Accounts and Audit Of A Company - Auditors of Company - Inter Corporate Loans and Investments

Books of Account to be kept by a Company
Every company must maintain proper books of accounts of its affairs. The following transactions must be entered in the books of accounts of the company which must be kept at its registered office :-

1. all sums of money received and expended by the company and the matters in respect of which the respect of which the receipt and expenditure took place;
2. all sales and purchases of goods by the company; and
3. the assets and liabilities of the company.
4. in the case of a company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or other items of cost as may be prescribed relating to certain class of companies as the Central Government may require.

The books of accounts must comply with the following conditions :-

1. The books must give a true and fair view of the state of affairs of the company or the branch office, if any, and explain its transaction.
2. The books must be kept on accrual basis and according to double entry system of accounting.

Every company must keep its books of account at its registered office. However, some of the books of account may be kept at such other place in India as the Board of Directors may decide, provided a notice in writing giving full address of that other place alongwith requisite filing fee is filed with the Registrar of Companies within seven of such decision.

If the company has a branch office, the books of account relating to transactions at the branch office may be kept at that branch office, but proper summarised reports and statements must be sent to the registered office or such other place where the books are kept, at intervals of not more than three months. The books of account of the branch must give a true and fair view of the affairs of the branch and clearly explain its transactions.

They must not conceal any transaction and also not disclose any transaction which is fictitious. The books of accounts and other documents and records are open to inspection by any director during business hours. Similarly, they are open to inspection by the Registrar of Companies or an officer authorised by the Central Government.

These books and papers together with the vouchers pertaining to entries made must be maintained for at least 8 years. It has been clarified by the Department of Company Affairs in their Circular No. 2/83 dated 2/3/1983 that the books of account should be prepared and maintained in indelible ink (and not in pencil).

The following persons are responsible for maintaining the books of accounts of a company :-

1. The managing director or manager;
2. If the company has neither a managing director nor manager, then every director of the company;
3. Every officer and other employee who has been authorised and to whom responsibility to maintain the books has been alloted by the Board of Directors.

If any of the persons referred to above fails to take all reasonable steps to maintain proper books of accounts or has by his own willful act been the cause of any default by the company in this respect, he is punishable with imprisonment up to six months or with fine which may extend to Rs. 1,000 or with both. However, no person can be sentenced to imprisonment unless it is proved that the contravention was committed by him wilfully.

Preparation of Balance Sheet and Profit and Loss Account
The company has to prepare its balance sheet and profit & loss account from the books of account maintained by it. Every Balance Sheet of a company must give a true and fair view of the state of affairs of the company as at the end of the financial year and must be in the prescribed format.

If the responsible for maintaining proper books of account fails to take all reasonable steps to secure compliance by the company with the requirement of law relating to the form and contents of the balance sheet, he is liable for each offence to imprisonment for a term extending up to six months or to fine up to Rs.1,000/- or to both.

Form of Balance Sheet,
Part 1 to Schedule VI of the Companies Act, 1956 gives the format in which the balance sheet is to be prepared. The schedule specifies 2 types of formats, the horizontal format and the vertical format. A company can prepare its balance sheet in either of the 2 formats. In the horizontal format, the liabilities including the share capital are placed on the left side and assets of all types on the right. The main heads in this form are arranged as under:

(a)	Share Capital (a) Fixed assets
(b)	Reserves and surplus (b) Investments
(c)	Loans (c) Current assets, loans and advances
(d)	Current liabilities and (d) Miscellaneous expenditure to the provisions extent not written off or adjusted
(e)	Profit & Loss Account
		---------- ---------
	Total

In the vertical format, the various heads of liabilities and assets are arranged vertically and current liabilities are shown as deduction, from current assets. Whatever information which is required to be given in the horizontal format must also be given in the vertical format. Summarised prescribed vertical form of balance sheet is given below:

I. Sources of Funds

(1)	Shareholders' funds
(2)	Loan funds
		---------------------
	Total

II Application of Funds

(1)	Fixed assets
(2)	Investments
(3)	Current assets, loans and advances
	Less: Current liabilities & provisions
(4)	(a) Miscellaneous expenditure to the extent not written off or adjusted
	(b) Profit & Loss Account
	Total

The Central Government may, on the application or with the consent of the Board of Directors of the company, by order, modify in relation to that company, any of the requirements as to matters to be stated in the company's balance sheet or profit and loss account for adapting them to the circumstances of the company.

Contents of Profit and Loss Account
Though no format has been prescribed for the profit and loss account, Part II to Schedule VI of the Companies Act, 1956 gives a list of items which must be disclosed in every profit & loss account. Every profit and loss account of a company must give a true and fair view of the company's profit or loss for the financial year for which it is drawn up.

