a company has one or more subsidiaries, it shall, in addition to
standalone financial statements prepare a consolidated financial statement
(CFS) of the company and of all the subsidiaries in the same form and
manner as that of its own which shall also be laid before the AGM of the
company along with the laying of its financial statement.
• Subsidiary shall include associate company and joint venture.
• Company shall also attach along with its financial statement, a separate
statement containing the salient features of the financial statement of its
subsidiary or subsidiaries in Form AOC I (Rule 5 of Companies
(Accounts) Rules, 2014)
Sec. 129
Financial Statements…
• As per the proviso to Sec. 129(3), the Central Government may provide for
the consolidation of accounts of companies in such manner as may be
prescribed.
• As per Rule 6 of Companies (Accounts) Rules, 2014 Manner of
consolidation of accounts.– The CFS of the company shall be made in accordance with the
provisions of Schedule III of the Act and the applicable accounting
standards.
– In case of a company covered under Sec. 129(3) which is not required
to prepare CFS under the Accounting Standards, it shall be sufficient if
the company complies with provisions on CFS provided in Schedule III
of the Act.
As per Companies (Meetings of Board and its Powers) Second Amendment
Rules, 2014 consideration of financial statements, including CFS, if any, shall
not be dealt with in a meeting held through video conferencing.
Financial Statements…
• The provisions of this Act applicable to the preparation, adoption and audit
of the financial statements of a holding company shall, mutatis mutandis,
apply to the CFS.
• Where the financial statements of a company do not comply with the
accounting standards, the company shall disclose in its financial statements,
the deviation from the accounting standards, the reasons for such deviation
and the financial effects, if any, arising out of such deviation.
• The Central Government may, on its own or on an application by a class or
classes of companies, by notification, exempt any class or classes of
companies from complying with any of the requirements of this section or
the rules made thereunder, if it is considered necessary to grant such
exemption in the public interest and any such exemption may be granted
either unconditionally or subject to such conditions as may be specified in
the notification
Sec. 129
Financial Statements…
• If a company contravenes the provisions of this section, the MD the WTD
in charge of finance, the CFO or any other person charged by the Board
with the duty of complying with the requirements of this section and in the
absence of any of the officers mentioned above, all the directors shall be
punishable with imprisonment for a term which may extend to one year or
with fine which shall not be less than ` 50,000 but which may extend to ` 5
lakhs, or with both.
Sec. 129
Financial Statements…
Consolidated Financial Statements – Key Points
 Companies having one or more subsidiaries, shall also prepare CFS and the
same shall be laid before the AGM of the Company along with standalone
financial statements.
 A separate statement containing salient features of the financial statement of
subsidiaries to be attached to the holding company’s financial statements. –
Form AOC - I
 ‘Subsidiary’ includes ‘associate company’ and ‘joint venture’
 Associate means a company other than a subsidiary company and joint
venture company, in which the other company has a significant influence.
 Significant influence means control of at least 20% of total share capital or
of business decisions under an agreement.
 In case of a company covered u/s 129(3), which is not required to prepare
CFS under the Accounting Standards, it shall be sufficient if the company
complies with provisions on CFS provided in Schedule III of the Act.
Financial Statements…
Form AOC-I
Part A – Subsidiaries
Information in respect of each subsidiary to be presented with amounts in `
1. Sl. No.
2. Name of the subsidiary
3. Reporting period for the subsidiary
concerned, if different from the holding
company’s reporting period
4. Reporting currency and Exchange rate as
on the last date of the relevant Financial
year in the case of foreign subsidiaries.
5. Share capital
6. Reserves & surplus
7. Total assets
8. Total Liabilities
9. Investments
10. Turnover
11. Profit before taxation
12. Provision for taxation
13. Profit after taxation
14. Proposed Dividend
15. % of shareholding
1. Names of subsidiaries which are yet to commence operations
2. Names of subsidiaries which have been liquidated or sold during the year.
Financial Statements…
Form AOC-I
Part B – Associates and Joint Ventures
Name of Associates/Joint Ventures
Name 1
Name 2
1. Latest audited Balance Sheet Date
2. Shares of Associate/Joint Ventures held by the company on the year end
No.
Amount of Investment in Associates/ Joint Venture
Extend of Holding %
3. Description of how there is significant influence
4. Reason why the associate/joint venture is not consolidated
5. Net worth attributable to Shareholding as per latest audited Balance Sheet
6. Profit / Loss for the year
i. Considered in Consolidation
ii. Not Considered in Consolidation
1. Names of associates or joint ventures which are yet to commence operations
2. Names of associates or joint ventures which have been liquidated or sold during the year.
Financial Statement - Signing
 The financial statement, including CFS, if any, shall be approved by the
Board of Directors before they are 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, or in the case of a One Person Company, only by
one director, for submission to the auditor for his report thereon.
 The auditors’ report shall be attached to every financial statement.
Sec. 134(1)
Financial Statement – Circulation of Accounts
 A listed company shall also place its financial statements including CFS, if
any, and all other documents required to be attached thereto, on its website.
As per the Rule 11, of Companies (Accounts) Rules, 2014, Manner of
circulation of financial statements in certain cases.• In case of all listed companies and such public companies which have a net
worth of more than ` 1 crore and turnover of more than ` 10 crore rupees,
the financial statements may be sent
– by electronic mode to such members whose shareholding is in
dematerialised format and whose email Ids are registered with
Depository for communication purposes;
– where Shareholding is held otherwise than by dematerialised format, to
such members who have positively consented in writing for receiving by
electronic mode; and
– by dispatch of physical copies through any recognised mode of delivery
as specified under section 20 of the Act, in all other cases.
