Co Accounts & Audit Pedia by CA Ravi Agrawal

AUDITPEDIA FOR CA FINAL – PAPER 3 – ADVANCED AUDITING AND PROFESSIONAL ETHICS
Chapter 6A – Company Accounts & Audit
6A.
Company Accounts & Audit
PART I. COMPANY ACCOUNTS
SECTION - 128 BOOKS OF ACCOUNTS, ETC. TO BE KEPT BY COMPANY
Section 2(13) “books of account” includes records maintained in respect of :-

 all sums of money received and expended by a company and matters in relation to which the
receipts and expenditure take place;
 all sales and purchases of goods and services by the company;
 the assets and liabilities of the company; and
 the items of cost as may be prescribed under section 148 in the case of
a company which belongs to any class of companies specified under
that section.
Section 128(1) – Maintenance of Books of Accounts
Conditions:
ii. Give True & Fair view of state of affairs of company
iii. Kept on accrual basis
iv. Kept as per double entry system of accounting
v. Books of accounts must explain the transactions effected at Registered office & Branch.
 First proviso to Section 128(1) – Place of Maintenance of Books of Accounts
 At the Registered Office (RO)

 At such other place as the Board may decide.
(Note: Notice to ROC to be issued within 7 days of board decision, in writing giving full
address of such other place)
 Second proviso to Section 128(1) – Electronic form of Books of Accounts
 Accessible in India
 Back-ups must be kept in servers physically located in India (on a periodic basis)
 Proper storage, retrieval, display & printouts
 Information from Branch, not altered (kept in a manner to depict what was originally
received from the branches)
 Details of Service providers (i.e.) Name, IP address, etc. must be informed to ROC on
annual basis.
Section 128(2) – Books of Accounts w.r.t. Branch of Company
 Where a company has a branch office in India or outside India, the proper books of account
relating to the transactions effected at the branch office may be kept at that office.
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 Proper summarized returns periodically are required to be sent by the branch office to the
company at its registered office or the other place as decided by Board of Directors.
 For foreign branches, periodical means “Quarterly” and it is open to director for inspection.
Section 128(3) – Person Who Can Inspect

a. Books kept within India  shall be open for inspection at the registered
office of the company or at such other place in India by any director
during business hours
b. FINANCIAL INFORMATION maintained OUTSIDE INDIA

i. Summarized returns sent to RO at Quarterly intervals & kept open to directors for
inspection
ii. Directors may request company to furnish ANY OTHER FINANCIAL INFORMATION
specifying the FULL DETAILS & PERIOD for which it is sought.
iii. Company shall produce such Financial Information within 15 days of request.
iv. Financial Information shall be sought for by Director himself & not by or through his
Power of Attorney / agent / representative.
 Proviso to Section 128 (3) – Inspection of Subsidiary shall be done only by person Authorized
by Board’s Resolution.
Section 128(4)
All officers and employees of the company shall give all assistance in connection with the
inspection to the person making such inspection.
Section 128(5) – Preservation of Books of Accounts

 The books of account of every company relating to a period of not less than 8 financial years
immediately preceding a financial year, or where the company had been in existence for a
period less than 8 years, in respect of all the preceding years together with the vouchers
relevant to any entry in such books of account shall be kept in good order.
 Where an investigation has been ordered in respect of the company, the Central Government
(CG) may direct that the books of account may be kept for such longer period as it may
deem fit.
Section 128(6) – Person Responsible for Maintenance & Penalty

If MD, WTD, CFO -in charge of finance or any other person of a company charged by the Board
with the duty of complying with the provisions of this section, contravenes such provisions, shall be
punishable with:
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SECTION - 129 FINANCIAL STATEMENT
Section 129(1) – Form of Financial Statements
The financial statements shall

 give a true and fair view of the state of affairs of the company,
 comply with the AS notified u/s 133 and
 shall be in the form as provided in Schedule III.
Proviso to Section 129 (1) – Exceptions: These provisions shall not

apply to any insurance / banking / Electricity / other companies
governed by such other special act.
Section 129(2)
BOD shall lay the FS for every FY before the AGM.
Section 129(3)
If a company has subsidiary(s) or associate company(s), it shall prepare CFS in same form &
manner as that of its own & as per applicable AS, which shall be laid before the AGM.  Proviso
to Section 129 (3) – Company shall attach along with FS, a separate statement containing salient
features of FS of its subsidiary(s) or associate company(s) in Form AOC - 1.
Section 129(5)
Where the financial statements of a company do not comply with the accounting standards, the
company shall disclose in its financial statements the following: i. the deviation from the
accounting standards, ii. the reasons for such deviation and iii. the financial effects, (if any) arising
out of such deviation.
Section 129(6)
Central Government may, either suo-moto or on an application made, exempt any class or
classes of companies from complying with any of the requirements of this section, if it is necessary
in the public interest and any such exemption may be granted either unconditionally or subject
to such conditions.
Section 129(7) – Penalty for Non-Compliance: Same as Section 128 penalty.
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SECTION - 130 REOPENING OF ACCOUNTS ON COURT/TRIBUNAL ORDER
SECTION - 131 VOLUNTARY REVISION OF FINANCIAL STATEMENTS OR

