Auditing and Ethics · Special Features of Audit of Different Type of Entities

Audit of Partnership Firms and Limited Liability Partnerships

Updated 4 October 2026 · Fact-checked

A partnership firm audit checks the firm's books against the partnership deed and the Partnership Act, 1932. A statutory LLP audit is required if turnover exceeds ₹40 lakh or contribution exceeds ₹25 lakh; the LLP agreement may require an audit even below these limits. Solve questions by reading the deed or LLP agreement first, then testing each item against it.

Understand Audit of Partnership Firms and Limited Liability Partnerships

A partnership firm is not a separate legal person under the Partnership Act, 1932. The partners run the business and share profits as agreed. There is no general law that makes the audit of a firm compulsory. The audit is usually needed because the Income-tax law requires it, because a bank asks for it, or because the partners want it.

The partnership deed is the auditor's main guide. It sets profit sharing ratio, interest on capital and drawings, salary or commission to partners, capital contributions, admission and retirement terms, and goodwill treatment. If the deed is silent, the default rules of the Partnership Act apply. Under Section 13(a), no partner is entitled to a salary or other remuneration. Under Section 13(b), profits are shared equally. Interest on capital is not allowed unless the deed provides for it. Where it is agreed, Section 13(c) says it is payable only out of profits. Separately, under Section 13(d), a partner who pays or advances money beyond the agreed capital is entitled to interest on that advance at 6% p.a.

A Limited Liability Partnership (LLP) is formed under the Limited Liability Partnership Act, 2008. It is a separate legal entity with perpetual succession. Partners' liability is generally limited to their agreed contribution. The governing document is the LLP agreement. If it is silent, the First Schedule to the LLP Act gives the default rules.

An LLP must maintain proper books on a cash or accrual basis. Every year it must prepare and file a Statement of Account and Solvency and an Annual Return, whether or not an audit is required. A statutory audit is required if the LLP's turnover exceeds ₹40 lakh in any financial year or its contribution exceeds ₹25 lakh. Crossing either limit is enough. The LLP agreement may require an audit even below these limits. The accounts are audited by a chartered accountant under Section 34 of the LLP Act, 2008 read with the LLP Rules.

The key contrast with a company audit is the framework. A company follows the Companies Act, 2013, Schedule III and CARO. An LLP follows the LLP Act, the LLP Rules and the LLP agreement. A firm follows the deed and the Partnership Act.

Key rules to remember

Primary source for firm audit: Partnership deed → then Partnership Act, 1932 (if deed is silent); Always check the deed first. Default Act rules apply only where the deed says nothing.
Primary source for LLP audit: LLP agreement → then First Schedule to LLP Act, 2008 (if agreement is silent); The same logic as a firm, but under the LLP Act.
LLP audit applicability: Audit needed if turnover > ₹40 lakh in any financial year or contribution > ₹25 lakh; Crossing either limit triggers the audit. Exactly ₹40 lakh turnover or ₹25 lakh contribution does not, because the test is 'exceeds'.
LLP auditor: Accounts audited by a chartered accountant under Section 34 of the LLP Act, 2008 read with the LLP Rules; The auditor is a chartered accountant within the meaning of the Chartered Accountants Act, 1949. The Statement of Account and Solvency is filed every year, even when no audit is required.
Default rules (Partnership Act, Section 13): No salary to partners (13(a)); profits shared equally (13(b)); no interest on capital unless agreed, and if agreed, payable only out of profits (13(c)); Apply only if the deed is silent.
Interest on partners' loans or advances (Partnership Act, Section 13(d)): Interest at 6% p.a. on a partner's payment or advance beyond the agreed capital; This is separate from the profit-sharing defaults. It applies to loans or advances, not to capital.

How to solve Audit of Partnership Firms and Limited Liability Partnerships questions

Use this method for any question on auditing a firm or an LLP.

1Identify the entity: partnership firm or LLP. This decides the governing law and document.
2Read the deed or LLP agreement clauses given in the question. Note profit ratio, interest, salary, capital and retirement terms.
3Decide whether audit is compulsory. For a firm, think of tax or other requirement. For an LLP, test turnover and contribution limits.
4List the audit checks: books, capital and current accounts, drawings, loans, appropriation of profit, and admission or retirement entries.
5Compare each item with the deed. Name any departure, such as interest charged at a wrong rate.
6State the effect on the financial statements and on the audit report.
7Conclude with the auditor's action: ask for correction, or modify the report if the issue remains uncorrected and material.

Quickest way: Deed first, then tick each clause

When to use it: Use for MCQs and for short written answers where time is tight.

For MCQs, eliminate options that apply company law ideas, such as Schedule III or a board of directors, to a firm.
If an option says the audit of a firm is compulsory under the Partnership Act, reject it.
For LLP, remember the audit trigger is turnover or contribution above the prescribed limit, and the accounts are audited by a chartered accountant under Section 34 of the LLP Act read with the LLP Rules.
In written answers, use three headings: provision, facts, conclusion. Write the deed clause, apply it to the facts, then state the auditor's action.
Give one line per point. Step marks come from naming the clause and the correction.

