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Audit of Company Accounts
Updated: Oct 24, 2021
What does the term Audit mean?
The term "Audit" generally means to examine something thoroughly. Auditing a company is a process of doing an independent inspection of the financial Information of that company/organization, whether profit-oriented or not profit-oriented, irrespective of its legal form, status, or size. This independent inspection is conducted to express an opinion about the Company's financial statements and the feasibility of relying on the statements for any stakeholder.
Need For Company Audit
A company has to prepare its financial statements once it closes its accounts every financial year. The Company is responsible for preparing the statements as per books of accounts depicting a true and fair view of the affairs of the Company.
As stakeholders view these statements for decision making, the financial statements must give a true and fair view of the Company's financial position. The financial statements are inspected by an external independent team, known as the auditing team, to verify this objective. The statutory auditor inspects the financials and gives his opinion as to what extent the financials provide a true and fair view. The importance of auditing is mainly seen in case of errors in the company accounts. If the company bookkeeping has not been up to date or in order, an auditor can uncover those details.
As per the Companies Act, 2013, Every Company should get its accounts audited by its Statutory Auditor irrespective of size and turnover and file the same with the Registrar of Companies.
According to the Companies Act, 2013, Every Company has to keep its books of accounts and other relevant books and papers and financial statements on an accrual basis and as per the double-entry system. As the stakeholders refer to these accounts and statements, the accounts must give a true and fair view of the Company's activities and financial position. The financials shall be maintained at the registered office of the Company for every financial year. However, the Board of directors are free to keep the books of accounts at any other place in India after filing a notice with the Registrar of Companies.
Types of Audit
There are three main types of audits:
1. Internal audits
Internal audits are performed by the employees of a company or organization. These audits are not distributed outside the Company. Instead, they are prepared for the use of management and other internal stakeholders.
Internal audits improve decision-making within a company by providing managers with actionable items to improve internal controls. They also ensure compliance with laws and regulations and maintain timely, fair, and accurate financial reporting.
Management teams can also utilize internal audits to identify flaws or inefficiencies within the Company before allowing external auditors to review the financial statements.
2. External audits
External organizations and third parties perform external audits. External audits provide an unbiased opinion that internal auditors might not be able to give. External financial audits are utilized to determine any material misstatements or errors in a company's financial statements.
When an auditor provides an unqualified opinion or clean opinion, it reflects that the Auditor provides confidence that the financial statements are represented with accuracy and completeness. External audits are essential for allowing various stakeholders to make decisions surrounding the Company being audited confidently.
The critical difference between an external auditor and an internal auditor is that an external auditor is independent. It means that they can provide a more unbiased opinion rather than an internal auditor, whose independence may be compromised due to the employer-employee relationship.
There are many well-established accounting firms that typically complete external audits for various corporations. The most well-known are the Big Four – Deloitte, KPMG, Ernst & Young (EY), and PricewaterhouseCoopers (PwC).
3. Government audits
Government audits are performed to ensure that financial statements have been prepared accurately not to misrepresent a company's taxable income.
Within the U.S., the Internal Revenue Services (IRS) performs audits that verify the accuracy of a taxpayer's tax returns and transactions. The IRS's Canadian counterpart is known as the Canada Revenue Agency (CRA).
Audit selections are made to ensure that companies are not misrepresenting their taxable income. Misstating taxable income, whether intentional or not, is considered tax fraud. The IRS and CRA now use statistical formulas and machine learning to find taxpayers at high risk of committing tax fraud.
Performing a government audit may result in a conclusion that there is:
No change in the tax return
A change that the taxpayer accepts
A change that the taxpayer does not accept
If a taxpayer does not accept a change, the issue will go through a legal process of mediation or appeal.
Appointment of Auditor.
In the Company's Annual General Meeting, the Company appoints a Statutory Auditor to inspect the financials. The appointed Statutory Auditor will then carry out the Audit of the Company. The Auditor of a company should be a Chartered Accountant registered and hold a certificate of practice under the Chartered Accountants Act, 1949. An auditing firm can also be appointed to conduct the Audit if most partners practice in India and are eligible for appointment. Only a chartered accountant can sign the audit papers.
