The Companies Act provides a legal framework for auditing the financial statements of companies. The specific requirements may vary depending on the jurisdiction (e.g., Companies Act 2013 in India, Companies Act 2006 in the UK, or the applicable law in other countries).
Below are the key aspects of an audit under the Companies Act:
1. Appointment of an Auditor:
Who appoints?
⇒ The Board of Directors (for the first auditor of a newly incorporated company).
⇒ The shareholders in a General Meeting for subsequent auditors. Eligibility:
⇒ The auditor must be a Chartered Accountant (CA) or a firm of CAs (as per local regulations).
⇒ Certain individuals, such as company employees or those with conflicts of interest, are disqualified.
2. Types of Audits Under the Companies Act
Statutory Audit:
⇒ Mandatory for all companies to ensure compliance with accounting standards and laws.
⇒ Conducted annually by an independent auditor. Internal Audit:
⇒ Applicable to certain companies based on size, turnover, or sector.
⇒ Conducted by an internal auditor, often appointed by management.
Cost Audit:
⇒ Required for companies in specific industries (e.g., manufacturing) to verify cost records.
⇒ Conducted by a Cost Accountant.
Secretarial Audit:
⇒ Applies to listed companies and certain large companies.
⇒ Conducted by a Company Secretary to ensure compliance with corporate laws.
3. Auditor’s Duties and Responsibilities
⇒ Examine financial statements to ensure they give a true and fair view.
⇒ Assess compliance with applicable laws (Companies Act, tax laws, etc.).
⇒ Evaluate internal controls and fraud risks.
⇒ Report findings in the Audit Report, including any qualifications, if applicable.
4. Audit Report and Opinion
⇒ Unqualified (Clean) Report: No material misstatements found.
⇒ Qualified Report: Some concerns but not significant enough to invalidate financial statements.
⇒ Adverse Report: Financial statements do not present a true and fair view.
⇒ Disclaimer of Opinion: Auditor is unable to express an opinion due to lack of sufficient evidence.
5. Penalties for Non-Compliance
⇒ Failure to comply with audit requirements under the Companies Act may result in:
⇒ Fines and penalties for directors and auditors.
⇒ Disqualification of auditors.
⇒ Legal action against the company.