Accounts, Audit and Auditors – Company Law Important Questions

Accounts, Audit and Auditors – Company Law Important Questions

Question 1.
Write a Short Note on True and Fair View. (December 2011) (4 marks)
Or
Every financial statement of the company must give a true and fair view of the state of affairs of the company at the end of the financial year. (June 2019) (5 marks)
Answer:
1. Every financial statement of the company must give a true and fair view of the state of affairs of the company at the end of the financial year.

2. True and Fair view in respect of financial statement means:
1. financial statements and items contained should comply with accounting standards notified under section 133;

2. financial statement shall be in form or forms as provided for different class or classes of companies in Schedule EH;

3. In case of any insurance or banking company or any company engaged in the generation or supply of electricity or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company, not treated to be disclosing a true and fair view of the state of affairs of the company, merely by the reason of the fact that they do not disclose:

  • in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999;
  • in the case of a banking company, any matters which are not required to be disclosed by the Banking Regulation Act, 1949;
  • in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed by the Electricity Act, 2003;
  • in the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that law.

Question 2.
Write a Short Note on Appointment of Cost Auditor. (June 2012) (4 marks)
Answer:
1. Appointment of Cost Auditor [Section 148(3)]:
The cost audit shall be conducted by a Practising Cost Accountant who shall be appointed by the Board on such remuneration as may be determined by the members.

2. Further Rule 14 of CompaniesfAudit & Auditors), Rules, 2014provides that:
(a) in the case of companies that are required to constitute an audit committee-

  1. the Board shall appoint an individual, who is a cost accountant, or a firm of cost accountants in practice, as cost auditor on the recommendations of the Audit Committee, which shall also recommend remuneration for such cost auditor;
  2. the remuneration recommended by the Audit Committee shall be considered and approved by the Board of Directors and ratified subsequently by the shareholders;

(b) in the case of other companies which are not required to constitute an audit committee, the Board shall appoint an individual who is a cost accountant or a firm of cost accountants in practice as cost auditor and the remuneration of such cost auditor shall be ratified by shareholders subsequently.

  • No person appointed under Section 139 (Le. statutory auditor) as an auditor of the Company shall be appointed for conducting the audit of cost records.
  • The cost auditor shall comply with the cost auditing standards. Cost audit shall be in addition to the audit conducted under Section 143 of Companies Act, 2013.

Question 3.
Write a Short Note on Intangible Assets (June 2013) (4 marks)
Answer:

  • Intangible assets are fixed assets, which cannot be seen or touched, or felt.
  • They appear on the balance sheet under the head “Fixed Assets”.
  • They are amortized over their useful life.

Example of Intangible assets:

  • Goodwill
  • Patent
  • Copyrights
  • Trademarks
  • Design rights

Question 4.
Write a Short Note on Approval and Signing of the balance sheet and profit and loss account. (December 2013) (4 marks)
Or
Financial Statement shall be signed only by the Chairperson of the company. Explain (June 2015) (4 marks)
Answer:
1. Approval and signing of financial statement [Section 134(1)]:
The financial statement, including the consolidated financial statement, if any, shall be approved by the Board of Directors before signing.

2. The financial statements are signed on behalf of the Board by the following persons:

  • The Chairperson (where he is authorized by the Board) or
  • Two directors out of which one shall be the Managing Director and the Chief Executive Officer.
  • The Chief Financial Officer (CFO) and the Company Secretary (if they are appointed)

3. In the case of One Person Company, the financial statements are signed by only one director, for submission to the auditor for his report.

4. The auditors’ report shall be attached to every financial statement. A report by its Board of Directors shall also be attached to statements laid before a company in a general meeting.

Question 5.
Write a short note on the Qualification and disqualification of auditors. (June 2014) (4 marks)
Answer:
Qualifications:
Section 141(1) & (2) of the Companies Act prescribed the following eligibility and qualifications of auditor which are as under:
1. Only a Chartered Accountant (individual) or a firm where the majority of partners practicing in India are Chartered Accountants can be appointed as auditor.

2. Where a firm including a limited liability partnership (LLP) is appointed as an auditor of a company, only the partners who are chartered ac¬countants shall be authorized to act and sign on behalf of the firm.

Disqualification:
Section 141(3) of the Companies Act, 2013, read with Rule 10 prescribed the following persons shall not be eligible for appointment as an auditor of a company, namely:
1. A body corporate, except LLP;

2. An officer or employee of the company;

3. Any partner/employee or officer or employee of the company;

4. A person who himself or his relative/partner is holding any security or interest in the company or any company which is its holding, subsidiary, associate;
1. A person whose relative is holding any security or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company, may hold security or interest in the company of face value not exceeding one thousand rupees or such sum not exceeding Rs. 1,00,000. This shall wherever relevant be also applicable in the case of a company not having share capital or other securities.