Financial Statement – Copy to be filed
Copy of Financial Statement to be Filed with Registrar
 A copy of the financial statements, including CFS, if any, along with all the
documents which are required to be or attached to such financial statements
under this Act, duly adopted at the AGM of the company, shall be filed with
the Registrar within 30 days of the date of AGM in Form AOC-4 - Rule
12(1).
 Where the financial statements are not adopted at the AGM or adjourned
AGM, such unadopted financial statements along with the required
documents shall be filed with the Registrar within 30 days of the date of
AGM and the Registrar shall take them in his records as provisional till the
financial statements are filed with him after their adoption in the adjourned
AGM for that purpose.
 The financial statements adopted in the adjourned AGM shall be filed with
the Registrar within 30 days of the date of such adjourned AGM.
Sec. 137
Financial Statement - Copy to be filed…
Copy of Financial Statement to be Filed with Registrar…
• Along with its financial statements to be filed with the Registrar, attach the
accounts of its subsidiary or subsidiaries which have been incorporated
outside India and which have not established their place of business in India.
• Where the AGM of a company for any year has not been held, the financial
statements along with the documents required to be attached, duly signed
along with the statement of facts and reasons for not holding the AGM shall
be filed with the Registrar within 30 days of the last date before which the
AGM should have been held.
Sec. 137
REVISION OF
FINANCIAL
STATEMENTS
Revision of Financial Statements
Mandatory reopening or recasting (Sec.130)
 A Company can reopen its books of accounts and recast its financial
statements if:
• The relevant accounts were prepared in fraudulent manner or
• Affairs of the Company were mismanaged during the relevant period
casting a doubt on the reliability of the financial statements
 On an application by Central Government, IT authorities, SEBI or any
regulatory body and an order being made by Court or Tribunal.
Voluntary Revision (Sec.131)
 The Company may, if it appears to the directors that the Financial
Statements or Board’s Report are not in compliance with the provisions of
the Act, may prepare revised financial statement or a revised Board’s Report
with the approval of Tribunal.
Not Notified
Revision of Financial Statements…
Key Points
• Revision / Reopening of financial statements for a period earlier than
immediately preceding financial year may impact financial statements for
subsequent years also.
• Presently, as per circular issued by SEBI in August 2012, SEBI is
empowered to require revision of financial statements, if the audit report is
qualified.
• Complications may arise when revision/ reopening pertains to companies
which have already amalgamated / amalgamation is pending Court’s
approval.
• Detailed process for revision, including involvement of current and
previous auditors , may lead to frivolous litigations.
• May require current auditor to re-audit entire financial statements for one or
more previous periods.
• Revision / reopening might have an impact on taxation as well.
BOARD’S REPORT
Board’s Report
The report by Board of Directors of a Company which is laid before a
company in general meeting shall include:
• Extract of the annual return
• Number of meetings of the Board
• Directors’ Responsibility Statement
• Statement on declaration given by independent directors under Sec.149(6)
• In case of a company covered under Sec.178(1), company’s policy on
directors’ appointment and remuneration including criteria for determining
qualifications, positive attributes, independence of a director and other
matters provided under Sec. 178(3).
• explanations or comments by the Board on every qualification, reservation
or adverse remark or disclaimer made
– by the auditor in his report and
– by the company secretary in practice in his secretarial audit report
• particulars of loans, guarantees or investments under sec.186
Sec. 134
Board’s Report…
• The state of the company’s affairs
• The amounts, if any, which it proposes to carry to any reserves
• The amount, if any, which it recommends should be paid by way of
dividend
• Material changes and commitments, if any, affecting the financial position
of the company which have occurred between the end of the financial year
of the company to which the financial statements relate and the date of the
report
• Conservation of energy, technology absorption, foreign exchange earnings
and outgo.
• Statement indicating development and implementation of a risk
management policy for the company including identification therein of
elements of risk, if any, which in the opinion of the Board may threaten the
existence of the company
• Details about the policy developed and implemented by the company on
corporate social responsibility initiatives taken during the year Sec. 134
Board’s Report…
• In case of a listed company and every other public company having such
paid-up share capital of ` 25 crore or more, a statement indicating the
manner in which formal annual evaluation has been made by the Board of
its own performance and that of its committees and individual directors.
• Report on the performance and financial position of each of the
subsidiaries, associates and joint venture companies included in the
consolidated financial statement is presented.
• Particulars of contracts or arrangements with related parties referred to in
sec.188(1) in the Form AOC-2.
• The financial summary or highlights
• Change in the nature of business, if any
• Details of directors or key managerial personnel who were appointed or
have resigned during the year
• Names of companies which have become or ceased to be its Subsidiaries,
joint ventures or associate companies during the year
Board’s Report…
• Details of significant and material orders passed by the regulators or courts
or tribunals impacting the going concern status and company’s operations in
future
• Details in respect of adequacy of internal financial controls with reference
to the Financial Statements.
• Details relating to deposits, covered under Chapter V of the Act,– accepted during the year
– remained unpaid or unclaimed as at the end of the year;
– whether there has been any default in repayment of deposits or payment
of interest thereon during the year and if so, number of such cases and
the total amount involved• at the beginning of the year
• maximum during the year
• at the end of the year
• Details of deposits which are not in compliance with the requirements of
Chapter V of the Act
Director’s Responsibility Statement
• In the preparation of the annual accounts, the applicable accounting
standards had been followed along with proper explanation relating to
material departures
• 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 of the
company at the end of the financial year and of the profit and loss of the
company for that period
• 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
• The directors had prepared the annual accounts on a going concern basis.
