Accounts & Audit of Company

ACCOUNTS OF

COMPANY

AUDIT &

AUDITORS

G.P.SAHI

ACCOUNTS OF COMPANY

CHAPTER IX

SECTION(S) 128-138

ACCOUNTS AND AUDIT - A REVIEW

1. BOOKS OF ACCOUNTS.2. FINANCIAL STATEMENT(FS)3. BOARD REPORT.4. CORPORATE SOCIAL RESPONSIBILITY.5. FS TO BE SENT TO MEMBERS/FILED WITH REGISTRAR.6. INTERNAL AUDIT.7. APPOINTMENT OF FIRST AUDITOR.8. SUBSEQUENT APPOINTMENT IN SPECIFIED/NON-SPECIFIED

COMPANY.9. VACANCY IN THE OFFICE OF AUDITOR.10.ELIGIBILTY, QUALIFICATION & DISQUALIFICATION OF AUDITOR.11.POWERS AND DUTY OF AUDITOR.12.PUNISHMENT .

BOOKS OF ACCOUNTS -- SECTION 128

.

Items of cost prescribed

under section 148

BOOKS OF ACCOUNTS

Sale & purchase of goods &

services by a company

Assets and liabilities of

the company

Money received &

expended by a company

BOOKS OF ACCOUNTS -- SECTION 128

. Every company shall:

prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year.

give a true and fair view of the state of the affairs of the company, including that of its branch office, if any, and

explain the transactions effected both at the registered office and its branches and

such books shall be kept on accrual basis and according to the double entry system of accounting

Inspection in respect of any subsidiary of the company shall be done only by any person authorised in this behalf by a resolution of the Board of directors.

Every Company may keep such books of account or other relevant papers in electronic mode.

The company shall intimate to the Registrar on an annual basis at the time of filing of financial statement- the name of the service provider; the internet protocol address of service provider; the location of the service provider (wherever

applicable); where the books of account and other books and

papers are maintained on cloud, such address as provided by the service provider.

The summarised returns of the books of account kept and

maintained outside India, shall be sent to the registered office at quarterly intervals.

BOOKS OF ACCOUNTS -- SECTION

128 .

7

WHAT ARE THEY?

Balance Sheet at the end of the financial year;

Profit or loss account / Income & expenditure Account;

Cash flow statement;

Notes forming part of the Accounts.

True and fair view.

Consolidated financial statements.

FINANCIAL STATEMENTS -- SECTION 129

.

HOLDING COMPANY

Total share capital in the context of subsidiary and associate company includes equity and convertible preference share capital.

Owns / Control ≥ 50% total share capital or

exercises control of Board

Owns / Control 20% total share capital or business

decisions under Agreement

Subsidiary Company

Associate Company

FINANCIAL STATEMENTS

.

Non Compliance with Accounting standards.

Financial year (1st April to 31st March).

Exception:- Companies which are holding/ subsidiaries of Companies incorporated outside India may have a different financial year with the permission of NCLT.

Approval of Financial Statements.

Mandatory restatement of accounts.

Voluntary revision of Financial statements or Board Report

FINANCIAL STATEMENTS -- SECTION

129 .

Extract of Annual Return

Number ofBoard

Meetings

Directors’ Responsibility

Statement

Nomination &

Remuneration Committee

Comments / Explanation by BOD on

Audit Report

Particulars of Loan /

Guarantee / Investment

Related Party

Contracts

Material changes

from end of FY to date of Report

Statement on Risk

Management Policy

Details of CSR Policy

BOD/ Committee

Performance Evaluation

Other Such Matters

Declaration by

Independent Director

BOARD’S REPORT -- SECTION

134 .

Extract of the Annual Return.

Number of meetings of the Board.

Directors’ Responsibility StatementApplicable accounting standard has been followed;Accounting policies selected have been applied consistently,

judgment and estimation made are reasonable;Maintenance of adequate accounting records, safeguarding the

assets, prevention and detecting of fraud;Annual Accounts prepared on a going concern basis; Internal financial control have been laid;Compliance of all applicable laws and that systems are adequate.

BOARD’S REPORT ---- CONTENTS -- SECTION

134 (3) .

Declaration by Independent Directors.

Nomination and Remuneration Committee.

