Corporate and Other Laws · Audit and Auditors

Statutory Audit and Books of Account Basics (Companies Act, 2013)

Updated 4 October 2026 · Fact-checked

Statutory audit is an independent check of a company's financial statements, which are prepared from the books of account. Section 128 requires every company to keep books on accrual basis and double entry system, giving a true and fair view. To answer, state the rule, apply it to the facts, and conclude.

Understand Statutory Audit and Books of Account Basics

A company cannot show its true position without records. Books of account are the day-to-day records of transactions: cash book, ledger, journal, vouchers and related papers. Financial statements are the summary prepared from those books at the year end, such as the balance sheet and the statement of profit and loss. Books come first. Statements come out of them.

Section 128(1) says every company must prepare and keep at its registered office books of account, other relevant books and papers, and financial statement for every financial year. They must give a true and fair view of the state of affairs of the company, including its branch offices, and explain transactions at the registered office and the branches. The books must be kept on accrual basis and according to the double entry system.

The law gives some flexibility. The Board may decide to keep the books at another place in India. If it does, the company must file a notice with the Registrar within seven days of the decision, giving the full address of that place. The company may also keep books and papers in electronic mode in the prescribed manner.

For branches, section 128(2) gives a deemed compliance rule. If proper books for branch transactions are kept at the branch, and proper summarised returns are sent periodically to the registered office (or the other place), the company is deemed to have complied with section 128(1). This applies to branches in India or outside India.

Audit sits on top of this. The auditor examines the books and the financial statements and reports whether they give a true and fair view. Good books make a good audit. Poor books lead to a qualified or adverse report. Directors have a right to inspect the books (section 128(3)), and officers must give them reasonable assistance (section 128(4)).

Key rules to remember

Basis and system of books: Books of account = accrual basis + double entry system (s. 128(1)); Both conditions are mandatory. Cash basis or single entry does not comply.
Place of keeping books: Registered office; or other place in India if Board decides + notice to Registrar within 7 days (s. 128(1) first proviso); Notice must give the full address of the other place.
Electronic mode: Books may be kept in electronic mode in the prescribed manner (s. 128(1) second proviso); The manner is prescribed in the Rules. Do not quote rule details unless sure.
Branch office compliance: Proper books at branch + periodic summarised returns to registered office = deemed compliance (s. 128(2)); Applies to branches in India or outside India.
Inspection by directors: Any director may inspect books during business hours (s. 128(3)); subsidiary inspection only by a person authorised by Board resolution; For financial information kept outside India, copies must be kept and produced, subject to prescribed conditions.
Preservation period: Books for not less than 8 financial years immediately preceding a financial year, with vouchers (s. 128(5)); If the company is less than 8 years old, keep for all preceding years. Central Government may direct a longer period if an investigation is ordered under Chapter XIV.
Penalty for default: Fine: not less than ₹50,000, up to ₹5,00,000 (s. 128(6)); Imposed on the managing director, whole-time director in charge of finance, CFO or other person charged by the Board. Imprisonment was removed w.e.f. 21-12-2020.

How to solve Statutory Audit and Books of Account Basics questions

Use this method for any question on books of account, financial statements or the audit framework.

1Identify what is asked: books of account, financial statements, audit scope or penalty.
2Recall the rule in plain words with its exact conditions, such as accrual basis, double entry, place, period.
3Pick out the facts: where books are kept, whether there is a branch, how long records were kept, who defaulted.
4Apply the rule to each fact one by one. Check the 7-day notice, the 8-year period and the deemed compliance test for branches.
5Name the person liable if there is a default, as per section 128(6).
6State the penalty range only if the question asks for it.
7Write a clear conclusion in one line: complied or not complied, and the consequence.

Quickest way: Rule, Facts, Conclusion in six lines

When to use it: Use it in the 70-mark written part when time is short, and as a checklist for MCQs.

For MCQs, look for the trap number: 7 days, 8 years, ₹50,000 and ₹5,00,000. Match the option to the exact figure.
Eliminate options saying cash basis, single entry, or imprisonment. Section 128 does not allow the first two, and imprisonment has been omitted.
For written answers, write: Provision, Facts, Conclusion. Each part earns marks.
Quote the section number only for what you are sure of: 128(1), (2), (3), (5), (6).
Keep one line for the penalty and the persons liable.
Underline key terms such as accrual basis and double entry system.