BOARD’S REPORT (Read with section 129 & 134)
If Financial Statements or Board Report, do not comply with the provisions of section 129 or
section 134 then the company may prepare revised financial statement or a revised board report
in respect of any of the three preceding financial years, after obtaining approval of the
Tribunal on an application made by the company a copy of the order passed by the Tribunal
shall be filed with ROC.
Tribunal shall give notice to CG & IT authorities seeking their representation before passing the
order.
Revised FS or Revised Board Report shall not be allowed for more than once in a FY.
Reasons for revision shall be disclosed in the Board Report in relevant FY in which revision is
made.
Where FS or report are already sent out to members or ROC, then show
 Correction(s) made, and
 Consequential alteration
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SECTION - 132 CONSTITUTION OF NATIONAL FINANCIAL REPORTING

AUTHORITY (NFRA)
The head office of the NFRA shall be at New Delhi and the NFRA may, meet at such other places in
India as it deems fit.
Composition
Functions of NFRA
 make recommendations to the Central Government on the formulation and laying down of
accounting and auditing policies and standards;
 monitor and enforce the compliance with accounting standards and auditing standards;
 oversee the quality of service of the professions associated with ensuring compliance with such
standards, and suggest measures required for improvement;
 Other functions.
Powers
 Power to Investigate:
a. have the power to investigate, either suo-moto or
b. on a reference made to it by the Central Government
into the matters of professional or other misconduct committed by any member or firm of
chartered accountants, registered under the Chartered Accountants Act, 1949
 Have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908.
 where misconduct is proved, have the power to make order for,

A. Imposing Penalty
i. Individual: not less than Rs 100,000, but which may extend to 5 times of the fees
received, and
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ii. Firm: not less than Rs 5,00,000, but which may extend to 10 times of the fees
received
B. Debarring the member or the firm from engaging himself or itself from practice as
member for a minimum period of 6 months or for such higher period not exceeding 10
years as may be decided by NFRA
Person aggrieved by any order: May prefer an appeal before the Appellate Tribunal
Accounts & Audit

 Maintain BOA & other books
 As prescribed by CG
 Audited by C&AG
 Audit Report forwarded to CG by NFRA
 Annual Report forwarded to CG by NFRA
 Audit Report & Annual Report to be laid before each house of Parliament
SECTION - 133 CENTRAL GOVERNMENT TO PRESCRIBE ACCOUNTING

STANDARDS
The CG may prescribe the standards of accounting or any addendum thereto, as recommended by
the ICAI, in consultation with and after examination of the recommendations made by the NFRA.
SECTION - 134 FINANCIAL STATEMENT, BOARD'S REPORTS. ETC.
Section 134(1) – FS including CFS shall be approved by BOD, before they are signed on behalf of
the board by,
In the case of a One Person Company, only by one director.
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Section 134(2) – Auditor’s Report shall be attached to every FS.
Section 134(3) – BOD’s Report shall be attached to statements laid before a company in general
meeting, which shall include —
a. the web address (if any), where annual return referred u/s 92(3) has been placed
b. number of meetings of the Board;
c. Directors’ Responsibility Statement;
d. details in respect of frauds reported by auditor’s u/s 143(12) other than those which are
reportable to the Central Government;
e. a statement on declaration given by independent directors u/s 149(6);
f. for company covered u/s 178(1), company’s policy on directors’ appointment and
remuneration including criteria for determining qualifications, etc.; [made available on
company’s website]
g. explanations or comments by the Board on every qualification, reservation or adverse
remark or disclaimer made —
 by the auditor in his report; and
 by the company secretary in practice in his secretarial audit report;
h. particulars of loans, guarantees or investments u/s 186;
i. particulars of contracts or arrangements with related parties referred to u/s 188(1);
j. the state of the company’s affairs;
k. the amounts (if any), which it proposes to carry to any reserves;
l. the amount (if any), which it recommends should be paid by way of dividend;
m. material changes and commitments (if any), affecting the financial position of the company
which have occurred between the Balance Sheet date but up to the date of report;
n. the conservation of energy, technology absorption, foreign exchange earnings and outgo, in
such manner as may be prescribed;
o. a statement indicating development and implementation of a risk management policy,
including identification therein of elements of risk, which may threaten the existence of the
company;
p. the details about the policy developed and implemented by the company on corporate social
responsibility initiatives taken during the year; [made available on company’s website]
q. in case of a listed company and every other public company having such paid-up share
capital as may be prescribed, a PUSC of Rs.25 Crore is prescribed, a statement indicating the
manner in which formal annual evaluation of the performance of the Board, its Committees
and of individual directors has been made;
r. such other matters as may be prescribed.
 First Proviso to Section 134 (3)

Where disclosures referred to in this sub-section have been included in the financial statements,
such disclosures shall be referred to instead of being repeated in the Board's report.
 Second Proviso to Section 134 (3)

