Companies Act, 2013 Provisions relevant for Audit of Financial Statements

Companies Act, 2013 Provisions relevant for Audit of Financial Statements CNK& Associates LLP CharteredAccountants Pareen Shah March26,2019 CNK

Synopsis • Provisions relatingto: • Some important definitions • Accounts and Financial Statements • Auditor appointment, resignation and other relevant provisions • Audit Reporting • Restriction on power of Board • Acceptance of Deposits by Companies • Loans to Directors etc. • Loan and Investment by company • Related PartyTransactions • Managerial Remuneration • DeclarationofDividend • Corporate Social Responsibility • New Returns/E-Forms CNK

Some Important Definitions CNK

Financial Year (Section 2(41)) • means the period ending on the 31st day of March every year • where company has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year. • Can company follow financial year other than March 31? CNK

Financial Year (Section 2(41)) • Can company follow financial year other than specified in definition ? • where a company or body corporate, which is a holding company or a subsidiary or associate company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Central Government may, on an application made by that company allow such period as its financial year. CNK

Free Reserve (Section 2(43)) • Such reserves which as per latest audited BS are available for distribution of dividend. • Proviso states that following to be excluded: • any amount representing unrealised gains, notional gains or revaluation of assets (whether shown as reserve or otherwise) or • Any change in carrying amount of an asset or liability recognised in equity, including surplus in PL on measurement of asset or liability at fair value • Whether Securities Premium reserve is free reserve? CNK

Net Worth (Section 2(57)) • Means aggregate value of • paid-up share capital • Add: all reserves created out of profit • Add: securities premium account • Less/Add: debit or credit balance of profit and loss account • Less: accumulated losses, • Less: deferred expenditure • Less: miscellaneous expenditure not written off • As per audited balance sheet, • but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation CNK

Small Company (Section 2(85)) • Means a company, other than a public company • Not Applicable to • A holding company or a subsidiary company • A company registered under section 8 • A company or body corporate governed by any special act CNK

RelatedParty • Section 2(76): • “related party”with reference to a company, means— • director or hisrelative; • KMP or hisrelative; • firm, in which a director, manager or his relative is apartner; • privatecompanyinwhichadirectorormanagerorhisrelativeisamember or director; • public company in which a director or manager is a director and holds along with his relatives, more than 2% of its paid-up share capital; • any body corporate whose BoD, MD, or manager is accustomed to act in accordance with the advice, directions or instructions of a director ormanager; CNK

RelatedParty • Section 2(76) ”related party”with reference to a company,means • any person under whose advice, directions or instructions a director or manager is accustomed toact; • Any body corporatewhich is– • a holding, subsidiary or an associate company of suchcompany; • a subsidiary of a holding company to which it is also a subsidiaryor • An investing company or the venturer of thecompany • the investing company or the venturer of a company - means a body corporate whose investment in the company would result in the company becoming an associate company of the bodycorporate • such other persons as may beprescribed CNK

Key ManagerialPerson • Sec 2(51) - • ‘‘keymanagerialpersonnel’’, (KMP) in relation to company, means – • Chief Executive Officer or the managing director or themanager • companysecretary • whole-timedirector • Chief Financial Officer;and • such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board;and • such other officer as may beprescribed CNK

Relative • Section2(77): • ‘‘relative’’,withreferencetoanyperson,meansanyone • who is related to another,if— • (i) they are members of a Hindu UndividedFamily; • (ii) they are husband and wife;or • (iii)onepersonisrelatedtotheotherinsuchmannerasmaybeprescribed*; • *- Father, mother, son, son’s wife, daughter, daughter’s husband, brother, sister, (including steprelations) CNK

Accounts and Financial Statements CNK

Books of Accounts and Financial Statements • Section 128: • Every company shall prepare and keep at its Registered Office, books of accounts and financial statement • Company may keep its books at some other place in India – Company shall file AOC-5 within 7 days of decision of BoD. • Books to be preserved for 8 years (or longer in case of any investigation) • Section 129: • At Every AGM, BOD shall lay financial statements • Where company has one or more subsidiaries/associate companies, prepare a consolidated financial statement and they shall also be laid before the AGM along with salient features of financial statement. • Where the financial statements do not comply with the accounting standards, company shall disclose in financial statements, the deviation from the accounting standards, the reasons for such deviation and the financial effects, arising out of such deviation. CNK

