Module 4

MODULE – 4
ACCOUNTS AND AUDIT

4.1 INTRODUCTION
As per the modern company legislation in India there is need for the proper maintenance and
disclosure of accounts and their periodical auditing. The main statutory requirement is that the
books of account must be kept by every company in order to enclose all the information like the
sums of money received and spent by the company, all sales and purchases of goods made by it,
and all assets and liabilities are required to be disclosed properly in the books of accounts. The
state of affairs of a company must be reflected in the books of accounts. By this, the financial
position of a company can be correctly assessed by it’s directors, members, officers, investors,
and all those who transact business with the company.

According to Section 128 of Companies Act, 2013 which requires every company to keep books
of accounts1 at its registered office with respect to –

All sums of money received and expended by the company and the matters in respect of
which the receipt and expenditure has taken place,
All sales and purchases of goods by the company,
The assets and liabilities of the company,
If the company is engaged in production, processing, manufacturing or mining activities,
particulars relating to utilisation of material or labour or other items of cost as may be
prescribed under Section 148 in the case with f a company which belongs to any class of
companies.


1 Books of Account is defined in Section 2(13) of the Companies Act, 2013.

The books of account may be kept either at the company’s registered office or at any other place
which the Board of Directors may decide. The decided address is required to be communicated
to the Registrar of Companies within seven days of any such decision.
This section also ensure that the true and fair account is reflected because it makes it obligatory
for the companies to maintain accounts as per mercantile system of accounting as against the
account on cash basis. In the case of Dhakeswar Prasad v. Comr. Of Income Tax2 it was
observed that in cash basis a record is kept of actual receipts and actual payments, entries being
made only when money is actually collected or disbursed and the net profit or loss of the
business is arrived at from the difference between the receipts and disbursements for the period
in question.
Now, the question arises that who is responsible for the maintenance of proper books of account?
Following are the person’s who are responsible for the maintenance of proper books of account
and the relevant record –

Where the company has a managing director or manager, such managing director or
manager and all officers and other employees and agents;
Where the company has neither a managing director nor a manager, every director of the
company.

4.2 INSPECTION OF BOOKS OF ACCOUNT
As per section 128(3) of the Companies Act, 2013 it is mentioned that the inspection of the
books of account can be done by the following –

4.2.1 Inspection by Director – The books of account and the other books and papers of
a company shall be open to inspection by any director during the business hours.
But the director has no right to take the copies of the books of account.


2 Dhakeswar Prasad v. Comr. Of Income Tax (1936)4 ITR 71(FB) India.

4.2.2 Inspection by Registrar – The books of account and the other books and papers
of a company shall be open to inspection by the registrar during the business
hours. The inspection can be made without giving any notice to the company or
any official thereof. The registrar is also entitled to take the copies of books of
account and other books and papers.

The powers of the person making the inspection is vested with the powers of a civil court in
respect of the following matters –

The discovery of production of books for account and other documents at such place and
time as may be specified by such person,
Summoning and enforcing the attendance of persons and examining them on oath,
Inspection of any books, registers and other documents of the company at any place.

4.2.3 NO STATUTORY RIGHTS OF INSPECTION TO MEMBERS
The members of a company has no right of inspection of the books of accounts and other
books and papers. Subject to the conditions laid down by the directors, to which the
members can inspect the books of account as envisaged in Regulation 95 of Table A of
the Companies Act.

4.3 BOOKS OF ACCOUNT OF A COMPANY
The main books of account which every company is supposed maintain with it –

Ledger Book
Cash Book
Fee Book
Interest-Account Book, and
Dead Stock Register

Apart from the aforesaid books of account, a company has also required to maintain register
of contracts, debentures holders, share-transfers, mortgage and charges, share warrants, calls,
etc.

4.4 AUDIT OF ACCOUNTS

The main object of the books of accounts of a company including the financial statement (profit
and loss account and balance sheet) is to disclose the relevant information for the protection of
the shareholders and investors. Therefore, it is necessary to ensure the authenticity of these kind
of documents. And for this reason, it is one of the most essential requirement that the account so
prepared or caused to be prepared by the company through its directors must be subject to check
and security by some independent authority so that they can be relied upon by those who are
concerned with the company’s affairs and business. All these kinds of functions are performed
by the independent professional experts who themselves have no personal interest in these
accounting records.

