Transcript Provisions relating to Accounts and Audit in The Companies

Presentation
By
CA Anil Sharma
Accounts
• Chapter IX
• Sections 128 to 138 (except sections 135 and
138)
• All sections are applicable w.e.f. 1.4.2014 except :
– Sec.130- Revision of accounts on Tribunal’s order
– Sec 131- Voluntary revision of accounts
– Sec 132 - NFRA
• The Companies (Accounts) Rules, 2014
( applicable w.e.f. 1.4.2014)
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Section 128- Books of Accounts to be
kept by the company
• Prepare and keep at its registered office:
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Books of accounts (Sec 2(13)
Other relevant books and papers (Sec 2(12) and
Financial statement(Sec 2(40)
For every financial year (Sec 2(41)
To be kept on accrual basis and according to the
Double Entry system of accounting
– Which give a true and fair view of the state of affairs
of the company including its branch office(s)
– May keep in electronic mode in such manner as may
be prescribed (Rule 3).
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Financial Statement
• Section 2(40) defines ‘Financial statement’ to include:
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Balance sheet
Profit and loss Account
Cash Flow Statement
Statement of Changes in Equity , if applicable
Explanatory Notes
• Cash flow statement not applicable to :
– OPC,
– small company and
– dormant company.
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Financial Year
• Section 2(41) – means the period ending on the
31st March every year
–Exception could be made by a Tribunal if a company
being holding or subsidiary of a company
incorporated abroad and is required to maintain
accounts for a different financial year outside India
• In the first year of incorporation:
–If incorporated before 1st Jan, then period ending 31st
March of the same financial year
–otherwise, period ending 31st March of the next
financial year.
• Existing companies to align within two years.
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Rules(3)- Manner of Books of account to be kept in
electronic mode
Conditions:
• To remain accessible in India so as to be usable for
subsequent reference.
• To be retained in the same format in which originally
generated sent or received.
• To remain complete and unaltered.
• To be capable of being displayed in a legible form.
• To have proper system for storage, retrieval, display or
printout of electronic records.
• Not to dispose off or rendered unusable, unless permitted by
law.
• Information received from Branch shall not be altered.
• The backup of books of account and other books and paper
shall be kept in servers physically located in India on a
periodical basis.
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Sec 129(1)- financial Statement
• It shall give true and fair view of the state of
affairs of the company,
• Shall comply with the accounting standards
notified under section 133 and
• Shall be in the form in Schedule III.
• At every AGM of a company, the BOD shall lay
before such meeting Financial statements for
the financial year.
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Section 133- Accounting Standards
• Rule 7 –
• Until accounting standards are specified under
section 133, accounting standards as per
Companies (Accounting Standards) rules, 2006
would be applicable.
• Till NFRA is constituted, Central Govt. may
add, amend and accounting standard as
recommended by ICAI after examining
recommendations of NACAS.
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Schedule III- Format and Instructions for
preparation of Balance Sheet and Statement of
Profit and Loss
• General Instructions
– Where compliance with the requirements of the Act
including Ass as applicable to the companies require any
change in treatment or disclosure including addition,
amendment, substitution or deletion in the head or subhead or any changes, inter se, in the financial statements
the same shall be made and the requirements of this
schedule shall stand modified accordingly.
• Part I- Balance Sheet and General Instructions for its
preparation,
• Part II- Statement of Profit and Loss and General
Instructions for its preparation and
• General Instructions for the preparation of CFS.
Sec 129(3)- CFS
• A company having one or more subsidiaries is
required to prepare a CFS
• ‘Subsidiary’ for the purpose of this clause
includes ‘ associates’ and ‘joint venture’.
• CFS shall be in addition to stand alone
financial statement.
• Stand alone F/S to include a Statement
containing salient features of F/S of
subsidiaries in Form AOC-1.
• Rule 6 provides for manner of consolidation.
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Rule 6- Manner of consolidation of accounts
• To be made in accordance with the provisions
of Schedule III and according to the applicable
accounting standards.
• In case not required to apply accounting
standards, compliance of provisions on CFS as
provided in Schedule III would be sufficient.
