• Every Company is required to maintain books of account (BA) at its registered office for every Financial Year (FY).
• The Act has defined FY to mean the year from April to March. However, in case a Company or Body Corporate which is a Holding or a Subsidiary of a Company incorporated outside India is required to follow a different FY for consolidation of its accounts outside India then it can do so with prior approval of the National Company Law Tribunal.
• The Act has provided a transitional period of 2 years for existing Companies to have their FY other than April to March to change the same from April to March.
• Company (including for its branches) are required to show

1. All money received and spent and details thereof,

2. Sales and purchases of goods,

3. Assets and liabilities and

4. Items of cost as may be prescribed.

The BA should be prepared on accrual basis using double entry system of accounting. The BA may be maintained in the Electronic mode as well.

The BA prepared in electronic form should fulfil the following conditions–

• Should remain accessible in India;
• Be retained completely in the format in which they were originally generated, and the information contained in the electronic records shall remain complete and unaltered;
• The information received from branch offices shall not be altered
• Information shall be capable of being displayed in a legible form.
• Should have a proper system for storage, retrieval, display or printout of the electronic records and such records shall not be disposed of or rendered unusable, unless permitted by law; and
• Adequate backup of BA maintained in electronic mode shall be taken. In case where the BA are maintained outside India, back up should be kept on servers physically located in India on periodic basis.

5. The Company shall have to intimate to the Registrar of Companies (RoC) on an annual basis at the time of filing of financial statements-

• The name of the service provider;
• The internet protocol address of service provider;
• The location of the service provider (wherever applicable);
  where the BA are maintained on cloud, such address as provided by the service provider.
• BA may also be kept at any place other than the registered office with intimation to the RoC (within 7 days) regarding the full address of such place. BA of the branch office in India or outside India may be kept at that office however periodical returns must be submitted to the head office by the branch.
• The BA shall be open for inspection to any director during business hours. In case of BA maintained outside India, summarised returns of the BA should be sent to the registered office at quarterly intervals and shall be kept open to the directors for inspection.
• The Company is required to maintain the BA along with supporting vouchers if any for a period of 8 years unless the Central Government (CG) requires the Company to maintain the same for a longer period owing to any investigation being ordered on the Company.
• Besides BA, every Company has to maintain deeds, vouchers, writings, documents, minutes and registers as required.

Financial Statements

The Financial Statements (FS) should –

• Present a true and fair view of the affairs of the Company
• Comply with the accounting standards (AS) notified under Section 133 of the Act
• Be prepared in the format as prescribed in Schedule III of the Act (which is similar to revised Schedule VI of the 1956 Act).

Not Applicable to;

1. Insurance or banking company

2. Company engaged in generation or supply of electricity

3. Other class of companies for which format is prescribed in or under the Act governing such companies.

FS are defined in the Act to include the following:

• Balance Sheet as at the end of the FY;
• A Statement of Profit and Loss Account, or in the case of a Company carrying on any activity not for profit, an Income and Expenditure Account for the FY;
• Cash Flow Statement for the FY;
• Statement of changes in Equity, if applicable; and
• Explanatory notes annexed to, or forming part of, any document referred to above.
• Cash Flow Statement is optional for FS with respect to OPC,

Small Company and

Dormant Company.

If the FS of the Company do not comply with the AS then the Company has to disclose in its FS –

• The deviation from the AS;
• The reasons for such deviation and;
• Financial effects, if any, due to such deviation.

The FS of the company have to be placed before every Annual General Meeting (AGM) of the Company.

Accounting Standards (AS)

For the preparation of FS, it is provided that the CG would prescribe the standards of accounting, as recommended by ICAI in consultation with and after examination of the recommendations made by the National Financial Reporting Authority (NFRA). NFRA is a new regulatory body sought to be set-up under the Act. A circular has also been issued that till NFRA is constituted, the existing standards issued under Section 211(3C) of the 1956 Act should be followed.

Preparation of Consolidated Financial Statements (CFS)

Where a Company has one or more subsidiaries then, in addition to the FS, it has also to prepare CFS of the Company and of all the subsidiaries in the same form and manner as that of its own and the same should also be placed before the AGM.

Preparation of CFS shall not apply for an intermediate wholly owned subsidiary, other than a wholly-owned subsidiary whose immediate parent is a company incorporated outside India:

A separate statement containing the salient features of the FS and its subsidiary/ies is also required to be attached to the FS.

It Is clarified that in the CFS, the company would give all the disclosures relevant to CFS only.

