Corporate Accounting and Auditing · Secretarial Audit

Secretarial Audit Process and Penalties for CMA Inter

Updated 10 October 2026 · Fact-checked

Secretarial audit is an audit of a company's secretarial and related records by a company secretary in practice. The process runs from planning to verification to reporting. Under section 204(4), a contravention attracts a penalty of ₹2 lakh on the company, each officer in default, or the company secretary in practice who is in default.

Understand Secretarial Audit Process and Penalties

A secretarial audit checks whether a company has followed the laws, rules and standards that apply to it, and whether its secretarial records are properly kept. The audit is done by a company secretary in practice. It is not the same as the financial audit by the statutory auditor, and it is not the cost audit under section 148.

Section 204(1) requires every listed company, and companies of other prescribed classes, to annex a secretarial audit report to the Board's report made under section 134(3). The form of the report is prescribed. Which unlisted companies are covered, and the report form, come from the rules, not from section 204 itself.

The process follows the usual audit flow. First the auditor plans: understands the company, lists the applicable laws and agrees the scope. Then the auditor verifies records such as minutes, registers, statutory filings and returns against the requirements. Findings are then written up as a report with any qualifications or observations. The company must help. Section 204(2) makes it the company's duty to give all assistance and facilities for auditing the secretarial and related records.

The report does not end with the auditor. Under section 204(3), the Board must explain in full any qualification, observation or other remark in its own report. This puts pressure on the Board to fix gaps rather than hide them.

Penalties matter because all three parties can be punished. Section 204(4) says that if the company, any officer of the company or the company secretary in practice contravenes the section, the company, every officer in default, or the company secretary in practice in default is liable to a penalty of two lakh rupees. Penalties are imposed by an adjudicating officer under section 454, after giving a reasonable opportunity of being heard. Benefits include better compliance, early warning of defaults and more confidence for investors. Limitations include dependence on records given by management, limited scope to laws applicable, and the fact that it does not replace the financial audit.

Key rules to remember

Who must annex the report: Listed companies + prescribed classes → secretarial audit report annexed to the Board's report under section 134(3); Section 204(1). The report is given by a company secretary in practice in the prescribed form.
Company's duty to assist: Company must give all assistance and facilities for auditing secretarial and related records; Section 204(2).
Board's response: Board must explain in full every qualification, observation or other remark; Section 204(3). The explanation goes in the Board's report.
Penalty for contravention: Company, every officer in default, or company secretary in practice in default: penalty of ₹2,00,000; Section 204(4). It covers the company, officers and the auditor.
Lesser penalty for small entities: Penalty ≤ ½ of the stated penalty, subject to a maximum of ₹2,00,000 for a company and ₹1,00,000 for an officer in default or any other person; Section 446B. Applies to One Person Company, small company, start-up company or Producer Company.
Adjudication and appeal: Adjudicating officer (not below Registrar) imposes penalty after hearing; appeal to Regional Director within 60 days of receiving the order; Section 454(1), (4), (5), (6).
Non-compliance with adjudication order: Company: fine ₹25,000 to ₹5,00,000. Officer in default or other person: imprisonment up to 6 months or fine ₹25,000 to ₹1,00,000, or both; Section 454(8), where the order is not complied with within 90 days of receiving its copy.

How to solve Secretarial Audit Process and Penalties questions

Use this method for any question on the secretarial audit process, checklist, penalty or benefits and limitations.

1Identify what is asked: process, checklist, penalty, or benefits and limitations. Write that as your opening line.
2State the legal base: section 204 applies to every listed company and prescribed classes, with the report annexed to the Board's report under section 134(3).
3For a process question, list the stages in order: understanding the company and planning, scoping applicable laws, verifying records, collecting evidence, forming findings, reporting, and Board response.
4For a checklist question, group items under headings such as minutes and registers, statutory filings, Board and general meetings, and compliance with applicable laws and standards.
5For a penalty question, name each party (company, officer in default, company secretary in practice), the amount of ₹2 lakh under section 204(4), and who imposes it under section 454.
6Add the special cases that fit the facts: lesser penalty under section 446B for small entities, and the appeal route to the Regional Director.
7Close with a one-line conclusion that applies the rule to the facts given.

Quickest way: Three-party penalty check

When to use it: Use this when a short question gives a default and asks who is liable and for how much.

Check whether the company is listed or in a prescribed class. If not, section 204 may not apply.
Name the party in default: company, officer, or the company secretary in practice.
Apply ₹2,00,000 under section 204(4) to each party in default.
Check if the company is a One Person Company, small company, start-up company or Producer Company. If yes, apply section 446B: at most half the penalty, within the caps.
Mention that the adjudicating officer decides after a hearing and that appeal lies to the Regional Director within 60 days.