• 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
Sec. 134(5)
Director’s Responsibility Statement…
Explanation.—For the purposes of this clause, the term “internal financial
controls” means the policies and procedures adopted by the company for
ensuring the orderly and efficient conduct of its business, including adherence
to company’s policies, the safeguarding of its assets, the prevention and
detection of frauds and errors, the accuracy and completeness of the
accounting records, and the timely preparation of reliable financial
information;
• 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.
Sec. 134(5)
AUDIT AND
AUDITORS
Audit and Auditors
NFRA
AUDITOR
APPOINTMENT
SCOPE OF SERVICES
ELIGIBILITY &
QUALIFICATIONS
REPORTING
REQUIREMENTS
POWERS
PENALITIES FOR
CONTRAVENTION
NATIONAL FINANCIAL
REPORTING AUTHORITY
Not Notified
National Financial Reporting Authority
• NFRA to be constituted by Central Government (CG) to provide for
dealing with matters relating to accounting and auditing policies and
standards to be followed by companies and their auditors.
• The Chairperson and full time members of NFRA shall not be associated
with any audit firm (including related consultancy firms) during the course
of their appointment and 2 years thereafter.
• Functions of NFRA are as below:
• Make recommendations to CG on the formulation of accounting and
auditing policies and standards
• Monitor and enforce compliance with accounting and auditing
standards
• Oversee the quality of service of the professions and suggest measures
required for improvement in quality of services and such other related
matters as may be prescribed;
• Perform other prescribed functions in relation to above as may be
prescribed.
Sec. 129
Not Notified
National Financial Reporting Authority…
• Powers of NFRA include:
• Investigate into the matters of professional or other misconduct committed by
member or firm of CA.
• Powers as are vested in a civil court under the Code of Civil Procedure, 1908
while trying a suit.
• Where professional or other misconduct is proved, NFRA has the power to
make order for imposing monetary penalty or debarring the member or the firm
from engaging himself or itself from practice as member of the institute for a
minimum period of 6 months or for such higher period not exceeding 10 years.
• Any person aggrieved by the order of NFRA can prefer an appeal to NFRAA.
• Function of NFRA as per Draft Rules – Standard Setting, Monitoring,
Compliance Review and Overseeing Quality of Service, Enforcement and
Investigation
• It has he power to investigate, suo moto or on reference made by Central
Government in matters of professional or other misconduct by CA or firm. No
other institute or body shall initiate or continue any proceedings in matters where
NFRA has initiated an investigation
Sec. 129
National Financial Reporting Authority…
• For monitoring compliance with Accounting Standards by Companies, the
Committee on Accounting Standards shall conduct scrutiny of financial
statements of such class of companies and in such manner as may be
decided by the Committee or the Authority.
• For monitoring compliance with Auditing Standards, the Committee on
Auditing Standards shall monitor the compliance of auditors including
individual auditors, audit firms and audit LLPs, with the notified
accounting standards and auditing standards and submit such periodical
report(s) to the Authority as the Authority may specify.
• Class of companies covered for investigation and quality review of audit
– Listed Companies
– Unlisted companies with net worth not less than ` 500 crores or paid up
capital not less than `500 crores or annual turnover not less than ` 1,000
crores as on 31st March of immediately preceding financial year or
– Companies having securities listed outside India
Draft Rules
National Financial Reporting Authority…
• Auditors to be covered under investigation by NFRA
• Auditors or audit firms which conduct the audit of the following
category of companies or their branches (including through the network
or brand to which it belongs), whether “directly or indirectly”, as defined
in Explanation to Sec. 144 of the Act a) audit of 200 companies or more in a year
b) audit of 20 or more listed companies
c) company or companies (including listed company or companies),
having net worth not less than ` 500 crores or paid up capital not less
than ` 500 crores or annual turnover not less than ` 1,000 crores as on
31st March of immediately preceding financial year or
d) company or companies having securities listed outside India
Draft Rules
National Financial Reporting Authority…





Act replaces NACAS with NFRA
Legal sanctity for Auditing Standards
Is NFRA conceptually similar to PCAOB??
Quasi-judicial powers to ensure independent oversight over CA’s
NFRA can take action against those working in Companies as well as
Auditors
AUDIT & AUDITORS
APPOINTMENT
OF AUDITOR
Appointment of Auditors
• Every company shall, at the first AGM, appoint an individual or a firm as
an auditor who shall hold office from the conclusion of that meeting till
the conclusion of its sixth AGM and thereafter till the conclusion of every
sixth meeting.
• Before the appointment is made, the written consent of auditor shall be
obtained.
• A certificate shall also be obtained, that the appointment , if made , shall
be in accordance with the conditions and that the auditor satisfies the
criteria provided in Section 141.
• The company shall inform the auditor of his appointment and file a notice
with the Registrar within 15 days of the meeting in which the auditor is
appointed.
Sec. 139
Appointment of Auditors…
Conditions for Appointment:
The auditor appointed shall submit a certificate that:
 The individual or the firm, as the case may be, is eligible for appointment
and is not disqualified for appointment under the Act, the Chartered
Accountants Act, 1949 and the rules or regulations made thereunder
 Proposed appointment is as per the term provided under the Act.
 Proposed appointment is within the limits laid down by or under the
authority of the Act.
 List of proceedings against the 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
The notice of appointment to the Registrar under the proviso to Section
139(1) shall be given by the company in Form ADT-1
Companies (Audit and Auditors) Rules, 2014
Appointment of Auditors…
Rotation of Auditors:
• A listed company or a company belonging to such class or classes of
companies as may be prescribed, shall not appoint or re-appoint—
(a) an individual as auditor for more than one term of 5 consecutive years
and
(b) an audit firm (including an LLP) as auditor for more than two terms
of 2 consecutive years.
