Corporate and Other Laws · Accounts of Companies

Audit-related Reporting and Internal Financial Controls

Updated 4 October 2026 · Fact-checked

The Board approves the financial statements and they are signed for submission to the auditor. The auditor's report is attached to them. The Board's report, which must respond to the auditor's remarks, goes with the statements laid at the AGM. For a listed company, the Directors' Responsibility Statement says internal financial controls are adequate and operating effectively.

Understand Audit-related Reporting and Internal Financial Controls

Accounts and audit are linked. The company prepares financial statements. The Board approves them. They are then signed on behalf of the Board and submitted to the auditor for his report. Section 134(1) says approval comes first, and the signing is for submission to the auditor.

The auditor's report must be attached to every financial statement (section 134(2)). A Board's report is attached to the statements laid before the general meeting (section 134(3)). The Board must give explanations or comments on every qualification, reservation, adverse remark or disclaimer made by the auditor in his report (section 134(3)(f)). So the Board's report must include comments on the auditor's qualifications, and in practice it follows the auditor's report. The Act does not prescribe a sequence for these steps, so do not memorise one as a statutory rule.

At every annual general meeting, the Board lays the financial statements for the financial year before the meeting (section 129(2)). If the company has subsidiaries, it also prepares consolidated financial statements and lays them at the AGM along with the laying of its own financial statements (section 129(3)). A signed copy of the financial statements must be issued, circulated or published together with the notes, the auditor's report and the Board's report (section 134(7)).

The Directors' Responsibility Statement (DRS) is part of the Board's report (section 134(3)(c)) and its content is set by section 134(5). One item is internal financial controls (IFC). For a listed company, the directors state that they laid down IFC and that these are adequate and operating effectively. IFC means the policies and procedures for orderly and efficient conduct of business, including adherence to company policies, safeguarding assets, preventing and detecting frauds and errors, accuracy and completeness of accounting records, and timely preparation of reliable financial information.

The DRS also covers systems to ensure compliance with all applicable laws. This applies to every company.

Section 131 deals with revision of financial statements and the Board's report. Its text is not supplied here, so read the section and your study material for the exact conditions. Do not write details of it from memory.

Key rules to remember

Flow of reporting: Board approves and signs (s.134(1)) → submitted to auditor → auditor's report attached (s.134(2)) → Board's report, answering the auditor's remarks, goes with statements laid (s.134(3)) → laid at AGM (s.129(2)); Approval and signing come first, as section 134(1) says. In practice the Board's report follows the auditor's report because it must comment on it. The Act does not prescribe a sequence for the later steps.
Who signs the financial statements: Chairperson (if authorised by Board) OR two directors (one the MD, if any) + CEO, CFO and company secretary wherever appointed; OPC: one director; Section 134(1). Signing is for submission to the auditor.
Directors' Responsibility Statement points: s.134(5): (a) AS followed, (b) policies and prudent judgments, (c) accounting records and fraud prevention, (d) going concern, (e) IFC (listed company), (f) compliance systems; Clause (e) on IFC applies only to a listed company. Clause (f) applies to all.
Auditor's remarks: Board must give explanations or comments on every qualification, reservation, adverse remark or disclaimer: s.134(3)(f); Also covers the secretarial auditor's report.
Fraud details: s.134(3)(ca): details of frauds reported by auditors under s.143(12), other than those reportable to the Central Government; Part of the Board's report.
Penalty for default in s.134: Company: ₹3,00,000. Every officer in default: ₹50,000. (s.134(8)); Penalty, not imprisonment.
Penalty for contravening s.129: Imprisonment up to 1 year or fine ₹50,000 to ₹5,00,000, or both (s.129(7)); Falls on the MD, whole-time director in charge of finance, CFO or person charged by the Board, else all directors.
Deviation from AS: Disclose the deviation, the reasons and the financial effects, if any (s.129(5)); Applies when the statements do not comply with accounting standards.

How to solve Audit-related Reporting and Internal Financial Controls questions

Use this method for any question on reporting, adoption or IFC. Write provision, facts, conclusion.

1Read the facts and find the stage: approval, signing, audit, Board's report or AGM.
2Name the provision. Use section 129 for statements and AGM laying, and section 134 for approval, signing, Board's report and DRS.
3Check who must act: Board, signatories, auditor or directors. Check the company type: listed, OPC, with subsidiaries.
4State the rule in plain words. Quote the key phrase, such as 'adequate and operating effectively'.
5Apply the rule to the facts. Say what the company did right or wrong.
6Give the consequence: penalty under section 134(8), or section 129(7) may be attracted for a contravention of section 129, or the missing item. If both sections are breached, state each consequence separately.
7End with a one-line conclusion that answers the question asked.

Quickest way: Stage, section, who, penalty

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

MCQ: spot the key word. 'Listed' points to the IFC clause in section 134(5)(e). 'Subsidiary' points to consolidation under section 129(3).
MCQ: eliminate options that are illogical, such as the auditor reporting before the Board has approved the statements, or the Board's report ignoring the auditor's qualification.
MCQ: for penalties, recall ₹3,00,000 and ₹50,000 for section 134 and ₹50,000 to ₹5,00,000 with up to one year's imprisonment for section 129.
Written: use three labelled lines: Provision, Facts, Conclusion. Put the section number in the first line to earn the step mark.
Written: list DRS points as short numbered items. Do not write long paragraphs.