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Schedule III-General Instructions for the
preparation of CFS
• the company shall mutatis mutandis follow the requirements
of this Schedule as applicable to a company in the preparation
of balance sheet and statement of profit and loss.
• In addition, the CFS shall disclose the information as per the
requirements specified in the applicable Accounting
Standards.
• All subsidiaries, associates and joint ventures (whether Indian
or foreign) will be covered under CFS.
• An entity shall disclose the list of subsidiaries or associates or
joint ventures which have not been consolidated in the
consolidated financial statements along with the reasons of
not consolidating.
Section 134(1)- Approval of financial Statement
• The financial statement, including CFS, if any,
shall be approved by the BOD before they are
signed on behalf of the Board by
– at least by the chairperson of the company where
he is authorised by the Board or by two directors
out of which one shall be managing director and
the CEO, if he is a director in the company and
– the Chief Financial Officer and the company
secretary of the company, wherever they are
appointed.
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Depreciation
• Section 123- Declaration of dividend.
• Section 198- computation of net profit for the
purpose of calculation of overall maximum
managerial remuneration under section 197.
• AS 6 - Depreciation accounting.
Section 123- Declaration of dividend
• Sec 123. (1) No dividend shall be declared or paid by a
company for any financial year except—
– (a) out of the profits of the company for that year arrived
at after providing for depreciation in accordance with the
provisions of sub-section (2), or out of the profits of the
company for any previous financial year or years arrived at
after providing for depreciation in accordance with the
provisions of that sub-section and remaining
undistributed, or out of both; or…
• (2) For the purposes of clause (a) of sub-section (1),
depreciation shall be provided in accordance with the
provisions of Schedule II.
Sec 198- computation of net profits
• 197. (1) The total managerial remuneration payable by a
public company, to its directors, including managing
director and whole-time director, and its manager in
respect of any financial year shall not exceed eleven per
cent. of the net profits of that company for that financial
year computed in the manner laid down in section 198
except that the remuneration of the directors shall not be
deducted from the gross profits.
• 198. (1) In computing the net profits of a company in any
financial year for the purpose of section 197….
• (4) In making the computation aforesaid, the following
sums shall be deducted, namely…
– (k) depreciation to the extent specified in section 123;
Schedule II- Useful Lives to Compute Depreciation
• Part A- Depreciation is a systematic allocation of the
depreciable amount of an asset over its useful life. Useful
life is the period over which an asset is expected to be
available for use by an entity or the number of production
units expected to be obtained from the asset by the entity.
• The useful life of an asset shall not be longer than the
useful life specified in Part C.
• Residual value shall not be more than 5% of the original
cost of the asset.
• Where a company uses a useful life which is different from
the limits in Part C, justification for the difference shall be
disclosed in its financial statement.
• For intangible assets, the provision of accounting standards
applicable for the time being in force shall apply except for
toll roads for which method is prescribed in the Schedule.
Schedule II- Useful Lives to Compute Depreciation
• Part B• The useful life and residual value of any
specific asset, as notified for accounting
purposes by a Regulatory Authority
constituted under an Act of Parliament or the
Central government shall be applied in
calculating the depreciation to be provided for
such asset irrespective of the requirement of
this Schedule.
Schedule II- Useful Lives to Compute Depreciation
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Part CNature of asset and their useful life
No extra shift depreciation of certain assets.
For double shift- 50% more for no. of days worked
For triple shift – 100% more
From the date this schedule comes into effect, the
carrying amount of asset on that date:
– shall be depreciated over the remaining useful life of the
asset as per this schedule.
– after retaining the residual value, shall be recognised in
the opening balance of retained earning where the
remaining useful life of an asset is nil.
AS 6- Depreciation Accounting
• Para 3.1Definition of depreciation:
– …Depreciation is allocated so as to charge a fair
proportion of the depreciable amount in each
accounting period during the expected useful life
of the asset.
• Para 29- Main Principles:
– The depreciable amount of a depreciable asset
should be allocated on systematic basis to each
accounting period during the useful life of the
asset.
Internal Audit
• Sec 138-Such class 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.
• The Central Govt. to prescribe by Rules, the
manner and intervals in which the internal
audit shall be conducted and reported to the
Board.