• Provided that
– an individual auditor shall not be eligible for re-appointment as
auditor in the same company for 5 years from the completion of his
term.
– an audit firm shall not be eligible for re-appointment as auditor in the
same company for 5 years from the completion of such term.
Sec.139
Appointment of Auditors…
Rotation of Auditors…
• Further as on the date of appointment, an audit firm having a common
partner or partners in the other audit firm, whose tenure has expired in a
company (in the) immediately preceding financial year, shall not be
appointed as auditor of the same company for a period of 5 years.
• The Central Government may prescribe the manner in which the
companies will rotate their auditors.
Sec.139
Appointment of Auditors…
Rotation of Auditors…
The class of companies for the purpose of rotation, shall mean the following
classes of companies excluding one person companies and small companies:
 Listed Companies
 Unlisted Public Companies - Paid up Share Capital of ` 10 crore or more
 Private Limited Companies - Paid up Share Capital of ` 20 crore or more
 Companies having paid up share capital of below threshold limit
mentioned
above, but having public borrowings from financial
institutions, banks or public deposits of ` 50 crores or more
Companies (Audit and Auditors) Rules, 2014
Appointment of Auditors…
Manner of Rotation of Auditors
 The period for which the individual or the firm has held office as auditor prior
to the commencement of the Act shall be taken into account for calculating the
period of 5 consecutive years or 10 consecutive years, as the case may be.
(retrospective)
 The incoming auditor or audit firm shall not be eligible if such auditor or audit
firm is associated with the outgoing auditor or audit firm under the same
network of audit firms.
 “Same Network” includes the firms operating or functioning, hitherto or in
future, under the same brand name, trade name or common control.
 A break in the term for a continuous period of five years shall be considered as
fulfilling the requirement of rotation.
 A partner, who is in charge of an audit firm and also certifies the financial
statements of the company, retires from the said firm and joins another firm of
chartered accountants, such other firm shall also be ineligible to be appointed
for a period of 5 years.
 In the case of joint auditors, the company may follow the rotation of auditors
in such a manner that both or all of the joint auditors, as the case may be, do
not complete their term in the same year. Companies (Audit and Auditors) Rules, 2014
Appointment of Auditors…
Manner and Procedure for Selection and Appointment:
 The Audit Committee, where constituted, or the Board in other cases, shall
take into consideration the qualifications and experience of the individual
or the firm proposed to be considered for appointment as auditor and
whether such qualifications and experience are commensurate with the size
and requirements of the company.
 The Audit Committee or the Board, as the case may be, may call for such
other information from the proposed auditor as it may deem fit.
 The Audit Committee or the Board, as the case may be, shall have regard to
any order or pending proceeding relating to professional matters of conduct
against the proposed auditor before the ICAI or any competent authority or
any Court.
 The Audit Committee, where constituted, shall recommend the name of an
individual or a firm as auditor to the Board for consideration and in other
cases, the Board shall consider and recommend an individual or a firm as
auditor to the members in the annual general meeting (AGM) for
appointment.
Companies (Audit and Auditors) Rules, 2014
Appointment of Auditors…
Manner and Procedure for Selection and Appointment…:
 If the Board agrees with the recommendation of the Audit Committee, it
shall further recommend the appointment of an individual or a firm as
auditor to the members in the AGM.
 If the Board disagrees with the recommendation of the Audit Committee, it
shall refer back the recommendation to the committee for reconsideration
citing reasons for such disagreement.
 If the Audit Committee does not reconsider its original recommendation,
the Board shall record the reasons for the same and send its own
recommendation for consideration of members.
 The auditor so appointed in the AGM shall hold office from conclusion of
that meeting to conclusion of sixth AGM, with the meeting wherein such
appointment has been made being counted as the first meeting.
 Such appointment shall be subject to ratification every year until
conclusion of sixth AGM by way of passing ordinary resolution.
 If appointment is not ratified by members of the Company, the Board may
appoint another individual or firm as auditor by following the procedure
laid down in the Act.
Companies (Audit and Auditors) Rules, 2014
Appointment of Auditors…
Government Companies – Sec.139(5)
• In case of a Government company or any other company owned or
controlled, directly or indirectly, by
– the Central Government(CG) or by any State Government(s) (SG) , or
– partly by the CG and partly by one or more SGs,
the Comptroller and Auditor-General of India (CAG) shall, in respect of a
financial year, appoint an auditor within a period of 180 days from the
commencement of the financial year, who shall hold office till the
conclusion of the AGM.
Section 224A of the 1956 Act Omitted
• Requirement of special resolution for appointment of auditor in certain cases
dropped.
• In the 1956 Act, if 25% or more of the subscribed capital of a company is held
by a public financial institution or a Government company or Central
Government or any State Government or Insurance Companies, the
appointment or re-appointment at each AGM of an auditor or auditors shall be
made by a special resolution.
Appointment of Auditors…
• In case deemed Government companies (ownership or control lies with two or
more Government companies or corporations as referred to in Sec.619B of
Companies Act, 1956), the appointment of auditor shall be through CAG and
such companies are covered u/s 139(5) and 139(7).
• The words ‘any other company owned or controlled, directly or indirectly…
by the Central Government and partly by one or more State Governments’ are
to be read with the definition of ‘control’ in Sec.2(27) of the Act. Thus
documents like articles of association and shareholders agreements etc
envisaging control are to be taken into account while deciding whether an
individual company is covered u/s 139(5) and 139(7).
• The responsibility of intimating to CAG, about incorporation of a company
subject to audit by an auditor to be appointed by the CAG, primarily rests with
company concerned. The concerned company shall intimate to the CAG about
its incorporation along with the name, location of registered office, capital
structure of such company immediately on its incorporation.