4.5 APPOINTMENT OF AUDITORS
According to Section 139 of the act which provides that subject to the provisions of Chapter X
(i.e. Audit & Auditors), every company shall at the first annual general meeting, appoint auditor
as an individual or form who shall hold office from the conclusion of the meeting till the
conclusion of its sixth annual general meeting. The procedure and manner of selection of
Auditors by the members of the company at such meeting shall be as such as may be prescribed.
Thus, the auditors have the tenure of five years subject to ratification at every general meeting of
the company.3

In case if a Government Company or any other Company which is owned or controlled by the
Central Government or by any State Government, then the Comptroller and Auditor-General of
India(CAG) shall appoint an auditor duly qualified under the Companies Act, in respect of a


3 Section 139 (1) proviso. Of Companies Act, 2013

Financial Year within 180 days from the commencement of the financial year, that person shall
hold the office till the conclusion of the annual general meeting.4
An officer who got retired may be re-appointed5 at the annual general meeting unless –

He is not qualified for re-appointment;
He has given the company notice in writing of his unwillingness to be re-appointed;
A resolution appointing someone else has been passed at the meeting providing that the
working auditor shall not be reappointed; or
Where notice has been given of an intended resolution to appoint some person or persons
in place of a retiring auditor, and by reason of the death, incapacity or disqualification of
that person or all those persons, as the case may be, the resolution cannot be proceeded
with.6

The first auditors are appointed by the Board of Directors of the company within thirty days
of the incorporation and they shall hold the office until the first annual general meeting. If
there is any casual vacancy then it may be filled by the board except when it is due to
resignation, in this case it has to be filled in by the company in general meeting. The
appointee hold the office until the conclusion of the next annual general meeting of the
company.

4.5.1 REMOVAL OF AUDITOR

Section 140 of the act provides for the removal of the auditor from the office before expiry of his
term only by a special resolution of the company after obtaining prior approval of the Central
Government in a prescribed manner. But before his removal, the concerned auditor shall be
given a reasonable opportunity to be heard.


4 Section 139 (5) proviso. Of Companies Act, 2013
5 Section 139 (6) proviso. Of Companies Act, 2013

6 Section 139 (9) proviso. Of Companies Act, 2013

The auditor can also resign from the company by filing a statement in the prescribed form with
Registrar of Companies (ROC) within a period of thirty days by indicating the reasons of
resignation.
The Tribunal can by the method of suo moto or an application made to it by the Central
Government or by an aggrieved person, if satisfied that the auditor of a company has acted in a
fraudulent manner or abetted or colluded in any fraud in connivance with company or its
directors or officers, may order or direct the company to change the auditors.

All such removed auditors by an order of the tribunal shall not be eligible to be appointed
as an auditor of the company for the period of five years front eh date of tribunals order and they
shall also be liable for action under Section 447 of the Companies Act, 2013.
As per the explanation clause, in case where the auditor is a firm, then the liability for collusion,
fraud, etc. shall extend to every partner of such firm.

4.6 REMUNERATION OF AUDITORS
Section 142 provides for the remuneration of the first auditors appointed by the Board of
Directors shall be fixed by the Board and subject to this, the remuneration of auditors of a
company must always be fixed by the company in general meeting or in such manner as the
company in general meeting may decide. In case if the auditor is appointed by the Comptroller
and Auditor-General of India, then the remuneration shall be fixed by the company in general
meeting or in such manner a s the company in general meeting may determine.

4.7 QUALIFICATION OF AUDITORS
The clause (1) of Section 141 provides that the person who may be appointed as auditors must be
qualified chartered accountants within the meaning of the Chartered Accountants Act, 1949 or
they must, for the time being be authorised by the Central Government to be appointed as having
obtained similar qualifications outside India. In case if there is a firm and whose all partners that
are practising in India then they are considered as qualified to be called as Chartered

Accountants, may also be appointed by its firm name to be auditor of a company, and the partner
so practising may act in the firm name.