Comments on reservation or Adverse remark made by the Auditors.

Particulars of loans, guarantees or investments.

Particulars of contracts or arrangements with related party transaction along with the justification.

State of the company’s affairs.

Amount towards reserves.

BOARD’S REPORT ---- CONTENTS -- SECTION 134

(3) .

Amount which it recommends should be paid by way of dividend.

Material changes and commitments, if any. Conservation of energy:

Steps taken / impact on conservation of energy; Efforts in brief, made towards technology absorption; Expenditure incurred on Research and Development; Foreign exchange earning and outgo.

Risk management policy of Company.CSR PolicyFormal evaluation of Board’s performance.

BOARD’S REPORT ---- CONTENTS -- SECTION

134 (3) .

Other matters:

Financial summary / highlights;

Change in nature of business, if any;

Details of directors or key managerial person appointed or resigned during the year;

Name of companies which have become or cease to become its subsidiaries, joint venture or associate companies;

Details relating to Deposits under Chapter V;

BOARD’S REPORT -- CONTENTS -- SECTION 134

(3) .

Other matters:

Deposits which are not in compliance with the requirements of Chapter V;

Details of significant and material orders passed by the Regulators or courts or tribunals;

Details in respect of adequacy of internal financial controls.

Restriction on purchase by Company or giving of loans by it for purchase of its shares.

Voluntary revision of Board’s Report

BOARD’S REPORT --- CONTENTS -- SECTION

134 (3) .

APPOINTMENT OF INDEPENDENT DIRECTOR

Appointment for five consecutive years. Reappointment for next five years by Special Resolution in

General Meeting. Cooling period of three years.

DIFFICULTIES ENVISAGED1. Are they really independent?2. No. of companies in which they are director?3. Availability of Independent Director?

APPLICABILITY

PUBLIC COMPANY LISTED COMPANY

Paid-up Capital Turnover Loans/Debenture ≥ Rs. 10 Cr. ≥ Rs. 100 Cr. ≥ Rs. 50 Cr.

BOARD’S REPORT -- CONTENTSSECTION ---- 134 (3)

BOARD’S REPORT -- CONTENTS -- SECTION

134 (3) .

Composition of Audit Committee / Recommendations not accepted.

Vigil MechanismManagerial Remuneration

Every listed company shall disclose in the Board’s report The ratio of the remuneration of each director to the

median remuneration of the employees of the Company for the financial year

For calculating median of salaries:-Arrange the salary data for all the employees (falling under one category) in ascending order. (Salary shall be inclusive of all perquisites and allowances calculated on the basis of cost to the Company.)If the number of employees is even then, Median = Average of the salaries of nth and (n+1)th employee where n = total number of employees / 2.

In example, shown in Table above, number of employees is six, Median will be average of salaries of 3rd and 4th employee. Hence the median will be INR 20,500 (average of INR 16,000 and INR 25,000;

Percentage increase in remuneration of CFO,CEO,CS Explanation on the relationship between average increase in

remuneration and company performance; Comparison of the remuneration of the Key Managerial Personnel

against the performance of the company;

Table: 1 SALARY (INR)Employee 1 10,000Employee 2 15,000Employee 3 16,000Employee 4 25,000Employee 5 30,000Employee 6 35,000

BOARD’S REPORT -- CONTENTS -- SECTION

134 (3) .

Statement of Employees.Managerial Remuneration.Secretarial audit Report.Report on Associate Companies.Report on OPC.Approval of Financial Statements and Board’s

Report.Signing of Board’s report

BOARD’S REPORT -- CONTENTS -- SECTION

134 (3) .

PROMOTING WELFARE

INITIATIVES 20

CORPORATE SOCIAL RESPONSIBILITY

-- SECTION 135 .

Net Worth ≥ Rs. 500 Cr. Turnover ≥ Rs. 1,000 Cr.Net Profit ≥ Rs. 5 Cr.

CSR COMMITTEE ROLE OF THE BOARD

Three or more directors with atleast one independent

directorFormulate &recommend a

CSR Policy Recommend CSR Initiatives

Monitor CSR expenditure

Form CSR Committee

Approve CSR Policy

Ensure Implementation of activities under CSR Ensure 2% spend of net

profit of preceding 3 years.

Disclose reasons for not spending amount

CSR COMMITTEE & ROLE OF BOARD

.

