Concepts of Various Audits: formula sheet

Key formulas

Core definition

Audit = independent + systematic examination → opinion

Use these three ideas to start any definition answer.

Statutory audit basis

Statutory audit = audit required by law, mainly the Companies Act, 2013

Done by an independent external auditor who reports to members.

Internal audit basis

Internal audit = review of operations and controls for management

Scope and reporting are decided by the board or audit committee. Internal audit is required for prescribed companies under the Companies Act, 2013.

Secretarial audit basis

Secretarial audit = check of compliance with corporate and other applicable laws

Required for prescribed classes of companies. Done by a practising Company Secretary.

Cost audit basis

Cost audit = verification of cost records and cost statements

Required for prescribed companies. Done by a cost accountant in practice.

Who may be internal auditor (Section 138)

Chartered accountant OR cost accountant (in practice or not) OR other professional decided by the Board

The internal auditor can be an employee or an outsider. Say this explicitly in answers.

Listed companies (Rule 13, Companies (Accounts) Rules, 2014)

Every listed company must appoint an internal auditor

No size test applies to listed companies.

Unlisted public companies (Rule 13)

Any ONE of: paid-up share capital ≥ ₹50 crore; turnover ≥ ₹200 crore; outstanding bank/PFI borrowings > ₹100 crore; outstanding deposits ≥ ₹25 crore

Paid-up capital and turnover are tested for the preceding financial year. Borrowings and deposits are tested at any point during the preceding financial year. Note the symbols: ≥ for capital, turnover and deposits, but > for borrowings.

Private companies (Rule 13)

Any ONE of: turnover ≥ ₹200 crore; outstanding bank/PFI borrowings > ₹100 crore

Paid-up capital and deposits are not tests for private companies.

Scope and manner

Audit Committee or Board, in consultation with the internal auditor, formulates scope, functioning, periodicity and methodology

The auditor does not set these alone, and neither does management alone.

Internal audit vs statutory audit

Internal: management's tool, appointed by Board, wide scope, continuous. Statutory: members' protection, appointed by members, opinion on financial statements, annual

Learn this as a comparison on appointment, purpose, scope, reporting and independence.

Section 148(1): cost records

Central Government specifies classes of companies engaged in production of goods or providing services that must maintain cost records

Applies only to classes notified under the Rules, not to every company.

Section 148(2): cost audit

Central Government may direct audit of cost records for specified classes of companies

Cost audit applies only to companies already covered for cost records and meeting the Rule 4 limits.

Cost records threshold (Rule 3)

Company in Table A or B with overall annual turnover ≥ ₹35 crore OR aggregate turnover of the individual products or services covered by the Tables ≥ ₹10 crore, in the immediately preceding financial year

Either limit is enough. Remember the test is OR, not AND. Verify the limits against the current text of the Rules before the exam.

Cost audit threshold, regulated sectors (Table A)

Overall turnover ≥ ₹50 crore OR aggregate turnover of the individual products or services covered ≥ ₹25 crore

Rule 4 applies only to a company already covered under Rule 3.

Cost audit threshold, non-regulated sectors (Table B)

Overall turnover ≥ ₹100 crore OR aggregate turnover of the individual products or services covered ≥ ₹35 crore

Either limit is enough. Remember the test is OR, not AND. Rule 4 applies only to a company already covered under Rule 3.

Exemptions

Rule 3: a company that meets neither turnover test (₹35 crore overall or ₹10 crore covered products) has no cost records duty. Rule 4(3): the cost audit requirement does not apply to a company covered under Rule 3 whose export revenue in foreign exchange exceeds 75% of total revenue and which has no operations in a domestic non-SEZ area, to a company operating from a Special Economic Zone, or to a company generating electricity for captive consumption through a captive generation plant

Rule 4(3) exempts from cost audit only, not from cost records. Do not assume any further exclusion, such as for small enterprises, unless you can point to the Rule that gives it.