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Internal Audit
• Such class or classes of companies as may be prescribed:
Rule 13 of the Companies (Accounts) Rules, 2014
• (a) every listed company
• (b) every unlisted public company , during the preceding year:
– having paid up share capital of Rs. 50 Crores or more or
– Having turnover of Rs. 200 crores or more or
– any outstanding loans or borrowings from banks or public financial
institutions exceeding Rs. 100 Crore at any point of time or
– which has outstanding deposits of Rs. 25 Crores rupees or more at any
point of time .
• (c) every private company , during the preceding year:
– turnover of Rs. 200 Crores or more or
– any outstanding loans or borrowings from banks or public financial
institutions exceeding Rs. 100 Crore at any point of time
• Existing companies to comply with the requirements within 6
months from 1.4.2014.
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Internal Audit Plan
• The Central Government may, by rules, prescribe the
manner and the intervals in which the internal audit shall be
conducted and reported to the Board:
• Rule 13 (2):
The Audit Committee of the company or the Board shall, in
consultation with the Internal Auditor, formulate the:
- scope,
- functioning,
- periodicity and
- methodology for conducting the internal audit.
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Internal auditor
• Section 138: Internal auditor shall either be:
– A chartered accountant or
– A cost accountant or
– Such other professional as may be decided by the
Board.
Definitions of CAs
• Section 2 (17) “chartered accountant” means
a chartered accountant as defined in clause
(b) of sub-section (1) of section 2 of the
Chartered Accountants Act, 1949 who holds a
valid certificate of practice under sub-section
(1) of section 6 of that Act.
• Section 2(28) “cost accountant” means a cost
accountant as defined in clause (b) of
subsection (1) of section 2 of the Cost and
Works Accountants Act, 1959.
Internal auditor
• Rule 13 of the Companies (Accounts) Rules,
2014 provided that
– Internal auditor can be employee of the company,
– Chartered Accountant may be the one not
engaged in practice.
Audit and Auditors
• Chapter X.
• Sections 139 to 148.
• All sections are applicable w.e.f. 1.4.2014 except :
– Second proviso to subsection (4) and Subsection (5) of
Sec.140- Removal of auditor
• The Companies (Audit and Auditors) Rules, 2014.
( applicable w.e.f. 1.4.2014)
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Section 139(6)- First Auditor’s
appointment
• To be appointed by the BOD with in 30 days of
incorporation of the company,
• If BOD does not appoint, shall inform the
members
• Members shall within 90 days appoint first
auditors of the company,
• First auditor to hold office till the conclusion
of first AGM.
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Sec 139(1) - Auditors appointment
• Auditors to be appointed for 5 years at a time in
the AGM
• Provided that such appointment shall be subject to
ratification in every annual general meeting till the
sixth such meeting by way of passing of an
ordinary resolution.
• Explanation to Rule 3 - For the purposes of this
rule, it is hereby clarified that, if the appointment
is not ratified by the members of the company, the
Board of Directors shall appoint another individual
or firm as its auditor or auditors after following the
procedure laid down in this behalf under the Act.
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Sec 139(1) - Auditors appointment
• Manner and procedure of selection prescribed
in Rule 3:
– Audit Committee, if there or Board to take into
consideration before recommending to BOD:
• The qualification and experience of the person proposed,
• Any pending disciplinary proceedings against the person,
• To assess whether commensurate to the size and
requirement of the company
– BOD to recommend to AGM
– BOD may refer back the matter to Audit Committee
to reconsider
– BOD may not agree to the recommendations of
Audit Committee, to explain the reasons in the
Board meeting.
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Rule 4- Consent/certificate from auditor
• Before appointing / reappointing, company to
obtain written consent of the auditor and a
certificate stating that:
– He is not disqualified for appointment under the Act,
the CA Act, 1949 and the rules or regulations made
thereunder;
– the proposed appointment is as per the term provided
under the Act;
– the proposed appointment is within the limits laid
down by or under the authority of the Act;
– the list of proceedings pending with respect to
professional matters of conduct, as disclosed in the
certificate, is true and correct.