Eradication of

Hunger & Poverty

Promoting

Education

Protection of National Heritage,

Art & Culture

Environment

Sustainability

Benefit of Armed Forces

Veterans

Training to Promote

Rural Sport

Contribution to PM National

Relief Fund

Rural Development Project

Gender Equality &

Women Empowerme

nt

CSR ACTIVITIES --- SCHEDULE VII.

CSR activities are the ones confined to the amended Schedule VII to the CA, 2013.

CSR activities and the expenditure thereto will have to be carried out only in India.

Activities which benefit the Company’s own employees or their families will not be counted for CSR activities.

Change in criteria for a Company.

Contribution to political party whether directly or indirectly will not count for CSR activity.

CSR expenditure would also exclude those on activities undertaken in the normal course of business of a company. Companies belonging to the same group can set up a registered trust or a registered society or a company established under section 8 of the Act, to undertake CSR activities.

CONTOURS OF CSR ACTIVITIES .

1. Explanation to section 135 states that for the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198. Rule 2(f) provides that “Net profit” shall not include the following:i. Any profit arising from any overseas branch or

branches of the company, whether operated as a separate company or otherwise and

ii. Any dividend received from other companies in India which are covered under and complying with the provisions of section 135 of the Act.

ISSUES .

2. Ambiguity in the new law that was expected to be corrected through the rules was the ‘local area preference’.

3. Whether or not social activities falling outside the purview of the schedule from a part of CSR activities still remains doubtful.

4. Tax treatment to be accorded to CSR spends.

5. Approval required under the Foreign Contribution Regulation Act, 2010 (FCRA). Will trigger amendments in FEMA and may require approval RBI.

FINANCIAL STATEMENT

RIGHT OF MEMBER TO COPIES OF AUDITED FINANCIAL STATEMENT ---- SECTION 136

.

ANNEXED WITH SEND TOEvery member

Auditor ReportOther documents

Consolidated financial statements

Every trustee for the debenture-holderAny other person entitled

In case of listed Company, the documents shall be Availability for inspection at registered office and a statement containing the salient features of such documents can be sent to the member in Form AOC-3 .

21 days

RIGHT OF MEMBER TO COPIES OF AUDITED FINANCIAL STATEMENT ---- SECTION 136

. SUBSIDIARY

COMPANY

Separate Audited Financial Statements

Separate Audited

Accounts

ShareholdersWebsite

PENATY Default by Company- Rs. 25,000.Officer in default-Rs. 5000.

A copy of the financial statements, consolidated financial statement shall be filed with the Registrar in Form AOC-4 within 30 days of AGM.

Unadopted financial statements along with the required documents shall be filed with the Registrar within thirty days of AGM.

Adoption of financial statement in adjourned G.M shall be filed with Registrar within 30 days.

OPC shall file financial statement with all documents within 180 days from closure of financial year.

Financial statements shall also have accounts of its subsidiary or subsidiaries which have been incorporated outside India.

In case of no AGM held during the year, statements of facts and reasons should be filed with Registrar within 30 days.

COPIES OF FINANCIAL STATEMENT TO BE FILED WITH REGISTRAR ---- SECTION 137

COPIES OF FINANCIAL STATEMENT TO BE FILED WITH REGISTRAR ---- SECTION 137

PENALTY

OFFICER IN DEFAULT MD/ CFO Directo

rAll

Director

COMPANY Fine of Rs. 1,000 which shall not exceeds Rs. 10 lakhs

Imprisonment which may extends to 6 months

Fine not less than Rs. 1 lakhs but may extends to Rs. 5 lakh

OR BOTH

INTERNAL AUDIT.

APPLICABILITY

LISTED COMPANY

UN-LISTED COMPANY

PRIVATE LTD. COMPANY

Outstanding Loan /

Borrowing ≥ Rs. 100

cr.

Turnover ≥

Rs. 200 cr.

Paid-Up Capital ≥

Rs. 50 cr.

Turnover ≥ Rs. 200 cr.

Outstanding Loan /

Borrowing ≥ Rs. 200 cr.

Outstanding Deposits ≥

Rs. 25 cr.