Where the policy referred to in clause (e) or clause (o) is made available on company's
website, if any, it shall be sufficient compliance of the requirements under such clauses if the
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salient features of the policy and any change therein are specified in brief in the Board's report
and the web address is available where complete policy is available.
Section 134(3A) – CG may prescribe an abridged report (Board's report), for the purpose of
compliance with this section by One Person Company or small company.
Section 134(4) – BOD’s report to be attached to the financial statement under this section shall,
in case of a One Person Company, mean a report containing explanations / comments by the
Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in
his report.
Section 134(5) – Contents of Directors Responsibility Statement:
a. applicable AS had been followed while preparing Annual Accounts along with proper
explanation relating to material departures;
b. the directors had selected such accounting policies and applied them consistently and made
judgments and estimates that are reasonable and prudent so as to give a true and fair view
of the state of affairs of the company;
c. Sufficient care for the maintenance of adequate accounting, safeguarding the assets and for
preventing and detecting fraud have been taken;
d. Annual accounts are prepared on a going concern basis; and
e. the directors, in the case of a listed company, had laid down internal financial controls to be
followed by the company and that they are adequate and were operating effectively.
f. the directors had devised proper systems to ensure compliance with the provisions of all
applicable laws and that such systems were adequate and operating effectively.
Section 134(6) – Signing of Board’s report & Annexures thereto
Section 134(7) – Signed copy of every financial statement, including consolidated financial
statement (if any), shall be issued, circulated or published along with a copy each of —
(i) notes forming part of such financial statement
(ii) Auditor’s Report
(iii) Board’s Report
Note: This implies the company cannot issue, circulate or publish unaudited Financial
Statements.
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Section 134(8) – If contravenes the provisions of this section, Punishment-
Note:
 Sec- 134(3)(e) shall not apply to Government company.
 Sec- 134(3)(p) shall not apply to some Government company.
 In case of Specified IFSC (Public & Private Company) - following proviso shall be inserted,
namely :-
“if any information listed in this sub-section is provided in the financial statement, the
company may not include such information in the report of the Board of Directors”.
SECTION - 135 FINANCIAL STATEMENT, BOARD'S REPORTS. ETC
Section 135(1) – Every Company (including its holding, subsidiary, & foreign cobranch in India)
having,
 Net profit 5 crore or

 Net worth 500 crore or
 Turnover 1000 crore
during the immediately preceding FY shall constitute a Corporate Social Responsibility

Committee of the Board consisting of 3 or more directors, out of which at least 1 director shall be
an independent director.
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Proviso: Where a company is not required to appoint an ID u/s 149(4), it shall have in its CSR
committee, two or more directors.
Section 135(2) – The Board's report u/s 134(3) shall disclose the composition of the CSR
Committee.
Section 135(3) – The CSR Committee shall, —
a. formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be
undertaken by the company as specified in Schedule VII;
b. recommend the amount of expenditure to be incurred; and
c. monitor the CSR Policy from time to time.
Section 135(4) – BOD shall, —

Approve the CSR Policy as recommended by CSR Committee and disclose such Policy in its report
and also on company's website (if any)
Section 135(5) – BOD shall ensure that the company spends, in every financial year, at least 2%
of the average net profits of the company made during the 3 immediately preceding FY, in
pursuance of its CSR Policy.
 First Proviso to Sec 135(5): preference should be given to local area and areas around it
where it operates, for spending the amount earmarked.
 Second Proviso to Sec 135(5): If the company fails to spend, specify reasons for not spending
the amount.
Note:
1. “Net-Profit” shall exclude profits from overseas branches & dividend from other companies.
2. Any amount spent in excess of 2%, shall not be carried forward to next year. It will be treated
as VOLUNTARY SPEDING.
Exception:
In case of IFSC (Public & Private) Company - Sec. 135 does not apply for 5 years from
commencement of its business.
IMPORTANT POINTS FROM THE COMPANIES (CSR POLICY) RULES, 2014:
 Every company including its holding or subsidiary, and a

foreign company defined u/s 2(42), having its branch
office or project office in India shall comply with the
provisions of section 135.
 Every company which ceases to be a company covered

u/s 135(1) for three consecutive financial years shall not be
required to – a. constitute a CSR Committee; and b.
comply with the provisions contained u/s 135(2) to 135 (5)
till such time it meets the criteria specified in sub-section
(1) of section 135.
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 CSR Activities:
 CSR Activities may be taken by company as per CSR policy.

 BOD may undertake the CSR activities approved by the CSR committee through
a. Company established u/s 8 or a registered trust or a registered society, established by the
company
b. Company established u/s 8 or a registered trust or a registered society, established by the
CG / SG
 If BOD undertakes these CSR activities through Sec. 8 company or Regd. Trust or Regd.
Society, other than those specified above, then they shall have a track record of 3 years in
undertaking similar programmes or projects.
 Expenditure / Projects / Programmes done in India will only be treated as CSR Expenditure.
 Such project / Programs which benefit only the employees of company & their families will
not constitute CSR expenditure.
 Company may build CSR capacities of their own personnel as well as those of their
implementing agencies through institutions with the established track records of minimum 3
years, but such expenditure including expenditure on administration OH, shall not exceed 5%
of total CSR expenditure in 1 FY.
 Contributions made to Political party u/s 182 shall not constitute CSR expenditure.
 CSR Committee: (in other cases)
 In case of Private Company with only 2 directors, CSR Committee shall have 2 such directors.
 In case of Foreign Company, CSR Committee shall comprise of at least 2 persons, one of
whom shall be the authorised person appointed u/s 380 and other shall be nominated by
such foreign company.
 Surplus arising out of CSR Programmes will not form part of business profit.
 Schedule VII: Activities which may be included by companies in CSR Activities: (relating to)
i. Eradicating hunger, poverty and malnutrition, promoting health care and sanitation
including contribution to the Swach Bharat Kosh and making available safe drinking water.
ii. promoting education, especially among children, women, etc.
iii. promoting gender equality, empowering women, setting up homes and hostels for women
and orphans; old age homes, day care centres, etc.
iv. ensuring environmental sustainability, ecological balance, conservation of natural resources
including contribution to the Clean Ganga Fund.
v. benefit of armed forces veterans, war widows, etc.
vi. protection of national heritage, art and culture, etc.
vii. training to promote rural sports, olympic sports, etc.
viii. contribution to the prime minister's national relief fund or any other fund set up for socio
economic development and relief and welfare of SC / ST, etc.
ix. rural development projects
x. slum area development
xi. Contribution to technology incubators located within academic institutions approved by CG
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SECTION - 136 RIGHT OF MEMBER TO COPIES OF AUDITED FINANCIAL