2. In the event of acquiring any security or interest by a relative, above the threshold prescribed, the corrective action to maintain the limits as specified above shall be taken by the auditor within sixty days of such acquisition or interest.

3. A person who or whose relative or partner is indebted to the company or its subsidiary or its holding or associate company or a subsidiary of such holding company, in excess of rupees five lakh shall not be eligible for appointment;

4. A person who or whose relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of one lakh rupees, shall not be eligible for appointment;

3. A person or a firm who, whether directly or indirectly, has a “business relationship” with the company, or its subsidiary, or its holding or associate company;

4. A person whose relative is a director or is in the employment of the company as a director or KMP;

5. A person who is in full-time employment elsewhere; Person who is the auditor of more than 20 companies; In case of private company -a person is ineligible if such person or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies other than one person companies, dormant companies, small companies, and private companies having paid-up share capital less than one hundred crore rupee;

6. A person who has been convicted by a court of an offense involving fraud and a period of ten years has not elapsed from the date of such conviction;

7. A person who, directly or indirectly, renders any service referred to in section 144 to the company or its holding company, or it’s a subsidiary company.

Question 6.
The power of directors to approve the financial statement can be delegated to a committee of directors or some of the directors. Comment. (June 2010) (4 marks)
Answer:
Approval and signing of financial statement [Section 134(1)]:
The financial statement, including the consolidated financial statement, if any, shall be approved by the Board of Directors before signing.

Thus, to approve the same the financial statement cannot be delegated to a committee of directors or some of the Directors.

Question 7.
It is not obligatory for every company to preserve its books of account. Comment. (June 2012) (5 marks)
Answer:
Preservation of Books of Account [Section 128(5)]:
Every Company is required to preserve books of account along with vouchers of last 8 financial years.

However, if an investigation has been ordered in respect of the Company, the Central Government may direct to keep the books of account for a longer period.

Regulation 9 of the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 provides the following for the preservation of documents:

The listed entity shall have a policy for the preservation of documents, approved by its Board of Directors, classifying them in at least two categories as follows:
(a) Documents whose preservation shall be permanent in nature;
(b) Documents with a preservation period of not less than eight years after completion of the relevant transactions:

However, the listed entity required to maintain documents in electronic mode. Thus, it is obligatory for every company to preserve its books of account.

Question 8.
Where a company has a branch office, whether, in India or abroad, the original books of account, records, etc of the branch office will have to be maintained in the registered office of the company. (June 2013) (5 marks)
Answer:
1. As per Section 128(1) of the Companies Act, 2013, in the case of a branch, books of account can be kept at the Branch.
However, proper summarized returns are required to be sent periodically by the branch office to the Company at its registered office or the other place where books of account are kept.

2. The branch office will maintain original books of account, records, etc. It is the primary responsibility of the Branch.

3. As per Rule 4(1) of the Rules, the branches of the company, if any, in India or outside India shall keep the books of account for the transaction effected at the branch office.

Further, the branch offices are required to send the proper summarized return at quarterly intervals to the company at its registered office and kept open to directors for inspection.

Thus, it is incorrect to say that the original books of account, records, etc of the branch office will have to be maintained in the registered office of the Company.

Question 9.
A director has absolute right of inspection of books of account. Com¬ment. (December 2013) (4 marks)
Answer:
Inspection of books of the account [Section 128(3)]:
1. The books of account and other books and paper shall be open for inspection at the registered office of the company house at such other place in India by any director during business hours.

2. In the case of financial information maintained outside the country, copies of such financial information shall be maintained and produced for inspection by any director subject to prescribed conditions.

3. In respect of subsidiaries of the company, inspection shall be done only by the person authorized interest in this behalf by a resolution of the Board of directors of the holding company. The officers and other employees of the company shall give to a person making inspection all assistance in connection with the inspection which the company may reasonably be expected to give.

4. As per decided case law, a director is entitled to take inspection of accounts personally or through an agent provided that there is no reasonable objection to the person chosen and the agent undertakes not to utilize the information obtained by him for any purpose other than the purpose of his principal.

Question 10.
Mention the importance of notes on accounts’. Will it convey mean¬ing to stakeholders? (December 2914) (4 marks)
Answer:
1. “Notes on Account” provides necessary explanation and communication of some of the vital information provided in the Annual Accounts of a Company.

