lunawat& co. ca. pramod...

LUNAWAT & CO.Chartered Accountants

LUNAWAT & CO.Chartered Accountants

CA. PRAMOD JAINFCA, FCS, FCMA, LL.B, MIMA, DISA

CA. PRAMOD JAINFCA, FCS, FCMA, LL.B, MIMA, DISA

18th October 201418th October 2014

RANCHIRANCHI

Agenda

� Overview

� Form

� OPC

� Incorporation

� Private Placement

� Deposits

� Filing of Resolutions

Lunawat & Co.

Agenda

� CLSS 2014

� Accounting

� Depreciation

� Audit

� Loans

� Fraud

Lunawat & Co.

Lunawat & Co.

Public PrivateCompany

New provisions

� OPC

� Small Co.

� Dormant Co

� NCLT & NCALT

� CSR

� NFRA

� Registered Valuers

� Fraud

Lunawat & Co.

Stress creators� Huge Penalties

� Rampant Prosecution Provisions

� Fraud – 19 Provisions

� Imprisonment – 61 Provisions

� Class Actions

� Penalties for late filings

� Even Board Resolutions to be filed

� Bringing in monies made tough

� Loans to be given only on interest

Lunawat & Co.

Stress creators� Detailed Annual Returns

� Detailed Directors Reports

� SA compliance made mandatory for auditors

� Director duties – conflict of interest

� Hosting on Website made mandatory – 17 provisions including:

� Closure of members Register

� GM notice

� Director Resignation

Lunawat & Co.

Opportunities� Women Directors

� Independent Directors

� Resident Directors

� Registered Valuers

� OPC & Dormant Cos

� NCLT & NCALT

� Cash Flow Statement

� Consolidated Financial Statements

Lunawat & Co.

Opportunities� Internal Audit

� Fixed Asset Registers to ascertain actual life of each asset

� Internal Financial Control Systems

� Secretarial Records and compliance audits

� Fast Track Merger

� Conversion into LLP

Lunawat & Co.

FormsLunawat & Co.

Forms� Are Alpha Numeric and Chapter-wise

now

� Chapter 2 – Incorporation – INC

� Chapter 5 – Deposits – DPT

� Chapter 10 – Audit – ADT

� No pre-certification in case of OPC & Small Co.

� Prescribes procedure for taking action against Professionals for false per-certification in e-Forms

Lunawat & Co.

Filings� Documents if to be filed on Non-judicial stamp

paper – to be submitted to ROC

� Electronic payment of stamp duty – no submission

� Correspondences (physically /electronically) to contain name, designation, address, M. No. or DIN

� No event based information / changes accepted unless defaulting Cos. file B/S, PL, AR, except:

◦ Filing of order of Court or other authorities,

◦ Balance Sheet and Profit and Loss Account,

◦ Compounding application,

◦ Transfer of money to IEPF,

◦ Application for removal of the Auditor and

◦ GNL-1 for making company active

Lunawat & Co.

Major formsRelated to Old Forms New Forms

Name Reservation 1A INC - 1

Allotment of Securities 2 PAS - 3

Alteration in Authorised Capital

5 SH – 7

Registered Office 18 INC - 22

Directors 32 DIR – 12

Financial Statements 23AC, 23ACA AOC – 4

Annual Return 20B MGT - 7

Secretarial Audit 66 Nil

Auditor Appointment 23B ADT - 1

Lunawat & Co.

Pre-certificationCA, CS, CMA

• INC 21, 22, 28• PAS 3, SH7• CHG 1,4,9,• MGT 14, • DIR6, 12• MR 1,2• MSC 1,3,4• GNL3• ADT1• NDH 1, 2, 3• GNL 1

(Optional)• DIR 3 (all cos)

CA

• DPT 3 (Deposits) (Auditors)

• AOC 4 (Old 23ACA)

CS in Practice

• MGT 10 (listed Co. change in shareholding)

Lunawat & Co.

Filing fee – general

S. No

Slabs (Authorised

Capital)

1956 Act 2013 Act

1 Upto 1 Lac 100 200

2 1 Lac to 5 Lac 200 300

3 5 Lac to 25 Lac 300 400

4 25 Lac to 1 Crore 500 500

5 Above 1 Crore 500 600

6 Application for DIN

100 500

Lunawat & Co.