AUDIT & AUDITORS

CHAPTER X SECTION(S) 139 - 148

BY GOVERNMENT COMPANY BY COMPANY

Extra Ordinary GeneralMeeting

within 60 days.

Board of Directors Within 30 days.

Comptroller and Auditor General within 60 days.

Extra Ordinary GeneralMeeting

within 90 days.

Board of Directors within 30 days.

APPOINTMENT OF FIRST / SUBSEQUENT AUDITOR

.

SUBSEQUENT AUDITOR

LISTED COMPANY PUB. CO PUC ≥ Rs.10 Cr.PVT. CO. PUC ≥ Rs. 20 Cr.ALL COS. BORROWING ≥ RS. 50 Cr.

NON SPECIFIED CLASS

AUDIT FIRMS

INDIVIDUAL AUDITOR

AUDITORS TO HOLD OFFICE FOR A PERIOD OF FIVE YEARS

RATIFICATION AT EACH AGMAPPOINTMENT

FOR ONE TERM OF FIVE YEARS

COOLING PERIOD OF FIVE YEARS

TWO CONSECUTIVE TERMS OF FIVE YEARS

Illustration 1:- Number of consecutive years for which an individual auditor has been functioning as auditor in the same company I

Maximum number of consecutive years

for which he may be appointed in the same company

(including transitional period)

Aggregate period which the auditor would complete in the same company in view of column I

and II

I II III 5 years (or more than

5 years) 3 years 8 years or more

4 years 3 years 7 years 3 years 3 years 6 years 2 years 3 years 5 years 1 year 4 years 5 years

Illustration explaining rotation in case of individual auditor

ROTATION OF AUDITOR

.

Illustration explaining rotation in case of audit firm

ROTATION OF AUDITOR

. Number of consecutive years for which an audit

firm has been functioning as auditor in the same

company

Maximum number of consecutive years for which the firm may be appointed in the same

company

Aggregate period which the firm would complete in the same company in view of column I and II

I II III 10 years (or more than 10

years) 3 years 13 years or more

9 years 3 years 12 years 8 years 3 years 11 years 7 years 3 years 10 years 6 years 4 years 10 years 5 years 5 years 10 years 4 years 6 years 10 years 3 years 7 years 10 years 2 years 8 years 10 years 1 year 9 years 10 years

Audit Committee should recommend the incoming Auditor. No common partner between incoming and outgoing firm. During the tenure the auditor can resign or may be removed. Members in General Meeting may decide the rotation of the

audit partner and his team or may appoint joint auditor. Auditor to give his consent for appointment. Company to inform to the auditor and the Registrar.

ACTION STEPSCompanies should assess as to whether a change in auditors is required and prepare for the transition accord ing ly . This may result in increased cost.

ROTATION OF AUDITOR

CONTD..

Hindalco Industries

Reliance Industries

Larsen & Toubro

Jaiprakash Associates

Mahindra &

Mahindra

Procter & Gamble

50

3530

25 2320

Auditors' tenure (in years) at Company

VINTAGE AUDITORLarge business groups including Reliance Industries,

Mahindra & Mahindra, L & T and a few MNCs like P&G have had the same auditors for decades

.

AUDITOR OLIGOPOLY

.

Deloitte E&Y PWC KPMG0

102030405060

2012-13

2012-13

5137

2514

Big 4 Others0

20406080

100120140

100200

127

94

VACANCY IN THE OFFICE OF AUDITOR

CASUAL VACANCY

REMOVAL BY COMPANY BY SPECIAL RESOLUTIONAFTER OBTAINING PRIOR

APPROVAL OF C.GSECTION 140(1)

REMOVAL BY TRIBUNAL

SECTION 140(5)

ANY PERSONCONCERNED

APPLICATIONBY CG

SUO MOTUDEATH /

INCAPACITY / DIS-

QUALIFICIAITON

RESIGNATION

WITHIN 30 DAYS BY BOD

WITHIN 90 DAYS IN GM

WITHIN 30DAYS BY

BOD

A retiring auditor may be re-appointed at an Annual General Meeting,

if he is not disqualified for re-appointment;

he has not given the company a notice in writing of his unwillingness to be re-appointed; and

a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed.