4.7.1 DISQUALIFICATIONS

Section 143(3) of the act provides that if a person who is otherwise qualified to act as an auditor
cannot act as such if he is –

A body corporate;
An officer or employee of the company; or
A partner or employee of an officer or of an employee of the company; or
A person who or his relative or partner is indebted to the company for an account
exceeding one thousand rupees, or who has given any guarantee or provided any security
in connection with indebtedness of any third person to the company for an amount
exceeding one thousand rupees; or
A person or a firm who, directly or indirectly, has business relationship with the company
or its subsidiary or is holding or associate company or subsidiary of such holding or
associate company;
A person whose relative is a director or is in employment as a key managerial personnel;
A person who is in whole-time employment elsewhere or a person or a partner of a firm
holding appointed as it’s auditor;
A person who has been convicted by the court of an offence involving fraud and a period
of ten years has not elapsed from the date of such conviction;
Any person whose subsidiary or associate company or any form of entity, is not engaged
as on the date of appointment in consulting and specialised services as provided in
Section 144.

4.8 POWERS AND DUTIES OF AUDITORS

The provisions with regards to the powers and duties of the auditors are provided under Section
143 of the Act –

Access to books, account and vouchers – Every auditor of a company has a right of
access at all times to the books and accounts and vouchers of the company.
To obtain information and explanations – In Bhavnagar Vegetable Products,7 case the
High Court of Gujarat held that the power of the auditor continues even after winding up
of a company has commenced and a liquidator has been appointed but the Court. The
articles of a company cannot preclude the auditor from exercising this power.
To sign the audit report – As per this only the person who is appointed as auditor of the
company, or where a firm is so appointed, only a partner in the firm practising in India,
may sign the auditors report or authenticate any document of the company required by
law to be signed or authenticated by the auditor. Thus, an auditor has to check the
accuracy of accounts.
The auditor has the power to receive the notice of and attend General Meetings.
The auditor has also the power to visit Branch Office of the Company and have access to
Books, etc.
The auditor has the power by which he can inspect the minute books of the board.
He also has the power to inform the Central Government about any fraud being
committed against the company.

4.9 INTERNAL AND STATUTORY AUDITOR
The person who is appointed by the management and is in the position of an employee is to be
called as Internal Auditor, whereas the Statutory Auditor is the person who is appointed by the
company as per the provisions of Section 139 of the Company Act, 2013 and he is required to
perform certain duties enjoined on him under Section 147 of the Act as per the rules provided
thereunder.

4.10 POWER OF REGISTRAR TO CALL FOR FURTHER INFORMATION


7 Bhavnagar Vegetable Products 1977 (47) Comp. Cas. 128(Guj) India.

Section 206 of the Company Act, 2013 provides that the Registrar may form his own opinion
that further information or explanation is necessary in respect of a matter to which a particular
document relates. In these kind of cases the registrar may require the company to furnish all the
necessary information or explanation. Further the Registrar may require to furnish books and
papers in case if the fails to submit the inadequate explanation. In case of default then the
company and its officers shall be punishable with fine which may extend to one lakh rupees and
in case of a continuous failure then with the additional fine of rupees which may extend to five
hundred rupees for every day after the failure continues.
In Barium Chemicals Ltd. V. Company law Board8 case the complaint has been filed by the
petitioners with the Company Law Board that they apprehended that some foreign Company has
acquired financial interest in Barium Chemicals for violating the Foreign Exchange Regulations,
1974 which was illegal and needed to be probed. The Supreme Court dismissed the petitioners
ought to have sought this information from the company itself under section 234 of the act rather
than removing Company Law Board for relief.

4.10.1 SEIZURE OF DOCUMENTS BY REGISTRAR
The Registrar has the power to seize the documents under the Section 209 of the Companies Act,
2013. The Registrar is empowered to make an order for the seizure of books and papers of a
company if he has the information or reasonable grounds to believe that the company or its
managerial officials may destroy, mutilate, alter or falsify or secret them. In such cases he may
apply to the Magistrate of the First Class having jurisdiction for an order for the seizure of such
books and papers.


8 Barium Chemicals Ltd. v. Company Law Board AIR 1967 SC 295 (India).