• It is also incumbent on such a company to share such intimation to the relevant
Government so that such Government may also send a suitable request to the
CAG
MCA Circular
Appointment of Auditors…
First Auditors
• The First Auditor of a Non-Government company – Sec.139(6):
– shall be appointed by the Board of Directors within 30 days from the date
of registration of the company and
– in the case of failure of the Board to appoint the auditor, it shall inform the
members of the company, who shall within (next) 90 days at an
extraordinary general meeting (EGM) appoint such auditor and such
auditor shall hold office till the conclusion of the first AGM.
• The First Auditor of Government Companies – Sec.139(7):
– shall be appointed by the CAG within 60 days from the date of registration of
the company and
– in case the CAG does not appoint such auditor within the said period, the
Board of Directors of the company shall appoint such auditor within the next
30 days and
– in the case of failure of the Board to appoint such auditor within the next 30
days, it shall inform the members of the company who shall appoint such
auditor within (next) 60 days at an EGM, who shall hold office till the
conclusion of the first AGM.
Appointment of Auditors…
Casual Vacancy
• In the case of a company other than a company whose accounts are subject
to audit by an auditor appointed by the CAG,
– to 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 AGM.
• In the case of a company whose accounts are subject to audit by an auditor
appointed by the CAG,
– to be filled by the CAG within 30 days,
– but if the CAG does not fill the vacancy within the said period, the
Board of Directors shall fill the vacancy within the next 30 days
Sec.139(8)
Appointment of Auditors…
Re-appointment of Auditor
• A retiring auditor may be re-appointed at an AGM, 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 and
(c) a special resolution has not been passed at that meeting appointing
some other auditor or providing expressly that he shall not be reappointed.
Failure to Appoint Auditors at AGM
Where at any AGM, no auditor is appointed or re-appointed, the existing auditor
shall continue to be the auditor of the company.
• As per the Companies Act, 1956, where at an AGM no auditors are appointed
or re-appointed, the Central Government may appoint a person to fill the
vacancy.
Sec.139(9) and Sec.139(10)
Appointment of Auditors…
Removal by Company – Sec. 140 (1)
• The auditor may be removed from his office before the expiry of his term, only
by a special resolution and after obtaining the previous approval of the CG in
that behalf.
• Before taking any action for removal, the auditor concerned shall be given a
reasonable opportunity of being heard.
• The application to the Central Government for removal of auditor shall be
made in Form ADT-2.
• The company shall hold the general meeting within 60 days of receipt of
approval of the Central Government for passing the special resolution.
Resignation by Auditor – Sec. 140 (2) & (3)
• The auditor who has resigned from the company shall file within a period of
30 days from the date of resignation, a statement in the prescribed form (Form
ADT-3) with the company and the Registrar and, in the case of Government
Companies with the CAG.
• If the auditor does not comply with the above, he or it shall be punishable with
fine which shall not be less than ` 50,000 but which may extend to ` 5 Lakhs.
Appointment of Auditors…
Remuneration
• The remuneration of the auditors shall be fixed in the general meeting or
in such manner as may be determined therein.
• The Board may fix remuneration of the first auditor appointed by it.
• The remuneration in addition to the audit fees payable include any
expenses incurred by the auditor in connection with the audit and any
facility extended to him.
• It does not include any remuneration paid to him for any other service
rendered by him at the request of the company.
Sec.142
Appointment of Auditors…
Branch Audit
• Where a company has a branch office, the accounts of that office shall be
audited:
– either by the auditor appointed for the company (the company’s
auditor) or
– by any other person qualified for appointment as an auditor of the
company under this Act and appointed as such under sec. 139.
• Where the branch office is situated in a country outside India, the accounts
of the branch office shall be audited:
– either by the company’s auditor or
– by an accountant or by any other person duly qualified to act as an
auditor of the accounts of the branch office in accordance with the laws
of that country.
• The branch auditor shall prepare a report on the accounts of the branch
examined by him and send it to the auditor of the company who shall deal
with it in his report in such manner as he considers necessary.
AUDIT & AUDITORS
ELIGIBILITY &
QUALIFICATIONS
Eligibility & Qualifications
Eligibility and qualifications for appointment:
 Only a Chartered Accountant (CA) shall be eligible to be appointed as
auditor of a Company.
 Incase of a firm where majority of partners practising in India are qualified
for appointment as aforesaid may be appointed by its firm name to be
auditor 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 authorised to act and sign on behalf of the firm.
Sec.141(1) and Sec.141(2)
Disqualifications
S No
Nature
Details
1
Holding of Security
- Rule 10(1)
He himself, his relative or partner hold any security
or interest in the company, its subsidiary, holding or
associate company or subsidiary of such holding
company.
However, the relative may be allowed to hold
security or interest in the company with face value
not exceeding ` 1 Lakh (corrective action shall be
taken within 60 days)
2
Indebtedness/
guarantee / security
- Rule 10(2) & (3)
He himself, his relative or partner is indebted to the
company, its subsidiary, holding or associate
company or subsidiary of such holding company, in
excess of ` 5 Lakh.
A similar disqualification has also been provided in
case of guarantee given or security provided in
connection with indebtedness of third person, with
a limit of ` 1 Lakh
Sec. 141(3) & Companies (Audit and Auditors) Rules, 2014
Disqualifications…
Definition of ‘relative’
Relative with reference to any person, means any one who is related to another,
if:
• Members of a Hindu Undivided Family
• Husband and wife
• Father (including Step Father)
• Mother (including Step Mother)
• Son (including Step Son)
• Son’s wife
• Daughter
• Daughter’s husband
• Brother (including Step Brother)
• Sister (including Step Sister)
Disqualifications…
S No
Nature
Details
3
Business Relationship
- Rule 10(4)
A person or a firm who, whether directly or
indirectly, has business relationship with the
company, or its subsidiary, or its holding or
associate company or subsidiary of such holding
company or associate company of such nature as
may be prescribed.
