Ambit on Audit Under the Companies Act, 2013
- The Companies Act promotes transparency, accountability, and sound corporate governance.
- One of the Act’s main requirements is that every company must undergo an audit.
- A company’s monetary accounts, records, and exchanges are checked and inspected as a feature of a review to ensure they keep every applicable rule and regulation.
- The Companies Act of 2013 permits three kinds of audits: Internal, Statutory, and Cost.
- An interior and cost review might be wilful depending on the company’s business exercises’ size, nature, and complexity. However, a statutory audit is expected for all businesses.
- These audits are performed to assure investors, loan bosses, and controllers that the company’s budget reports are trustworthy and accurate.
Types of Audit Under the 2013 Companies Act
- The Statutory Audit is essential for all organizations.
- The Companies Act of 2013 requires all public and private businesses to conduct a Statutory Audit.
- This audit confirms that the company’s budget summaries are accurate and consistent with the Companies Act of 2013 and applicable accounting standards.
- The firm’s investors choose the Statutory Auditor at the Annual General Meeting (AGM) for a five-year term.
- The auditor is responsible for inspecting the company’s financial records, assessing the internal controls and strategies, tracking any significant mistakes or fakes, and offering an opinion on the financial summaries.
- Companies might audit an internal review to assess internal controls, methodology, and risks.
- This auditor will probably console the management team and the top managerial staff that the business’ internal controls are reliable and its activities are successful.
- The business management picks the Internal Auditor and answers the Board of Directors’ Audit Committee.
- Examining the company’s internal controls, assessing the operations’ effectiveness and efficiency, identifying any flaws or holes in the internal controls, and making recommendations for improvement are all responsibilities of the auditor.
- According to the Companies Act of 2013, the Cost Audit is an optional audit vital for a few explicit industries.
- This audit aims to confirm that the company’s cost accounting records are correct, reliable, and agreeable with every appropriate regulation and guideline.
- The Cost Auditor, appointed by the company’s management, submits reports to the Central Government.
- The auditor’s duties include reviewing the company’s cost accounting records, assessing their dependability and accuracy, identifying inconsistencies or errors, and making suggestions for improvement.
However, The Internal Audit and Cost Audit depend on the scope, complexity, and size of the company’s business tasks. These reviews guarantee that companies are run according to good administration, responsibility, and transparency standards.
Recent Changes to the Audit Requirements of the Companies Act Of 2013:
The Companies Act of 2013’s audit requirements have been modified recently. The following are a couple of the significant changes:
- Higher Bar for Statutory Audits
- Statutory Auditors Are Rotated
- Elimination of Cost Audit in Certain Industries
1. Higher Bar for Statutory Audits
The Ministry of Corporate Affairs (MCA) increased the limit level for statutory audits from INR 1 crore to INR 2 crore for businesses with a turnover of at least INR 50 crore. This adjustment was executed to lessen the trouble for small and medium-sized associations.
2. Statutory Auditors are Rotated
The Companies Act of 2013 commands that Statutory Auditors rotate every five years. However, today, reliant upon several limits, the MCA has extended the Statutory Auditor’s maximum residency from five to 10 years. This modification was made to lessen the disruption caused by the Statutory Auditor’s frequent changes and to keep the audit process consistent.
3. Elimination of Cost Audit in Certain Industries
Per the MCA, a cost audit is not generally needed for specific companies that produce pharmaceuticals, fertilizers, and sugar. This change was executed to lessen the burden of consistency on particular enterprises.
Advantages of Review Under the Companies Act, 2013
1. Upgrades Transparency and Validity
According to the Companies Act of 2013, expanded reliability and transparency are two significant advantages of auditing financial information. The review cycle confirms that the financial statements are accurate and compliant with every material law and accounting standard. As a result, controllers, loan specialists, investors, and stakeholders currently have more confidence in the company’s financial reporting.
2. Identifies Risks and Weaknesses
Organizations can utilize examination to track weaknesses and risks in their internal controls and strategies. The audit report points out any significant frauds or omissions that were discovered, which can assist the company in resolving those issues and avoiding similar ones in the future. This can also help firms expand the effectiveness and productivity of their ordinary tasks.