RE-APPOINTMENT OF RETIRING AUDITOR

RE-APPOINTMENT OF RETIRING AUDITOR

Action stepsCompanies to make an assessment

of the timing for change of existing auditors in line with the amendments;

Companies to involve audit committees up-front in developing an internal system for assessment of eligible firms for appointment;

Management and audit committee to plan for seamless transition of auditors.

QUALIFICATION & DIS-QUALIFICATION OF AUDITOR

A limited liability partnership registered under the Limited Liability Partnership Act’ 2008 will be eligible for appointment as an auditor.

Persons who shall not be eligible for appointment as an auditor of a Company, namely:

A person who is a relative or partner; Is holding any security or interest in excess one Lac rupees in

the Company*; Is indebted in excess or Rupees Five Lacs to the Company*; or Has given a guarantee or provided any security in connection

with the indebtedness of any third person in excess of one Lac rupees to the Company

*Company includes subsidiary, holding, associate company or subsidiary of such holding company. Any person who has a business relationship with the Company

of commercial nature except transaction of professional service rendered by an auditor or transactions which are in the ordinary course of business and on arms length.

A person whose relative is a director or is in the employment of the company as a director or key managerial personnel;

A person who is holding appointment as auditor of more than twenty companies;

A person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction;

Any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialized services as provided in section 144.

ELIGIBILITY, QUALIFICATION & DIS-QUALIFICATION OF AUDITOR

CONTD.

POWER & DUTIES OF AUDITORS

Right of access to records of all its subsidiaries.

Auditors Report on Accounts, Financial Statements, Auditing and Accounting Standards.

Auditor’s Report shall state aboutAdequate internal financial controls systems.Effect of pending litigation on its financial position.Provision for material foreseeable losses.Delay in depositing money in IEPF.

FRAUD BY THE COMPANY

AUDITOR

within 45 days

Report to the Audit Committee/Board

Central GovernmentForm

ADT-4

Reply

No Reply

An auditor shall provide only such services as are approved by the Board of Directors / Audit Committee, but which shall not include the following services:

accounting and book keeping services; internal audit; design and implementation of any financial information

system; actuarial services; investment advisory services; investment

banking services; rendering of outsourced financial services; management

services; and

Auditor’s Remuneration Auditor to sign Auditor’s Report. Auditor to attend General Meeting. Class Action Suits

AUDITOR NOT TO RENDER CERTAIN SERVICES

AUDITOR -- PENALTYNature of

ContraventionWho is

PunishablePunishment

Default in provisions pertaining to appointment, removal / resignation, eligibility / qualification, remuneration, power and duties. Signing of audit report not rendering certain services

Company

Officer

Fine:Rs. 25,000/- to Rs. 5 Lacs

Imprisonment upto 1 year

ORFine: Rs. 10,000/- to Rs. 1 Lac or both

Default in provisions pertaining to Appointment of Auditors, power and duties of director, Auditor not to render certain services

Auditor Fine: Rs. 25,000/- to Rs. 5 Lacs

AUDITOR -- PENALTYNature of

ContraventionWho is

PunishablePunishment

Intention to deceive Company / Shareholders / Creditors / Tax Authorities

Auditor Fine:Rs. 1 Lac to Rs. 25 Lacs

Imprisonment upto 1 year

If convicted Auditor Fine: Refund the remunerationPay damages to Company, Statutory Authorities.

AUDITOR -- PENALTYNature of

ContraventionWho is

PunishablePunishment

FraudSection 147 (5) r/w Rule 9 of Companies (Audit & Auditors) Rules’ 2014

Auditor Fine:Upto thrice the amount involved in the fraud.

Imprisonment for a term of 6 months to 10 years

The term "intention to deceive" or ‘improper or mis-leading statement of particulars’, wrongful act or conduct’ are vague.

Definition of fraud is very wide and ambiguous.Impossible to detect all frauds. Likely difference of opinion as to existence of frauds. Potential unlimited liability on auditor may result in

adverse impact on auditing profession and may give rise to long disputes.

Auditors may have to take indemnity insurance cover against third party liability which might be expensive.

Audit firms will have to increase the support staff to do a more rigorous checking of the accounts.

Auditors are more likely to become conservative and ask for more details of expenses and statements from managements.

ISSUES

THANK YOU!

G.P.SAHI,Vice President(legal) &

Company SecretaryHotel Le Meridien, New Delhi.

[email protected]