Common mistakes in Audit-related Reporting and Internal Financial Controls

Saying IFC reporting in the DRS applies to every company.
Students remember the DRS list as one block.
Fix: Section 134(5)(e) says 'in the case of a listed company'. Clause (f) on compliance systems applies to all.
Thinking the auditor's report goes to members without any Board response.
Students stop at the auditor's report.
Fix: The Board's report must explain every qualification, reservation, adverse remark or disclaimer (section 134(3)(f)).
Mixing up section 129 and section 134 penalties.
Both deal with financial statements.
Fix: Section 129(7): up to one year or ₹50,000 to ₹5,00,000 fine, or both. Section 134(8): ₹3,00,000 on the company, ₹50,000 on each officer in default.
Forgetting consolidated statements are laid at the AGM along with standalone ones.
Students focus on standalone accounts.
Fix: Under section 129(3) a company with one or more subsidiaries prepares consolidated statements as well, and lays them along with its own.
Saying the auditor signs the financial statements for the Board.
Confusion between signing and reporting.
Fix: The Board approves and the named officers sign. Then the statements go to the auditor for his report.
Ignoring a departure from an accounting standard because the numbers look fair.
Students think a true and fair view is enough on its own.
Fix: Section 129(5) requires the company to disclose the deviation, the reasons for it and the financial effects, if any.

Worked examples

Example 1

X Ltd is a listed company. Its Board's report states that the accounts were prepared on a going concern basis, but says nothing about internal financial controls. The auditor has given a qualified opinion on one matter, and the Board's report is silent on it. Advise on compliance.

Show the solution

Provision: Section 134(5) lists what the Directors' Responsibility Statement must state. Clause (e) requires directors of a listed company to state that they laid down internal financial controls and that these are adequate and operating effectively.
Facts: X Ltd is listed, so clause (e) applies. The report mentions going concern only, which is clause (d). The IFC statement is missing.
Provision on the auditor's remark: Section 134(3)(f) requires the Board's report to include explanations or comments on every qualification, reservation, adverse remark or disclaimer in the auditor's report.
Facts: The Board's report is silent on the qualification. This is a breach of clause (f).
Consequence: Under section 134(8), the company is liable to a penalty of ₹3,00,000 and every officer of the company who is in default to ₹50,000.

Answer: X Ltd has not complied with section 134. It must add the IFC statement under section 134(5)(e) and give the Board's explanation on the auditor's qualification under section 134(3)(f). Default attracts ₹3,00,000 on the company and ₹50,000 on each officer in default.

Example 2

Y Ltd has two subsidiaries. At its AGM the Board lays only Y Ltd's own financial statements. The Board's report has not been attached. State the position under the Companies Act, 2013.

Show the solution

Provision: Section 129(2) requires the Board to lay financial statements for the financial year at every AGM.
Section 129(3): where a company has one or more subsidiaries, it must also prepare consolidated financial statements of the company and all subsidiaries, in the same form and manner as its own, and lay them at the AGM along with the laying of its financial statement under section 129(2).
Facts: Y Ltd has two subsidiaries, so consolidated statements are required. They were not laid.
Section 129(3) first proviso also requires a separate statement of salient features of the subsidiaries' financial statements, in the prescribed form, to be attached to the company's financial statement. This was not attached either.
Section 134(3): a Board's report must be attached to statements laid before the company in general meeting. It is missing.
Consequence 1: Failure to lay the consolidated statements and to attach the salient features statement is a contravention of section 129. Section 129(7) may therefore be attracted against the officers named in it: the managing director, the whole-time director in charge of finance, the CFO or any other person charged by the Board, and in their absence all the directors. The punishment is imprisonment up to one year or a fine of ₹50,000 to ₹5,00,000, or both.
Consequence 2: The missing Board's report is a default in complying with section 134, so section 134(8) applies: penalty of ₹3,00,000 on the company and ₹50,000 on every officer of the company who is in default.

Answer: Y Ltd has made two separate breaches. Not laying the consolidated statements and not attaching the salient features statement contravene section 129, so section 129(7) may be attracted against the officers named in it. Not attaching the Board's report is a default under section 134 and attracts section 134(8): ₹3,00,000 on the company and ₹50,000 on each officer in default. Y Ltd must lay the consolidated statements and attach the salient features statement and the Board's report.

Exam tips

Remember the logic, not a fixed order: Board approval and signing come first, then submission to the auditor. The auditor's report is attached, and the Board's report, which answers the auditor's remarks, goes with the statements laid at the AGM.
Memorise the DRS list (a) to (f) and mark which clause is only for listed companies.
Keep the two penalty sets apart: section 129(7) and section 134(8). Write the figures in rupees. If one case breaches both sections, deal with each separately.
In case studies, write 'Provision, Facts, Conclusion' and cite the sub-section, for example section 134(3)(f).
For section 131, learn the exact conditions from your study material and the statutory text. Do not fill gaps with guesses.

Practice questions from Accounts of Companies

Audit-related Reporting and Internal Financial Controls in other exams

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

Audit-related Reporting and Internal Financial Controls: frequently asked questions

Who signs the financial statements before they go to the auditor?

Under section 134(1), the chairperson if authorised by the Board, or two directors, one of whom is the managing director if there is one. The CEO, CFO and company secretary also sign wherever appointed. A One Person Company needs only one director.

Does every company have to state in the Board's report that IFC are adequate and operating effectively?

No. Section 134(5)(e) applies to a listed company. Clause (f), on systems to ensure compliance with applicable laws, applies to companies generally.

What happens if the financial statements do not follow an accounting standard?

Section 129(5) requires the company to disclose the deviation, the reasons for it and the financial effects, if any. The statements must still aim to give a true and fair view.

Who is punished if a company contravenes section 129?

Section 129(7) names the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person charged by the Board with the duty. If none of them is there, all the directors are liable. The punishment is imprisonment up to one year or a fine of ₹50,000 to ₹5,00,000, or both.