AUDIT OF COMPANY LIQUIDATION ACCOUNTS

The audit of the accounts of a firm is not compulsory, whereas the audit of accounts of a company is mandatory.

APPOINTMENT OF AUDITORS

The Companies Act, 2013 (the “Act”), has laid down specific and onerous obligations on the company and its auditors with stringent penalties, including imprisonment for non-compliance with the relevant provisions for appointment of auditors. At the same time, compliances have been made simple, yet comprehensive, to meet the contemporary need for good corporate governance practices.

Section 139 of the Act provides, every company shall, at its annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of sixth annual general meeting and there after till the conclusion of every sixth meeting

Section 139 also provides that before such appointment is made, the written consent of the auditor to such appointment, and a certificate from the individual auditor or the firm that the appointment, if made, shall be in accordance with the following conditions be obtained.

Rule 4 of the Companies (Audit and Auditors) Rules, 2014 requires the auditor to submit a certificate that:

  1. the individual or the firm (it), as the case may be, is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made there under.
  2. The proposed appointment is in accordance with the term provided under the Act.
  3. The proposed appointment is within the limits laid down by or under the authority of the Act.
  4. The list of proceedings against the auditor or audit firm or any partner of the audit firm, pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct

The certificate provided by the auditor shall also indicate whether the auditor also satisfies the criteria provided in Section 141 of the Act (enumerated in subsequent paragraphs).

The company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar in Form ADT-1, within fifteen days of the meeting in which the auditor is appointed/re-appointed.

Applicability of audit of company liquidation accounts

Rule 91- Half-yearly accounts to be filed

The Company Liquidator shall file his accounts to Tribunal twice a year and such accounts shall be made up to the 31st of March and 30th of September every year, the account for the period ending 31 st March being filed not later than the 30th of June following, and account for the period ending 30th September, not later than the 31st of December.

Rule 92- Form of Account

The account shall be a statement of receipts and payments in Form WIN 39 and shall be prepared in accordance with the instructions contained in the said form and three copies thereof shall be filed, and the account shall be verified by an affidavit of the Company Liquidator in Form WIN 40 and the final account shall be in Form WIN 41.

Rule 93- Nil Account

Where the Company Liquidator has not, during the period of account, received or paid any sum of money on account of the assets of the company, he shall file an affidavit of no receipts or payments on the date on which he shall have to file his accounts for the period.

Rule 94- Registry to send Copy of Account to Auditor

As soon as the accounts are filed, the Registry shall forward to the auditor one copy thereof for purposes of the audit with a requisition in Form WIN 42 requesting that the accounts may be audited and a certificate of audit be submitted to the Tribunal not later than one month from the date of receipt of the copy of the account as required.

Rule 95- Audit of Company Liquidator’s Accounts

The accounts shall be preferably audited by one or more Chartered Accountants appointed by the Tribunal from out of the panel to be maintained by the Tribunal, the audit shall be a complete check of the accounts of the Company Liquidator and the Company Liquidator shall produce before the auditor all his books and vouchers for the purposes of the audit, and shall give the auditor all such explanations, information and assistance as may be required of him in respect of the accounts.

Rule 96- Audit Certificate to be Filed

After the audit of the accounts of the Company Liquidator filed in Tribunal, the auditor shall forward to the Registry a certificate of audit relating to the account with his observations and comments, if any, on the account, together with a copy thereof and shall forward another copy to the Company Liquidator, and the Company Liquidator shall file copy of the audit certificate together with a copy of audited accounts with the Registrar of Companies and the Registry shall file the original audit certificate with the records of the Tribunal.

Rule 97- Audit Fees

The audit fees shall be fixed by the Tribunal from time to time having regard to -the nature and complexity of the case.

Rule 98- Inspection of Account and Certificate of Audit

Any creditor or contributory shall be entitled to inspect the accounts and the auditor’s certificate in the office of the Tribunal on payment of fees of one hundred rupees and to obtain a copy thereof on payment of the charges at the rate of five rupees per page.

Rule 99- Account and Auditor’s Report to be Placed before Tribunal

Upon the audit of the account, the Registry shall place the statement of account and the auditor’s certificate before the Tribunal for its consideration and orders.

POWERS AND DUTIES OF AUDITORS

Section 143 lays down the powers and duties of auditors. Every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and shall be entitled to require from the officers of the company, such information and explanation as he may consider necessary for the performance of his duties as auditor, and amongst other matters inquire into the following matters, namely:

  1. 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;
  2. Whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;
  3. Where the company not being an investment company or a banking company; whether so much of the assets of the company as consists of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;
  4. Whether loans and advances made by the company have been shown as deposits;
  5. Whether personal expenses have been charged to revenue account;
  6. 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:

The auditors of holding company shall also have the right of access to the records of all its subsidiaries and associate companies in so far as it relates to the consolidation of its financial statements with that of its subsidiaries and associate companies.

