Resignation of Auditors

Sub-sections (2) and (3) of section 140 of the Companies Act,2013 deal with resignation of statutory auditor . These are new provisions. There were no provisions like these in the Companies Act,1956

Obligation cast on auditor who resigns-Section 140(2)
Section 140(2)  requires that

• The auditor who has resigned from the company shall file a statement with the company as well as with the ROC 
• Statement shall be  in the prescribed form [Form No. ADT-3 - Rule 8 of the Companies (Audit and Auditors) Rules, 2014]indicating reasons and other facts as may be relevant with regard to his resignation 
• Statement shall be filed within 30 days of resignation
•  In case of companies referred to in section 139(5) ofthe 2013 Act (i.e. Government companies and companies owned orcontrolled directly or indirectly by the Central Government or by anyState Government(s) or partly by the Central Government and partlyby one or more State Governments), the auditor shall also file such statement with the CAG

Punishment-Section 140(3)
Section 140(3) provides that if the auditor does not comply with section 140(2) as above, he shall be punishable with a fine of not less  than Rs 50,000 but which may extend to Rs. 5,00,000.

Consolidated Financial Statements

Backdrop

The Companies Act,1956  was silent on consolidated financial statements. Section 129 of the Companies Act,2013 has made  consolidated financial statements mandatory  in cases where company has one or more subsidiaries or associates or joint ventures.

• Section 212 of the 1956 Act required  a holding company to attach to its balance sheet a statement showing holding company’s interest in subsidiary [See section 212(5) of the 1956 Act].  The 2013 Act omits this requirement.
• Instead the 2013 Act requires the holding company to attach with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary/ies, associate companies and joint ventures in Form No. AOC-1 of Companies (Accounts) Rules, 2014.
• The provisions relating to what should be the financial year of subsidiary [See section 212 of the 1956 Act] have also been omitted from the 2013 Act as the concept of uniform financial year of 1st April to 31st March has been made mandatory for companies under the 2013 Act.

Separate Financial Statements [Section 129(2)]

Section 129(2) of the Companies Act,2013 requires that "At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year".  Section 129(2) casts an obligation on every company. . In the context of a holding company, the financial statements referred to in sub-section (2) are commonly referred to as 'separate financial statements'


Consolidated Financial Statements

• Section 129(3) provides that where a company has one or more subsidiaries, it shall, prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own.
• The consolidated financial statements shall be in addition to its separate financial statements[ie .its financial statement under sub-section (2)]
• The  consolidated financial statements which shall also be laid before the annual general meeting of the company along with the laying of its separate financial statements[ie .its financial statement under sub-section (2)]
• The company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed (ie in Form AOC-1).
• The Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed.[See Rule 6 below]
• For the purposes of this sub-section [ie section 129(3)], the word “subsidiary” shall include associate company and joint venture.

Section 129(4) provides that the provisions of this Act applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, apply to the consolidated financial statements referred to in sub-section (3).



Rules Prescribed by Central Govt for consolidation[Rule6]
Rule 6 of the Companies (Accounts) Rules, 2014 provides that

• The consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards.
• In case of a company covered under sub-section (3) of section 129 which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.

 

Practical problems of Advanced Auditing and Professional Ethics-I

Comment on the following in the light of the provisions of Companies Act,2013
(1)PQR Ltd ,a  listed company, appoints R as its internal auditor. R is a member of Institute of Chartered Accountants of India but does not hold a certificate of practice
(2)ABC Ltd, a  listed company, proposes to appoint X& Co,a CA firm,as its internal auditor. X &Co are statutory auditors of  A Ltd. which is a subsidiary of ABC Ltd
(3)MNO Ltd,,a  listed company, appoints M as its internal auditor. M is a member of Institute of Cost Accountants of India but does not hold a certificate of practice
(4)ZLtd,a  listed company, contends that it is not required to appoint an internal auditor since its figures for preceding financial year were as under:
paid-up capital-Rs48 crores
turnover-Rs150 crores
outstanding loans or borrowings- Rs 90 crores
outstanding deposits-Nil
(5)PQR Pvt Ltd, had turnover of Rs. 180 crores and paid-up capital of Rs.60 crores  during the preceding financial year . Its outstanding loans or borrowings were Nil during the preceding financial year.  The company hasnt appointed any internal auditor

Mandatory internal audit for certain companies

Backdrop

• The Companies Act,1956 did not  cast a legal obligation on any company to have an internal audit.
• The MAOCARO,1988 and CARO,2003 orders issued by the Central Government under section 227(4A) of the said Act merely required statutory auditors of specified companies to comment in audit report whether company had an internal audit commensurate with the size and nature of its business. 
• The obligation was on the statutory auditor to report. If any specified company did not have an internal audit, it was not a violation of any statutory provision.
• The Companies Act,2013 brings a sea change in the position. Section 138 of the Companies Act,2013 titled 'Internal Audit' provides that such class or description of companies as may be prescribed  shall be required to appoint an internal auditor to conduct internal audit of the functions and activities of the company.

