Accounts and Auditors: formula sheet

Key formulas

Section 128(1): what to keep and how

Books of account + other relevant books and papers + financial statement; accrual basis; double entry system; at registered office

Must give a true and fair view and cover branches. Electronic mode is allowed in the prescribed manner.

Section 128(1) first proviso: other place in India

Board decision → notice to Registrar within 7 days with full address

The other place must be in India.

Section 128(2): branch books

Branch books at branch + periodic summarised returns to registered office (or other place)

Applies to branches in India or outside India. The company is then deemed to comply.

Section 128(3): inspection

Any director may inspect during business hours

For a subsidiary, inspection only by a person authorised by a Board resolution. Financial information kept outside India: copies must be maintained and produced.

Section 128(5): preservation

Books for not less than 8 financial years immediately preceding, with vouchers

If the company is younger than 8 years, all preceding years. Central Government may direct a longer period where an investigation is ordered under Chapter XIV.

Section 128(6): penalty

Fine: not less than ₹50,000, may extend to ₹5,00,000

Imposed on the managing director, whole-time director in charge of finance, CFO or other person charged by the Board. Imprisonment was omitted from this section from 21 December 2020.

Section 129(1): financial statements

True and fair view + comply with accounting standards under Section 133 + Schedule III form

Insurance, banking and electricity companies, and companies under an Act with its own form, are excluded from the Schedule III requirement.

Section 129(2) and (3)

Board lays financial statements at every AGM; consolidated statements if one or more subsidiaries

Attach a separate statement of salient features of subsidiaries in the prescribed form.

Section 129(5): deviation

Disclose deviation + reasons + financial effects

Needed where the statements do not comply with accounting standards.

Section 129(7): penalty

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

Falls on the managing director, whole-time director in charge of finance, CFO or person charged by the Board; if none of them, all the directors.

Approval and signing of financial statements (S.134(1))

Board approves first, then signing, then submission to auditor

Signed by the chairperson if authorised by the Board, or by two directors (one being the managing director, if any), plus the CEO, CFO and company secretary wherever appointed. In a One Person Company, only one director signs.

Auditor's report (S.134(2))

Auditor's report is attached to every financial statement

It is a mandatory attachment.

Signing of Board's report (S.134(6))

Chairperson (if authorised) OR at least two directors, one being MD OR the sole director

Applies to the Board's report and its annexures.

Circulation (S.134(7))

Signed financial statements + notes + auditor's report + Board's report

A signed copy of the financial statements must go out with all three.

DRS contents (S.134(5))

Clauses (a) to (f): accounting standards, policies and judgments, accounting records, going concern, internal financial controls, compliance systems

Clause (e) on internal financial controls applies to a listed company only. The other clauses apply to every company whose Board's report must contain the DRS. A One Person Company's Board's report is limited by S.134(4) to the Board's explanations on auditor's qualifications, reservations, adverse remarks or disclaimers, so the DRS is not part of it.

Filing with Registrar (S.137(1))

Within 30 days of the date of the AGM

Fees or additional fees as prescribed. A One Person Company files within 180 days from the closure of the financial year.

Where AGM not held (S.137(2))

Within 30 days of the last date by which the AGM should have been held

File with a statement of facts and reasons for not holding the AGM.

Penalty for default in S.134 (S.134(8))

Company ₹3,00,000; every officer in default ₹50,000

Fixed penalties as per the text supplied.

Penalty for late filing (S.137(3))

Company: ₹10,000 + ₹100 for each day the failure continues, maximum ₹2,00,000. Officers: ₹10,000 + ₹100 for each day after the first during which the failure continues, maximum ₹50,000

Officers liable are the MD and CFO; failing them, a director charged by the Board; failing that, all directors.

First auditor (non-Government company)

Board appoints within 30 days of registration; if Board fails, members at EGM within 90 days

Holds office till the conclusion of the first AGM. Section 139(6).

First auditor (Government company)

CAG within 60 days; else Board within next 30 days; else members at EGM within 60 days

Section 139(7). Applies to companies owned or controlled by the Central or State Governments.

Term of subsequent auditor

From the conclusion of the first AGM till the conclusion of the sixth AGM, then every sixth meeting

Section 139(1). Appointment includes re-appointment.

Notice to Registrar

Inform auditor and file notice with the Registrar within 15 days of the meeting

Written consent and certificate must be obtained before appointment.

Rotation limits

Individual: one term of 5 consecutive years. Audit firm: two terms of 5 consecutive years. Cooling-off: 5 years

Applies to listed companies and prescribed classes. Section 139(2).