“Business Relationship” shall be construed as any transaction entered into for a
commercial purpose, except
 Commercial transactions which are in the nature of professional services permitted
to be rendered by an auditor or audit firm under the Act and the Chartered
Accountants Act, 1949 and the rules or the regulations made under those Acts
 Commercial transactions which are in the ordinary course of business of the
company at arm’s length price - like sale of products or services to the auditor, as
customer, in the ordinary course of business, by companies engaged in the business
of telecommunications, airlines, hospitals, hotels and such other similar businesses.
Sec. 141(3) & Companies (Audit and Auditors) Rules, 2014
Disqualifications…
S No
Nature
Details
4
Relative’s
employment
A person, whose relative is director or is in the
employment of the company as a director or key
managerial personnel(KMP),
5
Limit on maximum
Person or partner at the date, holding appointment
number of Companies of 20 companies.
Currently, private companies are included in the
maximum cap of 20 companies.*
6
Fraud
7
Consulting
and Any person whose subsidiary or associate or any
specialised Services
other form of entity engaged on the date of
appointment in services as per Sec. 144
Convicted by a court of an offence involving fraud
and a period of 10 years has not elapsed from the
date of such conviction.
* As per the draft notification issued by MCA, Private Companies are proposed to
be excluded from this limit.
Sec. 141(3) & Companies (Audit and Auditors) Rules, 2014
AUDIT & AUDITORS
POWERS
Powers
Right of Access to Records and Information – Sec.143(1)
• The auditor of a company shall have a right of access at all times to the
books of account and vouchers of the company.
• He 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.
• The auditor of a company which is a holding company shall also have the
right of access to the records of all its subsidiaries in so far as it relates to
the consolidation of its financial statements with that of its subsidiaries.
AUDIT & AUDITORS
REPORTING REQUIREMENTS
Reporting Requirements
Specific Matters to be enquired
(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 members
(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, debentures
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.
Sec.143(1)
Reporting Requirements…
Auditors Report:
• The auditor shall make a report to the members of the company on the
accounts examined by him and on every financial statements 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 thereunder or under any order made under sub-section(11) and
to the best of his information and knowledge, the said accounts, financial
statements give a true and fair view of the state of the company’s affairs as
at the end of its financial year and profit or loss and cash flow for the year
and such other matters as may be prescribed.
• Where any of the matters required to be included in the audit report is
answered in the negative or with a qualification, the report shall state the
reasons therefor.
Sec.143(2)
Reporting Requirements…
Matters required to be stated in the auditor’s Report
(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 and if not, the details thereof and the effect of such
information on the financial statements
(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 by a person other than the company’s auditor has been sent to him
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
Sec.143(3)
Reporting Requirements…
Matters required to be stated in the auditor’s Report…
(e) whether, in his opinion, the financial statements comply with the
(f)
(g)
(h)
(i)
(j)
accounting standards
the observations or comments of the auditors on financial transactions or
matters which have any adverse effect on the functioning of the company
whether any director is disqualified from being appointed as a director
under sub-section (2) of section 164
any qualification, reservation or adverse remark relating to the
maintenance of accounts and other matters connected therewith
whether the company has adequate internal financial controls system in
place and the operating effectiveness of such controls
such other matters as may be prescribed.
Sec.143(3)
Reporting Requirements…
Other Matters to be included in Auditor’s Report
The auditor’s report shall also include their views and comments on the
following matters, namely:(a) whether the company has disclosed the impact, if any, of pending
litigations on its financial position in its financial statement.
(b) whether the company has made provision, as required under any law or
accounting standards, for material foreseeable losses, if any, on long term
contracts including derivative contracts.
(c) whether there has been any delay in transferring amounts, required to be
transferred, to the Investor Education and Protection Fund by the company.
As per MCA circular dated April 4, 2014, the auditor’s report in respect of
financial years, that commence on or after April 1, 2014, the provisions of the
Companies Act, 2013 shall apply. Accordingly, the reporting on the said
matters will be applicable from the financial years ending on or after March
31, 2015.
Companies (Audit and Auditors) Rules, 2014
Reporting Requirements…
Reporting on Frauds – Sec. 143(12) , (13) & (15)
• If an auditor of a company, in the course of the performance of his duties as
auditor, has reason to believe that an offence involving fraud is being or
has been committed against the company by officers or employees of the
company, he shall immediately report the matter to the Central Government
within such time and in such manner as may be prescribed.
• No duty to which an auditor of a company may be subject to shall be
regarded as having been contravened by reason of his reporting the matter
referred to above if it is done in good faith.
• If any auditor, cost accountant or company secretary in practice does not
comply with the above provisions, he shall be punishable with fine which
shall not be less than ` 1 lakh but which may extend to ` 25 lakh.
Reporting Requirements…
Reporting of Frauds by Auditor
 In case the auditor has sufficient reason to believe that an offence involving
fraud, is being or has been committed against the company by officers or
employees of the company, he shall report the matter to the Central
Government immediately but not later than 60 days of his knowledge.
 Auditor shall forward his report to the Board or the Audit Committee, as
the case may be, immediately after he comes to knowledge of the fraud,
seeking their reply or observations within 45 days.
 On receipt of such reply or observations the auditor shall forward his report
and the reply or observations of the Board or the Audit Committee along
with his comments (on such reply or observations of the Board or the Audit
Committee) to the Central Government within 15 days of receipt of such
reply or observations.