• After appointment, the company to inform the
auditor and to file a notice to this respect with in
15 days with Registrar in Form- ADT-1.
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Sec 139(2) - Auditors Rotation
• Listed companies and prescribed class of companies
cannot have the same auditor
• In case of a firm, after two terms of 5 years each
• In case of an individual, after one term of 5 years
• Such outgoing audit firm cannot become auditor for
a period of 5 years.
• The prohibition covers firms which have common
partners too.
• Such rotation will have to be effected by companies
covered by this requirement within 3 years of the
date of commencement of this section.
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Rule 5 – Class of companies for auditor’s
rotation
• Rule 5 : the class of companies shall mean the
following classes of companies excluding one
person companies and small companies:– (a) all unlisted public companies having paid up share capital
of rupees ten crore or more;
– (b) all private limited companies having paid up share capital
of rupees twenty crore or more;
– (c) all companies having paid up share capital of below
threshold limit mentioned in (a) and (b) above, but having
public borrowings from financial institutions, banks or public
deposits of rupees fifty crores or more.
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Rule 6: Manner of rotation
• The period for which he has been holding office as auditor prior
to the commencement of the Act shall be taken into account to
calculate the period of five consecutive years,
• Incoming auditor shall not be eligible if he is associated with the
outgoing auditor under the same network of audit firms or is
operating under the same trade mark or brand,
• Break in term for a continuous period of 5 years only be
considered as fulfilling the requirement of eligibility,
• if a partner, who is in charge of an audit firm and also certifies
the financial statements of the company, retires from the said
firm and joins another firm of chartered accountants, such other
firm shall also be ineligible to be appointed for a period of five
years.
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Sec 139(8) - casual vacancy
• In case of a Government company:
- To be filled by CAG within 30 days
- If not done by CAG then Board shall fill within next
30 days
• In case of other than Government companies:
– By the Board,
– if caused due to resignation then to be approved by
shareholders within three months
Sec 140- Auditors Removal / Resignation
• Removal of an existing auditor within the 5 years term shall
be possible only by
– Passing of a special resolution and
– Also CG approval ( Form ADT-2 to be filed)
• Also, the auditor will have to be heard before the approval
is given for the change of auditor.
• In case of a resignation by the auditor, there is a need to file
(with company, ROC and where applicable, CAG) within 30 days a
statement in Form ADT-3 giving the reasons and other facts
as may be relevant in regard to the resignation.
• NCLT could order for change of auditors when it is satisfied
that the auditors have directly or indirectly acted in a
fraudulent manner or abetted or colluded in any fraud.
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Sec 141-Eligibility of an auditor
• To be a chartered accountant or
• firm of chartered accountants or
• LLP
• ‘Chartered Accountant’ has been defined -Sec 2(17)
• In case of firm, majority of partners practicing in India
should be qualified to be appointed as such.( as against
all the partners in section 226 of CA, 1956)
• In case of firm including LLP, only partners who are
Chartered Accountants shall be authorised to act and
sign on behalf of firm.
Sec 141- Auditors disqualifications
• Enhanced disqualifications
• If the person holds any security or interest in the
Company or its subsidiary, holding, associate or cosubsidiary.
• If a relative holds any security in the Company,
subsidiary, holding, associate or co-subsidiary in
excess of Rs. 1 Lakh , However, the corrective action
to maintain the limits shall be taken by the auditor
within sixty days of such acquisition or interest.
(Rule 10).
• Indebtedness of the person or his relative or partner
in excess of Rs. 5 Lakhs or has guaranteed or
provided security for a third party to the Company,
subsidiary, holding, associate or co-subsidiary for an
amount in excess of Rs. 1 Lakh (Rule 10).
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Sec 141- Auditors disqualifications
• New disqualifications
• Having direct or indirect business relationship with the
Company, subsidiary, holding, associate or co-subsidiary
except
– (i) commercial transactions which are in the nature of
professional services permitted to be rendered by an auditor or
audit firm under the Act and the Chartered Accountants Act,
1949 and the rules or the regulations made under those Acts;
– (ii) commercial transactions which are in the ordinary course of
business of the company at arm’s length price - like sale of
products or services to the auditor, as customer, in the ordinary
course of business, by companies engaged in the business of
telecommunications, airlines, hospitals, hotels and such other
similar businesses.