2. It provides an explanation of the figures of the annual accounts and their significance.

3. They are clarificatory to meet the requirements of law.

4. Notes on accounts are intended to clarify and elucidate the financial position of the Company as disclosed in its balance sheet and profit and loss account.

Generally, the note on accounts dwell on the following matters:

  1. Basis of Accounting.
  2. Significant accounting policies.
  3. Method of valuation of fixed assets.
  4. Method of providing depreciation
  5. Valuation of Inventories.
  6. Treatment of any income and expenditure on a cash basis as against accrual basis.

Question 11.
Explain the provisions of the Companies Act, 2013 relating to ‘secretarial audit’. State whether ‘secretarial audit’ is mandatory for all companies. (June 2015) (4 marks)
Or
Explain with reference to the provisions of the Companies Act, 2013, the meaning and importance of ‘secretarial audit’. Which companies are required to get the ‘secretarial audit’ conducted? (December 2015) (4 marks)
Or
Who will appoint Secretarial Auditor of the Company: Board of directors or shareholders? What is the duty of the Board of Directors towards secretarial auditor and audit report? (June 2018) (4 marks)
Answer:
1. As per Section 204 of the Companies Act, 2013, every listed company and a company belonging to prescribed class shall annex with its Board’s report, a secretarial audit report, given by Practising Company Secretary (PCS) in the prescribed form.

2. As per Rule 8 of the Companies (Meeting of Board & its Powers) Rules, 2014, the secretarial auditor is required to be appointed by means of resolution at a duly convened board meeting.

3. It shall be the duty of the Company to give all assistance and facilities to the Practising Company Secretary, for auditing the secretarial and related records of the Company.

4. The Board of Directors in their report shall explain in full any qualification or observation or other remarks made by the PCS.

5. If a company or any officer or PCS, contravenes the provisions of this Section, they shall be punishable with a fine which shall not less than INR 1,00,000 but which may extend to INR 5,00,000.

6. As per Rule 9 of the Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014:
For the purposes of Section 204(1) of the Companies Act, 2013, the other class of companies shall be as under:
(a) Every public company having a paid-up share capital of INR 50 crore or more; or
(b) Every public company having a turnover of INR 200 crore or more; or
(c) Every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.

Explanation: For the purposes of this sub-rule, it is hereby clarified that the paid-up share capital, turnover, or outstanding loans or borrowings as the case may be, existing on the last date of the latest audited financial statement shall be taken into account.

Note: Inserted by Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2020Dated 03rd January 2020 Amendment effective from on or after 1st April 2020.

7. The format of the Secretarial Audit Report shall be in Form MR-3.

Question 12.
(i) Whether a private company is mandatorily required to appoint an internal auditor? Who may be appointed as an internal auditor? (2 marks)
(ii) Who may be appointed as Internal Auditor? Whether practicing com¬pany secretary (PCS) can be appointed as an internal auditor? (2 marks) (June 2015) (4 marks)
Answer:
(i) As per Rule 13 of the Companies (Accounts) Rules, 2014, makes following provisions relating to an internal audit:
The following class of companies shall be required to appoint an internal auditor or a firm of internal auditors, namely:
(a) Every Listed Company.

(b) Every unlisted public company having:

  1. Paid-up share capital of fifty crore rupees or more during ‘ the preceding financial year; or
  2. Turnover of two hundred crore rupees or more during the preceding financial year; or
  3. Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or
  4. Outstanding deposits of twenty-five crore rupees or more at any point of time during the preceding financial year.

(c) Every Private Company having:

  1. Turnover of two hundred crore rupees or more during the preceding financial year; or
  2. Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year.

Keeping in view of the above provisions:

  1. It is not mandatory for every private company to appoint an internal auditor. A private company is required to appoint an internal auditor only if its turnover exceeds INR 200 crore or its borrowing exceeds INR 100 crore.
  2. As per Section 138 of the Companies Act, 2013:
    (a) A Chartered Accountant or;
    (b) A Cost Accountant or;
    (c) Such other professionals as may be decided by the Board to conduct an internal audit of the functions and activities of the Company shall be required to appoint an internal auditor.

Thus, Practising Company Secretary (PCS) can be appointed as an internal auditor.

Question 13.
Perfect Pvt. Ltd. wishes to appoint its Secretary, Satish, as an internal auditor. Referring to the provisions of the Companies Act, 2013. Advise the Company. (June 2018) (4 marks)
Answer:
As per Section 138 of the Companies Act, 2013,
(a) A Chartered Accountant or;
(b) A Cost Accountant or;
(c) Such other professionals as may be decided by the Board to conduct an internal audit of the functions and activities of the Company; shall be required to appoint an internal auditor.