Re-opening of Accounts on court’s or Tribunal’s Order • Section 130: Company can not re-open its books of account or recast its financial statement unless, • Application made by CG, IT authorities, SEBI, or any other statutory regulatory body or authority or any other person concerned, and • an order is made by a court / tribunal under the following circumstances – • Earlier accounts were prepared in a fraudulent manner • The affairs of the Company were mismanaged during the relevant period, casting a doubt on the reliability of the Financial statement • No order shall be made in respect of re-opening of books of account relating to a period earlier than 8 financial years immediately preceding the current financial year subject to Section 128(5) CNK

Voluntary Revision of Financial Statements or Board’s Report • Section 131: If it appears to the directors of a company that financial statement or the Board Report • do not comply with the provisions of section 129or section 134 • they may prepare revised financial statement or a revised report in respect of any of the 3 preceding financial years • after obtaining approval of the Tribunal and a copy of the order passed by the Tribunal shall be filed with the Registrar • such revised financial statement or report shall not be prepared or filed more than once in a financial year. • detailed reasons for revision of such financial statement or report shall also be disclosed in the Board's report in the relevant financial year in which such revision is being made. CNK

Internal Audit Applicability (Section 138) • Section 138: Following companies required to appoint internal auditor who shall be Chartered Accountant or Cost Accountant or such other professional. • Every Listed Company • Every unlisted public company having • paid up share capital > 50 Crores or • Turnover > 200 Crores or • outstanding loans or borrowings from banks or public financial institutions > 100 crores at any point of time during the preceding financial year; or • outstanding deposits > 25 crores at any point of time during the preceding financial year; and • Every private company having • Turnover > 200 Crores or • outstanding loans or borrowings from banks or public financial institutions > 100 crores at any point of time during the preceding financial year CNK

Auditor appointment, resignation • and • other relevant provisions CNK

Appointment of Auditors (139 – 148) • Appointment to be done once for 5 years – No ratification to be done every year • Mandatory retirement after 5 years / 10 years for individual / firms • RBI/IRDA/CAG already have provisions for rotation • First appointment of auditors – to be done by BOD within 30 days – in such case rotation maybe after 1+5+5 years • Casual Vacancy to be filled by Board within 30days and shall also be approved at general meeting within 3 months of Board recommendation. CNK

Appointment of Auditors… • Rotation – Rules lay down retrospective applicability as under: • Applicable to all Listed Companies • For Unlisted Public Companies if share capital >= 10 crores • For Private Companies if share capital >= 20 crores • For other companies with capital below above limits if public borrowings (from FIs, banks, public deposits) >= 50 crores • Cooling period for 5 years • No rotation for Small Companies and OPCs • Members can decide that audit partner or team be rotated CNK

Appointment of Auditors… • Central government/ regional directors approval and special resolution required to remove auditor before his term • ADT-3 to be filled by Auditor within 30 days . • Transition not applicable if above conditions are met subsequent to Act coming force (i.e. 2014-15 onwards) • All notices of, and other communications relating to, any general meeting shall be forwarded to the auditor, (Sec146) • and the auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorized representative, who shall also be qualified to be an auditor, • any general meeting and shall have right to be heard at such meeting. CNK

Appointment Procedural Documents • Following documents to be taken on record before commencement of assignment of statutory audit • Board Resolution of appointment of statutory auditor • Appointment Letter • Consent Letter • NOC Request Letter, in case of first year of appointment • Acceptance Letter • Engagement Letter • ADT -1 to be filled by company within 15 days of appointment CNK

Auditor’s Penalties • For any contravention regarding appointment / rotation, powers / duties, prohibited services  fine of 25,000 to 5 lakhs or 4 times the remuneration of the auditor, whichever is less • For willful contraventions, • Fees received to be refunded • Imprisonment and fine of 50 thousand to 25 lakhs or 8 times the remuneration of the auditor, whichever is less • Liable for damages to company, statutory authorities or to members or creditors for loss arising out of incorrect or misleading statements • For audits carried out by a firm, if it is proved that any partner/s has acted in fraudulent manner, the above liability shall be joint and several. CNK

Auditor’s Penalties … • Action by NFRA • Penalty – • for individuals 1 lakh to 5 times fees received. • For firms – 5 lakhs to 10 times fees received • Debarring member or firm from practice for 6 months to 10 years CNK

Cost Audit (Section 148) • Classes of companies including foreign companies • Engaged in production of goods or providing services in regulated sectors and non-regulated sectors, having turnover > 35 crore during immediately preceding previous year • Cost Audit shall be conducted by cost accountant in practiceCost Accountant who shall be appointed by board. CNK