The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statement 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 and to the best of his information and knowledge, state that the said accounts and 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 (Rule 11 of Companies (Audit and Auditors Rules, 2014) discussed later

The auditor’s report shall also state:

  1. 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;
  2. 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;
  3. Whether the report on the accounts of any branch office of the company, audited 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;
  4. Whether the company’s balance sheet and profit and loss account dealt with in the report agree with the books of account and returns;
  5. Whether, in his opinion, the financial statements comply with the accounting standards;
  6. The observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;
  7. Whether any director is disqualified from being appointed as a director under sub-section (2) of Section 164;
  8. Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;
  9. Whether the company has adequate internal financial controls with reference to financial statement in place and the operating effectiveness of such controls;
  10. Such other matters as may be prescribed.

Rule 11 of the Companies (Audit and Auditors) Rules, 2014, specifies that the auditor’s report shall also include their views and comments on the following matters, namely:

  1. Whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statements;
  2. Whether the company has made provision, as required under any law or accounting standards, for material foreseeable losses, if any, on long term contracts including derivative contracts;
  3. Whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company.
  4. Whether the management has represented that, to the best of its knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the company to or in any other person(s) or entity, including foreign entities (“Intermediaries”), with the understanding, whether recorded in writing or otherwise, that the Intermediary shall, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the company (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries; and
    1. Whether the management has represented, that, to the best of its knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been received by the company from any person(s) or entity, including foreign entities (“Funding Parties”), with the understanding, whether recorded in writing or otherwise, that the company shall, whether, directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries; and
    1. Based on such audit procedures that the auditor has considered reasonable and appropriate in the circumstances, nothing has come to their notice that has caused them to believe that the representations under sub-clause (i) and (ii) contain any material mis-statement.
  5. Whether the dividend declared or paid during the year by the company follows section 123 of the Companies Act, 2013.
  6. (Whether the company, in respect of financial years commencing on or after the 1st April 2022,) has used such accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has been operated throughout the year for all transactions recorded in the software and the audit trail feature has not been tampered with and the audit trail has been preserved by the company as per the statutory requirements for record retention.

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 there for.

In the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Government, or partly by the Central Government and partly by one or more State Government, the Comptroller and Auditor-General of India shall appoint the auditor under sub-section (5) or sub-section (7) of section 139 and direct such auditor the manner in which the accounts of the company are required to be audited and”] and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller and Auditor-General of India which, among other things, include the directions, if any, issued by the Comptroller and Auditor-General of India, the action taken thereon and its impact on the accounts and financial statements of the company.

The Comptroller and Auditor-General of India shall within sixty days from the date of receipt of the audit report have a right to:

  1. Conduct a supplementary audit of the financial statements of the company by such person or persons as he may authorize in this behalf; and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorized, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General of India may direct; and
  2. Comment upon or supplement such audit report.

Provided that any comments given by the Comptroller and Auditor-General of India upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements and also be placed before the annual general meeting of the company at the same time and in the same manner as the audit report.

Without prejudice to the provisions of this chapter, the Comptroller and Auditor General of India may, in case of Government undertakings, if he considers necessary, by an order, cause test audit to be conducted of the accounts of such Government undertakings and the provisions of Section 19A of the Comptroller and Auditor-General’s (Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of such test audit.

Where a company has a branch office, the accounts of that office shall be audited either by the auditor appointed for the company (herein referred to as the “company’s auditor”) under this Act or by any other person qualified for appointment as an auditor of the company under this Act and appointed as such under Section 139, or where the branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the company’s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country.

Provided that the branch auditor shall prepare a report on the accounts of the branch examined by him and send it to the auditor of the company who shall deal with it in his report in such manner as he considers necessary.

Every auditor shall comply with the auditing standards.

The Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by the Institute of Chartered Accountants of India in consultation with and after examination of the recommendations made by the National Financial Reporting Authority. Until any such auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards.

The Central Government may, in consultation with the National Financial Reporting Authority, by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor’s report shall also include a Statement on such matters as may be specified therein.

Notwithstanding anything contained in this section, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving or expected of involve an amount of one crore or more, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed:

Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as may be prescribed. Provided further that the companies, whose auditors have reported frauds under this sub-section to the audit committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the Board’s report in such manner as may be prescribed.

Reference

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