Companies or classes of companies which are required to appoint internal auditor

Rule 13(1) of the Companies (Accounts)Rules,2014 provides that  the following class of companies shall be required to appoint an internal auditor or a firm of internal auditors, namely:—
(a) every listed company;

(b) every unlisted public company having—

• (i) paid up share capital of fifty crore rupees or more during the preceding financial year; or
• (ii) turnover of two hundred crore rupees or more during the preceding financial year; or
• (iii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or
• (iv) outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year; and

(c) every private company having—

• (i) turnover of two hundred crore rupees or more during the preceding financial year; or
• (ii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year:

An existing company covered under any of the above criteria shall comply with the requirements of section 138 and this rule within six months of commencement of such section.

Qualifications of internal auditor

 Internal auditor shall be

• a Chartered Accountant or 
• a Cost Accountant or 
• such other professional as may be decided by the Board.

 Explanation  to Rule 13(1) clarifies that —

• the internal auditor may or may not be an employee of the company;
• the term “Chartered Accountant” shall mean a Chartered Accountant whether engaged in practice or not.

Appointment of internal auditor shall be by Board resolution at a Board meeting
In view of section 179(3) of the Companies Act,2013 and Rule 8(4) of the Companies (Meetings of Board
and its Powers) Rules, 2014, the power of appointment of internal auditor shall be exercised by the Board of Directors by means of a resolution passed at a Board meeting . Appointment of internal auditor cannot be
made by means of a circular resolution. However, there is no bar in making the appointment at a Board meeting held through video conferencing or audio visual means

Scope, functioning, periodicity and methodology of internal audit
Rule 13(2) of the Companies (Accounts) Rules, 2014 provide that the Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate :
(i) the scope,
(ii) functioning,
(iii) periodicity, and
(iv) methodology
for conducting the internal audit.

Statutory auditor cant be internal auditor
A statutory auditor of a company cannot also be its internal auditor. Nor can he be the internal auditor of the company’s holding company or subsidiary company. [Section 144 of the 2013 Act].

Books of account in electronic mode

The second proviso to section 128(1) of the Companies Act,2013 provides that "the company may keep  books of account or other relevant papers in electronic mode in such manner as may be prescribed. Thus, under the Act, it is  not  compulsory to maintain books of account or other relevant papers in electronic mode. However, if a company opts to keep books of account or other papers in electronic mode, the company must comply with the rules prescribed in this regard ie Rule 3 of the Companies(Accounts) Rules,2013

Electronic Mode
"Electronic Mode"

• includes 'electronic form' as defined in section 2(1)(r) of the Information Technology Act,2000
• and also includes 'electronic record' as defined in section 2(1)(f) of the Information Technology Act,2000

Manner in which books of account are to be kept in electronic mode
Sub-rules(1) to (5) of  Rule 3 provide as under:

• The books of account and other relevant books and papers maintained in electronic mode shall:
• remain accessible in India so as to be usable for subsequent reference.
• be retained completely:
• in the format in which they were originally generated, sent or received, or 
• in a format which shall present accurately the information generated, sent or received 

• The information contained in the electronic records shall 
• remain complete and unaltered.
•  be capable of being displayed in a legible form 

• The information received from branch offices shall:
• not be altered and 
• be kept in a manner where it shall depict what was originally received from the branches.  

• There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate 
• Such records shall not be disposed of or rendered unusable, unless permitted by law. 
• The back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a periodic basis.

Sub-rule (6) of Rule (3) provides that the company shall intimate to the Registrar on an annual basis at the time of filing of financial statement—

  (a)  the name of the service provider;

  (b)  the internet protocol address of service provider;

  (c)  the location of the service provider (wherever applicable);

  (d)  where the books of account and other books and papers are maintained on cloud, such address as provided by the service provider.