Particulars | Non-government company | Listed/Specified company | Government company |
Application for 1st Auditor post Incorporation | Appointed by the Board Of Directors: This has to be done within 30 days from the date of Registration. Members can also make appointments at the Extraordinary General Meeting within 90 days of Information. | Appointed by the Board Of Directors: This has to be done within 30 days from the date of Registration. Members can also make appointments at the Extraordinary General Meeting within 90 days of Information. | Appointed by the Board Of Directors: This has to be done within 30 days from the date of Registration. Members can also make appointments at the Extraordinary General Meeting within 90 days of Information. |
Auditor at First AGM with the written consent and a certificate of Auditor. | The members make the appointment. He will hold office till the end of the 6th Annual General Meeting (AGM). The appointment shall be following the conditions laid down by the Auditor. | The members make the appointment for a maximum term of 5/10 consecutive years—a cooling-off period of 5 years before the next appointment will be there. | The appointment is made by the Comptroller and Auditor General of India. He should be appointed within 180 days from 1st April. |
Appointment of Subsequent Auditor | The members make the appointment, and he will hold office till the conclusion of the 6th meeting. | The members do the appointment for a Maximum term of 5/10 consecutive years. | The Comptroller and Auditor General make the appointment of India within 180 days from 1st April. |
Casual Vacancy due to resignation and other reasons | The appointment is by the members within three months of the recommendations of the Board, and he will hold office till the next AGM. | The appointment is by the members within three months of the recommendations of the Board and he will hold office till the next AGM. | The Comptroller and Auditor General make the appointment within 30 days. |
Rotation of Auditors
The appointment of auditors at AGM is for 5 years. Rotation of Auditors are applicable for companies that come under the categories:
Listed Companies
Unlisted Public Company having paid-up share capital of rupees 10 crores or more;
Private limited companies having paid-up share capital of rupees 50 crores or more;
Unlisted public companies and Private companies having public borrowings from financial institutions, banks, or public deposits of rupees 50 crores or more.
Rotation of Auditors do not apply to One Person Company (OPC) and Small Companies. That means, OPC) and Small Companies can appoint or reappoint an individual for more than one term of five consecutive years or an auditor firm for more than two terms of five consecutive years.
Remuneration of Auditors
Fixation of remuneration for various auditors is as follows:
When the Board of Directors appoints an auditor, (First auditors and Casual Vacancies), the remuneration is fixed by the Board of directors.
When the Central Government appoints an auditor, the Central government fixes the remuneration.
Shareholders also fix the remuneration of an auditor in the following two circumstances.
When the Auditor is appointed in the annual general meeting.
When Comptroller and Auditor General appoint the Auditor.
(The remuneration may be fixed either at the annual general meeting)
4. If a retiring auditor is reappointed, his remuneration continues to become unless it is decided otherwise in the general meeting.
5. Any sum paid by the Company to meet the auditors' expenses will be included in the word 'remuneration'.
6. In addition to remuneration for Audit, an auditor may receive separate remuneration for rendering consultancy services and attending to cases about Income-tax. Such fees do not require the approval of the general meeting.
Company's Audit process
The Company prepares accounts and financial statements like profit and loss account, balance sheet, cash flow statement, etc. upon the closure of its financial year (31st March). These statements are prepared as per the requirements of the Companies act. The Board of directors will then approve the statements and forward them to the Audit partners. The Auditor shall then make a detailed auditor report disclosing the accuracy of the transaction, whether it shows a true and fair view or not. The Auditor's opinion about the financials will depend on the accuracy of transactions, recording of the transactions, the Company's compliance with the country's policies and rules.
Audit fees in India
The Institute Of Cost Accountants Of India has released a revised minimum recommended scale of fees for various audit services. The fee structure depends on class A and B cities. You can view the audit fee by visiting this link - https://icmai.in/upload/pd/Scale_of_Fees.pdf.
Though not all companies must conduct statutory audits at the end of every financial year, auditing the company accounts has its benefits. Nevertheless, the benefits of conducting a final audit at the year-end, an interim audit, or a limited assurance audit depend on the type of business. The benefits should also be compared with the costs incurred to conduct such an Audit to know the feasibility of the audit process.
Company Annual Filing
Every Company registered under the Companies Act must file its returns with the Registrar of Companies (ROC) annually.
Company Annual Filing refers to the Filing of Audited Annual Financial Accounts of the Company along with Directors Report and Annual Return of Company with Registrar of Companies. These yearly filings are mandatory for every registered Company whether the Company carries on business or not.
Penalty for Contravention
When fraud occurs in the Company, and the Auditor fails to recognize it or knowingly takes part in hiding, it will be liable to the stakeholders and also would have to pay penalties.
The penalty for breaking the laws/contravention is as follows:
The Company shall be punishable with a fine not be less than Rs.25,000.00, which may extend to Rs.5,00,000
Every company officer shall be punishable with imprisonment for one year or with a fine, not less than Rs10,000.00, which may extend to Rs.1,00,000.00, or with both.
The Auditor shall be punishable with a fine, not less than Rs.25,000. However, which may extend to Rs.5,00,000.00 or 4 times the remuneration of the Auditor, whichever is less.
Further, suppose it is done knowingly or willfully to deceive the Company, its shareholders, creditors, or tax authorities. In that case, he shall be punishable with imprisonment for a term of 1 year and with a fine, not less than Rs.50,000.00, which may extend to Rs.25, 00,000.00, or 8 times the remuneration of the Auditor, whichever is less.
The Auditor convicted as mentioned above shall also be liable to refund the remuneration received to the Company and pay for damages to the company/statutory bodies/authorities/ to members/creditors of the Company.
If the partner or partners of the audit firm have acted in a fraudulent manner/colluded/abetted for the action of Company or directors, the concerned partner shall be liable, whether civil or criminal, as provided in this Act jointly severally.