3. Facilitates Legal Compliance
Companies must report on financial matters, internal controls, and corporate governance due to the Companies Act of 2013. The audit strategy decreases the probability of punishments or other legal results by ensuring that the company conforms to these managerial principles. The review report can also be utilized as proof of court consistency if fundamental.
4. Supports Decision-Making
The audit report covers the companies’ risks, internal controls, and financial performance. The administration and board of directors’ staff might find this data helpful when making decisions about the company’s future. For example, the audit report could assist the board with identifying prospective improvement areas, like cycle or cost optimization.
- The 2013 Company Act’s audit order gives companies various advantages, including greater credibility and transparency, the ability to perceive risks and weaknesses, simplicity in complying with lawful necessities, and help with requirements.
- Businesses should keep the essential audit standards to profit from these advantages and further develop their administration practices.
Eligibility, Qualification and Disqualifications of Auditors (Sec 141)
- Sub-Section (1) of Section 141 states that an individual will be qualified for appointment as an auditor of a company provided that he is a chartered accountant.
- The term “Chartered Accountant” is defined as follows in sub-section (17) of section 2 of the Act:
- A chartered accountant holds a valid certificate of practice under sub-section (1) of section 6 of the Chartered Accountants Act, 1949 (38 of 1949), as defined in clause (b) of subsection (1) of section 2.
- Further, according to clause (b) of sub-Section (1) of Section 2 of the Chartered Accountants Act, 1949, “Chartered Accountants” signifies an individual who is a member of the Institute. In addition, the following is stated in sub-section (1) of section 6 of the said Act, which addresses certificates of practice:
- “Section 6 of the Certificate of Practice states: No member of the Institute will be qualified for practice, whether in India or elsewhere, except if he has obtained a certificate of training from the Council.
- Given that nothing contained in this sub-section will apply to any individual who, preceding the commencement of this Act, has been practically practised as a registered accountant or a holder of a restricted certificate until one month has passed from the date of the central meeting of the Council.”
- From the above, “chartered accountant” has been utilized throughout the Act, except if the setting expects it to mean a practising chartered accountant.
- Additionally, a firm with most of its partners practising in India and qualified for the appointment above may be appointed as the company’s auditor under its firm name under the provisions of sub-section (1) of section 141. In other words, the proviso clarifies that only audit firms with a majority of partners practising in India who are chartered accountants, as defined in sub-section (17) of section 2 of the Act, are qualified to be appointed auditors.
- When a limited liability partnership (LLP) is appointed as a company’s auditor, only chartered accountants are permitted to sign on behalf of the firm, as stated in sub-section (2) of section 141. Section 145, which discusses the signing and certification of audit reports and other documents, also refers to this sub-section.
Disqualifications of Auditors
As given in sub-Section (3) of Section 141, the following people will not be qualified for appointment as an auditor of a company, expressly:
- A body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008. According to clause (a), all body corporates except LLPs are disqualified from being an auditor of a company.
- An officer or employee of the company;
According to clause (b), an officer or employee of the company is excluded from being an auditor of the company. In provision (b), the Council has utilized the words “officer” and “employee. “In sub-section (59) of section 2 of the Act, the term “officer” has a comprehensive definition; however, the Act does not define the term “employee.”
By sub-section (59) of section 2, the term “officer” refers to any director, manager, or key managerial personnel and any individual for whom the board of directors or any one or more directors are accustomed to acting. The legislature has used “includes” and “accustomed to Act. “The concept of “accustomed to act” has been covered in detail in the commentary under the definition section.
The Companies Act of 2013 states that audits are essential for financial reporting and corporate administration. They guarantee dependability, accuracy, and consistency with all financial records’ pertinent lawful and accounting principles.
Moreover, it works with direction, helps organizations decide their weaknesses and risks, and upgrades consistency with legal requirements. To diminish organizations’ compliance costs and ensure the productivity of the audit method, a few ongoing changes have been made to the audit requirements under the Companies Act of 2013.
Due to progressions like the expanded edge for legal review and the increased maximum residency of the Statutory Auditor, it is currently simpler for small and medium-sized firms to fulfil the audit rules. Organizations should comprehend the meaning of reviews under the 2013 Companies Act and ensure they maintain all material legal requirements.
This will help them strengthen their corporate administration and financial reporting procedures and increase their marketability and reliability.