 

New concepts introduced by Companies Act,2013-Accounts & Audit

New provisions/concepts introduced by the Companies Act,2013 on Accounts (Chapter IX-Sections 128 to 138) and Audit and Auditors(Chapter X-Sections 139 to 148)
Are you prepared on these new concepts/provisions introduced by the Companies Act,2013?
Accounts of Companies(Chapter IX)
(i)Electronic books of account[2nd proviso to section 128(1)]
http://advancedauditingandprofessionalethics.blogspot.in/2014/11/books-of-accopunt-in-electronic-mode.html

(ii)Consolidated Financial statements[Section 129(3) to (5)] made compulsory for holding company
 http://advancedauditingandprofessionalethics.blogspot.in/2014/11/consolidated-financial-statements-quick.html

(iii)Corporate Social Responsibility[Section 135]

(iv)Internal audit made compulsory for certain classes of companies[Section 138]
 http://advancedauditingandprofessionalethics.blogspot.in/2014/11/consolidated-financial-statements-quick.html
http://advancedauditingandprofessionalethics.blogspot.in/2014/11/practical-problems-of-advanced-auditing.html

Audit and Auditors(Chapter X)
(v)Compulsory rotation of auditors for listed companies and other prescribed classes of companies[Section 139(2)]

(vi)Auditor to file statement in prescribed form with ROC in case he resigns[Section 140(2)/(3)]
 http://advancedauditingandprofessionalethics.blogspot.in/2014/11/resignation-of-auditors-quick-reviser.html

(vii)Power of National Company Law Tribunal to remove auditor in case he colludes with management[Section 140(5)]

(viii)Mandatory compliance by auditor with auditing standards[Sections 143(9)/(10)]

(ix)Duty of auditor to report fraud to Central Government[Section 143(12)]

(x)Auditor not to render certain services [Section 144]
(xi)Auditors to attend general meetings[Section 146]

Companies Act,2013 -Important definitions-Section 2

Sections 2(7),143(9)&143(10): Auditing Standards made mandatory

• Section 143(9): Every auditor shall comply with auditing standards 
• Section 2(7) read with section 143(7) define “auditing standards”

Section 2(12): “book and paper” or “book or paper”

• Recognises books/papers maintained in electronic form

Section 2(13)& Section 128: “books of account”

• Requires books of account to be maintained also for sales and purchases of services by company\
• Recognises that books of account maintained in electronic form

Section 2(14):Branch office

• In relation to a company, it means any establishment described as such by the company.
• Company totally at liberty to designate or undesignated any of its establishments as Branch Office
• Company  doesn’t have to comply with any Rules or apply to Central Govt for exemption from Branch audit. It can get exemption from audit of any of its branches by exercising choice on designating or undesignating its offices as branch offices

Section 2(18):Chief Executive Officer

• Means  an officer designated as CEO by the company

Section 2(19):Chief Financial Officer

uMeans  a person appointed as CFO by the company

Section 2(40):Financial Statement

• The term covers “statement of changes in equity” if applicable.  [Section 2(41)(iv)]
• So SOCIE  will be compulsory for companies to whom Ind ASs will be made applicable
• The term covers cash flow statement also.[Section 2(41)(iii) & proviso to section 2(41)]
• Cash flow statement made mandatory for all companies Except 
• (i)One person companies[Section 2(62)]
• (ii)Small companies[Section 2(85)]
• (iii)Dormant companies[Section 455]

Section 2(41): Financial Year

• To make financial statements of all companies comparable, companies have to adopt uniform financial year 1^St April to 31^st March
• The above rule subject to certain exceptions

Section 2(51): Key Managerial Personnel

The term covers

• CEO,
• MD
• Manager
• Company secretary
• Whole-time director
• CFO
• Such other officer as may be prescribed

Section 2(60): Officer in default

Section 2(60)(vii) brings within the ambit of OID the following third parties involved in issue /transfer of securities

• Share transfer agents 
• Registrars
• Merchant bankers to the issue or transfer

 Section 2(62):One person company

• It means a company with only one person as a member 
• Not to be confused with ‘One man company’ of Salomon v Salomon case
• OPC is also a ‘private company’ and must comply with conditions applicable to private company in section 2(68) except the condition to limiting maximum no. of members to 200.(This “ maximum 200 members” limit is meaningless to OPC as it has only one sole member)

Section 2(68):Private Company

• Private Company can have maximum 200 members as against 50 earlier  

Students advised to go through the supplementary study material &RTPs brought out by ICAI