Common mistakes in Audit of Partnership Firms and Limited Liability Partnerships

Saying every partnership firm must be audited under the Partnership Act.
Students carry over the company audit rule to firms.
Fix: Write that the Partnership Act has no audit requirement. A firm is audited because of tax law, lenders or the deed.
Applying the Partnership Act default rules even when the deed says otherwise.
Students remember the default rules better than the deed idea.
Fix: Use the deed first. Use the Act only where the deed is silent.
Saying every LLP must be audited.
Confusing LLPs with companies.
Fix: State that a statutory LLP audit applies when turnover or contribution exceeds the prescribed limits. The LLP agreement may require an audit even below them.
Treating an LLP like a firm with unlimited partner liability.
Both are called partnerships.
Fix: Write that an LLP is a separate legal entity and partners' liability is limited to their agreed contribution, subject to the LLP Act.
Applying Schedule III and CARO to a firm or LLP.
Students memorise company audit formats.
Fix: Use the LLP Act, LLP Rules and the agreement. Schedule III and CARO apply to companies.

Worked examples

Example 1

A partnership firm's deed says partners A and B share profits 3:2 and that interest on capital is allowed at 8% p.a. The firm's accountant credited interest on capital at 12% p.a. and shared profits equally. As auditor, what do you do?

Show the solution

Identify the source: the partnership deed governs, so the Partnership Act defaults do not apply.
Check interest: the deed allows 8%, but 12% was credited. This is a departure from the deed.
Check profit sharing: the deed says 3:2, but profits were shared equally. This is another departure.
Effect: whether interest on capital is an appropriation of profit or a charge depends on the deed, and the books must follow the deed. Where the deed treats it as an appropriation, the wrong rate does not change the total profit available for appropriation. Interest credited at 12% instead of 8% increases the interest allocated to partners and reduces the residual profit shared in the ratio. Sharing the residual equally instead of 3:2 then moves profit between A and B. Only the allocation among partners is misstated, so the partners' capital and current accounts are misstated. No figures are given, so the amount of misstatement per partner cannot be computed here.
Tax: whether the excess interest is disallowed in computing the firm's taxable income is a separate matter under the Income-tax law. Do not mix it with the deed-compliance point.
Action: ask management to correct the interest rate and the profit sharing, and adjust the partners' accounts.
If the partners do not correct it and the effect is material, modify the audit report.

Answer: Both entries breach the deed. Ask for correction of interest at 8% and profit sharing at 3:2. Where the deed treats interest as an appropriation, the errors change the allocation of profit among partners, not the firm's total profit. Tax disallowance is a separate matter. If not corrected and material, modify the report.

Example 2

Explain whether an LLP must get its accounts audited, and who can audit it. How does this differ from a company audit?

Show the solution

Provision: a statutory audit is required if the LLP's turnover exceeds ₹40 lakh in any financial year or its contribution exceeds ₹25 lakh, as set by the LLP Rules. The LLP agreement may require an audit even below these limits.
Facts: if neither limit is crossed and the agreement does not require one, a statutory audit is not required. The Statement of Account and Solvency must still be prepared and filed every year.
Auditor: the accounts are audited by a chartered accountant under Section 34 of the LLP Act, 2008 read with the LLP Rules.
Difference: a company audit is compulsory for every company under the Companies Act, 2013, with Schedule III and CARO as the framework.
Difference: an LLP audit depends on the limits (or the agreement) and follows the LLP Act, the Rules and the agreement.
Conclusion: audit of an LLP is conditional, while a company audit is mandatory.

Answer: A statutory LLP audit is required when turnover exceeds ₹40 lakh in any financial year or contribution exceeds ₹25 lakh, and the LLP agreement may require one even below these limits. A chartered accountant must conduct it under Section 34 of the LLP Act, 2008 read with the LLP Rules. A company audit is always mandatory.

Exam tips

Start every answer with the governing document: the deed for a firm or the LLP agreement for an LLP.
Remember the LLP audit limits: turnover above ₹40 lakh in any financial year or contribution above ₹25 lakh. Questions may give figures and ask whether audit applies.
In scenario questions, name the departure from the deed, its effect and the auditor's action.
For MCQs, reject options that bring in company law concepts such as Schedule III or a board of directors.
When asked for differences, use clear contrasts: governing law, legal status, audit trigger and framework.

Practice questions from Special Features of Audit of Different Type of Entities

Audit of Partnership Firms and Limited Liability Partnerships in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit of Partnership Firms and Limited Liability Partnerships: frequently asked questions

Is audit of a partnership firm compulsory?

The Partnership Act, 1932 does not require an audit. A firm is usually audited because tax law requires it, a lender asks for it, or the deed says so.

When is an LLP required to get its accounts audited?

An LLP must be audited if its turnover exceeds ₹40 lakh in any financial year or its contribution exceeds ₹25 lakh. Below both limits, audit is not mandatory, but the Statement of Account and Solvency is still filed each year.

Why is the partnership deed so important to the auditor?

The deed sets profit sharing, interest, salaries and admission and retirement terms. The auditor tests the books against it. Default Partnership Act rules apply only if the deed is silent.

What is the main difference between an LLP audit and a company audit?

A company audit is mandatory under the Companies Act, 2013 and follows Schedule III and CARO. An LLP audit is conditional on the ₹40 lakh turnover and ₹25 lakh contribution limits and follows the LLP Act, the LLP Rules and the LLP agreement.