Companies Act, 2013

–Accounts and Audit

- Anand Banka

What is Company?O Latin wordO Com = with or togetherO Pains = breadO OPC?

Salient FeaturesCOMPANIES ACT 1956 COMPANIES BILL 2013

13 Parts 29 Chapters658 Sections 470 Clauses15 Schedules 7 Schedules

Status as of now…O Companies Act, 2013 issued and

finalisedO Effective in phased mannerO 98 sections already applicable from

12 September 2013O No corresponding rules!!!

O 2 phases of rules issuedO 16 ChaptersO 8 Chapters

Accounts

Financial StatementO Balance sheetO Profit and loss account/ income and

expenditure accountO Cash flow statement (except one

person company, small company and dormant company)

O Statement of change in equity, if applicable

O Notes

IssuesO Companies (AS) Rules, 2006O Accounting Standards issued by ICAI

SMC Vs. Small Company

Relevant Factor

Rules. 2006 Act, 2013

Turnover Does not exceed Rs. 50 Crore

Does not exceed Rs. 2 Crore

Paid-up share capital

No such criteria Does not exceed Rs. 50 lakh

Listing Should not be listed

Should not be public company

Borrowings Does not exceed Rs. 10 Crore

No such criterion

Holding/ Subsidiary

Not a holding/ subsidiary of Non-SMC

Not a holding/ subsidiary

Financial YearO March 31O In-line with Income Tax ActO If company formed on or after 1st Jan,

the March 31 of next yearO Existing companies to re-align within

2 yearsO Application to be made if different

financial year to be followed

IssuesO Holding/ subsidiary outside India

having a different financial yearO Approval from Tribunal

What’s new!O Compulsory consolidation of

accounts O Holding Company O Subsidiaries O Joint Venture and O Associates

ConsolidationO Mandated by clause 32 of listing

agreementO AS 21 applicable only if a subsidiary

O Argument 1: AS says only if u have subsidiary, else AS 21 not applicable. Hence, same will prevail

O Argument 2: Prepare CFS even if no subsidiary

O Applicable to PVT LTD COMPANY also (incl. OPC)O If OPC is allowed to have a subsidiary!!

IssuesO Companies preparing CFS as per

IFRS basis option in listing agreement

O Definition of ‘Control’O Control over more than one-half of

total share capitalO Includes Preference Shares?

O Control of more than 50% total shares but holding of equity less than 50%... Then how to consolidate?

What’s new!O Re-opening or re-casting of book of

accounts of the CompanyO By order of the courtO Voluntary – by consent of the Tribunal

Re-opening on Court’s or Tribunal’s Orders

O Relevant earlier accounts were prepared in fraudulent manner

O The affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements

Voluntary RevisionO If it appears to the directors of the Company

that the financial statement of the Company or the reports of the Board do not comply with the provisions of section 129 or section 134, the company can make an application to the Tribunal

O The order copy passed by the Tribunal shall be filed with the Registrar

O Such revised financial statement or report shall not be prepared or filed more than once in a financial year.

Voluntary RevisionO Max once in a yearO 3 years limit for Voluntary revisionO Reopening of previous to previous

year’s may impact opening balances, mandating revision of previous year

IssuesO Recently, the SEBI has issued a

Circular, which empowers it to require revision of financial statements, if the audit report is qualified

O In Amalgamation/ Merger scheme approved by the court back-dated, it might help

O Revision in one Subsidiary affects CFS

DepreciationO Schedule IIO Useful life of assets givenO 3 class of companies

O Ind-AS: Permitted to adopt different rates, if disclosed justification

O Where authorities prescribe ratesO Others: not longer than that given in

Schedule IIO Rs. 5000 criteria removed

IssuesO No separate rate mentioned for

intangible assets (rebuttable 10 yrs as per AS 26)

O Useful life is reduced in Sch II as compared to Sch XIV for many assets

O Remaining useful life = 0O Carrying amount adjust with retained

earningsO Remaining useful life = 1

O Carrying amount taken to P/L

IssuesO Identify significant components

separately with different useful lifeO In case of revaluation, depreciation

to be charged on revalued amount

Audit

Appointment of AuditorO Appointment of auditors for 5 years

O No requirement for annual appointment/ re-appointment

O Automatic re-appointment if no other auditor appointed at AGM

O CG approval for removal of auditor before term

O Limited Liability Partnerships may be appointed as auditors

O Majority partners practicing in India should be qualified for appointment (old Act – All partners)

Rotation of AuditorsO Compulsory rotation - for Listed

Companies and other prescribed class of companies (Still under consideration)O 5 years (individual)O 10 years (firm)

O Cooling period = 5 yearsO Auditor who has COMPLETED his term –

not eligible for reappointmentO Global companies having single

auditorO Whether disqualified across globe!!