Thus, Perfect Pvt. Ltd. can appoint Secretary, Mr. Satish as an internal auditor of the Company.

Question 14.
Distinguish between: ‘Internal Audit’ and ‘Secretarial Audit. (June 2017) (4 marks)
Answer:

Points of Distinction Secretarial Audit Internal Audit
Meaning A secretarial Audit is an audit to check compliance with various legislations including the Companies Act and other corporate and economic laws applicable to the Company. Internal Audit is the independent appraisal activity within an organization for the review of accounting, financial and other business practices as protective and constructive arms of management.
Who can be appointed? The secretarial audit has to be carried out by Practising Company Secretary. Internal Audit is conducted by the internal audit staff who may be Chartered Accountant, Cost Accountant, or officer of the Company.
An employee can be appointed or not? A secretarial Auditor can never be an employee of the Company. Internal Auditor may or may not be an employee of the Company.
Form Secretarial Audit Report is required to be provided in the format prescribed in Form MR-3. There is no form prescribed for the Internal Audit.

Question 15.
Explain the provisions of the Companies Act, 2013 relating to the constitution of an audit committee. What role does the audit committee play in the management of a company? (June 2015) (4 marks)
Answer:
1. Constitution of Audit Committee [Section 177(1)]:
The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.

2. As per Rule 6 of the Companies (Meetings of Board & Its Powers) Rules, 2014, the Board of Directors of every listed company and the following classes of companies shall constitute an Audit Committee and a Nomi¬nation and Remuneration Committee of the Board:

All public companies with a paid-up capital of INR 10 Crore or more; All public companies having turnover of INR 100 crore or more; iii All public companies having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding INR 50 crore or more.

3. Composition of Audit Committee [Section 177(2)]:
The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority.
The majority of members of the Audit Committee including its Chairperson shall be persons with the ability to read and understand the financial statement.

4. Role of an Audit Committee:

  • Section 177(5): Interaction with internal and statutory auditors.
  • Section 177(6): Power to investigate and obtains professional advice.
  • Section 177(7): Auditor and KMP right to be heard in the Meetings of the Audit Committee.

Question 16.
Consolidation of financial statements is mandatory for all companies including unlisted companies and private companies. Comment. (June 2017) (5 marks)
Answer:
1. As per Section 129, where a company has one or more subsidiaries, it shall in addition to the financial statement prepare a consolidated financial statement of the Company and of all subsidiaries in the same form and manner as that of its own which shall also be laid before the AGM of the Company along with the laying of its financial statement.

2. The Central Government may provide for the consolidation of accounts of companies in such a manner as may be prescribed.

3. A company is required to present a “consolidated financial statement”. If it is a holding company and another is a subsidiary of the earlier company.

Thus, consolidation of the financial statements is mandatory for all companies including the unlisted and private companies.

Question 17.
A statutory auditor of a private limited company is restricted to take up any other assignment in the company. Comment. (June 2017) (5 marks)
Answer:
As per Section 144 of the Companies Act, 2013, An auditor shall provide to the company only such other services as are approved by the Board of Directors / the audit committee, but which shall not include any of the following services whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company, namely:

  • accounting and bookkeeping services;
  • internal audit;
  • design and implementation of any financial information system;
  • actuarial services;
  • investment advisory services;
  • investment banking services;
  • rendering of outsourced financial services;
  • management services; and
  • Any other kind of services as may be prescribed.

Question 18.
Appointment and rotation of statutory auditor are mandatory for One Person Company (OPC) and Small Company. Comment. (June 2018) (4 marks)
Answer:
1. The Companies Act, 2013 has introduced the system of rotation of auditors under Section 139 (2) and Rule 5 which is applicable to-

  • all listed companies;
  • all unlisted public companies having paid-up share capital of rupees 10 crores or more;
  • all companies having paid-up share capital of below threshold limit mentioned above but having public borrowings from financial institutions, banks, or public deposits of rupees 50 crores or more.
  • all private limited companies having paid-up share capital of rupees 5 20 crores or more;

2. The concept of rotation of auditors shall not apply to one-person companies and small companies.

3. All the companies mentioned above shall not appoint or re-appoint an individual as an auditor of the company for more than the term of 5 consecutive years. An individual auditor, who has completed his term of 5 consecutive years, shall not be eligible for re-appointment as an auditor in the same company for 5 years from the date of completion.

4. All the companies mentioned above shall not appoint or re-ap-point an audit firm as an auditor of the company for more than 2 terms of 5 consecutive years. No audit firm shall be appointed; as auditor of the company for a period of Eve years, if the same firm presently having a common partner(s) to the previous audit firm, whose tenure has expired in a company immediately preceding the financial year.

