What are the audit requirements under the Companies Act, 2013?

Introduction 

Audit requirement is the most essential step under the Companies Act, 2013, which ensures the transparency, accountability, and a true and fair view of companies’ financial statements. Section 143(2) of this Act defines the appointment and the roles of auditors under the scope of audits. The auditing process safeguards against fraud and mismanagement in company operations. According to the Companies Act, 2013, it is mandatory for all companies to undergo an annual audit of their financial statements by an independent auditor. These audits are conducted to confirm that the financial records are complied with the specified standard and reflect the true and fair view of the financial transactions of the company. There are various types of audits as per their specific requirements depending upon nature, size and operations of the companies, such as internal audits under Section 138, secretarial audits under Section 204, and cost audits under Section 148. Thus, it is important to gain stakeholders confidence and statutory compliance for the companies.

Meaning of Audit 

Audit is the process of examination of financial statements, books of accounts, business transactions and the operations of a company to provide a true and fair view of the state of the company’s affairs at the end of the financial year.

Types of Audits

According to the Companies Act, there are various types of audits which depend on their size, nature, and operations, are as follows:

1. Internal Audit: An internal audit is an independent assessment of internal records, risk management and helps prevent frauds in the company. An internal auditor can be a Chartered Accountant or a Cost Accountant or such other professional as may be decided by the Board to conduct internal audit in the company. According to Section 138 of the Companies Act, 2013, the following class of companies shall appoint an internal auditor-

• Every listed company irrespective of any criteria.
• Every producer company irrespective of any criteria.
• Unlisted company having share capital of fifty crores rupees or more, or turnover two hundred crores rupees or more, or outstanding loans and borrowings from banks and public financial institutions are more than one hundred crores rupees at any time, or outstanding deposits of twenty-five crores rupees or more, during the preceding financial year[1].
• Every private company having a turnover of two hundred crores rupees or more or outstanding loans and borrowings from banks or public financial institutions are more than one hundred crores rupees at any time, during the preceding financial year.

2. Secretarial Audit: The purpose of secretarial audit is to check and make a report on compliance of applicable laws and secretarial standards and point out non-compliance and inadequacy during compliance. According to Section 204 of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, certain class of companies are required to annex their Board report under Section 134(3) of the Act and a secretarial audit report shall be made by a Company Secretary in Form MR-3 -

• Every listed company irrespective of any criteria.
• Every public company having a paid-up share capital of fifty crores rupees or more, or turnover of two hundred fifty crores’ rupees or more, or outstanding loans and borrowings of one hundred crores rupees or more, existing on the last date of the latest audited financial statement[2].
• Every private company which is a subsidiary of a public company.

3. Cost Audit: A company engaged in production, manufacturing, processing and mining activities, required to maintain particulars relating to utilization of material, labour or other items of cost for such class of companies. According to Section 148 read with Rule 6 of the Companies (Cost Records and Audit) Rules, 2014, companies engaged in the above-mentioned activities having its annual turnover more than fifty crores rupees are required to appoint a cost auditor by the Board of Directors of the company. Every cost auditor shall submit the cost audit report in Form CRA-3 to the Board of Director of a company within a period of 180 days from the closure of the financial year[3].

Appointment of Auditors 

According to the Companies Act, 2013, the appointment of directors is necessary to protect businesses from fraud and point out discrepancies in applicable compliances. The appointment process varies depending on whether the company is required to form an Audit Committee under Section 177. If no committee is required, the Board of Directors evaluates the qualifications and experience of the proposed individual or audit firm. Therefore, there are stages of the appointment of auditors that are as following:

• Initial Appointment: According to Section 139 of the Act, the Board of Directors of a company shall appoint an individual auditor or auditor’s firm of a company within 30 days from the date of registration of the company except government companies. If appointment of first auditor is not made within the given period, it shall inform the members of the company, call an EGM within 90 days and appoint such auditor of the company.
• Subsequent Appointment of Auditor: According to Section 139(9) of this Act, subsequent auditor shall be appointed by members in annual general meeting till the 6^th AGM in case of unlisted company, and in case of listed company the appointment shall be for 5 years in case of individual auditor and 10 years in case of audit firm and also eligible for reappointment after 5 year cooling period, in case of government company CAG shall be appointed an auditor within 180 days from 1^st April.
• Appointment in case of casual vacancy: According to Section 139(8) of this Act, if casual vacancy occurred due to resignation or other reason, the Board of company has power to fill the casual vacancy within 30 days, if such casual vacancy occurred due to resignation then such appointment should also be approved by company in general meeting within 3 months of recommendation of the Board. In case of a government company such vacancy should be filled by Comptroller and Auditor General of India (CAG) within 30 days and if CAG does not fill the vacancy within such period, the Board of Director shall fill the vacancy within next 30 days.

Removal of Auditors 

According to Section 140(1), read with Rule 7 of the Companies (Audit and Auditors) Rules, 2014, the auditor appointed under Section 139 of the Act may be removed from his office before the expiry of his term by a special resolution in general meeting of the company and after obtaining prior approval from the Central Government in Form ADT-2 within 30 days of resolution passed by the Board, after this company shall hold general meeting within 60 days and pass a special resolution. The Auditor concerned shall be given an opportunity of being heard[4].

Conclusion

The provisions of audit requirements are an instrument that ensures the transparency, accountability and compliance with financial records in corporate governance. The audits depend upon the nature, size and operations of the company including internal audits, secretarial audits and cost audits. These audits ensure a true and fair representation of the company’s affairs while preventing fraud and mismanagement. The appointment and removal of auditors are also governed by specific procedures provided under this Act for each class of companies separately. Thus, these audit provisions help in strengthening corporate governance and build trust among the stakeholders of the company.

[1]  ICSI Company Law & Practices 461.

[2]  Id. at 457.

[3]   Id. at 453.

[4]   Id. at 445.

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