- 3.1 Mandatory Auditor Rotation and Joint Auditors
- 3.2 Non-audit Services
- 3.3 Auditing Standards
- 3.4 Cognizance of Indian Accounting Standards (Ind as)
- 3.5 Secretarial Audit for Bigger Companies
- 3.6 Secretarial Standards
- 3.7 Internal Audit
- 3.8 Audit of Items of Cost
Objectives of Companies Act 2013
The Companies Act, 2013 is enacted to regulate companies and protect the interest of shareholders and other stakeholders.
The new Companies Act, 2013 is implemented for achieving the following objectives:
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To make the key managerial personnel and directors accountable by defining their duties.
The Companies Act, 2013 introduced a new type of business entity (or company) to the existing list, including public and private limited companies. This new business entity is termed a One Person Company (OPC).
According to the Companies Act 2013, “An OPC means a company with only one person as its member [section 3(1) of 2013 Act]. The draft rules state that only a natural person who is an Indian citizen and resident in India can incorporate an OPC or be a nominee for the sole member of an OPC“.
Audit Provisions under the New Companies Act, 2013
Audit provisions under the new Companies Act, 2013 are as follows:
Mandatory Auditor Rotation and Joint Auditors
The Companies Act, 2013 now mandates the rotation of auditors after the specified time period. The Act also includes an enabling provision for joint audits.
Non-audit Services
The Companies Act, 2013 states that any services to be rendered by the auditor should be approved by the board of directors or the audit committee. Additionally, the auditor is also restricted from providing certain specific services.
Auditing Standards
The standards on auditing have been accorded legal sanctity in the Companies Act, 2013, and would be subject to notification by the National Financial Reporting Authority (NFRA). Auditors are now mandatorily bound by the Act to ensure compliance with standards on auditing.
Cognizance of Indian Accounting Standards (Ind as)
The Companies Act, 2013, in several sections, has given cognizance to the Indian Accounting Standards, which are standards converged with the International Financial Reporting Standards, for their applicability in the future.
For example, the definition of a financial statement includes a ‘statement of changes in equity’, which would be required under the Ind AS. [Section 2(40) of 2013 Act]
Secretarial Audit for Bigger Companies
In respect of the listed companies and other classes of companies as may be prescribed, the Companies Act, 2013 provides for a mandatory requirement to have a secretarial audit. The draft rules make it applicable to every public company with a paid-up share capital of > ₹100 crores.
As specified in the Companies Act, 2013, such companies would be required to annex a secretarial audit report given by a company secretary in practice with its board’s report. [Section 204 of 2013 Act]
Secretarial Standards
The Companies Act, 2013 requires every company to observe secretarial standards specified by the Institute of Company Secretaries of India with respect to general and board meetings [Section 118 (10) of the 2013 Act], which were hitherto not given cognizance under the 1956 Act.
Internal Audit
The importance of an internal audit has been well acknowledged in Companies (Auditor Report) Order, 2003 (the ‘Order’), pursuant to which the auditor of a company is required to comment on the fact that the internal audit system of the company is commensurate with the nature and size of the company’s operations.
However, the order did not mandate that an internal audit should be conducted by the internal auditor of the company. The Order acknowledged that an internal audit can be conducted by an individual who is not appointed by the company.
The Companies Act, 2013 now moves a step forward and mandates the appointment of an internal auditor who shall be either a chartered accountant or a cost accountant, or such other professional as may be decided by the board to conduct an internal audit of the functions and activities of the company.
The companies that shall be required to mandatorily appoint an internal auditor as per the draft rules are as follows:
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Every listed company
Audit of Items of Cost
The Central Government may, by order, in respect of such class of companies engaged in the production of such goods or providing such services as may be prescribed, direct that particulars relating to the utilization of material or labor or to other items of cost, as may be prescribed, shall also be included in the books of account kept by that class of companies.
By virtue of this section of the Companies Act, 2013, the cost audit would be mandated for certain companies [Section 148 of the 2013 Act]. It is pertinent to note that similar requirements have recently been notified by the Central Government.
Scope and Major Provisions of Companies Act, 2013
The Companies Act, 2013 is applicable to all companies registered and incorporated in India. Its major provisions are as follows:
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It lays down the procedure for incorporating a new company.
Difference Between Companies Act 1956 and Companies Act 2013
Some of the key differences between Companies Act 1956 and Companies Act 2013 are as follows:
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Incorporation of One Person’s Company is allowed under the new Companies Act, of 2013.
From the point of view of sections, the following changes have taken place in the Companies Act, 2013 as compared with the Companies Act, 1956:
| Basis of Difference | Companies Act, 2013 | Companies Act, 1956 |
|---|---|---|
| Charge Definition Sec 2(16) | Charge means an interest or lien created over the property or asset. | No Provision. |
| Appointment of Auditors | Section 139 states that auditors shall be appointed for a period of 5 years and have to compulsorily retire at the end of the 5th year (in the case of the firm, 10 years). | No restriction on the appointment of auditors. |
| Concept of Independent Directors (Section 149) | For the specified classes of the company, the appointment of independent Directors is mandatory. | No such requirement and independent Directors were only required for listed companies. |
| Loans to Directors | Loans to Directors under Section 295 are restricted. | Approval of the Central Government was required. |
| Related Party Transaction | As per Section 188 of the Companies Act, 2013, prior approval is required to be taken for related party transactions. | Central Government’s approval was required for related party transactions. |
| Small companies | No concept of small companies. | The concept of small companies was introduced, and the same was defined as a company, other than a public company: |
I. having the paid-up share capital not exceeding ₹50 lakhs or such amount, not exceeding ₹5 Crores, as may be prescribed or
One Person company is not bound to include a cash flow statement in its financial statement.
Memorandum of the One Person Company shall indicate the name of the other person, with his/her prior written consent in the prescribed form. Such other person may withdraw his/her consent in such manner as may be prescribed, provided that the member of the One Person Company may at any time, change the name of such other person by giving notice in such manner as may be prescribed.
In the case of listed companies and certain other prescribed companies, compulsory rotation of individual auditors every five years and of audit firms every 10 years has been provided.
ARTICLE SOURCES- Clarkson K., Miller R., Jentz G., Cross F. (2009). Business Law: Text and Cases. Boston, Massachusetts: Cengage Learning Inc.