Question 19.
The Board of Directors of Grow More Limited; a public company, has duly delegated its power to approve the financial statement of the com¬pany for the year 2014-2015 to a committee of directors. The said committee considered the financial statement and approved the same before the financial statement was handed over to the statutory auditor of the company. Will you accept such approval of the financial statement? (June 2012) (5 marks)
Answer:

  1. The Financial Statements are required to be placed only at an Annual General Meeting and not at any other meeting.
  2. The Board of Directors cannot delegate power to approve the financial statements to a committee of directors.
  3. In the given case, the Board of Directors of Grow More Limited; a public company, has duly delegated its power to approve the financial statement of the company for the year 2014-2015 to a committee of directors. The said committee considered the financial statement and approved the same before the financial statement was handed over to the statutory auditor of the company.

Thus, such approval of financial statements is not tenable.

Question 20.
An auditor of a company signed the balance sheet, profit and loss account, and schedules/notes and furnished the auditor’s report on the same date on which the reports were signed by the directors on behalf of the Board.
The director raised an objection stating that the audit cannot be completed and certified in a day. Do you agree with directors and if not, why? (December 2012) (5 marks)
Answer:
Section 143 of the Companies Act, 2013, gives the auditors at all times to the books of account and vouchers of the company, which suggests that they do not have to remain idle at any time after their appointment as auditors. Subject to the convenience of the company, he may actually commence the checking up of vouchers, etc and the company may prepare trial balances, balance sheets, etc which will save time for the auditors in the preparation of their report in due course.

There is no violation of Section 134 where the audit is completed before approval of the balance sheet by the Board of directors.

Thus, if the auditor signs a balance sheet on the same date on which the director has approved, it may not be inferred from the circumstances that the auditor has not performed the audit efficiently.

Question 21.
The Director of the company along with another director was prosecuted for their failure to file returns, annual accounts, and audited balance sheets required to be laid before the Annual General Meeting. The director moved the court to quash the prosecution initialed by the ROC. As a Company Secretary in Practice advice in the matter. (December 2013) (4 marks)
Answer:
1. The facts of the given case are similar to Kishan Prasad Palaypu v. Registrar of Companies [(2008) 83 SCL 376 (AP)]. A Director of the company along with another director was prosecuted for their failure to file returns, annual accounts, and audited balance sheets required to be laid before the Annual General Meeting. The director moved the Court under Section 482 of the Code of Criminal Procedure for con¬tending that the complaints filed were barred by limitation.

2. The Court held that Section provides for penalty at the rate of INR 1,000 for every day till the default continues, it was held that default in complying with the provisions is a continuing default covered by Section 472 of the Code of Criminal Procedure.

3. The contravention is a continuing offense and the period of limitation prescribed under Section 468 of the Code does not apply to the prosecution launched against the Company.

Thus, the Court will reject to quash the prosecution initiated by the ROC.

Question 22.
Vir is a director of DJA Limited (the company). The company holds 75% shares of MRN Limited. Vir wants to inspect the books of MRN Limited.
Examining the provision of the Companies Act, 2013 advice whether Vir, the director of DJA Limited can be allowed to inspect the books of MRN Limited. (June 2015) (4 marks)
Answer:
1. As per Section 128(3) of the Companies Act, 2013, the inspection in respect of any subsidiary of the Company shall be done only by the person authorized on this behalf by a resolution of the Board of Directors of Holding Company.

2. In the given case, Vir is a director in DJA Limited (the company). The Company holds 7596 shares of MRN Limited. Vir wants to inspect the books of MRN Limited (a subsidiary of DJA Ltd.). The director of DJA Limited can be allowed to inspect the books of MRN Limited.

Thus, Vir can inspect the books of account of MRN Ltd. (a subsidiary of DJA Ltd.) if he is authorized by the resolution of the Board of Directors Of DJA Limited. If authorization of the Board of Directors of DJA Ltd is given only then it is possible.

Question 23.
Manohar, the auditor of Belle Limited appointed by the company in its last general meeting has resigned from the office of auditor of the company for some personal reasons.
Referring to the provisions of the Companies Act, 2013, answer the following:
(a) Who is the competent authority to accept and approve the resignation?
(b) State the manner in which the vacancy caused by Manohar’s resignation shall be filled in. (December 2015) (4 marks)
Answer:
1. Resignation by Auditor [Section 140(2)]:
The auditor who has resigned from the Company shall file within a period of 30 days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of Government Companies referred to in Section 139(5), the auditor shall also file such statement with the CAG indicating the reasons and other facts as may be relevant with regard to his resignation.