Manner of preparing CFS

• Schedule III of the Act prescribes general guidelines for preparation of CFS.
• The Act also mentions that Subsidiary includes Associate Company and JV.

Reopening of accounts on Court’s or Tribunal’s Order

A Company will have to re-open its books of account and recast its FS after an application in this regard is made by the CG, the Income Tax (IT) authorities, the Securities and Exchange Board of India, or any other statutory regulatory body or authority or any other person concerned, and an order is made by a court of competent jurisdiction or the Tribunal under the following circumstances –

• Relevant earlier accounts were prepared in a fraudulent manner or
• The affairs of the Company were mismanaged during the relevant period, casting a doubt on the reliability of the FS.

The accounts so revised or recast above shall be final.

Voluntary revision of FS or Board’s Report:

• A Company can undertake voluntary revision of FS if it appears to the Director of a Company that the FS and Board Report of the Company does not comply with the provisions of the Act in respect of any of 3 preceding financial years, after obtaining approval from the Tribunal.
• A revised FS or report cannot be prepared or filed more than once within a financial year and the detailed reasons for revision of such FS or report shall also be disclosed in the Board’s Report in the relevant financial year in which such a revision is being made.
• Where the copies of the previous FS or report have been sent to the members or delivered to the Registrar of Companies (RoC) or laid before the general meeting, the revisions should be confined to –

1. The correction in respect of which the previous FS or report do not comply with Section 129 or Section 134 of the Act and ;

2. The making of necessary consequential alternation

Internal Audit

Internal Auditors can either be

1. Chartered Accountant or

2. Cost accountant or

3. Such other professional as may be decided by the Board of Directors (BoD) to conduct an internal audit of the functions and activities of the Company.

As per the Rules, the following Companies are required to appoint Internal Auditors:

1. Every listed Company

2. Every unlisted Company having-

• Paid up share capital of Rs.50 crore or more during the preceding financial year (FY); or
• Turnover of Rs.200 crore or more during the preceding FY; or
• Outstanding loans or borrowings from banks or public financial institutions exceeding Rs.100 crore or more at any point of time during the preceding FY; or
• Outstanding deposits of Rs..25 crore or more at any point of time during the preceding FY

3. Every private Company having-

• Turnover of Rs.200 crore or more during the preceding FY; or
• Outstanding loans or borrowings from banks or public financial institutions exceeding Rs.100 crore or more at any point of time during the preceding FY.

An existing Company covered under any of the above criteria shall comply with the requirements of Section 138 (Internal Audit) of the Act and the relevant Rule within 6 months of commencement of such section. (i.e. within 6 months from 1st April 2014).

A Company may appoint a firm of Internal Auditors or an Internal Auditor. Such a person may or may not be an employee of the Company.

The Audit Committee of the Company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit.

Appointment, Eligibility and Disqualifications of AuditorsAppointment of Statutory Auditors:

Appointment of 1st Auditor

• The first auditors of a company need to be appointed within 30 days of incorporation by the board.
• If it fails to appoint within such time, then the members are required to appoint the auditors within 90 days.
• The auditor appointed by the members will hold office till the conclusion of first AGM.

In the case of a Government Company or deemed Government Company appointment of first auditor is to be done by C&AG within a period of 180 days from the commencement of the financial year.(Circular No.33/2014).

Appointment of Subsequent Auditor:

Every company shall at the first AGM, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth AGM and thereafter till the conclusion of every sixth meeting.

Such appointment shall be subject to ratification at every AGM till such sixth AGM by way of passing an ordinary resolution.

Rotation of Auditors

Compulsory rotation of individual auditors in every 5 years and of audit firm in every 10 years for the following category of companies:

1. Listed companies;

2. All unlisted companies having paid up share capital of Rs.10 crores or more;

3. All private limited companies having paid up share capital of Rs.20 crores or more;

4. All companies having paid up capital below threshold limit as stated in (b) and (c) above, but having public borrowings from FIs, banks or public deposits of Rs.50 crores or more.

Every existing company which falls in the above categories, shall comply with the requirements of rotation of auditors within three years from the date of commencement of the Act.

There is an option granted to the members of the Company to rotate the signing partner in an audit firm or to appoint an additional auditor.

On expiry of the term of auditors, the new firm which gets appointed shall not have a partner in common with the retiring firm.

Qualifications and Disqualification of Auditors

Only Chartered Accountants are eligible to be appointed as auditors of a Company.

In case of LLPs being appointed as auditors, only Chartered Accountant partners shall be authorised to act on behalf of the firm.