STATEMENT
Section 136(1) – A copy of the

 Financial statements, including consolidated financial statements, if any,
 auditor’s report and
 every other document required by law to be annexed or attached to the financial
statements,
which are to be laid before a company in its general meeting, shall be sent to
 every member of the company,
 to every trustee for the debenture-holder of any debentures issued by the company, and
 to all persons other than such member or trustee,
entitled, not less than 21 days before the date of the meeting.
Note: In case of Sec. 8 Companies, the same has to be sent 14 days before the date of meeting.
 First Proviso to Sec. 136: If in case of sending copies less than 21 days before the meeting, it
should be agreed by members holding minimum,
a. Company has share capital : 95% of PUSC
b. Company does not have share capital : 95% of Voting rights
 Second Proviso to Sec. 136: If in case of Listed entities :

 Place its financial statements including consolidated financial statements, if any, and all other
documents required to be attached thereto, on its website.
 The copies of the documents are made available for inspection at its registered office during
working hours for a period of 21 days before the date of the meeting and a statement
containing the salient features of such documents in the prescribed form or copies of the
documents is sent to every member by the company not less than 21 days before the date of
the meeting, unless the shareholders ask for full financial statements
 Third Proviso to Sec. 136: Circulation in certain cases
In case of,
i. All Listed Companies , and
ii. Other public limited companies with Net Worth exceeding Rs. 1 Crore & Turnover exceeding
Rs. 10 Crore
FS to be sent,
a. By electronic mode where the shares are held in DMAT form & email ID’s are registered with
depository.
b. If shares are held in non-DMAT form, then by electronic mode, if they have consented in
writing for receipt through electronic mode
c. In all other cases, physical copies must be sent.
Section 136(3) – Liable for Penalty :

(a) Company : Rs. 25,000
(b) Defaulting Officer : Rs. 5,000
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SECTION - 137 COPY OF FINANCIAL STATEMENT TO BE FILED WITH

REGISTRAR
Section 137(1) – A copy of FS & CFS, if any, along with all the documents, shall be filed with the
Registrar within 30 days of the date of AGM in Form AOC- 4.
 First & Second Proviso to Sec. 137: If the FS are not adopted at AGM or adjourned AGM, such
un-adopted financial statements shall be filed with the Registrar within 30 days of the date of
AGM and the Registrar shall take them in his records as “provisional” till the adopted financial
statements are filed.
When the FS are subsequently adopted in the adjourned AGM, file adopted FS’s within 30 days
of the date of such adjourned AGM.
 Third Proviso to Sec. 137: OPC shall file a copy of the FS, within 180 days from the closure of the
financial year
 Fourth Proviso to Sec. 137: Attach along with FS, copy of accounts of its subsidiary(s), if
subsidiary(s) have been incorporated outside India and have not established their place of
business (POB) in India.
Section 137(2) – Where the AGM of a company for any year has not been held: The FS(s)
along with documents required to be attached along with the statement of facts and reasons for
not holding the AGM shall be filed with the Registrar within 30 days of the last date before which
the AGM should have been held with fees.
Section 137(3) – Penalty for Contravention:
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EXTENSIBLE BUSINESS REPORTING LANGUAGE (XBRL)
SECTION - 138 INTERNAL AUDIT
Such class or classes of companies as may be prescribed shall be required to appoint an internal
auditor.
Following are the companies prescribed under Rules:
Where,
D – Deposits – 25 crore or more (at any point during the preceding FY)
P – PUSC – 50 crore or more (preceding FY)
B – Borrowings – exceeding 100 crore or more (at any point of time during the preceding FY)
T – Turnover - 200 crore or more (preceding FY)
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Who can be an Internal Auditor:
 CA (Whether in Practice or not) or a CWA, or other professional as may be decided by the Board.
 may or may not be an employee of the company.
 Audit Committee or BOD shall formulate the scope, functioning, periodicity & methodology for
Internal Audit.
PART II. COMPANY AUDIT
SECTION - 139 APPOINTMENT OF AUDITORS

Apointment by company
Every company shall, at the first AGM, appoint an individual or a

firm as an auditor.
Tenure of auditor
The auditor so appointed shall hold office from the conclusion of

that meeting till the conclusion of its 6th AGM and thereafter till
the conclusion of every sixth meeting.
 Second and Third Proviso to Sec. 139(1) - Certificate by Auditor:

Auditor is required to give a Certificate to the company before accepting appointment as
auditor, & written consent to such appointment shall be obtained from the auditor.
The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141.
Content of the Certificate – Rule 4 of the Companies (Audit and Auditors) Rules, 2014, the
auditor appointed shall submit a certificate that:
a. the individual / firm is eligible for appointment and is not disqualified for appointment;
b. proposed appointment is as per the Act;
c. proposed appointment is within the limits [max limit u/s 141];
d. list of proceedings against the auditor or audit firm or any partner pending, as disclosed in
the certificate, is true and correct.
Note:
 The company shall inform the auditor concerned of his or its appointment, and also file a
notice (Form ADT–1) of such appointment with the Registrar within 15 days of the meeting of
such appointment.
 Appointment includes re-appointment.
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Section 139(2) Term of Auditor for Specified Company/Rotation of Auditor
Note:
3. When a partner of an existing firm resigns and joins a new firm, the new firm is also ineligible
for appointment.
4. Further Auditor / Audit Firm with common logo or brand name cannot be appointed during
the cooling period in case of specified companies.
5. Cooling off period - 5 years i.e. Individual/Firm who have served there term of 5/10
consecutive years are not eligible to be appointed for a period of 5 years in the same
company.
Section 139(6) - First Auditor (Other than Government Company / Government Owned or
Controlled) –
The first auditor of a company, other than a Government company, shall be appointed by the
BOD within 30 days from the date of registration of the company. If Board fails to appoint
first auditor, members within 90 days at an EGM shall appoint the auditor.
Tenure: First auditor shall hold office till the conclusion of the first AGM.
Section 139(7) - First Auditor in Government Company / Government Owned or Controlled
First auditor shall be appointed by the CAG of India within 60 days from the date of
registration of the company
Consequences of failure:
a) Failure by CAG: the BOD of the company shall appoint such auditor within next 30 days;
b) Failure by CAG and then also by Board: Members shall appoint such auditor within 60 days
at an EGM.
Tenure: The first Auditor shall hold office till the conclusion of first AGM.
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Section 139(5) – Subsequent Auditor of Government Company / Government Owned or

Controlled –
Appointed by CAG within 180 days from the commencement of the financial year.
Tenure: The auditor shall hold office till the conclusion of the AGM.
Section 139(8) - Filling of Casual Vacancy –
Meaning of Casual Vacancy: Vacancy arises due to death, resignation, dissolution of firm of
auditors etc.
(i) Non-Government Company:

 Any casual vacancy in the office of an auditor shall, be filled by the BOD within 30 days.
 But, if such casual vacancy is due to resignation, such appointment shall also be
approved by the company at GM convened within 3 months of the recommendation
of the Board and he shall hold the office till the conclusion of the next AGM;
(ii) Govt. Company or Govt. owned / controlled companies:

 Any casual vacancy shall be filled by the CAG within 30 days.
 In case the CAG does not fill the vacancy within the said period, the BOD shall fill the
vacancy within next 30 days.
Section 139(9) - Reappointment of Retiring Auditor –
Section 139(10) - Consequences of failure to appoint / re-appoint auditor in AGM –
If at any AGM, no auditor is appointed/ re-appointed, the existing auditor shall continue to be
the auditor of the company.
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Manner and procedure of selection and appointment of Auditors: Rule 3 of the Companies
(Audit and Auditors) Rules, 2014.
SECTION - 140 REMOVAL, RESIGNATION OF AUDITOR AND GIVING OF

SPECIAL NOTICE
Section 140(1) – Removal of statutory auditor appointed u/s 139 before expiry of term –
 Board resolution shall be passed.

 Make an application to CG in Form ADT-2 within 30 days of the resolution.
 Company receives approval from CG.
 Hold the GM within 60 days of receipt of approval of CG for passing the special resolution.
 Proviso to Section 140(1) - Before taking any action for removal of auditor before the expiry of
his term, the auditor concerned shall be given a reasonable opportunity of being heard.
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Section 140(2) Filing of Statement in case of resignation by the Auditor –
 The auditor who has resigned from the company shall file within a period of 30 days from
the date of resignation, a statement in the Form ADT-3 with the company and the
Registrar.
Note: In case of Govt. companies or Govt. owned/controlled companies, also file such statement
with CAG.
Section 140(3) Consequences of non-compliance –
 If the auditor does not comply with the provisions of Sec. 140(2), he or it shall be liable to a
penalty of
Rs. 50,000 or an amount equal to the remuneration of the auditor, whichever is less.
&
In case of continuing failure, with further penalty of Rs. 500 for each day, subject to a
maximum of Rs. 5 lakh.
Section 140(4) Procedure of Removal –
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Restricting the auditor’s right of representation:
 Company or any other aggrieved person may apply to Tribunal for not sending or reading
the representation, if this right is being abused by the auditor.
 If the Tribunal is satisfied, then, the copy of the representation may not be sent and the
representation need not be read out at the meeting.
Note: One of the Joint Auditor’s of PY is considered by the members as sole auditor, it is similar to
non-reappointment of one of the retiring Joint Auditor’s
Section 140(5) – Directions Issued by Tribunal for Change of Auditors –
SECTION - 141 ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF

AUDITORS
Section 141(1) & (2) – Eligibility to be appointed as auditor –
In case of Provided
Individual He is a Chartered Accountant
Firm Majority of partners practicing in India
Only partners who are CA shall be
Firm Includes LLP authorized to act and sign on behalf of
the firm.
Page No. 6A.20

