Accounts and records of company and Audit

Account and audit is one of the most important parts of every institution. For the protection of company
creditors, shareholders and for worker rights and benefit company's transactions are kept clear and
manageable, not only for above reasons but also for paying tax, actual transaction are shown by the
company, it is a obligation of the directors.
For the fulfillment of above Purposes, Company must maintain its books of account properly which show
the income and expenditure, along with clear picture of financial status of the institutions.
Every company to keep its registered office proper books of account. The books of account must give a
true and fair view of the state of affairs of the company and explain its transaction.
Companies Act, 2063 of Nepal in section 108.1 provides that every company shall have to duly mention
accounts in Nepali or in English language. This is the new approach adopted in company law in Nepal
where account can be maintained even in English language. Previously all company must have
maintained their account in Nepali language compulsorily.
Legal Provision of Accounts of Company 108
 Every company shall duly maintain its accounts in the Nepali or English language.
 The account of company should be kept at registered place except otherwise permitted by the
office.
 The account of company must be maintained in accordance to the double entry system of
accounting (accounting standard) prescribed by concern authority as to clearly reflect the actual
situation of the transactions of the company.
 The cash balance shall be deposited in a bank and transaction shall be done through the bank.
 Companies may use any electronic communication device and computer for recording books of
account.
 Preparation of account is the responsibilities of directors and officers of the company.
 If any directors or officers of a company fails to maintain, hide or conceals or damage books of
account such responsible person shall punish with a fine from 20,000 to 50,000 rupees or with
imprisonment up to 2 years.
 The accounts and annual financial statements of a company shall be kept safely for at least five
years after the expiry date of the financial year. ( Inland Revenue Office have right to amend tax
assessment within 4 years. section 101 of Income tax Act,2058)
Reports of Board of Directors / Annual Financial Report [109]
Board of directors is the supreme executive body of the company. It must manage all the affairs of the
company, exercise power and perform duties with in the company Act, MoA and AoA and decision taken
in general meeting.

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The Board has duty to present all the information related to its transaction as long as financial positions to
the shareholders and to the general meetings, so, the BoD has to prepare or submit its reports of such
things to the concerned authority.
The directors of a company should prepared the brief report within a period of financial year which show
the economic activities, financial status of the companies as like report contained the effort to manage the
transaction and future program and planning of the companies that report known as directors report. The
Board report include (a) The annual Financial Statement and (b) Separate report of the board.
Such report must be prepared separately but at the same period of time.
A. Annual Financial statement of the Company (AFS)
 According to section 109 (1) The board of directors of a public company has to prepare annual
financial statement at least 30 days prior to the holding of its annual general meeting and in the
case of private company, within six months from the expiry of its fiscal year. The annual
financial statements shall have to be approved by the board of directors and audited.
(convene of AGM as per 76. within 6 months of the expiry of financial year)
 The report must clearly show the financial picture of the company, the annual financial report
should consist.
a] Balance-sheet till the end of fiscal year.
b] Profit and loss account c] Cash flow statement
 2. This annual financial statement shall give true and fair view of the state of affairs of the
company as at the last day of the financial year concerned and also state the account of profit and
loss and description of cash flow made in that financial year. Such financial statements shall be
prepared in the format prescribed by the prevailing law.
 3. The annual financial statements shall have to be approved by the board of directors and
audited.
B. Separate Report of Board of Directors: The directors of a company should prepared the brief report
within a period of financial year which show the economic activities, financial status of the companies as
like report contained the effort to manage the transaction and future program and planning of the
companies that report known as directors report.
Section 109(4) state that Board of Directors of every public company or private company with its paid up
capital of 10 million rupees or more or the annual turnover of 100 million or more shall also prepare a
separate board report , in addition to the AFS, stating the following matters.
(a) Review of the transactions of the previous year;
(b) Impacts, if any, caused on the transactions of the company from national and international
situation;
(c) Achievements in the current year.

