Accounts and Audit: formula sheet

Key formulas

Basis and system of books (Section 128(1))

Books = accrual basis + double entry system, kept for every financial year

They must give a true and fair view and explain transactions at the registered office and branches.

Place of keeping books

Registered office; or another place in India decided by the Board, with notice to the Registrar within 7 days

The notice must give the full address of the other place. Books may also be kept in electronic mode as prescribed.

Branch office (Section 128(2))

Proper books at the branch + proper summarised returns sent periodically to the company = deemed compliance

Applies to branches in India or outside India.

Inspection (Section 128(3))

Any director may inspect during business hours; inspection of a subsidiary only by a person authorised by Board resolution

For financial information kept outside India, copies must be kept and produced for inspection by a director, subject to prescribed conditions.

Preservation period (Section 128(5))

Books and vouchers for not less than 8 financial years immediately preceding the current year

If the company has existed for less than 8 years, keep them for all preceding years. After an investigation order under Chapter XIV, the Central Government may direct a longer period.

Penalty under Section 128(6)

Fine of ₹50,000 to ₹5,00,000 on the managing director, whole-time director in charge of finance, CFO or other person charged by the Board

The imprisonment limb was removed with effect from 21 December 2020. Only a fine remains.

Financial statements (Section 129(1))

True and fair view + notified accounting standards (section 133) + Schedule III form

Items must be in accordance with the accounting standards. Insurance, banking and electricity companies, and classes with a form fixed by their own Act, are excluded.

Consolidation (Section 129(3))

Subsidiaries exist: standalone statements + consolidated statements, both laid before the AGM

Attach a separate statement of the salient features of each subsidiary's financial statement, in the prescribed form.

Deviation from standards (Section 129(5))

Disclose: the deviation + the reasons + the financial effect, if any

Applies where the statements do not comply with the accounting standards.

Penalty under Section 129(7)

Imprisonment up to 1 year, or fine of ₹50,000 to ₹5,00,000, or both

Applies to the MD, whole-time director in charge of finance, CFO or other person charged by the Board. If none of them exists, all directors are liable.

Auditor's term

First AGM appointment → till conclusion of 6th AGM

Applies to appointment under Section 139(1). Appointment includes re-appointment.

Rotation limit

Individual: 1 term of 5 years; Firm: 2 terms of 5 years

For listed companies and prescribed classes. Cooling-off period of 5 years in the same company.

First auditor (non-government company)

Board: 30 days from registration → members at EGM: 90 days

Holds office till conclusion of first AGM.

First auditor (Government company)

CAG: 60 days → Board: next 30 days → members at EGM: 60 days

Holds office till conclusion of first AGM.

Casual vacancy (non-CAG company)

Board fills within 30 days; if by resignation, general meeting approval within 3 months of Board recommendation

Auditor holds office till next AGM. For CAG-audited companies the CAG fills within 30 days, else the Board within the next 30 days.

Removal

Special resolution + prior Central Government approval + hearing

Section 140(1).

Resignation filing

Statement within 30 days to company and Registrar

Also to the CAG for Government companies. Penalty is ₹50,000 or the auditor's remuneration, whichever is less, plus ₹500 per day after the first, subject to a maximum of ₹2,00,000.

Notice to Registrar

Within 15 days of the meeting appointing the auditor

The company must also inform the auditor.

Eligibility of auditor

Chartered accountant, or firm with majority of India-practising partners being CAs

Section 141(1). Firm is appointed by firm name. Under 141(2) only CA partners sign and act.

Body corporate bar

Body corporate not eligible, except an LLP registered under the LLP Act, 2008

Section 141(3)(a). Many students forget the LLP exception.

Employment and relationship bars

Officer or employee of the company; partner or employee of such an officer or employee; person whose relative is a director or KMP/employee as director or KMP

Section 141(3)(b), (c), (f).

Securities, debt and guarantee bars

Person, relative or partner holding security or interest, indebted, or having given guarantee or security for a third person's debt, in company, subsidiary, holding, associate or subsidiary of holding

Section 141(3)(d). Relative may hold security of face value up to ₹1,000 or prescribed sum. Debt and guarantee amounts are as prescribed.

Business relationship bar

Person or firm with direct or indirect business relationship of prescribed nature

Section 141(3)(e).

Ceiling on number of audits

Not more than 20 companies at date of appointment or reappointment

Section 141(3)(g). Also bars a person in full-time employment elsewhere. For a firm, the partner is counted.

Fraud conviction

Convicted of fraud offence and 10 years not elapsed from date of conviction

Section 141(3)(h).

Prohibited services

Accounting and book keeping; internal audit; financial information system design and implementation; actuarial; investment advisory; investment banking; outsourced financial services; management services; others prescribed

Section 144. Applies to company, holding and subsidiary, directly or indirectly. Other services need Board or audit committee approval. Section 141(3)(i) makes rendering them a disqualification.