Section 141(3) - Disqualifications
The following persons shall not be eligible for appointment as an auditor of a company, namely:
a) a body corporate (other than a LLP);

b) an officer/ employee of the company;
c) partner/ employee of an officer or employee of the company;
d) a person who, or his relative or partner, in Company, Associate company or its Subsidiary,
or its Holding (C.A.S.H) or subsidiary of such holding company —
e) person or a firm who, whether directly or indirectly, has business relationship with C.A.S.H
or subsidiary of such holding company
Exceptions:
 commercial transactions which are in the nature of professional services;
 commercial transactions which are in the ordinary course of business of the company at
arm’s length price.
f) person whose relative is a director/employee of company as director/ KMP;
g) person shall not be eligible for appointment as auditor if –
Note: Public Co, Other Private Co (PUSC 100 Crore), Government Co, Sec-8 Companies,
shall be counted.
Page No. 6A.21

h) a person who has been convicted by a court of an offence involving fraud and a period of
10 years has not elapsed from the date of such conviction;
i) a person who, directly or indirectly, renders any service referred to in Sec. 144 to C.A.S.H.
Meaning of “Relative” [Sec. 2 (77) of Companies Act, 2013]
A person shall be deemed to be a relative of another, if, and only if they are members of a Hindu
undivided family ; or they are husband and wife ; or the one is related to the other in such
manner as may be prescribed
As per Rule 4 of the Companies (Specification of Definitions details) Rules, 2014 a person shall be
deemed to be the relative of another , if he or she is related in the following manner, namely :
 Father (including step-father)

 Mother (including step-mother)
 Son (including step-son)
 Son's wife
 Daughter
 Daughter's husband
 Brother(Including step-brother)
 Sister (Including step-sister)
Section 141(4) - Subsequent Disqualification
Where a person appointed as an auditor of a company incurs any of the disqualifications

mentioned u/s 141(3) after his appointment, he shall vacate his office as such auditor and such
vacation shall be deemed to be a casual vacancy in the office of the auditor.
SECTION - 142 REMUNERATION OF AUDITORS
Page No. 6A.22

SECTION - 143 POWERS AND DUTIES OF AUDITORS

Section 143(1) Rights, Powers and Duties
 Right & Powers of Auditor:

6. Right to access books of account of company, whether kept at RO or at any other place.
7. Entitled to have necessary information and explanation from officers of Company.
8. (Proviso to Section 143(1) - Right of auditor of Holding Company) The auditor of a
holding company shall also have the right to access records of all its subsidiaries and
associate companies in so far as it relates to the consolidation of its financial statements.
 Duties of Auditor - Inquire into Propriety Matters - Amongst other matters, auditor is
required to inquire into the following matters, namely:
(a) loans and advances made by the company on the basis of security
 have been properly secured and
 whether the terms are not prejudicial to the interests of the company or its members;
(b) transactions of the company which are represented merely by book entries
 are not prejudicial to the interests of the company;
(c) where the company not being an investment company or a banking company,
 Investments in the form of shares, debentures and other securities
 have been sold at a price less than cost price;
 Reasons
(d) loans and advances made by the company
 have been shown as deposits;
(e) personal expenses have been  charged to revenue account;
(f) If shares have been allotted for cash,
 if no cash has actually been received, whether it is shown in books of accounts.
Section 143(2): Auditor shall report to members.
Section 143(3) Other elements to be covered in Audit Report – The auditor’s report shall also
state:
a) whether all information and explanations has been obtained which to the best of his
knowledge and belief were necessary for the purpose of his audit and (if not, the details
thereof & effect of such information on FS.
b) Whether BOA have been kept as per law & proper returns have been received from
branches not visited by him.
c) whether auditor has dealt with branch auditor’s report;
d) whether company’s B/S and P&L are in agreement with the BOA and returns;
e) whether FS comply with AS;
f) the observations or comments of auditors on financial transactions/matters which have
any adverse effect on the functioning of the company;
g) whether any director is disqualified from being appointed as director u/s 164(2);
h) any qualification, reservation or adverse remark relating to accounts etc;
i) whether company has adequate internal financial controls with reference to financial
statements are in place and operating effectively (however, not applicable to
a. OPC
b. Small company
Page No. 6A.23

c. Private company having T/o < 50 crore, as per latest audited B/sheet & aggregate
borrowings from banks, PFI, body corporate at any point during FY, 25 crore)
j) Such other matters as may be prescribed
a. Co has disclosed impact of pending litigations on its financial position in FS
b. Co has made provisions for material foreseeable losses on long term contracts including
derivative contracts.
c. Delay in transferring amount to IE&PF
d. Disclosure w.r.t holding/dealing in specified bank notes during 8/11/2016 to 30/12/2016
Section 143(5) Duties of auditor of Govt. companies –

 CAG shall appoint the auditor
 CAG shall direct such auditor the manner in which accounts are required to be audited.
 The auditor shall submit audit report to CAG which, among other things, include the
following:
i. directions, if any, issued by the CAG,
ii. the action taken thereon and
iii. its impact on the accounts and financial statement of the company.
Section 143(6): Right of CAG to conduct supplementary Audit –

 The CAG within 60 days audit report have a right to, conduct a supplementary audit of the
financial statement by such person or persons as he may authorise in this behalf; and
 for the purposes of such audit, require information or additional information to be
furnished to any person or persons, so authorised, on such matters, by such person or persons,
and in such form, as the CAG may direct; and
 comment upon or supplement such audit report.
 Any comments given by the CAG shall be sent by the company to every person entitled
to copies of audited financial statements u/s 136(1) and also be placed before the AGM.
Section 143(7) - Test Audit - CAG may also cause test audit to be conducted of accounts of such
company
Section 143 (8) - Audit of Branch Office –
 Definition of Branch Office u/s 2(14) Branch office, in relation to a company, means any
establishment described as such by the company.
 Eligible Person: Where a company has a branch office, the accounts of that office shall be
audited by either of following:
 the auditor appointed for the company, i.e. company auditor, or
 any other person qualified for appointment as an auditor of the company under this
Act, or
 where the branch office is situated in a country outside India, the accounts of the
branch office shall be audited either by the company’s auditor or by an accountant or
by any other person duly qualified to act as an auditor of the accounts of the
branch office in accordance with the laws of that country.
 Duties & powers of Branch Auditor: Same as company auditor, he shall submit his report
to company auditor. Also, the provisions of sec 143(12) i.e. reporting of fraud shall also apply
to branch auditor.
Page No. 6A.24