Rotation of AuditorsO MCA voluntary code – 5 yearsO An analysis of 286 listed companies

reveals that 25% have had the same auditor for more than ten years.

O This includes 56% of the SENSEX companies and 40% of the NIFTY companies.

O Infact only 131 companies, comprising mostly of banks, are found to conform to the MCA guidelines.

Rotation – clarificationsO “Existing companies have to comply

with the requirements within 3 years from the date of commencement of the Act”

O RetrospectiveO RBI and IRDA requirement overrides – 4

years

DisqualificationO Not holding any security of

company/subsidiary/holding/ associate/ fellow subsidiary.O Relative may hold securities of FV upto Rs. 1

LAKHO Not indebted to same category of companies for

Rs. 1 LAKHO Not provided guarantee/ security to same

category of companies – Rs. 1 LAKHO No direct/ indirect business relationship (i.e.

any transaction for a commercial purpose)O A person who is a partner or who is in the

employment of an officer or employee of the company

O No Court Conviction in last 10 years

Relative?O SpouseO Father/ Mother (incl. step)O Grandfather/ Grandmother (Father’s

side and mother’s side)O Son / Daughter (incl. step)O Son’s wife, Son’s son, Son’s daughterO Daughter’s husbandO Brother/ Sister (incl. step)

DisqualificationO Maximum number of companies in which a

person may be appointed as auditor - 20 companies (incl. Pvt Companies?)

O Rotation of auditing partner and his team (in case of an audit firm) can be imposed by the company

O Resignation of auditors O statement in prescribed form to be filed with

company as well as ROC O indicating reasons and other facts as may be

relevantO failure to attract fine

DisqualificationO Restrictions on Auditor to provide either

directly or indirectly following services O accounting and book keeping,O Internal audit O design and implementation of any financial

information system, O management services, O investment advisory services, O investment banking services, O rendering of outsourced financial servicesto the company, its holding company and subsidiary company.

O What happens to global companies?

DisqualificationO Restriction on Common Partner Firms

O Part of same group / networkO Same addressO Common relative

O Disqualified for providing other services to Subsidiary/ Holding/ Associate, etc.O Also during holiday/ cool – off period

DisqualificationO Tribunal may direct company to change

auditors O if satisfied that auditor acted in

fraudulent manner or O abetted or colluded in any fraud by or in

relation to company or its directors or officers

O The Charge of disciplinary committee has been handed over to NFRAO Previously with ICAI

MiscellaneousO Auditing and cost auditing standards made

mandatoryO In case of fraud

O Auditor/secretarial auditor/cost auditor to report to Central Government

O Internal Audit mandatory forO Listed companyO Public company with Share capital >= 10 CrsO Public company with loans/ deposits >= 25

Crs

MiscellaneousO Cost audit to be mandatory O Mandatory Secretarial audit

Structure of Auditing Standards

SQC1-99

Historical financial

statementse.g. Stat Audit

Other assurance engagements

e.g. ProjectionsRelated servicese.g. Accounting

Audit100-1999

Review2000-2699

General3000-3399

Subject Specific

3400-36994000-4699

Formulation of Auditing Standards

Companies Act, 1956

Companies Act, 2013

SA’s Formulation –

ICAINACAS- Ratify

NFRA – Formulation

(in consultation with ICAI)

Audit ReportO Whether the company has disclosed

the effect, if any, of pending litigations on its financial position in its financial statement

O Whether the company has made provision for foreseeable losses, if any, on long term contracts including derivative contracts

O Whether there has been delay in depositing money into the Investor Education and Protection Fund by the company

Liability of AuditorsO Contravention of certain provisions – fine (Rs.

25,000 to Rs. 5 Lakhs)O Knowingly or willful contravention with the intent to

deceive company, shareholders, creditors, tax authorities – imprisonment and fine (1 Lakh-25 Lakhs)

O Convicted for offence – liable to refund remuneration and pay damages for loss arising out of incorrect or misleading statements in audit report

O In case of audit firm – if proved that audit partner/s have acted in fraudulent manner or abetted or colluded in any fraud, the liability, civil or criminal, would be of audit partner/s concerned as well as of the firm jointly and severally

Prosecution by NFRAO Suo moto or on a reference made to

it by CGO Professional or other misconductO Penalty

O Individuals – 1 lakh to 5 x feesO Firm – 10 lakh to 10 x fees

O Debar the member/ firm – 6 months to 10 years

Class ActionO Members/ DepositorsO Claim damages/ compensation from

auditor/ audit firmO Improper/ misleading statement

made in audit report or for any misconduct

O Liability will be joint and severalO Will benefit of LLP be available in

such scenario??

ThanQ?

Anand BankaPartner,Talati & TalatiChartered Accountants

Email: anand.banka@talatiandtalati.comMob: 98673 53743