2. As per Rule 8 of the Companies (Audit & Auditors) Rules, 2014, when an auditor has resigned from the company, he shall file a statement in Form ADT-3.

3. Filling of a casual vacancy of auditors [Section 139(8)(i)]:
Any casual vacancy in the office of an auditor shall be filled by the board of directors within 30 days. If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the Company at a general meeting convened within 3 months of the recommendation of the Board and he shall hold the office till the conclusion of the Next Annual General Meeting.

4. Filling of a casual vacancy of auditors by Government Company [Section 139(8)(ii)]:
In the case of a Government company, any casual vacancy in the office of an auditor shall be filled by the CAG within 30 days. If the CAG does not fill the vacancy within the next 30 days.
(a) The competent authority to accept and approve the resignation of the auditor is the Board of Directors of the Company.
(b) Manohar’s resignation shall be filled in by way of filling of casual vacancy.

Question 24.
Adorable Limited, incorporated under the Companies Act, 2013 has on its Board, 5 directors and a Managing Director. The company has also appointed a Company Secretary. The financial statements of the company, viz. balance sheet and statement of profit and loss for the year ended 31st March 2015, were authenticated under the signatures of one director and the Company Secretary.
Referring to the provisions of the Companies Act, 2013, examine the validity of authentication. What shall be your answer in case the company in question is a ‘One Person Company? (December 2015) (4 marks)
Answer:
1. Approval and signing of financial statement [Section 134(1)]:
The financial statement, including the consolidated financial statement, if any, shall be approved by the Board of Directors before signing.

2. The financial statements are signed on behalf of the Board by the following persons:

  • The Chairperson (where he is authorized by the Board) or
  • Two directors out of which one shall be the Managing Director and the Chief Executive Officer.
  • The Chief Financial Officer (CFO) and the Company Secretary (if they are appointed)

3. In the case of One Person Company, the financial statements are signed by only one director, for submission to the auditor for his report

4. As per the facts given in the financial statements are signed by only one director and Company Secretary and it amounts to a contravention of Section 134(1).

The financial statement should have been signed by:

  1. Managing Director.
  2. One -director other than the Managing director.
  3. Whole-Time Company Secretary.

The answer differs in the case of OPC.

In the case of OPC, the financial statements are signed by only one director, for submission to the auditor for his report.

Question 25.
Sanjay, a Chartered Accountant, is the financial controller of Sonik Industries (Private) Limited for the last 5 years. The company now wants to appoint him as the statuary auditor of the company. Examining the provisions of the Companies Act, 2013, advise whether the company can appoint Sanjay as its statutory auditor. (June 2016) (4 marks)
Answer:
1. As per Section 141 (1) of the Companies Act, 2013, a person shall be eligible for appointment as an auditor of a company only if he is a Chartered Accountant.

2. AsperSection 141(3) of the Companies Act, 2013, an officer or employee of the Company is disqualified for appointment as an auditor.

3. As per the facts of the case, Sanjay is an employee of Sonik Industries Ltd. Working as a financial controller.

Thus, he is disqualified for an appointment as an auditor.

Question 26.
The paid-up equity share capital of Strong Foundry Limited is INR 45 lakh. President (Finance) of the company seeks your advice on whether it is possible to re-open its books of account and recast the company’s financial statements of the previous year. You being the Secretary of the company, advise the President (Finance) by preparing a note in this regard. (June 2016) (4 marks)
Answer:
Voluntary revision of financial statements or Board’s Report [Section 131]:
1. Section 131 allows the directors to prepare a revised financial statement or a revised Board’s report in respect of any of the three preceding financial years after obtaining approval of the Tribunal if it appears to them that the company’s financial statement or the Board’s Report do not comply with the requirements of Section 129 or Section 134.

2. The Tribunal shall give notice to the Central Government and the In-come-tax authorities and shall take into consideration the representations, if any, made by that Government or the authorities before passing any order under this section.

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

4. The detailed reasons for revision of such financial statement or report shall also be disclosed in the Board’s report in the relevant financial year in which such revision is being made.

Limitation of revision of financial statements [Section 131(2)]:
Where copies of the previous financial statement or report have been sent out to members or delivered to the Registrar or laid before the company in general meeting, the revisions must be confined to-
(a) the correction in respect of which the previous financial statement or report do not comply with the provisions of section 129 or section 134; and

(b) the making of any necessary consequential alternation.