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 (d) Industrial or professional relations of the company;
(e) Alterations in the board of directors and the reasons therefore;
(f) Major things affecting the transactions;
(g) If there are any remarks in the audit report, the comments of the board of directors on such
remarks;
(h) Amount recommended for payment by way of dividend;
(i) In the event of forfeiture of shares, details regarding the number of forfeited shares,
(j) Progress of transactions of the company and of its subsidiary company .
(k) Major transactions completed by the company and its subsidiary company
(l) Disclosures made by the substantial shareholders of the company
(m) Details of shareholding taken by the directors
(n) Details of disclosures made about the personal interest of any director and his/her close relative
in any agreements related with the company during the previous financial year;
(o) In the event that the company has bought its own shares (buy-back), the reasons for such
buyback ,number and face value of such shares, and amount paid by the company for such buy-
back;
(p) Whether there is an internal control system in place or not; and details of such system, if it is in
place;
(q) Details of total management expenses during the previous financial year;
(r) Name-list of the members of audit committee, remuneration, allowances and facilities received
by them,
(s) Amount, if any, outstanding and payable to the company by any director, managing
director ,chief executive, substantial shareholder or his/her close relative
(t) Amount of remuneration, allowances and faculties paid to the director, managing director, chief
executive and officer;
(u) Amount of dividends remaining unclaimed by the shareholders ;
(v) Details of sale and purchase of properties pursuant to Section 141;
(w) Details of transactions carried on between the associated companies pursuant to Section 175;
(x) Any other matters required to be set out in the report of board of directors under this Act and the
prevailing law;
(y) Other necessary matters.
If shareholders feels any suspense about the transaction and account of the company the shareholders
holding not less than 10% of paid up capital or 25% of total number of shareholders may make an
application to the office, after receiving such application the office as per necessity depute inspector and
examine the transaction and account. [121]

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Account of Holding Company: Any holding company shall enclose the following documents of its
subsidiary company in its balance sheet. [143]
a] One copy of the annual accounts of the subsidiary company, along with Board report.
b] Auditors reports
c] Details of investment of the holding companies in the subsidiary company.
d] In case where the financial year are different of both companies, if any matters of change in
any manner the right of holding company over the subsidiary company during such different
period.
Account of Foreign Company: Every foreign company registered in Nepal shall prepare an annual
financial statement along with the balance sheet and profit and loss account which show real situation of
its transaction in state of Nepal and submit to the office within six month of expiration of a financial year.
[156.1]
The foreign company's annual financial statement shall include the following details.
a] The foreign company's property with in Nepal.
b] Clear details of cash held in Nepalese financial institution.
c] Clear details of loans and overdraft.
d] Total amounts of loans and liabilities payable to Nepalese citizen or a Nepalese company.
The report and document which is submitted to the office by foreign company are in a language other
than the Nepali or English, a copy of authentic translation of such document in to Nepali or English
language shall also be attached therewith.
Rights of Shareholders and liabilities of company Relating to Accounts
Audit 110
Principally all companies whether public, private, foreign, holding and subsidiary and profit not
distributing has to audit compulsory its account in every. Audit is an examination of the records and
reports of an enterprise by accounting specialist other than those responsible for their preparation. Audit
provides real information on the business transaction of the company.
 According to section 110 of companies Act, every company should appoint an auditor to audit its
accounts.
 The auditor so appointed may also audit account of any branch of the company established even
in foreign country, if any, unless otherwise provided under the existing law of such country.
Types of Audit
a. External/ Statutory b. Internal c. Special d. Cost e. Social
a. External/ Statutory: The audit is prescribed by statute, it is statutory audit. The statue prescribed
the method of audit and auditor follows the rules and regulations statutory audit also known as
financial audit and external audit. An independent person appointed by the company for

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 examination of books of account of the company is called external audit. External audit involves
the examination of the truth and fairness of the financial statement of an entity. Company law in
most jurisdiction requires external audit an annual basis for companies.
Section 110 of companies Act, 2063says : Every company shall have appoint an auditor in
accordance with this Act to audit its accounts
b. Internal Audit: The audit conducted by internal auditor is called internal audit. It is voluntary
appraisal activity undertaken by an organization to provide the assurance over the effectiveness of
internal controls, risk management and governance to facilitate the achievement of organizational
objectives
Internal audit is performed by employees of the organization, who report to the audit committee
of the board of directors as opposed to the external audit. Nepalese Companies Act, 2063 has no
compulsory provision to have internal audit. chapter 18 of the Act has 2(two) references on
internal auditing.
a. Section 164 authorized the audit committee may by giving notice call to internal auditor,
present in meeting to seeks information on any matter and it shall be their duty of such
auditor.
b. Similarly under section 165 the audit committee may review and supervise the conduct of
internal auditing.
c. Special audit: The audit which doesnot take in regular activity but only to meet certain situation is
special audit. The specific audits are done by organization for the specific objectives. Following are
some example where special audit may conduct.
i. When there is general indication of fraud in specific ares.
ii. When the organization wants to acquire another company is such case they ask for a special
audit before acquiring.
iii. In the case of public organization the donor community may want to audit before making
donations.
iv. When some organizations like income tax, excise, customs may ask the organization to
conduct the special audit.
d. Cost Audit: is a monetary value or price of goods. The price is determined after the fair valuation of
goods on the basis of materials used, labor consumed and resources used by it. The audited which conduct
basically to find out the cost of production of any product or services is called cost audit. It is also
employed to find out the efficiency of machinery or tools or equipments.
Cost is related to the relationship between the value of production inputs and the level of output.
e. Social audit: Social audit is the process whereby an organization can account for its social
performance, report on and improved the performance. It assess the social impact and ethical behavior of

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an organization in relation to its aims and those of its stockholders. Generally company do take part in
social activities to enhance its social rating at the time of social auditing.
Social auditing doesnot involve the examination of books of account or finance. It consists the
relationship with society, impact on society, services its rendered to society, the quality services or
product, it provided to community. In short social auditing does every things else an organization, except
handling money.