Cost record retention

Cost records are kept in good order for at least 8 financial years immediately after the year to which they relate

Records may be kept in physical or electronic form.

Cost auditor appointment

Board appoints within 180 days of the start of the financial year, on the recommendation of the audit committee where the company is required to have one under Section 177 (otherwise the Board appoints directly), after getting the auditor's written consent and eligibility certificate

The auditor must be a cost accountant in practice. The statutory auditor cannot be appointed for cost audit.

Form CRA-2

Company informs the Central Government of the cost auditor's appointment within 30 days of the Board meeting date or within 180 days of the start of the financial year, whichever is earlier

This is the appointment intimation form.

Cost audit report timeline

Cost auditor submits report (Form CRA-3) to the Board within 180 days of the close of the financial year; company files it with the Central Government in Form CRA-4 within 30 days of receiving it

The company's filing must include full information and explanation on every reservation or qualification.

Forms in brief

CRA-1: cost records | CRA-2: appointment intimation | CRA-3: cost audit report | CRA-4: filing of the report with Central Government

Learn these four. Examiners often ask which form applies to which step.

Authority for secretarial audit

Section 204 of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014

Cite both when answering on applicability.

Who must get it done

Every listed company + unlisted public companies with paid-up capital ₹50 crore or more, or turnover ₹250 crore or more, or outstanding loans or borrowings from banks or public financial institutions ₹100 crore or more

Test paid-up capital on the last day of the preceding financial year. Test turnover and borrowings by reference to the preceding financial year. SEBI Listing Regulations separately cover material unlisted subsidiaries of listed entities.

Who can conduct it

Company secretary in practice, or a firm of company secretaries in practice, holding a valid certificate of practice

Section 204 requires the report to be annexed to the board's report. For non-listed companies, the board appoints. For listed companies, Reg. 24A of the SEBI Listing Regulations (since 1 April 2025) requires shareholder approval at the AGM, based on a board recommendation. The term is up to 5 years for an individual and up to two terms of 5 years for a firm.

Report form

Form MR-3, annexed to the board's report

Qualifications, reservations or adverse remarks must be explained by the board in its report.

Matters covered by the audit

Companies Act and rules + Securities Contracts (Regulation) Act, Depositories Act, SEBI laws + FEMA (FDI, ODI, ECB) + other applicable laws + Secretarial Standards + listing agreements/regulations

Learn this as the scope list and add the sector laws relevant to the company in the question.

Tax audit

Purpose = verify tax compliance and correct reporting of income and deductions

Done by a chartered accountant. Applies when turnover or receipts exceed the prescribed limits. Quote section numbers only for the Act named in your syllabus.

Management audit vs operational audit

Management audit = effectiveness of management as a whole; Operational audit = economy, efficiency and effectiveness of operations

Both give recommendations. Neither gives a true and fair opinion.

Forensic audit

Detect + investigate + document fraud → evidence

Output is a report usable in legal or regulatory proceedings.

Propriety audit

Legality is not enough; test wisdom, fairness and public interest

Common in public sector context.

Energy and social audit

Energy audit = measure use and find savings; Social audit = measure social impact with stakeholders

Both are non-financial in focus.

Composition under Section 177

Minimum 3 directors; independent directors form the majority; majority of members, including the chairperson, able to read and understand financial statements (Section 177(2))

Applies to listed companies and prescribed public companies. Chairperson is not fixed as independent in the Act text itself, while LODR requires it.

Composition under SEBI LODR (Reg. 18)

Minimum 3 directors; ⅔ of members independent (Reg. 18(1)(b)); all members financially literate and at least one with accounting or financial management expertise (Reg. 18(1)(c)); chair independent and present at the AGM (Reg. 18(1)(d))

Applies to listed entities. Two-thirds is a stricter test than a simple majority. Financially literate means able to read and understand financial statements.