Common mistakes in Secretarial Audit Process and Penalties

Saying the penalty applies only to the company.
Students remember the company as the main party and forget the rest of the sentence.
Fix: Section 204(4) names the company, every officer in default and the company secretary in practice in default. Name all three.
Mixing up secretarial audit with cost audit or statutory audit.
All are audits annexed to or linked with the Board's report, and the names look alike.
Fix: Secretarial audit checks compliance and records by a company secretary in practice. Cost audit under section 148 is by a cost accountant. Statutory audit covers financial statements.
Forgetting the Board's duty to respond to the report.
Students focus on the auditor's work and stop at the report.
Fix: Add that under section 204(3) the Board must explain in full any qualification, observation or remark in its own report.
Applying the ₹2 lakh penalty to a small company without checking section 446B.
Students learn the headline amount and skip the special rule.
Fix: For a One Person Company, small company, start-up company or Producer Company, the penalty is not more than half the specified amount, within the caps in section 446B.
Saying the company secretary in practice pays under the Companies Act only if they sign wrongly.
Students assume the auditor is always protected.
Fix: Section 204(4) makes the company secretary in practice liable if they contravene the section and are in default.
Treating section 454 as the source of the penalty amount.
Both sections appear in the same answer.
Fix: Section 204(4) gives the amount. Section 454 gives the procedure: adjudicating officer, hearing, appeal and consequences of not complying with the order.

Worked examples

Example 1

Sharma Textiles Ltd is a listed company. It did not annex a secretarial audit report to the Board's report. Who may be penalised and by how much? The company is not a small company or start-up.

Show the solution

The company is listed, so section 204(1) requires a secretarial audit report to be annexed to the Board's report under section 134(3).
Not annexing it is a contravention of section 204.
Under section 204(4), the company and every officer of the company who is in default are each liable to a penalty of ₹2,00,000.
Section 446B does not apply, as the company is not a One Person Company, small company, start-up company or Producer Company.
The penalty is imposed by an adjudicating officer under section 454 after a reasonable opportunity of being heard.

Answer: The company and every officer in default are each liable to a penalty of ₹2,00,000 under section 204(4), imposed by the adjudicating officer after a hearing.

Example 2

Kaveri Foods Pvt Ltd is a start-up company recognised under the Central Government notification, and it is covered by section 204. It contravenes the section. The penalty for the company is stated as ₹2,00,000 and for an officer in default it is also ₹2,00,000. What is the maximum penalty on the company and on the officer in default?

Show the solution

Section 204(4) states the penalty as ₹2,00,000 for each party in default.
The company is a start-up company, so section 446B applies.
Section 446B limits the penalty to not more than one-half of the penalty specified, subject to a maximum of ₹2,00,000 for a company and ₹1,00,000 for an officer in default.
Company: one-half of ₹2,00,000 = ₹1,00,000. This is below the cap of ₹2,00,000.
Officer in default: one-half of ₹2,00,000 = ₹1,00,000. This equals the cap of ₹1,00,000.

Answer: The maximum penalty is ₹1,00,000 on the company and ₹1,00,000 on the officer in default.

Exam tips

For a 'procedure' question, write the stages as a numbered list: planning, scoping laws, verifying records, findings, report, Board response. Examiners give step marks for sequence.
Always quote section 204(4) for the penalty and name all three parties. This is a frequent one-line MCQ trap.
If the question mentions a small company, One Person Company, start-up or Producer Company, check section 446B before writing the amount.
For benefits and limitations, give two or three of each. Benefits: better compliance, early detection of defaults, investor confidence. Limitations: reliance on management records, limited to applicable laws, not a substitute for financial audit.
In MCQs, watch the words 'in practice'. The secretarial auditor is a company secretary in practice, while the cost auditor is a cost accountant.

Practice questions from Secretarial Audit

Secretarial Audit Process and Penalties in other exams

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

Secretarial Audit Process and Penalties: frequently asked questions

What is the penalty under section 204 of the Companies Act, 2013?

Section 204(4) says that if the company, any officer of the company or the company secretary in practice contravenes the section, each one in default is liable to a penalty of two lakh rupees. For small entities, section 446B may reduce this.

Who must get a secretarial audit done?

Every listed company and companies of other prescribed classes. The report is given by a company secretary in practice and annexed to the Board's report under section 134(3). The other classes are set by the rules.

What must the Board do about remarks in the secretarial audit report?

Under section 204(3), the Board must explain in full any qualification, observation or other remark made by the company secretary in practice. The explanation goes in the Board's report.

Who imposes the penalty and can it be challenged?

Under section 454, an adjudicating officer, not below the rank of Registrar, imposes the penalty after giving a reasonable opportunity of being heard. A person aggrieved can appeal to the Regional Director within sixty days of receiving the order.

What are the limitations of a secretarial audit?

It depends on records and information given by management. It covers compliance with applicable laws and standards, not the truth and fairness of financial statements. It does not replace the statutory audit or the cost audit.