Post-appointment disqualification

Vacate office; treated as casual vacancy

Section 141(4).

Remuneration

Fixed in general meeting or as it determines; Board fixes for first auditor; includes expenses, excludes other services

Section 142(1) and (2).

Right of access (s.143(1))

Access at all times to books of account and vouchers, at the registered office or any other place, plus the right to require information and explanation

Extends to records of subsidiaries and associate companies for a holding company's auditor, only as it relates to consolidation.

Matters to inquire into (s.143(1)(a)-(f))

Secured loans | book-entry transactions | securities sold below cost | loans shown as deposits | personal expenses charged to revenue | shares allotted for cash

Clause (c) applies where the company is not an investment company or a banking company.

Main report (s.143(2))

Report to members: accounts give a true and fair view of state of affairs, profit or loss and cash flow

Stated to the best of his information and knowledge, after taking into account the Act, the standards and the matters required in the report.

Further matters in report (s.143(3))

Clauses (a) to (j): information obtained, books kept, branch report, agreement with books, accounting standards, adverse observations, director disqualification, qualifications, internal financial controls, other prescribed matters

Under s.143(4), a negative or qualified answer must state reasons.

Fraud reporting (s.143(12))

Fraud reason-to-believe, at or above the specified amount: report to Central Government. Below the specified amount: report to audit committee or Board

Company must disclose in the Board's report the frauds reported only to the audit committee or Board, in the prescribed manner.

Penalty (s.143(15))

Listed company: ₹5,00,000. Any other company: ₹1,00,000

Applies to an auditor, cost accountant or company secretary in practice who does not comply with sub-section (12).

Application to other audits (s.143(14))

Section applies mutatis mutandis to a cost accountant conducting cost audit under s.148 and a company secretary in practice conducting secretarial audit under s.204

Useful for linking this topic to cost audit and secretarial audit questions.

Internal auditor eligibility (Section 138(1))

Internal auditor = chartered accountant OR cost accountant OR other professional decided by the Board

Applies to prescribed classes of companies only. The Act says the professional conducts internal audit of the functions and activities of the company.

Internal audit manner and intervals (Section 138(2))

Central Government prescribes by rules the manner and intervals; reporting is to the Board

The Act leaves the details to rules.

Cost records (Section 148(1))

Central Government order + prescribed class of companies, goods or services → cost items included in books of account

For companies under a special Act, the Central Government must first consult the regulator.

Cost audit trigger (Section 148(2))

Order by Central Government + company covered by 148(1) + prescribed net worth or turnover

Both the order and the prescribed limits matter. Coverage under 148(1) alone does not mean an audit.

Cost auditor appointment (Section 148(3))

Cost accountant appointed by the Board; remuneration determined by members as prescribed

The Section 139 auditor cannot be appointed as cost auditor. Cost auditing standards must be followed.

Cost audit report (Sections 148(5) and 148(6))

Report to the Board of Directors; company files with Central Government within 30 days of receiving a copy

Include full information and explanation on every reservation or qualification.

Who must get secretarial audit (Section 204(1))

Every listed company + other prescribed classes → secretarial audit report by a company secretary in practice, annexed to the Board's report

The thresholds for other classes are in the Rules, not in the section text. Do not quote figures unless you are sure of them.

Penalty under Section 204(4)

Company, every officer in default, or the company secretary in practice → penalty of ₹2,00,000

It applies to the company secretary in practice too, not only to the company.

Audit committee composition (Section 177(2))

Minimum 3 directors; independent directors form a majority

Majority of members including the Chairperson must be able to read and understand financial statements.

Who must constitute it (Section 177(1))

Every listed public company + prescribed classes

The words 'listed public company' replaced 'listed company' with effect from 7-5-2018.

Terms of reference (Section 177(4))

Auditor recommendation; auditor independence and performance; financial statements; related party approvals; inter-corporate loans and investments; valuation; internal financial controls and risk management; end use of public funds

The list is 'inter alia', so the Board can add more.

Voidable small transaction (third proviso to Section 177(4)(iv))

Transaction up to ₹1 crore entered into by a director or officer without approval and not ratified within 3 months → voidable at the Audit Committee's option

If it is with a related party of a director or authorised by another director, the director concerned indemnifies the company against loss.

Right to be heard (Section 177(7))

Auditors and KMP: right to be heard when the committee considers the auditor's report; no right to vote

Do not say they can attend every meeting as of right.

Vigil mechanism (Section 177(9)-(10))

Listed companies + prescribed classes → vigil mechanism with safeguards against victimisation and direct access to the Audit Committee Chairperson in appropriate cases

Details must be disclosed on the website, if any, and in the Board's report.