Section 143(9) Compliance with Auditing Standards - Every auditor shall comply with the
auditing standards.
Section 143(10) - The Central Government may prescribe the standards of auditing as
recommended by ICAI in consultation with NFRA. Until any auditing standards are notified,
standards issued by ICAI shall be followed.
Section 143(12) & 143(13) Reporting of Fraud –

 If an auditor during the performance of his audit, has reason to believe that fraud has
committed against the company by its by its officers or employees & amount of fraud
involved is Rs 1 crore or more, auditor shall report the matter to the Central Government
within such time and in such manner as may be prescribed (Rule 13).
 Provided that in case of a fraud involving lesser than the specified amount, the auditor shall
report the matter to the audit committee constituted u/s 177 or to the Board in other cases
within such time and in such manner as may be prescribed.
 Provided further that the companies, whose auditors have reported frauds under this sub-
section to the audit committee or the Board but not reported to the Central Government,
shall disclose the details about such frauds in the Board's report in such manner as may be
prescribed.
 It will be deemed that auditor has not contravened any duty by reporting of fraud to CG, if it
is done in good faith.
Time and Manner of Reporting prescribed under Rules – Rule 13
1. The auditor shall report the matter to the CG as under:

a) the auditor shall report the fraud within 2 days to the Board or
the Audit Committee, as the case may be, in form ADT-4.
b) seek their reply or observations within 45 days;
c) on receipt of such reply or observations, the auditor shall forward
his report and the reply or observations of the to the CG within 15
days;
d) in case the auditor fails to get any reply or observations from the Board or the Audit
Committee within the stipulated period of 45 days, he shall forward his report to the CG
along with a note containing the details of his report that was earlier forwarded to the
Board or the Audit Committee for which he has not received any reply or observations;
e) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by
Registered Post with Acknowledgement Due or by Speed Post followed by an email in
confirmation of the same;
f) the report shall be on the letter-head of the audit or containing postal address, e-mail
address and contact telephone number or mobile number and be signed by the auditor
with his seal and shall indicate his Membership Number; and
g) the report shall be in the form of a statement as specified in Form ADT-4.
2. In case of a fraud involving amount less than Rs. 1Cr., the auditor shall report the matter to
Audit Committee constituted u/s 177 or to the Board immediately but not later than 2 days of
his knowledge of the fraud and he shall report the matter specifying the following:
a) Nature of Fraud with description;
b) Approximate amount involved; and
c) Parties involved.
3. The following details of each of the fraud shall be disclosed in the Board’s Report:
(a) Nature of Fraud with description;
Page No. 6A.25

(b) Approximate Amount involved;

(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
4. The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a
Secretarial Auditor during the performance of his duties under section 148 and section 204
respectively.
Section 143(15) Penalty for noncompliance –
If any auditor, cost accountant or company secretary in practice do not comply with the
provisions of Sec. 143(12), he shall be punishable with fine which shall not be less than Rs. 100,000
but which may extend to Rs. 25,00,000.
SECTION - 144 AUDITOR NOT TO RENDER CERTAIN SERVICES

SERVICES THAT MAY BE RENDERED:
An auditor appointed under this Act shall provide to the company only such other services as are
approved by the Board of Directors or the audit committee, as the case may be.
SERVICES THAT CANNOT BE RENDERED:
1. Investment Banking Services

2. Investment Advisory Services
3. Design & Implementation of Financial Information System
4. Management Services
5. Actuarial Services
6. Rendering of Outsourced Financial Services
7. Internal Audit
8. Accounting & Book keeping service
9. any other service as may be prescribed.
SECTION - 145 AUDITOR TO SIGN THE AUDIT REPORT

The auditor's report/ other document required to be signed or certified by
auditor, shall be signed only by the Company Auditor.
Any qualifications, observations or comments given by the auditor having
any adverse effect on the functioning of the company shall be read before the
company in GM ; and open to inspection by any member of the company.
SECTION - 146 AUDITOR TO ATTEND THE GENERAL MEETING

The auditor shall attend either by himself or through his authorized representative (who shall also
be qualified to be an auditor) any general meeting.
Auditor shall have right to be heard at such meeting on any part of the business which concerns
him as the auditor.
Page No. 6A.26

SECTION - 147 PUNISHMENT FOR CONTRAVENTION (AUDITOR)
Note: If auditor has contravened such provisions knowingly or wilfully with the intention to deceive
the company or itsshareholders or creditors or tax authorities, he shall be punishable with
imprisonment for a term which may extend to 1 year and fine of Rs. 50,000 to Rs. 25 Lacs or 8
times the remuneration of auditor whichever is less.
Section 147(3) Other Liabilities of the Auditor – Where an auditor has been convicted u/s
147(2), he shall be liable to
(i) refund the remuneration received by him to the company; and
(ii) pay for damages to the company, statutory bodies or authorities or to members or creditors
of the company for loss arising out of incorrect or misleading statements of particulars made
in his audit report.
Note: If partner acted in fraudulent manner, both firm & partner(s) shall be jointly & severally
liable. However, for criminal liability only fraudulent partner shall be liable.
Page No. 6A.27