Companies (Audit and Auditors) Rules, 2014
Reporting Requirements…
Reporting of Frauds by Auditor…
 In case the auditor fails to get any reply or observations from the Board or
the Audit Committee within the stipulated period of 45 days, he shall
forward his report to the Central Government along with a note containing
the details of his report that was earlier forwarded to the Board or the Audit
Committee for which he failed to receive any reply or observations within
the stipulated time.
 The report shall be sent to the Secretary, Ministry of Corporate Affairs in a
sealed cover by Registered Post with Acknowledgement Due or by Speed
post followed by an e-mail in confirmation of the same.
 The report shall be on the letter-head of the auditor containing postal
address, e-mail address and contact number and be signed by the auditor
with his seal and shall indicate his Membership Number.
The Report shall be in the form of a Statement as per Form ADT – 4
Companies (Audit and Auditors) Rules, 2014
Reporting on Fraud
Reporting on Fraud…
Reporting Requirements…
• Reporting under Sec.143(12) would be applicable only for the financial
year 2014-2015 and onwards. It would not be applicable for audits of
financial statements for the interim periods, such as quarterly or half
yearly audit, as the same are not carried out under Companies Act, 2013.
• Sec.143(12) had come into force in respect of FY beginning on or after
April 1, 2014 and applies to the auditors appointed under the Companies
Act 2013 to audit the financial statements for the year beginning on or
after April 1, 2014. The requirements of these sections and related Rules
would not apply to audits of financial statements of the periods beginning
on or before March 31 2014, even if the audits therefor were actually
carried out and auditor’s report thereon issued on or after 1st April 2014.
• The provisions of Sec.143(3)(i) would apply to the audits of the financial
year beginning on or after April 1, 2014.
ICAI Announcement
Reporting Requirements…
Reporting on Fraud – Few issues




Auditor is responsible for detection of fraud ?
Interpretation of ‘in the course of performance of his duties as auditor’?
What is the meaning of ‘reason to believe’ ?
As the auditor performs, audit procedures on the basis of materiality, can
the same be adopted for reporting to the Central Government?
 If the fraud identified, dates back to earlier years, covered under the
Companies Act, 1956, should such frauds be reported to the Central
Government ?
 Does it cover under its ambit corruption, bribery, money laundering etc. ?
Reporting Requirements…
Sec . 145 : Signing the Audit Report
• The auditor shall the sign the audit report or sign or certify any other
document of the Company.
• Qualifications, observations or comments on financial transactions or
matters which have any adverse effect on the functioning of the company
mentioned in the auditor’s report shall be read before the company in
general meeting and shall be open for inspection by any member of the
company.
Sec. 146 : Auditors to Attend General Meeting
• The auditor shall, unless otherwise exempted by the company, attend
either by himself or through his authorised representative, who shall also
be qualified to be an auditor, any general meeting and shall have right to
be heard at such meeting on any part of the business which concerns him
as the auditor.
Reporting Requirements…
Focus of Audit:
 Detection of Fraud?
 Test of Controls?
 Business Risks?
 Verifying financial and Non-GAAP financial information in all
accompanying documents?
Auditing Techniques:
 Issuing opinions with adequate/sufficient evidence.
 Increased audit scope and level of testing.
 Risk based auditing.
 Systems approach to auditing.
Reporting Requirements…
Reporting Considerations:




Report on Financial Statements.
Report on Other Specific Matters (CARO?)
Report on Propriety/ Other Aspects.
Increase in scope of reporting for auditors– need to report on adequacy of
internal financial control systems and the operating effectiveness of such
controls.
AUDIT & AUDITORS
INTERNAL FINANCIAL CONTROLS
Internal Financial Controls
 Audit Committee is required to evaluate the Company’s internal financial
control (“IFC”) systems – Sec.177 (4)(vii)
 Directors’ Responsibility Statement, in the case of listed companies, to include
a statement that they have laid down internal financial controls to be followed
by the company and that such internal financial controls are adequate and were
operating effectively – Section 134 (5)(e).
 The report of the Board shall also contain the details in respect of adequacy of
internal financial controls with reference to the Financial Statements.
 Auditors required to report on whether the company has adequate internal
financial controls system in place and the operating effectiveness of such
controls – Sec.143(3)(j)
 Standards on Auditing (SA) 700 “Forming an Opinion and Reporting on
Financial Statements” issued by the ICAI, at present, specifically requires the
auditor to state that the auditor’s consideration of the internal controls in the
entity are not for the purpose of expressing an opinion on the effectiveness of
the entity’s internal control – Para 31(b) of SA700.
Internal Financial Controls…
• Meaning of IFC provided in the explanation to Section 134(5)(e):
– For purpose of this section, “internal financial controls” means the policies and
procedures adopted by the company for ensuring the orderly and efficient
conduct of its business, including adherence to company’s policies, the
safeguarding of its assets, the prevention and detection of frauds and errors, the
accuracy and completeness of the accounting records, and the timely
preparation of reliable financial information.
• IFC includes systems in the company for ensuring
• the orderly and efficient conduct of its business
– This matter is proprietary and auditors may not be able to comment on
the same. SA 200 specifically excludes this as an objective of the
auditor.
• the accuracy of the accounting records, and the timely preparation of
reliable financial information
– Auditors apply the concept of materiality in their audits. Audit is
performed to obtain reasonable assurance.
Internal Financial Controls…
• Definition of Internal Control as per the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”)
 Internal control is a process, effected by an entity’s board of directors,
management, and other personnel, designed to provide reasonable
assurance regarding the achievement of objectives relating to operations,
reporting, and compliance.