Adoption of Balance Sheet and Profit & Loss Account
The Board of directors must present to the shareholders of the company, the balance sheet and a profit and loss account for the financial year at every annual general meeting. In the case of companies which are not commercial organisations such as Section 25 companies, instead if the profit & loss account, an income & expenditure account may be prepared. The profit and loss account to be placed in the FIRST annual general meeting should relate to a period beginning with the incorporation of the company and ending with a day, the interval between which and the date of the meeting does not exceed nine months. In case of subsequent annual general meetings, the profit and loss account should relate to a period beginning with a day immediately after the period for which the preceding profit & loss account was made and ending with a day, the interval between which and the date of the meeting should not exceed six months. The financial year may be more or less than a calendar year, but it must not exceed 15 months or with the special permission of the Registrar, 18 months.

If any director fails to take all reasonable steps to comply with the aforesaid requirements he is, in respect of each offence liable to be punished with imprisonment up to six months or with fine up to Rs.1,000/- or with both.

Authentication of Balance Sheet and Profit & Loss Account
The balance sheet and profit & loss account of a company must be signed on behalf of the Board of directors by two directors out of whom one must be the managing director, where there is one and the manager, or secretary, if any. The balance sheet and profit and loss account must be approved by the Board of directors before they are submitted to the auditors for the purpose of audit. The report of the auditors must be attached to the balance sheet and profit & loss account.

The company and every officer of the company who is in default with the above provisions shall be punishable with the fine which may extend to Rs.500/-, if:

1. any copy of balance sheet and profit and loss account is issued, circulated or published, without being signed as required ; or
2. any copy of balance sheet is issued, circulated or published, without there being annexed or attached thereto, a copy each of the following :-

1. the profit and loss account;
2. any accounts, reports or statements pertaining to subsidiary companies which are required to be attached to the balance sheet,
3. the auditors' report; and
4. the Report of the Board of Directors

Circulation of Balance Sheet and Auditors' Report
A copy of every balance sheet, profit and loss account, auditors' report and every other document required to be annexed or attached to the balance sheet must be sent not less than twenty-one days before the general meeting to every member, to every trustee for debenture holders, and to all other persons who are entitled to have a notice of general meetings. In the case of a company not having a share capital, the above documents need not be sent to a member, or debenture holder who is not entitled to have notice of general meetings.

In case of listed companies, the company may keep the aforesaid documents available for inspection at its registered office during working hours for a period of twenty-one days before the meeting and send to every member and trustee for debentureholders only a summarised statement containing the salient features of these documents in the prescribed format.

Filing of Annual Accounts with the Registrar
Every company must file with the Registrar within 30 days from the day on which the annual accounts, auditor’s report and the director’s report were presented at the annual general meeting, three certified copies of these documents signed by the managing director, manager or secretary of the company or if there be none of these by a director of the company.

These accounts may be inspected and copies thereof may be obtained by any member of the public at the Registrar of Companies on payment of the requisite fee. However, no person other than a member of the company is entitled to inspect, or obtain copies, of the profit and loss account in the case of the following types of companies :-

1. a private company which is not a subsidiary of public company;
2. a private company whose entire paid-up capital is held only by one or more bodies corporate incorporated outside India; or
3. a private company which is deemed to be a public company by virtue of Section 43A, if the Central Government directs that it is not in the public interest that any person other than a member of the company should be entitled to inspect or obtain copies of the profit and loss account of the company.

In case the annual general meeting of a company for any year has not been held, , 3 copies of the balance sheet and profit and loss account, duly signed, within thiry days from the latest day on or before which that meeting should have been held in accordance with the provisions of the Act must be filed with the Registrar of Companies. If for any reason, the annual general meeting before which a balance sheet is laid does not adopt it, or is adjourned without adopting the balance sheet or if the annual general meeting of a company for any year has not been held, a statement of the fact and reasons thereof must also be annexed to the balance sheet and to the copies thereof to be filed with the Registrar.

If default is made in complying with the above provisions, then the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs.50 for every day during the period the default continues.

Directors' Report
The report of the Board of Directors must be attached to every balance sheet prsented at the annual general meeting. The report must contain information regarding the following matters :-

1. The state of affairs of the company
2. The amount, if any, which it proposes to carry to any reserves in such balance sheet
3. The amount of dividend recommended
4. Details of any material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report
5. Conservation of energy, technology absorption, foreign exchange earnings and outgo.
6. Names, designations and other particulars of all employees drawing more than Rs. 50000/- p.m. in the company
7. Details necessary for a proper understanding of the state of the company's affairs and which are not, in the Board's opinion, harmful to the business of the company or of any of its subsidiaries, in respect of changes which have occured during the financial year :-

1. in the nature of company's business;
2. in the company's subsidiaries or in the nature of the business carried on by them; and
3. generally in the classes of business in which the company has an interest

Auditors of Company

Auditors of Government Companies
The auditor of a Government company is appointed or re-appointed by the Central Government on the advice of the Comptroller and Auditor-General of India provided that the audit would be within the number of acceptable audits available to each auditor.