Auditor
An independent and professional of account appointed for examine the profit and loss account, cash flow
statement, balance sheet and annual financial report prepared by the company is called Auditor.
Appointment of auditor [111]
The companies Act provides various provisions relating to appointment, removal, duties etc. of a
company auditor. Only audit conducted by eligible auditor would be valid otherwise it would be held
invalid
In the case of public company, the general meeting of a company shall appoint auditor among the
auditors registered at concerned authority or having certificates and in the case of a private company, the
company as provided for in the Memorandum, Articles or consensus agreement and if it is silent, the
general meeting will appoint and the name of such auditor shall be forwarded to the office within 15days
from the date of such appointment. However, that the board of directors may appoint the auditor prior to
the holding of the first annual general meeting.
According to these rules, an auditor can be appointed by applying the following modes.
Appointment by board of Directors. [ section 111 proviso clause] : Board of Directors can appoint a
person as an auditor before the holding of First annual General Meeting of the company. An auditor
appointed in this way is called first auditor.
Appointment by AGM [111.1]: In case of public company an auditor is appointed by the AGM.
 Appointment in a private company: In case of private company an auditor is appointed as
provisioned for MoA and AoA or in the unanimous agreement and by the general meeting in the
absence of such arrangements.
Appointment by the OCR: [113] In certain case an auditors is appointed by the OCR also. But these rule
applies only in case where the BoD of a company request the OCR on any of the following reasons to
appoint an auditor.
- If the AGM fails to appoint an auditor.
- If the AGM could not be held and
- If the auditor appointed under these Act ceases to hold the office for any reason.
2. Tenure: The auditor appointed above shall hold office only until the next annual general meeting.

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3. No auditor or his/her partner or ex-partner or employee or ex-employee shall be appointed as auditor
for more than three consecutive terms to perform the audit of a public company.
Such restriction shall not apply to any partner who ended partnership or any employee who left the
services three years ago.
Disqualification for appointment of auditor. [112]
The following persons or the firms or companies in which such persons are partners cannot be appointed
as auditor or shall not remain in office even if, already appointed.
a] director, advisor appointed with entitlement to regular remuneration or cash benefit, employee or
worker of the company, partner of a director or employee of the company or their close relatives.
[Sect. 2 (z9) “Close relative” means a partition shareholder in joint family or husband, wife, father,
mother, mother-in -law, father-in- law, elder brother, younger brother, elder sister, younger sister,
sisterin– law ,(elder or younger brother’s wife), brother-in– law , sister–in–law, brother-in- law, (husband
of elder sister), uncle, aunt, maternal uncle, maternal aunt, son, daughter, daughter-in-law ,grand–son,
grand-daughter, grand-daughter-in– law or son-in– law.]
b] Debtor of the company
c] A person punished on any charge pertaining to auditing and three years has not been elapsed.
d] a person who has become insolvent
e] Substantial shareholders or close relatives of such shareholders of the company.
f] A person convicted on corruption, fraud or an criminal offence involving moral turpitude and a
period of five years has not elapsed thereafter.
g] A person or his partner or employee, who has been appointed as auditors in past three consecutive
years in public company.
h] In the case of a public company , any person who works, whether full time or part time , for any
governmental body or any body owned fully or partly by the Government of Nepal or any other
company or a partner of such person or a person who is working as an employee of such partner or a
person who is authorized to sign any documents or reports to be prepared by the management of the
company;
i] company having limited liability or body corporate.
j] Person having interest on any transaction with the company or close relative of directors, official or
interest in any transaction with the company.
Right of auditor:
Companies Act has recognized some powers of auditor, generally the auditor enjoys the following
right.
i] Right to access the account. [114]: An auditor is entitled to access the accounts and books of the
company. He can demand all the accounts, bills, vouchers, ledgers, records and so on of the company