• Sec 143(3)(i) requires the auditor to report whether the company has
adequate internal financial controls system in place and the operating
effectiveness of such controls.
 Requirement not specific if the reporting should be on IFC as at the
Balance Sheet date or during the year.
• Auditors may be required to report on IFC even in the report on
consolidated financial statements. If so,
 Scope of testing to extend to subsidiaries, JV and significant associates
 Need for oversight on work performed by the component auditors.
AUDIT & AUDITORS
AUDITING
STANDARDS
Auditing Standards
Auditing Standards –Sec. 143(9) & (10)
• Every auditor shall comply with the auditing standards.
• The Central Government may prescribe the standards of auditing or any
addendum thereto, as recommended by the Institute of Chartered
Accountants of India (ICAI), in consultation with and after examination of
the recommendations made by the NFRA.
• Until any auditing standards are notified, any standard or standards of
auditing specified by the ICAI shall be deemed to be the auditing
standards.
Statement to be Included in Auditor’s Report (CARO?)
• The Central Government may, in consultation with the NFRA, by general
or special order, direct, in respect of such class or description of
companies, as may be specified in the order, that the auditor’s report shall
also include a statement on such matters as may be specified therein
AUDIT & AUDITORS
PROSCRIBED
SERVICES
Proscribed Services
Sec. 144 : Auditors not to Render Certain Services
An auditor shall provide to the company only such other services as approved
by the Board of Directors or Audit Committee, as the case may be, but shall
not render any of the following services rendered either directly or indirectly
to the company or its holding company or its subsidiary company
(a) accounting and book keeping services
(b) internal audit
(c) design and implementation of any financial information system
(d) actuarial services
(e) investment advisory services
(f) investment banking services
(g) rendering of outsourced financial services
(h) management services
(i) any other kind of services as may be prescribed under the Rules.
Transition Period : To comply with the restriction before the closure of the
1st FY after the date of commencement of 2013 Act.
Proscribed Services…
Sec. 144 : Auditors not to Render Certain Services…
The term “directly or indirectly” shall include rendering of services by the
auditor:
(i) in case of auditor being an individual, either himself or through his
relative or any other person connected or associated with such individual
or through any other entity, whatsoever, in which such individual has
significant influence or control, or whose name or trade mark or brand is
used by such individual;
(ii) in case of auditor being a firm, either itself or through any of its
partners or through its parent, subsidiary or associate entity or through
any other entity, whatsoever, in which the firm or any partner of the firm
has significant influence or control, or whose name or trade mark or
brand is used by the firm or any of its partners.
AUDIT & AUDITORS
PUNISHMENT FOR
CONTRAVENTION
Punishment for Contravention
• If an auditor of a company contravenes any of the provisions of sec. 139,
sec. 143, sec.144 or sec. 145, the auditor shall be punishable with fine
which shall not be less than `25000 but which may extend to ` 5 Lakh
• If an auditor has contravened such provisions knowingly or wilfully with
the intention to deceive the company or its shareholders or creditors or tax
authorities, he shall be punishable with imprisonment for a term which
may extend to one year and with fine which shall not be less than ` 1 Lakh
but which may extend to ` 25 Lakh
• Where an auditor has been convicted for the above contraventions, he
shall be liable to—
(i) refund the remuneration received by him to the company and
(ii) pay for damages to the company, statutory bodies or authorities or to
any other persons for loss arising out of incorrect or misleading
statements of particulars made in his audit report.
Sec.147
Punishment for Contravention…
• Where, in case of audit of a company being conducted by an audit firm, it
is proved that the partner or partners of the audit firm has or have acted in
a fraudulent manner or abetted or colluded in any fraud by, or in relation
to or by, the company or its directors or officers, the liability, whether civil
or criminal as provided in this Act or in any other law for the time being in
force, for such act shall be of the partner or partners concerned of the audit
firm and of the firm jointly and severally.
Liability to devolve on concerned Partners Only
• In case of criminal liability of any audit firm, the liability other than fine,
shall devolve only on the concerned partner or partners, who acted in a
fraudulent manner or abetted or, as the case may be, colluded in any fraud.
Sec. 147 & Companies (Audit and Auditors) Rules, 2014
CLASS ACTION
SUITS
Class Action Suits
Such number of member or members, depositor or depositors or any class of
them, as the case may be may, if they are of the opinion that the management
or conduct of the affairs of the company are being conducted in a manner
prejudicial to the interests of the company or its members or depositors, file
an application before the Tribunal seeking inter alia the following orders:
(g) to claim damages or compensation or demand any other suitable action
from or against—
(i) the company or its directors for any fraudulent, unlawful or wrongful act
or omission or conduct or any likely act or omission or conduct on its or
their part
(ii) the auditor including audit firm of the company for any improper or
misleading statement of particulars made in his audit report or for any
fraudulent, unlawful or wrongful act or conduct or
(iii) any expert or advisor or consultant or any other person for any incorrect
or misleading statement made to the company or for any fraudulent,
unlawful or wrongful act or conduct or any likely act or conduct on his par.
Not Notified
Sec. 245
IMPACT ON PROFESSIONALS
Impact on Professionals
 Greater expectations
 Emphasis on fraud prevention and detection
 Onerous responsibilities
 Stringent independence requirements
 Stiff penalties / punishment
 Independent Oversight
CHALLENGES
AHEAD
Challenges Ahead
 Transition challenges
 Basic Concepts Redefined
 Emphasis on Fraud Prevention and Detection
 Greater Reporting Requirements for Auditors
 Legal Recognition of the Auditing Standards
 Punishment for Non Compliances
 Path Breaking and Global Outlook
 Redefining roles and responsibilities
THANK YOU

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