Quorum under LODR

Higher of 2 members or ⅓ of members, with at least 2 independent directors (Reg. 18(2)(b))

Both parts of the test must be met.

Meeting frequency under LODR

At least 4 meetings a year; gap between two meetings not more than 120 days (Reg. 18(2)(a))

Compare with the Companies Act, which leaves frequency to the terms of reference.

Mandatory standards

SA: Section 143(10); SS: Section 118(10)

SAs bind the auditor; SS bind the company and its board.

Key audit committee roles

Recommend auditor; review financials; approve related party transactions; scrutinise inter-corporate loans; review internal control; evaluate valuation; oversee vigil mechanism

Use as a checklist when listing the role in an answer.

Quick revision

• Audit is an independent examination of records and statements to form an opinion on whether they give a true and fair view.
• Statutory audit is required by the Companies Act, 2013 and is done by an auditor who is a chartered accountant in practice or a firm.
• The statutory auditor reports to the members of the company, not to the management.
• Internal audit is mainly for management, and its scope and frequency are set by the board or audit committee.
• Cost audit applies only to companies and products covered by the cost records and audit rules; check the applicability conditions.
• Cost records are maintained by the company, while the cost auditor examines them and reports.
• Secretarial audit checks compliance with company law and other specified laws, and is done by a practising company secretary.
• Forensic audit looks into suspected fraud and aims to produce evidence, while operational audit looks at efficiency.
• Management audit reviews the quality of management decisions and performance.
• The audit committee oversees financial reporting, auditors and internal controls, and works with the statutory auditor.
• Audit standards set the expected quality and method of an audit.
• In answers, always state the audit, the person responsible, the rule and then the conclusion.

Common mistakes

• Saying the auditor prepares the financial statements. Fix: Write that management prepares the statements and the auditor examines them and gives an opinion.
• Treating detection of fraud as the main objective of a statutory audit. Fix: Say the primary objective is an opinion on the financial statements. Fraud detection is an important objective, but the auditor gives reasonable, not absolute, assurance.
• Applying the paid-up capital and deposit tests to private companies. Fix: Remember that private companies have only two tests: turnover and borrowings. Learn public companies as four tests and private as two.
• Saying the internal auditor must be an employee, or must not be one. Fix: Write that the internal auditor may or may not be an employee, and must be a CA, a cost accountant or another professional decided by the Board.
• Saying every company must get a cost audit. Fix: Remember that Section 148 works through notified classes. Always check the sector table and the turnover tests before concluding.
• Mixing up the cost records limit with the cost audit limit. Fix: Keep two rows: cost records at ₹35 crore overall or ₹10 crore covered products (Rule 3), and cost audit at Rule 4 limits that differ for Table A and Table B.
• Treating secretarial audit as an audit of the financial statements. Fix: Write that it checks legal and procedural compliance and the compliance system, not true and fair view of accounts.
• Saying every company needs a secretarial audit. Fix: State that it applies to listed companies and other prescribed companies, and test the facts given.
• Treating management audit and operational audit as the same. Fix: Link management audit to the overall management and its policies, and operational audit to specific processes and their efficiency.
• Saying forensic audit is just a detailed statutory audit. Fix: Stress that forensic audit starts from suspicion of fraud and aims at evidence, not a true and fair opinion.

Exam tips

• Begin every answer with a crisp definition. It earns easy marks.
• For distinguish questions, use matching points on both sides in a clear list.
• Always give a classification basis before listing types.
• Link each type to the CS role where possible, especially secretarial audit.
• Avoid quoting section numbers unless you are certain.
• Quote both Section 138 and Rule 13 of the Companies (Accounts) Rules, 2014 in applicability answers. It shows you know where the thresholds sit.
• Always separate the three company types. A neat three-line layout for listed, unlisted public and private companies earns clear marks.
• For comparison questions, use at least five points: appointment, purpose, scope, reporting, frequency. Add independence if you have time.