Question 27.
Referring to the provisions of the Companies Act, 2013, explain whether the Company Secretary is a Chief Financial Officer of the Company can be held liable for the maintenance of books of account of the company. (June 2016) (4 marks)
Or
Chief Financial Officer is responsible to maintain books of account of the company. Comment. (December 2018) (5 marks)
Answer:
1. The person responsible for keeping books of the account [Section 128(6)]:

Following persons are responsible for maintaining the books of account:

  • Managing Director;
  • Whole-time director in charge of finance
  • Chief Financial Officer, or
  • Any other person charged by the Board with the duty of complying with the provisions of Section 128.

2. Approval and signing of Financial Statement [Section 134(1)]:
The financial statement, including the consolidated financial statement, if any, shall be approved by the Board of Directors before signing.

The Financial Statements are signed on behalf of the Board by the following persons:

  • The Chairperson (where he is authorized by the Board) or
  • Two directors out of which one shall be the Managing Director and the Chief Executive Officer.
  • The Chief Financial Officer (CFO) and the Company Secretary (if they are appointed)

Thus, if a Company Secretary is also appointed as Chief Financial Officer he is responsible for the maintenance of books of account.

Question 28.
Suresh, a member of Ruchi Limited, wants to inspect the register of deposits maintained by the company as required finder the provision of the Companies Act, 2013. The company refused to provide the register for inspection without assigning any reason. Referring to the provision of the
Act, examine the validity of the company’s refusal. What shall be your answer if the same Register is demanded by the statutory auditors of the company for inspection and for their audit? (December 2016) (4 marks)
Answer:
1. Inspect the Register of Deposits by Suresh:
Register of Deposit is part of the books of account of a company and hence are not normally open for inspection by members of the Company.

Thus, Mr. Suresh a member of Ruchi Limited cannot inspect the Register of Deposit and the company can refuse to inspect the register without giving any reason.

2. Inspect the Register of Deposits by the Statutory Auditors:
The auditor enjoys the right of accessibility to books and records because he has to mention in his report whether proper books and records are maintained.

Thus, the statutory auditor can inspect the register of deposits and the Company cannot refuse inspection of the Register of deposits to the statutory auditor.

Question 29.
The Board of directors of KM Limited proposes to transfer 11.33°o of the net profits of the company for the financial year 2015- 2016 to general reserve. Examining the provisions of the Companies Act, 2013, advise the Board whether it can go ahead with its proposal. (December 2016) (4 marks)
Answer:
Transfer To Reserve [First Proviso to Section 128(1)]:
A company may before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the Company.

In the given cases, the Board of directors of KM Limited proposes to transfer 11.33% of the net profits of the company for the financial year 2015- 2016 to general reserve.

Thus, the Board of Directors of KM Ltd. may transfer 11.3396 of the Net Profit to the General Reserve.

Question 30.
The Board of Directors of Anil Limited has decided not to preserve the books of account and other related records of accounts, for more than five years immediately preceding the relevant financial year of 2016-17 due to shortage of space in the office premises. Referring to the provisions of the Companies Act, 2013, examine the validity of the Board’s decision. (June 2017) (4 marks)
Answer:
1. Preservation of Books of Account [Section 128(5)]:
Every Company is required to preserve books of account along with vouchers of last 8 financial years.

However, if an investigation has been ordered in respect of the Company, the Central Government may direct to keep the books of account for a longer period.

2. In the given case, the Board of Directors of Anil Limited has decided not to preserve the books of account and other related records of accounts, for more than five years immediately preceding the relevant financial year of 2016-17 due to shortage of space in the office premises.

Thus, the Board of Directors of Anil Ltd. has to preserve its books of account for 8 years even if there is a shortage of space on its office premises.

However, all or any of the books of account and other relevant papers may be kept at such other place in India as the Board of Directors may decide.

Question 31.
CIF Technosystems Private Limited is proposed to be incorporated in Bhubaneshwar, Orissa under the Companies Act, 2013. The company will be a holding company of CIF Holding Private Limited, already incorporated in Brazil under the Company Law of Brazil. The company in Brazil follows financial year 1st January to 31st December of a calendar year. Referring to the provisions of the Companies Act, 2013, state whether the financial year of CIF Techno-system can also be 1st January to 31st December, in order to make it easier to prepare consolidated financial statements. (June 2017) (4 marks)
Answer:
1. Section 2(41) of the Companies Act, 2013, “financial year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up.

2. Further, Application under sub-section (41) of section 2 for change in a financial year:
Rule 40 of the Companies (Incorporation) Act, 2014: The application for approval of concerned Regional Director under sub-section (41) of section 2, shall be filed in e-Form No.RD-1 along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 and shall be accompanied by the following documents, namely:

  • Grounds and reasons for the application;
  • A copy of the minutes of the board meeting at which the resolution authorizing such change was passed, giving details of the number of votes cast in favor and/or against the resolution;
  • Power of Attorney or Memorandum of Appearance, as the case may be;
  • Details of any previous application made within the last five years for a change in the financial year and outcome thereof along with a copy of the order.

