company law
company law
company law
Introduction
Meaning of Accounts: Section 128 of the Companies Act 2013
Section 128 of Companies act 2013 stated that every company need to maintain its
registered office books of accounts and other relevant papers and books for every
financial year which states the true and fair view of state of affair of company
including its all branches .
Section 206[1] says that registrar can call for books of accounts, papers,
explanation by giving written notice. Registrar shall write his reason in writing for
giving the notice under section 206. In any special circumstances, central
government can appoint an inspector under section 206[5] for an inspection of
books of accounts, papers.
It is the duty of officers, directors and employees to produce all the documents,
statements, information which was asked by the registrar or inspector during
inspection.
The registrar and inspector can take the copies of books of account as a token of
inspection having been made.
Directors have also the Right of inspection- Section 128 [3] says that director can
inspect the accounts of books. Right of inspection is a statutory right , If a director
has been prevented from this right , he may enforce it from the court. Also this
Right is not an absolute in nature.
Accounting standards
Section 129[1] says that financial statement shall comply with accounting
standards given under section 133
Financial statements ( Sec. 129) The Financial statements shall give a true and fair
view of the state of affairs of the company and it should comply with accounting
standards given u/s 133 & shall be in the form or forms as may be provided for
different class of companies in Schedule III. This does not apply to any insurance,
banking or any electricity company or to any other class of company for which a
form of financial statements has already been specified. The company shall
disclose in its financial statements for the deviation from the accounting standards
with reason and stating its affect on the financial statements.[section129(5)].
Consolidated financial statements in case of subsidiaries
The Companies Act, 2013 Act mandat”s consolidated financial statements (CFS)
for any company having a subsidiary, associate or a joint venture [section 129(3)].
Further, the 2013 Act requires adoption and audit of CFS in the same manner as
standalone financial statements of the holding company [section 129(4)].
The consolidation of financial statements of the company shall be made in
accordance with the provisions of Schedule III of the Act and the applicable
accounting standards.
Reopening of accounts on Court’s or Tribunal’s Orders (section130) and. Voluntary
revision of financial statements or board’s report (Sec 131)
The Companies Act 2013 act states that a company can re-open its books of
accounts and recast its financial statements after making an application in this
regard to the central government, the income tax authorities, the SEBI, or any other
statutory regulatory body or authority or any other person concerned, and an order
is made by a court of competent jurisdiction or the Tribunal under the following
circumstances:
Detection of fraud
Detection of technical error
Detection of error of principles.
The ability for success of such an goal was a unique analysis of transactions.
Document retained must belong to the client who owes the money.
Documents need to be in possession of the auditor on the authority which was of
client. It should not been received through any irregular or illegal means. In case of
company client they must be received on the authority of the board of directors.
The auditor can retain the documents only if he has done work on the documents
assigned to him.
Such of the documents can be retained which are connected with the work on
which fees have not been paid.
Limitation of auditor’s duties
No limitation can be placed upon rights or responsibilities of the auditor given
under section 143 either done by any articles of company or done by any other
resolution of the members. Where the articles of company provided:
Directors shall have power to form an internal reserve which was once no longer to
be disclosed in the balance sheet and which must be utilised in a way that directors
thought fit.
Auditors shall have access to accounts to relating to such reserve fund and that it
was once utilised to the functions of the company as mentioned in the special
articles , however that they should no longer disclose any data with regard to the
shareholders or otherwise; such provisions in the articles had been held to be
invalid as being hassle of the statutory responsibilities of the auditors
Who is an auditor
An auditor is a person appointed to validate the correctness of the accounting
records of the company. Under the Companies Act, 2013, a person practising
Chartered Accountant (hereinafter, “CA”) is qualified to be appointed as the
statutory auditor in a company. A person would not be qualified as a company’s
statutory auditor unless there is appropriation on the part of the person to perform
in the capacity of an auditor. Furthermore, as per the Companies Act, 2013, only a
practising Chartered Accountant is qualified to be appointed as a statutory auditor
in a company. Such appointments are possible if a majority of the partners are
executing Chartered Accountants.
Importance of Auditors/Auditing
Auditing is important because it increases the credibility of a set of financial
statements and convinces shareholders that the financial statements are accurate
and fair. It also helps to improve a company’s internal controls and systems.
Auditing helps in improving a company’s profitability and plays an essential role
in the public interest and the company’s trust factor.