SECTION - 148 COST AUDIT

The CG may, by order, in respect of such class of companies engaged in the
production of such goods or providing such services as may be prescribed,
direct that particulars relating to the utilisation of material or labour or to
other items of cost as may be prescribed shall also be included in the books
of account kept by that class of companies.
The audit under Sec. 148(2) shall be conducted by a Cost Accountant who shall be appointed
by the Board on such remuneration as may be determined by the members in such manner
as may be prescribed.
Statutory Auditor appointed u/s 139 cannot be appointed cost auditor.
The qualifications, disqualifications, rights, duties and obligations shall be same as
statutory auditor.
The report shall be submitted by cost auditor to BOD of the company.
A company shall within 30 days from the date of receipt of a copy of the cost audit report
furnish the Central Government with such report along with full information and
explanation on every reservation or qualification contained therein.
Contravention: penalty same as sec 147.
Application of Cost records – Rule 3:

(1) the specified class of companies, including foreign companies, engaged in the production
of the goods or providing services, having an overall turnover from all its products and
services of Rs.35 Cr. or more during the immediately preceding financial year, shall include
cost records for such products or services in their books of account.
(2) A company which is classified as a micro enterprise or a small enterprise under the
Micro, Small and Medium Enterprises Development Act, 2006 are exempted from
compliance of these provisions.
Page No. 6A.28

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AUDITPEDIA FOR CA FINAL – PAPER 3 – ADVANCED AUDITING AND PROFESSIONAL ETHICS

Chapter 6A – Company Accounts & Audit

PART I. COMPANY ACCOUNTS

SECTION - 128 BOOKS OF ACCOUNTS, ETC. TO BE KEPT BY COMPANY

Section 2(13) “books of account” includes records maintained in respect of :-

Section 128(1) – Maintenance of Books of Accounts

 First proviso to Section 128(1) – Place of Maintenance of Books of Accounts

 At the Registered Office (RO)

 Second proviso to Section 128(1) – Electronic form of Books of Accounts

Section 128(2) – Books of Accounts w.r.t. Branch of Company

Page No. 6A.1

CA RAVI AGARWAL – BELIEVE & PROSPER – CALL / WHATSAPP +91-8334866117

Chapter 6A – Company Accounts & Audit

Section 128(3) – Person Who Can Inspect

b. FINANCIAL INFORMATION maintained OUTSIDE INDIA

Section 128(5) – Preservation of Books of Accounts

Section 128(6) – Person Responsible for Maintenance & Penalty

Page No. 6A.2

CA RAVI AGARWAL – BELIEVE & PROSPER – CALL / WHATSAPP +91-8334866117

Chapter 6A – Company Accounts & Audit

SECTION - 129 FINANCIAL STATEMENT

Section 129(1) – Form of Financial Statements

The financial statements shall

Proviso to Section 129 (1) – Exceptions: These provisions shall not

BOD shall lay the FS for every FY before the AGM.

Section 129(7) – Penalty for Non-Compliance: Same as Section 128 penalty.

Page No. 6A.3

CA RAVI AGARWAL – BELIEVE & PROSPER – CALL / WHATSAPP +91-8334866117

Chapter 6A – Company Accounts & Audit

SECTION - 130 REOPENING OF ACCOUNTS ON COURT/TRIBUNAL ORDER

SECTION - 131 VOLUNTARY REVISION OF FINANCIAL STATEMENTS OR

CA RAVI AGARWAL – BELIEVE & PROSPER – CALL / WHATSAPP +91-8334866117

Chapter 6A – Company Accounts & Audit

SECTION - 132 CONSTITUTION OF NATIONAL FINANCIAL REPORTING

 where misconduct is proved, have the power to make order for,

CA RAVI AGARWAL – BELIEVE & PROSPER – CALL / WHATSAPP +91-8334866117

Chapter 6A – Company Accounts & Audit

Accounts & Audit

SECTION - 133 CENTRAL GOVERNMENT TO PRESCRIBE ACCOUNTING

SECTION - 134 FINANCIAL STATEMENT, BOARD'S REPORTS. ETC.

In the case of a One Person Company, only by one director.

Page No. 6A.6

CA RAVI AGARWAL – BELIEVE & PROSPER – CALL / WHATSAPP +91-8334866117

Chapter 6A – Company Accounts & Audit

Section 134(2) – Auditor’s Report shall be attached to every FS.

 First Proviso to Section 134 (3)

 Second Proviso to Section 134 (3)

Page No. 6A.7

CA RAVI AGARWAL – BELIEVE & PROSPER – CALL / WHATSAPP +91-8334866117

Chapter 6A – Company Accounts & Audit

Section 134(5) – Contents of Directors Responsibility Statement:

Section 134(6) – Signing of Board’s report & Annexures thereto

Page No. 6A.8

CA RAVI AGARWAL – BELIEVE & PROSPER – CALL / WHATSAPP +91-8334866117

Chapter 6A – Company Accounts & Audit

Section 134(8) – If contravenes the provisions of this section, Punishment-

SECTION - 135 FINANCIAL STATEMENT, BOARD'S REPORTS. ETC

 Net profit 5 crore or

during the immediately preceding FY shall constitute a Corporate Social Responsibility

Page No. 6A.9

CA RAVI AGARWAL – BELIEVE & PROSPER – CALL / WHATSAPP +91-8334866117

Chapter 6A – Company Accounts & Audit

Section 135(3) – The CSR Committee shall, —