Audit Reporting Under Companies Act, 2013 CNK

Audit Report Formats • Audit Reporting in India for companies is governed by statute: • Companies Act lays down various provisions for reporting by Statutory Auditors • Sec 143 of Companies Act, 2013 • The statute however, only lays down the various points to be included in an audit report • The actual format in which reporting is to be done is governed by the applicable Standards on Auditing (Sas) CNK

Audit reporting under Companies Act, 2013 • Sec 143 (1)- Every auditor of a company shall amongst other matters inquire * into the following matters, namely:— • whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members; • whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the co; • where the company not being an investment company or banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company; • whether loans and advances made by the company have been shown as deposits; * to be reported only if answer is in negative CNK

Audit reporting under Companies Act, 2013… • whether personal expenses have been charged to revenue account; • where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading: • Provided that the auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries. CNK

Audit reporting under Companies Act, 2013… • Sec 143(2)- • The auditor shall make a report to the members of the company on the accounts examined by him and on every FS which are required by or under this Act to be laid before the company in general meeting and • the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made thereunder or under any order made under sub-section (11) and to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company’s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed. CNK

Audit reporting under Companies Act, 2013… • Sec 143(3)- The auditor’s report shall also state— • whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements; • whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books and proper returns adequate for the purposes of his audit have been received from branches not visited by him; • whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditor has been sent to him and the manner in which he has dealt with it in preparing his report; • whether the company’s balance sheet and Profit and Loss dealt with in the report are in agreement with the books of account and returns; • whether, in his opinion, the financial statements comply with the accounting standards; CNK

Audit reporting under Companies Act, 2013… • Sec 143(3)… • the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company; • whether any director is disqualified from being appointed as a director under sub-section (2) of section 164; • any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith; • whether the company has adequate internal financial controls with reference to financial statements n place and the operating effectiveness of such controls; (not mandatory for certain Private limited companies) • such other matters as may be prescribed(as per next slide) CNK

Audit reporting under Companies Act, 2013… • Other matters to be included in auditors report u/s 143(3): Rule 11 • Whether company has disclosed impact, if any, of pending litigations on its financial position in its FS. ** • Whether company has provided for material foreseeable losses, if any, on long term contracts including derivative contracts. • Whether there has been any delay in in transferring amounts to IEPF. ** (to be cross referred and given as annexure to FS) CNK

Audit reporting under Companies Act, 2013… • Sec 143(4) -Where any of the matters required to be included in the audit report under this section is answered in the negative or with a qualification, the report shall state the reasons therefor. • Requirement of highlighting adverse observations/comments in audit report in thick type or italics omitted. • Sec 143(5) to 143(7) – Reporting to C&AG for government companies. • Sec 143(8) – Branch Auditors – Reporting to main auditor – same responsibility as per sec 143(1) to 143(4), 143(12) • Sec 143(9) / (10) – Auditor to comply with Auditing Standards • Sec 143(11) – Statement to be included in report on matters specified (CARO) CNK

Audit reporting under Companies Act, 2013… • Sec 143(12) - Reporting of frauds • If an auditor of a company, in the course of the performance of his duties as auditor, • has 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 immediately report the matter to the CG/Audit committee within the time prescribed. • Sec 143(13)- No duty of auditor w.r.t. fraud reporting to be deemed as having been contravened, if it is done in good faith. • Sec 143(15)- If the auditor does not report the fraud committed or being committed, he shall be punishable with fine which shall be less than Rs. 1 lakhs but may extend to Rs. 25 lakhs. CNK

Audit reporting under Companies Act, 2013… • Sec 143(14) – Provisions u/s 143(12) shall mutatis mutandis apply to • Cost Accountant in practice • Company Secretary in practice CNK

Restriction on Power of Board CNK

Restriction on powers of board (section 180) • BOD shall exercise following powers by special resolution • to sell, lease or otherwise dispose of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings • to invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation • to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and securities premium, apart from temporary loans • to remit, or give time for the repayment of, any debt due from a director CNK

Company to contribute to Bona fide and charitable funds (section 181) • BOD may contribute to bona fide charitable and other funds • Provided that prior permission of the company in general meeting shall be required • for such contribution • in case any amount the aggregate of which, in any financial year, • exceed 5%of its average net profits for the three immediately preceding financial years CNK

Prohibitions and Restrictions Regarding Political Contributions (section 182) • A company, other than a Government Company and company has been in existence less than 3 years may contribute any amount directly or indirectly to any political party • The aggregate of the amount contributed by the company in any financial year shall not exceed 7.5% of its average net profits during the three immediately preceding financial years. • No such contribution shall be made by a company unless a resolution is passed at a meeting of the Board of Directors. • Every company shall disclose in its profitand loss account the total amount contributed by it.. CNK