Furthermore, auditors are important because they can provide an objective and
independent opinion on an organisation’s financial statements. It benefits
companies in several ways, such as finding errors in processing, maintaining
consistency, or detecting some kind of fraud. Furthermore, it objectively advises on
the matter related to the company, which involves the board of directors,
shareholders, or interest groups. An auditor’s ability to prepare fair financial
statements for a particular company also helps in reducing investor risk while
ensuring effectiveness. This, in turn, boosts the confidence of the investors.
Furthermore, an audit report provides an overview of a company’s financial
statements, indicating good corporate governance, if passed.
Types of Auditors
It is important to understand that auditors can be of two types, i.e., internal auditors
and external auditors.
Internal Auditors
According to Section 138 (1) of the Companies Act, 2013, read with Rule 13 of
Companies (Accounts) Rules, 2014, the following class of companies need to
appoint Internal Auditors:
External Auditors
On the other hand, an external auditor is defined as an auditor who audits an
organisation from an independent perspective. They will look at several areas of
the organisation, such as risk management or financial processes and reporting, to
check whether they are working properly and being properly documented. For
example, after an audit is completed, an external auditor can provide their
objective audit to shareholders or stakeholders. A classic statutory audit, also
known as an audit or statutory audit, is performed by an external auditor.
The external auditor’s role is to determine whether the accounts are adequately
kept and whether the financial statements truthfully and fairly reflect the
company’s financial position. The external auditor’s report is critical because it
contains the auditor’s assessment of the company’s integrity. Financial statements
and audit reports are available to stakeholders, including the public. The judgment
of the external auditor is impartial and pure with the members of the companies.
Auditors are appointed in a way that they can exercise their powers until the
conclusion of the First General Meeting of Shareholders. The company must file
an ADT-1 form (hereinafter, Form for Appointment of First Auditor) with the
Registrar of Companies along with the prescribed fee. For government companies,
the first auditor will be appointed by the Auditor General of India within 60 days
from the date of incorporation of the company; if the Auditor General of India fails
to appoint the auditor within the said period, the board of directors of the company
will appoint the latter within the next thirty days. If not appointed by the board
within the next thirty days, members must approve an auditor within sixty days in
the Extraordinary General Meeting (hereinafter, EGM). The term of office for the
first auditor will be until the conclusion of the first annual general meeting.
Furthermore, the subsequent appointment of an auditor will be made by the
members, and he/she will hold office until the conclusion of the sixth annual
general meeting. However, it is important to note down that the company members
will permit an auditor’s appointment in every annual general meeting.
Pursuant to Rule 3(6) of the Companies (Auditors and Auditors) Rules 2014, if the
board decides not to reconsider the recommendation given by the Audit Committee
related to the appointment of a firm or an individual as an auditor, the board must
record the reasons for its disagreement with the committee, and submit its own
proposals for consideration of the members at the Annual General Meeting
(AGM).
Section 139 also provides that prior to any such appointment, the written approval
of the auditor for such appointment must be obtained, and the appointment of the
individual auditor or firm, if appointed, will comply with the prescribed terms.
Rule 4 of the Companies (Audit and Auditors) Rules, 2014, obligate the auditor to
submit a certificate that contains:-
He or the company (as the case may be) shall be entitled to an appointment and not
be disqualified under the Act, the Chartered Accountants Act 1949, and any rules
or regulations made therein;
The term of office to be appointed shall be the term prescribed by law;
The proposed appointment is within the scope of the law or is authorised by the
law;
The list of pending professional proceedings against the statutory auditor, the audit
firm, or a partner of the audit firm disclosed in the auditor’s report is true and
accurate.
The auditor’s certificate must also indicate whether the auditor also meets the
criteria of Section 141 of the Act (listed in the following paragraphs).
The firm must notify the applicable auditor of its appointment within fifteen days
of the meeting to appoint/re-appoint the auditor and file a notification of such
appointment with the Registrar on Form ADT-1.
Other reasons are that an auditor should have reasonable skills, caution, and care
depending on each case’s circumstances. There are several other purposes for
appointing an auditor, such as examining the company’s accounts; he or she should
not be biased and give an independent opinion to the company’s owners to keep
the company’s financial condition safe and protected from the threat. An auditor is
not obligated to be a detective and approach his work with suspicion or any
preconceived conclusion. If there is anything that might give rise to suspicion, he
should investigate, but if such issues are not there, then he has the only duty to take
reasonable care and caution.
Appointing an auditor is one of the key tasks a company has to face. As an auditor,
they have many responsibilities that serve the company’s interests, in addition to
reviewing consistent financial statement records and maintaining their occasional
maintenance. Auditors are appointed after a thorough examination and
consideration of the quality of the personnel. All these things make an auditor’s
role very important in a company’s development, and their paramount purpose in a
company cannot be ignored.
