Which Companies Should Be Audited?

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What is Audit? 

“Audit” means to examine something thoroughly. “Auditing is an independent inspection of the financial information of any organization; whether profit-oriented or not profit-oriented, irrespective of its legal form, status or size when such examination is conducted with a view to express an opinion thereof”.

Need For Company Audit

Regardless of size or turnover, any business must have its accounts audited by a Statutory Auditor and file the reports with the Registrar of Companies.

Every business is required by the Companies Act 2013 to keep its books of accounts, other related books and documents, and financial statements providing an accurate and reasonable view on an accrual basis and using the double entry method, which must be held at the company’s registered office for each financial year. After filing a notice with the Registrar of Companies, the board of directors can hold the books of accounts in any other location in India.

Who can become Auditor of a Company

A company’s audit is conducted by the Statutory Auditor, who is appointed by the company’s Annual General Meeting. Only a Chartered Accountant with a valid certificate of practise under the Chartered Accountants Act, 1949, may become the company’s auditor. In addition, if the majority of the partners are practising in India and are eligible for appointment, the company may nominate a firm as its auditor. Furthermore, only chartered accountant partners would be permitted to sign on behalf of such a company.

Appointment of First Auditor by a Company.

The first auditor of a company must be named by the board of directors within 30 days of the company’s incorporation date. If the Board fails to select one, the company’s shareholders must hold an Extraordinary General Meeting 120 days after the date of incorporation to appoint the first auditor.

Appointment of Auditor at AGM of Company.

The statutory auditor is elected by the shareholders of the corporation at an annual general meeting and serves for five years unless removed or the auditor resigns.

Rotation of Auditors

Auditors are appointed for a five-year term at the AGM. Auditor rotation is applicable to companies that fall into the following categories:

• Publicly Listed Companies

• An unlisted public company with a paid-up share capital of at least Rs. 10 crores;

• Private limited companies with a paid-up capital of at minimum Rs. 50 crore;

• Unlisted public companies and private companies with public borrowings of rupees 50 crore or more from financial institutions, banks, or public deposits.

Auditor rotation does not extend to one-person firms (OPCs) or small businesses. That means that OPC and Small Businesses can appoint or reappoint an individual for more than one term of five years or an auditing firm for more than two terms of five years.

Auditor to Sign Audit Reports

In accordance with the Act, the statutory auditor must sign the auditor’s report or approve financial statements and other documents as required.

Timeline for Company Audit

Auditing is a continuous process that reviews different compliances, risks, and accounting standards. Following the end of a financial year (March 31st), the company must file financial statements based on the books of accounts held, and the board of directors must authorise them for submission to the audit process.

After that, the auditor must write a detailed audit report reporting the transaction’s accuracy and whether it reflects an accurate and fair view. The company must hold its Annual General Meeting (AGM) within six months of the financial year’s end, and notice of the AGM must be issued to all shareholders at least 21 days before the meeting. Members must receive a copy of the Directors Report and the Audited Financial Statement, as well as the auditors’ report, along with notice of the AGM. As a result, the Auditors Report must be made available before the notice is sent.

Notice of AGM must be sent by the first week of September if the organisation wishes to hold an AGM by the 30th of September (6 months from the date of closing of accounts). As a result, the Audit of Company Accounts should be done by August 31st.

Company Annual Filing

Any company that is registered under the Companies Act must file annual returns with the Registrar of Companies. The filing of the company’s Audited Annual Financial Accounts along with the  Directors Report, and Annual Return with the Registrar of Companies is referred to as “Company Annual Filing.” Any registered company, whether or not it conducts business, is required to file these annual reports.

Also Read  Sarla Verma & Ors. v. Delhi Transport Corporation & Anr. (2009)

Penalty for Contravention

• The company will be charged a minimum of Rs.25,000 which may extend Rs.5,000,000.

• Every company officer shall be punished by imprisonment for a period of one year or a fine of not less than Rs10,000.00 but not more than Rs1,000,000.00, or both.

• The auditor shall be fined not less than Rs.25,000, but not more than Rs.5,00,000.00 or four times the auditor’s remuneration, whichever is less.

Furthermore, if it is done intentionally or wilfully with the intent to mislead the company, its shareholders, creditors, or tax authorities, he will be sentenced to one year in prison and a fine of not less than Rs.50,000.00, which may extend upto Rs.25,000.00, or eight times the auditor’s remuneration, whichever is less.

Furthermore, the auditor convicted as stated above is liable to reimburse the company for the remuneration he obtained and pay damages to the company/statutory bodies/authorities/members/creditors of the company. If an audit firm’s partner or partners behaved fraudulently/colluded/abetted for the company’s or directors’ conduct, the concerned partner is jointly and severally responsible under this Act, whether civil or criminal.

Statutory Audit

A Statutory Audit is a form of audit that is mandated by a statute or regulation to ensure that the book of accounts of a company is portrayed to regulators and the public in an accurate and reasonable manner. Statutory Audits, unlike internal audits, are not optional and must be conducted if an organisation meets certain requirements. Statutory audits must be carried out by qualified Chartered Accountants who are not associated with the business. Furthermore, the Auditor’s observations must be presented in the format specified by the Regulator in his or her report.

Company audits and tax audits are the two most common types of statutory audits. According to the Companies Act of 2013, any company must have its book of accounts audited every financial year, regardless of its revenue turnover, nature of operation, or money. As a result, a Company’s Board of Directors is required by statute to select an Auditor within 30 days of its incorporation and to perform an annual audit of its financial statements. If a Limited Liability Partnership (LLP) has an annual turnover of Rs.40 lakhs or more, or a capital investment of Rs.25 lakhs or more, its accounts must be audited.