• Relative is a director or is employed as a director or KMP in
the company.
• A person convicted of fraud and 10 years not having
elapsed from such conviction.
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Sec 141(3)(g)-Cap on number of audits
• Provides a cap of twenty companies per
partner.
• Earlier Act provided for limits only covering
public companies. No such reference in the
Section.
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Sec 143(12)- Reporting of Frauds by Auditors
• If the auditor has sufficient reason to believe that an
offence involving fraud, is being or has been
committed against the company by officers or
employees of the company, he shall report the
matter to the Central Government immediately but
not later than sixty days of his knowledge and after
following the procedure given in Rule 13.
• The report shall be sent to the Secretary, MCA in a
sealed cover by Registered Post with A/D or by Speed
post followed by an e-mail in confirmation of the
same.
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Procedure for reporting fraud by auditors
• Rule 13- Report to be submitted in Form ADT-4
– (i) auditor shall forward his report to the Board / the
Audit Committee, immediately after he comes to
knowledge of the fraud, seeking their reply or
observations within forty-five days;
– (ii) on receipt of such reply or observations the
auditor shall forward his report and the reply or
observations of the Board or the Audit Committee
along with his comments (on such reply) to the
Central Government within fifteen days of receipt of
such reply or observations;
– (iii) in case the auditor fails to get any reply or
observations from the Board or the Audit Committee
within the stipulated period of forty-five days, he shall
forward his report to the Central Government.
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Sec 144- Auditors – Prohibited services
• Auditors can provide only such services as are
approved by the AC / Board, but cannot provide
the following either directly or indirectly to the
company, its holding and subsidiaries:
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Accounting and Book Keeping services
Internal audit
Design and implementation of any financial information system
Actuarial services
Investment advisory services
Investment banking services
Rendering of outsourced financial services
Management services
Any other kind of services as may be prescribed
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Sec 144- Auditors – Prohibited services
• In case of an audit firm, this prohibition extends to
– All its partners
– Its parent, subsidiary and associate entity and
– Any other entity, whatsoever, in which the firm or
any partner of the firm has significant influence or
control, or whose name or trade mark or brand is
used by the firm or any of its partners.
• Any auditor or firm already providing any non- audit
services shall comply with the provisions before
closure of the first financial year after the date of
such commencement.
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Auditors - Penalties
• Contravention of law
– Relating to appointment, rotation, powers and
duties, prohibited services or signing of audit
report –Min Rs.25,000 to Max Rs. 5 Lakhs
– If done willfully with an intention to deceive –
imprisonment up to 1 year and penalty of Rs. I
Lakh to Rs. 25 Lakhs.
• Also to refund the audit fee to the Company
• Pay damages to those who have lost on
account of such incorrect / misleading
statements or particulars in his audit report
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Auditors - Penalties
• Prosecution by NFRA (on suo moto or reference
based investigation)
– Penalty
• Min Rs.1 Lakh to 5 times the fees received,
for individuals
• Min Rs.10 Lakh to 10 times the fees
received, for firms
– Debar from practice
• Member / firm for a min 6 months to 10
years period
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Auditors - Penalties
• Class action suit by the members (section 37)
or by depositors (section 75)
– in case of improper or misleading statements
in the audit report or fraudulent, unlawful or
wrongful act
– Liability against the firm and each partner
who was involved
– In case of proof of fraud / abetting to fraud,
then the liability will be joint and several for
the auditor, his partners and firm
Tuesday, July 21, 2015
General Circular 08/2014 dated 4.4.2014
• Commencement of provisions of the CA Act, 2013
with regard to
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maintenance of books of accounts,
Preparation/adoption/filing of financial statements
Auditors’ report
Board of Directors’ Report
Provision of Schedule II (useful lives to compute
depreciation)
– Schedule III (format of Financial Statements)
– Related Rules issued
• Shall be applicable for financial year that
commence after 1st April, 2014 only.
THANK YOU
Contact me at:
9811320203
[email protected]
Tuesday, July 21, 2015