Is Audit Mandatory for a Private Limited Company in India?

Started a private limited company, but didn’t make a single sale during the year. You might think there is no need to get your accounts checked because your business has not started earning money. But is that really true? Even a company with no business or income must follow certain annual compliance requirements, and statutory audit is one of them. Read this  complete guide to know more about audit compulsion, requirements and eligibility.

Need help with statutory audit, auditor appointment or annual ROC compliance? Connect with Startup Movers for professional assistance with your company's compliance requirements.

Audit Compulsion for a Private Limited Company 

Yes, audit is mandatory for every Private Limited Company in India, regardless of its turnover, profit, business activity or financial position. Under Section 139 of the Companies Act, 2013, every private limited company must appoint a statutory auditor to examine its financial statements and prepare an audit report for every financial year.

This means that even if a company has zero turnover, has not started its business, has incurred losses or has no financial transactions, it must still conduct a statutory audit.

Many business owners believe that an audit is required only when a company earns money or crosses a particular turnover limit. However, this is not true for a statutory audit. The Companies Act, 2013 makes it compulsory for every private limited company.

What Is a Statutory Audit of a Private Limited Company?

A statutory audit is an examination of a company's financial records by an independent Chartered Accountant (CA) appointed as its auditor under the Companies Act, 2013.

In simple words, a statutory audit is like getting your company's financial report checked by an independent professional to make sure that the numbers are correct and the financial statements show a true and fair picture of the company's financial position.

During the audit, the auditor generally checks:

• Financial statements: Whether the company's balance sheet, statement of profit and loss and other required financial statements are properly prepared.
• Accounting records: Whether the company has maintained proper books of accounts and supporting documents.
• Income and expenses: Whether the company's income, purchases, expenses and other transactions are properly recorded.
• Assets and liabilities: Whether the company's assets, loans, dues and other liabilities are correctly shown.
• Legal compliance: Whether the company has followed applicable accounting standards and relevant provisions of the Companies Act, 2013.

After checking these records, the auditor prepares an independent audit report stating whether the financial statements give a true and fair view of the company's financial position.

Here are some examples:

Important: A private limited company cannot avoid its statutory audit simply because it has no business activity or financial transactions during the year.

Who Can Conduct a Statutory Audit of a Private Limited Company?

A statutory audit must be conducted by an eligible independent auditor under Section 141 of the Companies Act, 2013.

The auditor can be:

• An individual Chartered Accountant: A CA holding a valid Certificate of Practice.
• A firm of Chartered Accountants: A firm in which the majority of partners practising in India are qualified to be appointed as auditors.
• An LLP of Chartered Accountants: An LLP can also be appointed as an audit firm, but only its partners who are Chartered Accountants can act and sign on behalf of the firm.

A company cannot appoint just any accountant, employee or person to conduct its statutory audit.

What Documents Are Required for a Private Limited Company Audit?

The auditor checks the company's financial records and supporting documents to verify its financial statements.

The documents generally required include:

• Financial statements: Balance sheet, statement of profit and loss and other applicable financial statements.
• Books of accounts: General ledger, cash book, journal and other accounting records.
• Bank statements: Statements of all company bank accounts and bank reconciliation statements.
• Sales and purchase records: Sales invoices, purchase bills and other transaction details.
• Expense records: Bills, vouchers, receipts and supporting documents for business expenses.
• Loan documents: Details of loans taken or given, interest payments and repayment records.
• Fixed asset details: Information about machinery, furniture, equipment and other assets, along with depreciation calculations.
• Tax records: GST returns, TDS records, income tax returns and other applicable tax documents.
• Company records: Certificate of Incorporation, MOA, AOA, statutory registers and relevant Board and shareholder meeting minutes.
• Payroll records: Salary details, employee records and applicable PF and ESIC compliance documents.

The exact documents may differ depending on the company's business activities and financial transactions.

What Is the Process of Statutory Audit for a Private Limited Company?

The statutory audit process involves checking the company's financial records, verifying transactions and preparing an independent audit report.

The general process includes:

• Appointment of the auditor: The company appoints an eligible Chartered Accountant or audit firm as its statutory auditor in accordance with Section 139 of the Companies Act, 2013.
• Submission of financial records: The company provides its books of accounts, financial statements, bank statements, invoices, tax records and other supporting documents to the auditor.
• Verification of financial transactions: The auditor examines the company's income, expenses, assets, liabilities, loans and other financial transactions to check whether they are properly recorded.
• Checking legal and accounting compliance: The auditor checks whether the company has prepared its financial statements according to the applicable accounting standards and relevant provisions of the Companies Act, 2013.
• Preparation of the audit report: After completing the audit, the auditor prepares an audit report containing an independent opinion on the company's financial statements. If the auditor identifies material errors, misstatements or other issues, the report may include qualifications or modifications to the audit opinion.
• Approval and filing of financial statements: The Board of Directors approves the financial statements, and the company places them before its members at the AGM. After the AGM, the company files the financial statements and required attachments with the Registrar of Companies (ROC) through Form AOC-4, generally within 30 days of the AGM.

Is Internal Audit Also Mandatory for a Private Limited Company?

No, internal audits are not mandatory for every private limited company. Under Section 138 of the Companies Act, 2013, read with Rule 13 of the Companies (Accounts) Rules, 2014, a private limited company must appoint an internal auditor if, during the preceding financial year:

• Its turnover is ₹200 crore or more; or
• Its outstanding loans or borrowings from banks or public financial institutions exceed ₹100 crore at any point during the financial year.

The internal auditor can be a Chartered Accountant, Cost Accountant or another professional decided by the Board of Directors.

In simple words, statutory audit is compulsory for every private limited company, whereas internal audit is compulsory only for companies meeting the above conditions.

What Happens If a Private Limited Company Does Not Conduct a Statutory Audit?

A private limited company that fails to comply with the statutory audit requirements may face legal consequences under the Companies Act, 2013.

Section 147 of the Companies Act, 2013 deals with penalties for contravention of provisions relating to audit and auditors.

Non-compliance can also create problems when the company needs to file its financial statements, complete annual ROC compliances or provide financial information to banks, investors and other stakeholders.

The company should therefore ensure that it appoints an eligible auditor, completes the audit and files its financial statements within the prescribed time.

What Is the Cost of a Statutory Audit for a Private Limited Company?

There is no fixed government fee for conducting a statutory audit of a private limited company. The professional fee is generally decided by the company and the auditor.

The cost depends on the company's size, turnover, number of transactions, complexity of accounts and the time required to complete the audit.

Conclusion

A statutory audit is mandatory for every Private Limited Company in India, irrespective of its turnover, profit or business activity. The company must appoint an eligible auditor, maintain proper books of accounts, complete its annual audit and file its financial statements with the ROC within the prescribed time.

Need help with statutory audit, auditor appointment or annual ROC compliance? Connect with Startup Movers for professional assistance with your company's compliance requirements.