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 with the director, employee at any time during office hours and the officials must furnish such matters
to him for the sake of auditing as soon as possible.
ii] Right to ask explanation [114]: In the course of auditing the auditor can ask the concerned officials
to give explanation on the accounts as he finds necessary. The officials have to explain such matters
accurately and in a right manner.
iii] Right to visit all the branches [110.2]: If the company has more than one branch, the auditor can
visit the branch office and examine all the accounts kept therein. If different auditors have been
appointed for each branch the related auditor can check account of the related branch.
iv] Right to get opportunity [119.3]: The auditor cannot be removed before the completion of his
terms. If he is removed from the post he must give a reasonable opportunity to defense.
v] Right to request for calling EGM [82.2]: In the course of auditing accounts of a public company if
the auditors thinks it necessary to call the EGM due to any reason, he can request the BoD for calling
such meeting, if the BoD fails to call such meeting he can apply in the OCR explaining the reason and
OCR has to call such meeting.
vi] Right to get remuneration [118]: An auditor is entitled to get remuneration for the act performed
by him. the remuneration is fixed by the appointing authority, auditors receive remuneration after
submitting the audit report. The company is responsible to provide remuneration.
Functions and duties of auditor: Generally the auditor has the following duties.
i] To submit audit report [115] : The primary duty of an auditor is to submit audit report. He addressing
the shareholders or the appointing authority has to submit to the company his report together with a copy,
duly certified by him, of the profit and loss accounts, balance sheet, statement of income and expenses
and cash flow audited by him.
Such report must prepared as per the audit standard prescribed by competent authority under the
existence law.
115.3 The audit report shall also indicate the following matters, inter alia:
(a) Whether such information and explanations have been made available as were required for the
completion of audit;
(b) Whether the books of account have been properly maintained by the company.
(c) Whether the balance sheet, profit and loss account and cash flow statements received have been
prepared in compliance with the accounting standards.
(d) Whether the present balance sheet properly reflects the financial situation of the company or not ,
(e) Whether the board of directors or any representative or any employee has acted contrary to law
caused any loss or damage to the company or not;
(f) whether any accounting fraud has been committed in the company
(g) Suggestion, if any.

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ii] To affix signature [116]: Another duty of an auditor is to affix signature on the audit reports prepared
by him. Similarly, he must mention the date on which he audited them.
In case of any accounting institution appointed as the auditor, the authorized member of its partner has to
sign it and mention the date of singing.
iii] To perform duty with care : Another most important duty of an auditor is to perform all the duties
with proper diligence and care. ( Re Kingstone Cotton Mill Co.1896)
Removal of Auditor: [119]
1.No auditor appointed pursuant to this Chapter shall be removed pending the completion of audit of
accounts of any financial year for which he/she was appointed as the auditor.
2. Three conditions to remove: If any auditor (a) breaches the code of conduct,
(b) does any act against the interest of the company,
© Commits any act contrary to the prevailing law,
Procedure : Such auditor may be removed through the same process whereby he/she was appointed as
auditor, by giving prior information to the Nepal Chartered Accountants Institute, and with the approval
of the regulatory authority, if any authorized by the prevailing law for the regulation of business of the
company concerned, and failing such authority, with the approval of the Office.
3. While removing an auditor the auditor shall be provided with a reasonable opportunity to defend
him/herself.
Audit Committee [164]
164. Audit Committee:
(1) A listed company with paid up capital of thirty million rupees or more or a company which is fully or
partly owned by the Government of Nepal shall form an audit committee under the Chairpersonship of a
director who is not involved in the day-to –day operations of the company and consisting of a least three
members .
(2) An person who is a close relative of the chief executive of a company shall not be eligible to be a
member of the audit committee.
(3) At least one member of the audit committee shall be an experienced person having obtained
professional certificate on accounting or a person having gained experience in accounting and financial
field after having obtained at least bachelor’s degree in accounts, commerce, management, finance or
economics.
(4) The report of board of directors required to be prepared by a company shall set out a short description
of the activities of the audit committee, working policies adopted by the board of directors to implement
the suggestions ,if any ,given by the audit committee, the allowances or facilities ,if any, received by the
members or the audit committee and the names of the members of audit committee.
(5) The audit committee may, for inquiring into any matter, notify the managing director of the company,
chief executive or the company or other director, auditor, internal auditor and accounts chief involved in
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the day-to-day operations of the company to attend its meeting; and it shall be their duty to be present in
the meeting of that committee if they are so notified.
(6) The board of directors shall implement the suggestions given by the audit committee in respect of the
accounts and financial management the company; and where any suggestion cannot be implemented, the
board of directors shall also mention the reasons for the same in its report.
(7) An company shall arrange for such means and resources as may be adequate for the fulfillment of
responsibilities of the audit committee; and the audit committee may fix its internal rules of procedures on
its own.
(8) The chairperson of the audit committee shall be present in the annual general meeting of the company.
(9) The audit committee shall meet as per necessity.

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