Books of account (s 294(1))

Company Liquidator keeps proper and regular books, including receipts and payments accounts, in the prescribed form and manner

The duty is on the liquidator himself.

Presentation to Tribunal (s 294(2))

Account of receipts and payments → Tribunal, at prescribed times, not less than twice in each year, in prescribed form, in duplicate, with verifying declaration

Twice a year is the minimum, not the fixed number.

Audit (s 294(3))

Tribunal causes accounts to be audited in such manner as it thinks fit

The Tribunal decides the manner of audit. The liquidator supplies vouchers and information.

Filing after audit (s 294(4))

One copy → Tribunal; other copy → Registrar (open to inspection by any creditor, contributory or person interested)

Do not swap the two recipients.

Government company (s 294(5))

Copy → Central Government if it is a member; → State Government if it is a member; → both if both are members

Only the Government that is a member receives the copy.

Printing and circulation (s 294(6))

Audited accounts or summary printed and posted to every creditor and every contributory

The Tribunal may dispense with this in any case it deems fit.

Quick revision

• Under section 143(1), the auditor has a right of access at all times to books of account and vouchers, wherever kept.
• The auditor can require from officers such information and explanation as he considers necessary for his duties.
• A holding company's auditor can access records of its subsidiaries and associate companies for consolidation purposes.
• The auditor reports to the members on the accounts and financial statements, stating whether they give a true and fair view.
• Under section 143(4), a negative or qualified answer on any required matter needs reasons.
• The report must state whether the company has adequate internal financial controls with reference to financial statements and their operating effectiveness.
• Every auditor must comply with the auditing standards (section 143(9)).
• Fraud by officers or employees: the auditor must report as prescribed. Below the specified amount, report to the audit committee or the Board.
• Penalty for not reporting fraud: five lakh rupees for a listed company, one lakh rupees for any other company.
• Section 143 applies with the necessary changes to a cost accountant doing cost audit and a company secretary in practice doing secretarial audit.
• Branch auditor's report goes to the company's auditor, who deals with it in his report as he considers necessary.
• For Government companies, the CAG appoints the auditor and may conduct a supplementary audit within sixty days of receiving the audit report.

Common mistakes

• Saying books may be kept on the cash basis or single entry for small companies Fix: Section 128(1) applies to every company. Books must be on the accrual basis and the double entry system.
• Writing that books must be kept for 8 years from the date of the transaction Fix: The rule is a period of not less than eight financial years immediately preceding a financial year, with vouchers. A company younger than 8 years keeps all preceding years.
• Saying the auditor serves for five years under Section 139(1). Fix: The term is till the sixth AGM. The five-year limit is only the rotation term for listed and prescribed companies.
• Applying rotation to all companies. Fix: Section 139(2) applies to listed companies and prescribed classes only.
• Saying any body corporate cannot be auditor, ignoring LLPs. Fix: Write: body corporate other than an LLP registered under the LLP Act, 2008 is disqualified. LLPs can be appointed, with only CA partners signing.
• Treating the 20-company limit as 20 audits per firm. Fix: The text says a person or a partner of a firm holding appointment as its auditor of more than twenty companies. Apply it at the date of appointment or reappointment.
• Saying the auditor needs the Board's permission to see books or ask for information. Fix: Remember it is a statutory right at all times, wherever the books are kept, and the auditor can require information and explanation from officers.
• Reporting every fraud to the Central Government. Fix: Fraud below the specified amount goes to the audit committee, or to the Board where there is no audit committee. Others go to the Central Government.
• Saying every company must appoint an internal auditor. Fix: Always say that only prescribed classes need an internal auditor, and the classes are set by rules.
• Saying the internal auditor must be a chartered accountant. Fix: Remember the three options: chartered accountant, cost accountant, or another professional decided by the Board.

Exam tips

• Memorise the numbers: 7 days, 8 financial years, and the fine range of ₹50,000 to ₹5,00,000. These are common MCQ targets.
• Know the difference between Section 128(6), which carries only a fine, and Section 129(7), which carries imprisonment, a fine, or both.
• In case answers, name the officer who is liable: the MD, the whole-time director in charge of finance, the CFO or the person charged by the Board.
• For standalone versus consolidated questions, say that consolidated statements are prepared in addition, in the same form and manner, and laid at the same AGM.
• Do not give the contents of the Board's report from memory of Section 134 unless you are sure. Revise that section separately and list its items point by point.
• Learn the numbers as a set: 30, 60, 90, 180 days, 15 days, 5 years, sixth AGM.
• In case studies, first check whether the company is listed or Government, since that changes the rule.
• Write the authority for each step: Board, members, CAG or Central Government.