Casual vacancy

Board fills within 30 days; if caused by resignation, approval of company at a general meeting within 3 months of Board's recommendation

Auditor holds office till the next AGM. For CAG-audited companies, CAG fills within 30 days, else Board within the next 30 days. Section 139(8).

Re-appointment of retiring auditor

Allowed if not disqualified, has not given written notice of unwillingness, and no special resolution appoints another or bars him

Section 139(9).

Ceiling on number of audits

Not eligible if holding appointment as auditor of more than 20 companies

Section 141(3)(g). Applies to a person or a partner of a firm, at the date of appointment or re-appointment.

Fraud conviction

Disqualified until 10 years have elapsed from the date of conviction

Section 141(3)(h).

Right of access (s.143(1))

Access at all times to books of account and vouchers, wherever kept

Applies whether records are at the registered office or any other place. Auditor can also require information and explanations from officers as considered necessary.

Matters the auditor must inquire into (s.143(1)(a) to (f))

Six inquiries: secured loans, book entries, sale of securities 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.

Holding company auditor (proviso to s.143(1))

Right of access to records of all subsidiaries and associate companies, so far as it relates to consolidation

Limited to consolidation of financial statements.

Report to members (s.143(2))

True and fair view of state of affairs, profit or loss and cash flow, after considering the Act, accounting and auditing standards

Addressed to members on accounts examined and financial statements laid before the general meeting.

Additional statements (s.143(3)(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

Clause (g) concerns disqualification under section 164(2). Clause (i) covers adequacy and operating effectiveness of internal financial controls with reference to financial statements.

Negative answers (s.143(4))

Negative or qualified answer means reasons must be stated

Do not just say 'no'. Give the reason.

Auditing standards (s.143(9) and (10))

Every auditor must comply with auditing standards

Central Government may prescribe standards recommended by ICAI after consulting NFRA. Until notified, ICAI standards are deemed auditing standards.

Fraud reporting (s.143(12), (13), (15))

Fraud by officers or employees: report to Central Government; if below specified amount, to audit committee or Board

Good-faith reporting is not a breach of duty. Penalty for non-compliance: ₹5,00,000 for a listed company and ₹1,00,000 for any other company.

Branch audit (s.143(8))

Branch auditor sends report to company auditor, who deals with it as he considers necessary

For a branch outside India, the company's auditor or a person qualified under that country's laws may audit.

Core opinion - section 143(2)

Auditor reports to members; accounts and financial statements give a true and fair view of state of affairs, profit or loss and cash flow

Opinion is to the best of the auditor's information and knowledge and after considering the Act and standards.

Matters to be stated - section 143(3)(a) to (j)

Information obtained; proper books; branch returns; agreement with books; accounting standards; adverse observations; director disqualification; qualifications on accounts; IFC adequacy and operating effectiveness; other prescribed matters

Clause (a) to (j) is a checklist. Learn it as a list.

Reasons for negative answers - section 143(4)

Negative or qualified answer on a required matter → report must state reasons

Applies to any matter required in the report under section 143.

Internal financial controls - section 143(3)(i)

Report whether the company has adequate internal financial controls with reference to financial statements and their operating effectiveness

Two tests: adequacy and operating effectiveness.

Order on additional statements - section 143(11)

Central Government + NFRA consultation → order for specified companies → report includes statement on specified matters

CARO works through this power.

Auditing standards - section 143(9)

Every auditor shall comply with the auditing standards

Mandatory, not optional.

Fraud reporting - section 143(12) and (15)

Reason to believe fraud by officers or employees → report to Central Government; lower amount → audit committee or Board; penalty for non-compliance ₹5,00,000 (listed) or ₹1,00,000 (other)

Good-faith reporting is not a breach of duty under section 143(13).

Internal audit: who must appoint (Section 138(1))

Prescribed classes of companies → internal auditor (CA, cost accountant or other professional decided by the Board)

The classes are set by rules. Do not say every company needs one.

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

Central Government prescribes by rules how and how often the audit is conducted and reported to the Board

The report goes to the Board.

Cost audit: two-stage order (Section 148(1) and (2))

Order to keep cost records → then order for audit of cost records, only for covered companies with prescribed net worth or turnover

Cost records come first. The audit applies only if the Central Government so directs.

Cost auditor (Section 148(3))

Cost accountant, appointed by the Board; remuneration determined by members in the prescribed manner

A Section 139 statutory auditor of the company cannot be appointed as cost auditor. The cost auditor must follow cost auditing standards.