Following persons shall not be eligible for appointment as auditors of the Company:-

• A Body Corporate other than LLP registered under the LLP Act, 2008;
• An officer or employee of the Company;
• A person who is a partner, or who is in the employment , of an officer or employee of the Company;
• A person who, or his relative or partner
  • Is holding any security of or interest ( of FV not more than Rs.1 lakh) in the Company or its subsidiary, or of its holding or associate Company or a subsidiary of such holding Company:
  • Is indebted to the Company, or its subsidiary, or its holding or associate Company or a subsidiary of such holding Company, in excess of Rs.5 lakhs; or
  • Has given a guarantee or provided any security in connection with the indebtedness of any 3rd person to the Company, or its subsidiary, or its holding or associate Company or a subsidiary of such holding Company, for an amount in excess of Rs.1 lakh;

• A person or a firm who, whether directly or indirectly, has business relationship with the Company, or its subsidiary, or its holding or associate Company or subsidiary of such holding Company or associate Company. The “business relationship” shall not include following transactions :

• Commercial transactions which are in the nature of professional services permitted to be rendered by auditor/audit firm; and

• Commercial transactions which are in the ordinary course of business at an arm’s length price.

  • 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 in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 Companies; other than OPCS, dormant companies, small companies and private companies having paid-up share capital less than Rs.100 crores.
  • 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;
  • Any person whose subsidiary or associate Company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided in Section 144 (Auditor not to render certain services) of the Act.

Resignation and Removal of Auditors

• An auditor can be removed from his office before the end of his term by passing a special resolution after obtaining pervious approval from CG. In such cases, the auditor should be given an opportunity of being heard before such removal.
• In case the auditor has resigned, he would have to file a statement with the Company and RoC mentioning reasons of his resignation and other relevant facts within 30 days from the date of resignation.
• In case a Company has an Audit Committee (AC), all appointments, reappointments of auditors shall be made by the BoD on recommendations of the Committee.
• If the National Company Law Tribunal either suo motu or on application made to it by the CG or by any person concerned is satisfied that the auditor of a Company has acted in fraudulent manner or abetted or colluded in any fraud by, or in relation to, the Company or its Directors or Officers, it may, by order, direct the Company to change its auditors.

Remuneration of Auditors

• The remuneration of 1st auditors shall be fixed by the BoD and of subsequent auditors by the Company in the general meeting. The remuneration shall include any other expenses incurred by the auditor for the audit purposes but will not include any remuneration paid to him for any other services rendered by him at the request of the Company.

Reporting of Frauds

(A) If the Auditor has sufficient reason to believe that a fraud has been/is being committed against the company by its officers or employees he is required to report:

• To the Government, if such fraud involves such amount or amounts as may be prescribed in the rule.
• To the Audit Committee, if constituted by the company or to the Board of Directors, if such fraud involves amounts below the specified amount, within such time and in such manner as may be prescribed.

The company whose auditors have reported frauds to the Audit Committee or the Board of Directors, but not to the Government, shall disclose the details about such frauds in the board's report in such manner as may be prescribed.

(B) If the Auditor is required by law to report the same to the Central Government (CG), following procedure, not later than 60 days from the day he obtains knowledge regarding the fraud should be followed.

• The Auditor should forward a report on fraud to the Board/ Audit Committee immediately after his knowledge on the fraud and requesting their reply within 45 days;
• On receipt of responses as above, he should forward the replies, with his report to the CG within 15 days of receipt of such reply or observations;
• In case of failure to obtain replies from the Audit Committee/ Board within the stipulated period of 45 days as above, 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/Audit Committee for which he failed to receive any reply or observations within the stipulated time.

Also refer ICAI Guidance Note on Reporting of Fraud for further reference.

Ineligible Services

Auditor being an individual/firm, either himself/itself or through his relative/partner or any other person connected or associated with such individual/firm, parent, subsidiary or associate Company of such firm or through any other entity, whatsoever, in which such individual/firm/partners has significant influence or control, or whose name or trade mark or brand is used by such individual/firm ; is not supposed to render the following services directly/indirectly to the Company in which he is appointed as an auditor

• 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
• Any other kind of services as may be prescribed:

An auditor or audit firm who or which has been performing any non-audit services on or before the commencement of this Act shall have to comply with the above provisions before the closure of the 1st financial year after the date of such commencement.

Auditors to attend Annual General Meeting (AGM)

The auditor or his representative (who shall also be qualified enough to be an auditor) shall have to attend the AGM of the Company and be heard at such AGM.