From the Knowledge Centre
What a Statutory Audit under the Companies Act Involves, and How to Prepare for One
Every company in India, from a newly incorporated private company with no revenue to a large listed group, must have its annual financial statements audited. Knowing what the auditor needs makes the process faster and avoids qualifications.
Appointment of the auditor
- First auditor: appointed by the Board within 30 days of incorporation. If the Board does not do so, the members appoint one within 90 days.
- Subsequent auditors: appointed by the members at the AGM for a term of five years. The company files ADT-1 within 15 days of the meeting.
- Rotation: listed companies and certain classes of public and private companies must rotate individual auditors after one term of five years and audit firms after two terms.
- Eligibility: the auditor must be independent, and must not hold securities in, be indebted to, or have business relationships with the company beyond the limits in Section 141. There are also limits on the number of company audits one partner can hold.
- Removal or resignation before the end of the term follows a defined procedure, including filing ADT-2 or ADT-3.
What the auditor reports on
- Opinion on the financial statements – whether they give a true and fair view under the applicable accounting framework.
- Section 143(3) matters – whether proper books were kept, whether the statements agree with the books, directors' disqualification, pending litigation and other matters.
- Audit trail – whether the accounting software has the edit log feature, whether it operated throughout the year, and whether it was preserved.
- Internal financial controls – for companies other than small companies and private companies below specified thresholds.
- CARO 2020 – a detailed report on fixed assets, inventory, loans given, deposits, statutory dues, defaults on borrowings, fraud, related parties, cash losses and other matters.
When CARO 2020 does not apply
CARO does not apply to:
- one person companies and small companies
- private companies that are not holding or subsidiary companies of a public company, with paid-up capital plus reserves not more than ₹1 crore, borrowings not more than ₹1 crore at any time in the year, and revenue not more than ₹10 crore
- banking, insurance and Section 8 companies
Preparation checklist for management
- Closed books: final trial balance with all year-end entries, including depreciation, provisions, accruals and stock valuation.
- Bank: reconciliations and balance confirmations for every account, including closed accounts.
- Receivables and payables: ageing, balance confirmations for key parties, and MSME classification of suppliers.
- Inventory: a physical verification report, valuation working and an analysis of slow-moving stock.
- Fixed assets: register with additions and disposals and the supporting invoices.
- Statutory dues: GST, TDS, PF and ESI reconciliations, with proof of payment.
- Related parties: a list, and the transactions with them, with Board / shareholder approvals.
- Minutes and registers: Board and general meeting minutes, and the statutory registers.
- Software: confirmation that the audit trail feature was enabled throughout the year.
A well-prepared audit usually finishes on time. Delays push the AGM and the AOC-4 and MGT-7 filings, which attract additional fees.
The information in this article reflects the law as on the date of publication and is for general guidance only.