Cost audit relation to other audit (Section 148(4))

Cost audit is in addition to the Section 143 audit

It does not replace the financial audit.

Cost audit report (Section 148(5) proviso and (6))

Report goes to the Board of Directors; company sends a copy to the Central Government within 30 days of receiving it, with full information and explanation on every reservation or qualification

The 30 days run from the date the company receives the report.

Secretarial audit (Section 204)

Listed companies and prescribed classes → secretarial audit report by a company secretary in practice, annexed to the Board's report under Section 134(3)

The Board must explain in full any qualification, observation or remark.

Penalty for contravening Section 204

Company, every officer in default and the company secretary in practice in default: liable to a penalty of ₹2,00,000

The penalty can fall on the company secretary too.

Quick revision

• Under Section 143(1), the auditor has a right of access at all times to the books of account and vouchers, wherever they are kept.
• The auditor may require from officers such information and explanation as he considers necessary for his duties.
• A holding company's auditor also has access to the records of its subsidiaries and associate companies, as far as they relate to consolidation.
• Section 143(1) lists six inquiry matters: whether loans and advances made on security are properly secured and whether their terms are prejudicial to the interests of the company or its members, book entries, sale of securities below cost, loans shown as deposits, personal expenses and shares allotted for cash.
• The auditor reports to the members on the accounts and the financial statements to be laid before the company in general meeting.
• The report must state whether the statements give a true and fair view of the state of affairs, profit or loss and cash flow.
• Under Section 143(4), any negative or qualified answer must state the reasons.
• The report must say 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, under Section 143(9).
• For a branch, the branch auditor sends a report to the company's auditor, who deals with it as he considers necessary.
• Fraud by officers or employees: the auditor reports to the Central Government. For fraud involving lesser than the specified amount, the report goes to the audit committee constituted under section 177 or, in other cases, to the Board.
• Good-faith fraud reporting is not a breach of duty. Under Section 143(15), an auditor, cost accountant or company secretary in practice who does not comply with sub-section (12) is liable to a penalty of ₹5,00,000 for a listed company and ₹1,00,000 for any other company.

Common mistakes

• Saying books may be kept at any place, even outside India. Fix: Write 'another place in India' and add the 7-day notice to the Registrar with the full address.
• Mixing up the 8-year preservation rule with the 8-year limit for re-opening accounts. Fix: Keep them apart. Section 128(5) is about keeping books. Section 130 limits Tribunal or court orders to re-open books to eight preceding financial years.
• Saying the internal financial controls clause in the DRS applies to every company. Fix: Write that clause (e) applies in the case of a listed company. Clause (f) on compliance systems has no such condition.
• Stating that any two directors can sign the financial statements. Fix: Say the two directors must include the managing director, if any. Also add the CEO, CFO and company secretary wherever appointed.
• Saying the first auditor is appointed by members at the first AGM. Fix: The Board appoints the first auditor within 30 days of registration. Members appoint at the first AGM the auditor who serves till the sixth AGM.
• Applying the rotation rule to every company. Fix: Section 139(2) applies to listed companies and prescribed classes only.
• Saying the auditor reports to the Board. Fix: Write that the auditor reports to the members under s.143(2). Only fraud below the specified amount goes to the audit committee or Board.
• Treating the right of access as limited to the registered office. Fix: State that access is at all times, wherever the books are kept.
• Treating qualified, adverse and disclaimer as sections of the Act. Fix: Section 143 does not use these labels. Explain them as types of modified opinion and cite section 143(2) and (4) for the duty to report and give reasons.
• Omitting reasons when the answer is negative. Fix: Always add that a negative or qualified answer must be supported by stated reasons.

Exam tips

• Learn the numbers exactly: 7 days for the notice, 8 financial years for preservation, ₹50,000 to ₹5,00,000 for the fine.
• Always name the persons liable. Examiners expect the managing director, whole-time director in charge of finance, CFO or person charged by the Board.
• Keep Section 128 (records) and Section 129 (statements) separate in your answer, then link them in the conclusion.
• In case questions, check branches, subsidiaries and electronic records. These are the usual hooks.
• Cite the section in the first line and again in the conclusion. It is a cheap way to earn marks.
• Write the section number before every point. ICSI-style answers earn marks for the provision first.
• When a question gives facts, such as a listed company or a One Person Company, say how that fact changes the rule.
• For DRS questions, list all six clauses and note the listed-company condition in clause (e).