Common mistakes in Statutory Audit and Books of Account Basics

Treating books of account and financial statements as the same thing.
Both appear together in section 128(1) and sound alike.
Fix: Remember the flow: books are the records of transactions, financial statements are the year-end summary prepared from them.
Saying books may be kept only at the registered office.
Students remember the main rule and skip the proviso.
Fix: The Board may decide on another place in India, but must file a notice with the Registrar within seven days giving the full address.
Writing 'eight years from the date of the transaction' for preservation.
Students recall the number but not the reference point.
Fix: The rule covers not less than eight financial years immediately preceding a financial year, with the relevant vouchers. For a younger company, all preceding years.
Stating that imprisonment is still a punishment under section 128(6).
Old notes still carry the earlier punishment.
Fix: Imprisonment and the 'or with both' words were omitted w.e.f. 21-12-2020. Now only a fine of ₹50,000 to ₹5,00,000 applies.
Saying a branch must send full books to the registered office.
Students forget the deemed compliance rule.
Fix: Proper branch books at the branch plus proper summarised returns sent periodically are enough under section 128(2).
Saying only the Board or auditor can inspect books.
Confusing director rights with auditor rights.
Fix: Any director can inspect during business hours. For a subsidiary, inspection is only by a person authorised by a Board resolution.

Worked examples

Example 1

The Board of Mehta Textiles Ltd decides to keep its books of account at its factory in another city in India. Advise the company on the compliance needed and the basis on which books must be kept.

Show the solution

Provision: Under section 128(1), books are to be kept at the registered office. The first proviso lets the Board decide on another place in India.
Facts: The Board has chosen the factory in another city within India. This is allowed.
Compliance: The company must file a written notice with the Registrar within seven days of the Board decision, giving the full address of that place.
Basis: The books must be kept on accrual basis and according to the double entry system, and must give a true and fair view.

Answer: The company may keep the books at the factory in India, provided it files a notice with the Registrar within seven days of the Board decision giving the full address. The books must be on accrual basis and double entry system.

Example 2

Shree Ltd was incorporated 5 years ago. It has a branch abroad that keeps its own books and sends summarised returns every quarter to the registered office. The Board asks: (a) is the company in default for not holding the branch books at the registered office, and (b) for how long must it preserve its books?

Show the solution

Rule for (a): Section 128(2) deems compliance with section 128(1) if proper branch books are kept at the branch and proper summarised returns are sent periodically to the registered office.
Application: The branch is outside India, which is covered. It keeps its books and sends returns every quarter, which is periodic.
Conclusion for (a): There is no default, assuming the branch books are proper and the returns are proper summarised returns.
Rule for (b): Section 128(5) requires books for not less than eight financial years immediately preceding a financial year, or for all preceding years if the company is younger than eight years, along with relevant vouchers.
Application: The company is 5 years old, so it is less than eight years old.
Conclusion for (b): It must keep the books for all preceding years together with the vouchers. A longer period may be directed by the Central Government if an investigation is ordered under Chapter XIV.

Answer: (a) No default, as section 128(2) deems compliance with proper branch books and periodic summarised returns. (b) The company must keep books for all 5 preceding years with vouchers, since it is less than eight years old.

Exam tips

Memorise the numbers: 7 days, 8 financial years, ₹50,000 and ₹5,00,000. MCQs test these directly.
In case studies, check who is liable for default: the managing director, whole-time director in charge of finance, CFO or another person charged by the Board.
Use the words 'accrual basis', 'double entry system' and 'true and fair view' in your answer. Examiners look for them.
Do not mention imprisonment under section 128(6). It was omitted w.e.f. 21-12-2020.
Link books of account to audit in one line: the auditor reports on financial statements prepared from books that must meet section 128.

Practice questions from Audit and Auditors

Statutory Audit and Books of Account Basics in other exams

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

Statutory Audit and Books of Account Basics: frequently asked questions

What is the difference between books of account and financial statements?

Books of account are the records of transactions, such as ledgers, cash book and vouchers. Financial statements are the summary prepared from them at the year end, such as the balance sheet and statement of profit and loss. Section 128(1) requires both to give a true and fair view.

Can a company keep books of account in electronic mode?

Yes. The second proviso to section 128(1) allows books and other relevant papers to be kept in electronic mode in the prescribed manner. Check the Rules for the detailed conditions.

For how long must a company preserve its books of account?

Not less than eight financial years immediately preceding a financial year, along with relevant vouchers. If the company is less than eight years old, it must keep them for all the preceding years. The Central Government may direct a longer period if an investigation is ordered under Chapter XIV.

What is the penalty for not complying with section 128?

The managing director, whole-time director in charge of finance, CFO or other person charged by the Board is punishable with fine of not less than ₹50,000 and up to ₹5,00,000. The imprisonment words were omitted w.e.f. 21-12-2020.