Proprietorships and Partnership Companies that have met a certain revenue threshold, on the other hand, are expected to undergo a tax audit.


Regardless of the type of business or revenue turnover, all businesses (Private Limited Company, One Individual Company, Limited Company, Section 8 Company, Nidhi Company, Producer Company) must appoint a Statutory Auditor.

Limited Liability Partnership

Regardless of the nature of the company, all Limited Liability Partnerships (LLPs) must have their accounts audited if their annual revenue turnover exceeds Rs.40 lakhs or their capital investment exceeds Rs.25 lakhs.


If a proprietorship firm’s annual sales turnover exceeds Rs.1 crore in terms of company or annual gross receipts exceed Rs.25 lakhs in terms of occupation, a tax audit by a Chartered Accountant is required.

Types of Statutory Audit

  • Audits under the Companies Act, 2013
    • Financial audit prescribed u/s 139
    • Secretarial Audit prescribed u/s 208
    • Internal audit prescribed u/s 138(1)
    • Cost Audit prescribed u/s 148
  • Audits under the Direct & Indirect Tax Laws
    • Tax Audit prescribed u/s 44AB of the Income Tax Act, 1961
    • Audit under Customs Act, Central Excise Act, & State VAT Acts
    • GST Audit prescribed u/s 35(5) of the GST Act, 2017

What is Internal Audit?

“Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.”. It helps the company achieve its goals by adopting a structured and disciplined approach to measuring and enhancing the efficacy of risk management, monitoring, and reporting.

Internal Auditing Legal Requirements

The following class of companies are expected to name an internal auditor under Section 138 of the Companies Act 2013 and Rule 13 of the Companies (Accounts) Rules, 2014:

every public listed company;

any public company that isn’t listed on the stock exchange –

Also Read  Sarla Verma & Ors. v. Delhi Transport Corporation & Anr. (2009)

a paid-up share capital of at least Rs.50 crore in the previous financial year; or

outstanding deposits of at least Rs.25 crore at any point during the previous financial year; and any unlisted public company or private company with a previous financial year turnover of Rs.200 crore or more; or unpaid loans or borrowings from banks or public financial institutions exceeding Rs.100 crore or more at any point during the previous financial year:

Internal Auditor Legal Provisions

Section 138 (1) Any class or classes of companies shall be required to appoint an internal auditor, who shall be a chartered accountant or a cost accountant, or such other professional as the Board can specify, to perform internal audit of the company’s operations and activities;

The internal auditor may or may not be a company employee.

The words “Chartered Accountant” and “Cost Accountant” apply to someone who is a “Chartered Accountant” or a “Cost Accountant,” as the case may be, whether or not they are practising.

In consultation with the Internal Auditor, the company’s Audit Committee or Board of Directors shall determine the scope, activity, frequency, and methodology for conducting the internal audit.

Who will perform the audit?

The Comptroller and Auditor General performs audits of governments and public bodies (C&AG).

Independent professionals designated as auditors perform an audit of a public or private company or business enterprise.

Except in the case of internal audit, independent auditors are not employees.

Cost Accountants perform a substantial number of statutory audits.

Specialist practitioners perform other special audits.

Secretarial audit 

A secretarial audit is a method of evaluating whether or not an organisation is in compliance with applicable laws, guidelines, regulations, and notifications in force at the time of the audit. It is being checked in this case to see whether a company has been following the provisions of the Companies Act 2013 and all of its regulations.

Companies are subject to a number of rules and regulations that are becoming increasingly complex. The roles of directors, promoters, and other management positions are often complex and significant. As a result, recruiting a Practicing Company Secretary (PCS) to perform a secretarial audit is important.

According to the Companies Act, a secretarial audit is required.

The provisions concerning Secretarial Audit are dealt with in Section 2014 (1) of the Act. The audit is mandated by law for the following businesses:

  • Each and every listed company.
  • A public company with a paid-up capital of more than 50 crores 
  • A public company with a turnover of more than 250 crores 
  • Any private company which is a subsidiary of a public company and falls within one of the two categories mentioned above.

Only a practising Company Secretary who is a member of the Institute of Company Secretaries of India (ICSI) is allowed to perform a statutory secretarial audit of these businesses, according to the act.

Cost Audit

All major decisions, such as price setting and manufacturing decisions, involve data from management. This information is provided to management by the cost accounting process. Cost audit ensures that this method is correct, so it is extremely significant.

Section 148 of the Companies Act has provisions regarding cost audits of companies. And the provisions state that cost audit is applicable in the following two situations,

  1. Table A of specified goods and services,
    • where turnover from the goods and services is exceeds 50 crores.
    • Aggregate turnover from the individual product for which cost records are necessary is exceeds 25 crores.
  2. Table B of specified goods and services
    1. where turnover from the goods and services is exceeds 100 crores.
    2. Aggregate turnover from the individual product for which cost records are necessary is exceeds 35 crores.

Final Remarks

The primary aim of auditing is to check the accuracy of the accountant’s books of accounts. The Companies Act of 2013 in India made auditing of company accounts mandatory. The purpose of auditing has shifted with the exponential growth in the size of enterprises and the volume of transactions that occur on a daily basis. Auditing is now focused on a fair representation of financial efforts. The Companies Act of 2013 also requires the auditor to be eligible. Due to an amendment to the Companies Act of 2013, specific regulations on cost audit, internal audit, and secretarial audit can be found in the Act as of April 1, 2014.

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