Duties of an auditor
Section 143 sets out the powers and duties of the auditor. Every auditor of the
company shall have the right to inspect the books and records of the company at
any time, whether kept at the company’s registered office or elsewhere, and shall
have the right to request such information as he deems necessary for the
performance of his acts. Statements necessary for the duties of auditors and
inquiries about the following, such as:
Whether loans and advances made by the company by way of security are properly
secured and whether the terms of the loans and advances are prejudicial to the
interests of the company or its members;
Whether the company’s transaction represented solely by the booking is
detrimental to the company’s interests;
If the company is not an investment company or bank; whether most of the
company’s assets (including stocks, bonds, and other securities) are being sold at a
lower price than when the company purchased it;
Whether the loans and advances made by the entity have been recorded as
deposits;
Whether personal expenses are included in the revenue account;
If the company’s books and documents indicate that shares were distributed as
cash, whether the distribution received cash, and if no cash was received, whether
the item is correct, regular, and not misleading as indicated on the books and
balance sheet.
The auditor of a company also has the power to examine the records of all its
subsidiaries in order to consolidate its accounts.
The auditor will report to the shareholders on its audited books and financial
statements to be submitted under this Act or to the company’s general meeting of
shareholders and prepare reports in accordance with the provisions of this Act, the
accounting and auditing standards, and the law or in accordance therewith. The
regulations enacted require matters to be included in the audit report and, to the
best of our knowledge and belief, declare that the above-mentioned financial
statements are a true and fair view of the company’s year-end profit and loss and
cash flow and other prescribed matters.
Work of an auditor
The work of an auditor has been laid down under the Companies Act, 2013, given
in Section 143. The Act further explains the duties of an auditor, while the list
provided is not exhaustive.
Auditing standards
The Central Government shall issue auditing standards in collaboration with the
National Financial Reporting Authority. These standards help the auditor to
perform his/her auditing tasks in the given subject manner. However, there lies a
responsibility on the auditor to comply with the standards while performing his/her
tasks because this will boost their efficiency.
Rights of an auditor
The Companies Act gives extensive rights to an auditor. Specific provisions are
specified in the Act, which states that an auditor cannot be prevented by anyone
from enjoying his/her rights. Some of the rights are as follows: –
Branch visits
As per Section 143(8) of the Companies Act, an auditor has full authority to visit
the branches to check all the works related to the company’s matter. However, the
auditor has no authority to visit foreign branches.
Right to be indemnified
Under certain conditions, a company can take civil or criminal actions against the
auditor. If any legal action is taken against him, he generally defends himself
against the proceedings. However, if the judgment goes in his favour means in
favour of the auditor, then the company has to pay compensations for all the losses
incurred by him during the proceeding. These types of rights are general rights
given in most cases.
Conclusion
The Companies Act, 2013 comprehensively clarifies the law relating to statutory
audits and auditors in Sections 139 to 148. From this article, it became clear that
choosing the right auditor is extremely important for the growth of the company.
Several duties stated above prove that the auditor’s role in a company is extremely
important. Typically, an auditor reviews a company’s accounting practices and
determines whether they meet minimum requirements. Furthermore, statutory
auditors review a company’s accounting practices on an annual basis. The review
includes key accounting activities, internal controls, and reporting procedures.
In essence, it is important for a company to have an auditor so that he/she can look
at all the important work required for the company’s growth.
Frequently Asked Questions (FAQs)
What every auditor should know?
Ans: An auditor must know the company where they work. They should observe
people and the business culture. Learn to jargon things and put the best possible
outcome for the company’s benefit.
Conclusion
The Companies Act, 2013 comprehensively clarifies the law relating to statutory
audits and auditors in Sections 139 to 148. From this article, it became clear that
choosing the right auditor is extremely important for the growth of the company.
Several duties stated above prove that the auditor’s role in a company is extremely
important. Typically, an auditor reviews a company’s accounting practices and
determines whether they meet minimum requirements. Furthermore, statutory
auditors review a company’s accounting practices on an annual basis. The review
includes key accounting activities, internal controls, and reporting procedures.
In essence, it is important for a company to have an auditor so that he/she can look
at all the important work required for the company’s growth.
https://blog.ipleaders.in/dividends-audit-and-accounts-under-the-companies-act-
2013/
https://www.klaggarwal.com/others/accounts-under-companies-act-2013/