Question 32.
Ram is a Chartered Accountant in practice. His proprietary concern has been appointed as a statutory auditor of a private limited company. Subsequently, it came to light that Mrs. Ram has been holding less than 1% shares of that private limited company. Examine the legal validity of the appointment of the statutory auditor. (December 2017) (4 marks)
Answer:
1. Section 141(3)(d) of the Companies Act, 2013: A person who himself or his relative/partner is holding any security or interest in the company or any company which is its holding, subsidiary, associate.

2. In the given case, Ram is a Chartered Accountant in practice. His proprietary concern has been appointed as a statutory auditor of a private limited company. Subsequently, it came to light that Mrs. Ram has been holding less than 1% shares of that private limited company.

Thus, Mr. Ram is disqualified for appointment as auditor as he holding shares of the Company.

Hence, his appointment is not valid.

Question 33.
Ram is a practicing Chartered Accountant and partner of two audit firms namely PYMG and YE. In the immediately preceding financial year, PYMG has completed its two terms of five consecutive years in Gayatri Pvt. Ltd. having paid-up share capital of INR 60 crore. Now Gayatri Pvt. Ltd. is considering appointing YE firm as its statutory auditors. Can Gayatri Pvt. Ltd. appoint YE firm as its auditors?
What will be your answer in the following cases?
(i) If appointing company is a one-person company;
(ii) If appointing company is a small company (December 2018) (5 marks)
Answer:
1. As per the provisions of Section 139 (2) of the Companies Act, 2013, the Listed Company or a company belonging to such class or classes of companies as may be prescribed shall not appoint or reappoint:
(a) An individual as auditor for more than one term of five consecutive years and
(b) An audit firm as auditor for more than two terms of five consecutive years.

However, an individual auditor who has completed his term of 5 years shall not be eligible for reappointment as an auditor in the same company for Eve years from the completion of his term.

In case of an audit firm that has completed its 2 terms of 5 years shall not be eligible for re-appointment as Auditor in the same company for five years from the completion of such term.

It is further provided that as on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year shall be appointed as auditor of the same company for a period of 5 years.

As per Rule 5 of the Companies (Audit and Auditors) Rules, 2014 for the purposes of Section 139(2) of the Companies Act, 2013, the class of companies shall mean the following classes of companies excluding one-person companies and small companies:

All unlisted public companies having paid-up share capital of rupees 10 crores or more;

  • All Private Limited companies having paid-up share capital of rupees 20 crores or more;
  • All companies having public borrowings from Financial Institutions, banks, or public deposits of rupees 50 crores or more.

As per the provisions above mentioned:

  1. Audit firm YE cannot be appointed as auditor of Gayatri Private Limited.
  2. Rotation of Auditors is not applicable to one-person companies and small companies. Audit firm YE is eligible to be appointed as auditor of Gayatri Private Limited if it is one personal company or small company.

Question 34.
Vijay is an auditor of XYZ Ltd, a listed public company having paid-up share capital of INR 10 crore. Advise him as to whether he can render the following services, keeping in mind, the relevant provisions of the Companies Act, 2013?
(i) Vijay wants to conduct an internal audit of XYZ Ltd. He also wishes to provide actuarial services to XYZ Ltd.
(ii) Vijay wishes to “design and implement one financial system” and offer management services to ABC Ltd, the holding company of XYZ Ltd.
(iii) What will be your answer in the above two cases if services are provided to QPR Ltd, a subsidiary company of XYZ Ltd. ? (June 2019) (5 marks)
Answer:
As per Section 144 of the Companies Act, 2013, An auditor shall provide to the company only such other services as are approved by the Board of Directors the audit committee, but which shall not include any of the following services whether such services are rendered directly or indirectly to the company or its holding company or subsidiary company, namely:

  • accounting and bookkeeping services;
  • internal audit;
  • design and implementation of any financial information system;
  • actuarial services;
  • investment advisory services;
  • investment banking services;
  • rendering of outsourced financial services;
  • management services; and
  • Any other kind of services as may be prescribed.

As per the above-discussed provisions of the Companies Act, 2013:

  1. Vijay cannot provide “internal audit” and “actuarial services” to the Company.
  2. Vijay cannot provide “design and implementation of any financial information system” service to the Company.
  3. Services that cannot be provided by the auditor to the company also cannot be provided to its “holding company” or “subsidiary company”, thus the answer remains the same.

 

CS Executive Company Law Questions and Answers

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