Power of Board and Other Persons to Make Contributions to National Defence Fund, etc. (section 183) • The Board of Directors of any company or any person or authority exercising the powers of the Board of Directors in general meeting, • contribute such amount as it thinks fit to the National Defence Fund or • any other Fund approved by the Central Government for the purpose of national defence. • Every company shall disclose in its profits and loss account the total amount or amounts contributed by it to the Fund. CNK

Disclosure of interest by directors (section 184) • Every director shall at his first meeting of board and if changes in disclosure, then at first meeting after change, disclose his concern or interest in Form MBP – 1 • Disclose the interest in contract or arrangement to be entered into • With body corporate where director holds > 2% of shareholding or its promotor, manager, CEO • With firm where director is a partner, owner or member • It shall not apply to any contract or arrangement entered into or to be entered into between two companies or between one or more companies and one or more bodies corporate where any of the directors of the one company or body corporate or two or more of them hold < 2% of the paid-up share capital in the other company or the body corporate CNK

Acceptance of Deposits by Companies CNK

Acceptance Of Deposits ByCompanies(Section –73) • Section 73 • On and after the commencement of this Act, no company shall invite, accept or renew deposits under this Act from the public except in a manner provided under thisChapter • Exclusions: • BankingCompany • Non- Banking Finance Company registered withRBI • AnyothercompanyspecifiedbyCentral Government afterconsultation withRBI CNK

DepositDefinitions • Section 2(31) : "Deposit" includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed* in consultation with the Reserve Bank ofIndia; • Rule 2(c)- “deposit includes any receipt of money by way of deposits or loan or in any other form, by a company, but does not include the following:…..” • Therefore , the three elements which will constitute asdeposit • Any receipt of money by way ofdeposit; • Any loan;and • Any receipt of money in any other form CNK

Deposit: Rule 2(c) of CAD Rules2014 • Certain types of monies received by a company are excluded fromthe definition of 'deposit'- • From Central Government /State Government/ local authority/Statutory Authority • Foreign or international banks/multilateral financial institution, foreignauthoritiesandpersonsresidentoutside Indiasubjectto provisions of FEMA,1999 • Banking Companies and Banking Institution notified underBankingRegulation Act including co-operativebanks • Public FinancialInstitution/RegionalFinancialInstitutions/ Insurance Companies / Scheduled Banks CNK

Deposit: Rule 2(c) of CAD Rules2014 • Commercial paper or any other instruments issued inaccordancewith the guidelines of Reserve Bank ofIndia • Any other Company • Subscription for securities including share applicationmoney • A director or relative of director of privatecompany • Issue of bonds or debentures secured by first charge on any assets / listed unsecured NCDs • Any listed NCD issued without any charge on assets • An employee of the company not exceeding his annual salary in the nature of non interest bearing security CNK

Deposit: Rule 2(c) of CAD Rules2014 • ANon- interest bearing amount received and held intrust • Any amount received in the course of or the purpose of the business for the following: • As advance for the supply of goods or provision ofservices, Provided such advances are is appropriated against such supply or services within a period of 365 days. • As advance received in connection with consideration for immovable property under an agreement or arrangement • As security deposit for the performance of the contract for supply of goods or provision of services • As advance received under long term projects for supply of capital goods CNK

Deposit: Rule 2(c) of CAD Rules2014 • As advance towards consideration for providing futureservices, maintenance, warranty for maximum period of 5 years. • As advance Received and as allowed by any sectoral regulator fromCG/SG • advancefor subscription towardspublication • Anyamount brought inbythepromotersthemselves or their relatives by way of unsecured loan in pursuance of a stipulation of any lending institution on thepromoters • any amount accepted by a Nidhi Company in accordance with rules made U/s 406 of the Act • any amount received by way of subscription by Chit fund company CNK

Deposit: Rule 2(c) of CAD Rules2014 • Any amount received by company under collective investment scheme framed by SEBI • An amount of twenty five lakh rupees or more received by a start-up company, by way of a convertible note in a single tranche, from a person • Any amount received by a company from Alternate Investment Funds, Domestic Venture Capital Funds, Infrastructure Investment Funds, Real Estate Investment Fund and Mutual Funds registered with the SEBI in accordance with regulations made byit. CNK

Companies Act, 2013 Provisions relevant for Audit of Financial Statements