The Comptroller & Auditor General of India has the power :-

1. to direct the manner in which the company's accounts are to be be audited by the auditor so appointed and to give such auditor instructions in regard to any matter relating to the performance of his functions as such
2. to conduct supplementary or test audit of the company's accounts by such person or persons or persons as he may authorise in this behalf; and for the purpose of such audit, to require additional information to be furnished to any person or persons so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General may, by general or special order, direct.

The auditor must submit a copy of his audit report to the Comptroller and Auditor-General of India who shall have the right to comment upon or supplement, the audit report in such manner as he may think fit.

Any such comments upon, or supplement to, the audit report must be placed before the annual general meeting of the company at the same time and in the same manner as the auditors' report.

Auditors of Other Companies
It is the duty of the auditor conduct the audit of the books of accounts of the company and to make his report to the members of the company on the accounts examined by him, and on every balance sheet, every profit and loss account and on every other document declared by the Act to be part of or annexed to the balance-sheet or profit and loss account and laid before the company in general meeting during his tenure of office. The auditor’s report, besides other things necessary in any particular case, must expressly state-

1. whether, in his opinion and to the best of his information and according to explanation given to him, the accounts give the information required by the Act and in the manner as required;
2. whether the balance-sheet gives a true and fair view of the company's affairs as at the end of the financial year and the profit and loss account gives a true and fair view of the profit or loss for the financial year;
3. whether he has obtained all the information and explanations required by him for the purposes of his audit;
4. whether in his opinion, the profit & loss account and balance sheet refered to in his report comply with the accounting standards recommended by the Institute of Chartered Accountants of India;
5. whether, in his opinion, proper books of account as required by law have been kept by the company, and proper returns for the purposes of his audit have been received from the branches not visited by him;
6. whether the company's balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns.

In case any of the above matters is answered in the negative or with a qualification, the auditor's report must state the reason for the same. Where the auditor is unable to express any opinion in answer to a particular question, his report shall indicate such fact together with the reasons why it is not possible for him to give an answer to such question.

The Central Government is empowered to issue orders requiring the auditor to include in his report a statement on such matters as may be specified. In exercise of this power the Central Government has issued an order called "The Manufacturing and other Companies (Auditor's Report) Order, 1975. It is the duty of the auditor to comply with this order when making his report to the shareholders.

Only the person appointed as auditor of the company or where a firm of auditors is so appointed, only a partner of that the firm practising in India, can sign the auditor's report or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.

Inter Corporate Loans and Investments

A company cannot :-

1. make any loan to any other body corporate
2. give guarantee or security in connection with any loan made by any person to another body corporate
3. acquire, by subscription, purchase or in any other manner, securities in any other body corporate

exceeding 60 % of its paid up share capital and free reserves or 100 % of its free reserves, whichever is more, unless approved by a special resolution passed at a general meeting of members.

The Board of the company may give a guarantee without being previously authorised by a special resolution of members if all the following conditions are satisfied :-

1. a Board resolution is passed to this effect
2. there exist exceptional circumstances which prevent the company from obtaining previous authorisation by special resolution
3. the Board resolution is confirmed within 12 months in a general meeting or its next Annual general meeting, whichever is earlier.

Notice of such resolution must clearly indicate the specific limits, the particulars of the body corporate in which the investment / loan / guarantee / security is proposed, the purpose of the investment / loan / guarantee / security, sources of funding, etc.

No investment / loan / guarantee / security may be made or given unless the Board resolution sanctioning it is with the consent of all directors present at the meeting and prior approval of the public financial institution ( if any term loan is outstanding ) is obtained.

Approval of the public financial institution is not required if the investment / loan / guarantee / security is with the 60 % limit as mentioned above and there has been no default in repaying the term loan and / or interest thereon.

No loan can be made at a rate of interest lower than the bank rate prescribed by the Reserve Bank of India.

A company which has defaulted in repaying public fixed deposits cannot make or give any investment / loan / guarantee / security unless the fixed deposit is fully repaid along with interest due as per the terms and conditions of the fixed deposit.

A register of such inter-corporate loans and investments must be maintained giving the relevant details.

The above provisions do not apply to :-

1. Any loan / guarantee / security made or given by :-

1. a banking company or an insurance company or a housing finance company in the ordinary course of its business or a company established with the object of financing industrial enterprises or providing infrastructural facilities
2. a company whose principal business is the acquisition of shares, stocks, debentures or other securities
3. a private company unless it is a subsidiary of a public company

2. Investment made under Rights issue of securities
3. Loan made by holding company to its wholly subsidiary company
4. Guarantee or security given by a holding company for loan to its wholly owned subsidiary
5. Acquisition of securities by a holding company in its wholly owned subsidiary


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