Filing fee – late fee

S. No

Delay 1956 Act 2013 Act

1 Upto 15 Days 1 Time 1 Times

2 15 to 30 Days 2 Times 2 Times

3 30 to 60 Days 4 Times 4 times





Lunawat & Co.

Filing fee - general

� Fee increased for incorporation

� Separate fee for OPC and small co.

� Fee applicable as on date

� If delay after 270 days s. 403 (2) -penalty, wherever prescribed.

� Annual fee u/s 455(5) for dormant co.:◦ OPC & small - < 25 L – 1000; 25 – 50 L – 2500

◦ Others - < 25 – 2000; 25 to 50 L – 5000; 50L to 5 Cr – 10000; 5 Cr to 10 Cr – 15000; above 10 Cr -20000

Lunawat & Co.

Classification of companies

• Small• Others

Size

• One Person Company (OPC)• Private• Public

No. of Members

• Holding• Subsidiary• Associates

Control

• Limited – Shares; Guarantee• Unlimited

Liability

• Listed• Unlisted

Manner of access of capital

• Charitable ; Dormant• Outside India; Govt. Company; Nidhi• Producer Company

Special Characteristics

Lunawat & Co.

Partnerships� Earlier limit of Max. 20 in partnerships.

� Now 50 but shall not exceed 100

� Limits not applicable for an association or partnership, if it is formed by professionals who are governed by special Acts (464)

Lunawat & Co.

Important definitions• Associate Co• Includes JV• Significant influence – 20% of total capital or

business decisions in an agreement

2(6)

• Financial Statement • B/S, P&L, Cash Flow, statement of changes in

equity, any explanatory note to before items2(40)

• Financial Year• 31/3, if incorporated after 1/1 – 31/3 of next yr.

– align in 2 Yrs2(41)

• Private company• 1 L, restricts right to transfer; no of members

200 (employees excluded); prohibits public invitation for securities

2(68)

Lunawat & Co.

Important definitions

• Related Party2(76)

• Small Company• Capital < 50 L / < 5 Cr or Turnover , 2Cr / <20

Cr –NA to holding, subsidiary, S. 8, Special Act Co

2(85)

• Promoter• Prospectus , A/R, control over affairs of

company, on whose instructions Board acts2(69)

• KMP• CEO or MD or Manager; CS, whole-time

director; CFO; other prescribed2(51)

Lunawat & Co.

One Person CompanyLunawat & Co.

OPC - Basic

A company which has only one person as member.

It would be a private company.

MOA to indicate name of person who shall became member in case of death / incapacity to contract – INC2

Consent of that person to be filed with ROC – INC -3

Other person can withdraw his consent – member to nominate another person within 15 days –Co file INC 4

Member can change the name of other person at any time – INC 4

"One person company" has be mentioned in (bracket) below the name of company.

Lunawat & Co.

OPC - conditions� Can be formed by resident, individual,

citizen

� Only resident, individual, citizen can be nominee

� Not more than 1 OPC or nominee

� If nominee becomes member in 2 OPC –comply in 180 days

� Minor cannot be member / nominee

� No AGM / BOD etc. provisions

� No Cash Flow

� FS filing within 180 days

� No NBFC activities

Lunawat & Co.

OPC - conversion� Cannot be incorporated / converted as s. 8

co

� Cannot be converted voluntary within 2 years

� Compulsory conversion if:� Paid up capital increase by 50 Lacs; or

� Average annual turnover exceeds 2 Crs

� To convert within 6 months from happening

� To inform ROC in Form INC-5 within 60 days that it has ceased to be OPC and is required to be converted

� Contravention – F 10K + 1k per day

� A private co can also be converted into OPC

Lunawat & Co.

Incorporation

Lunawat & Co.

Formation

For Lawful Purpose

Public

Private

OPC

Lunawat & Co.

Liability

Limited by Shares

Limited by Guarantee

Unlimited

Lunawat & Co.

Commencement

Reserve Name – INC -

1

File documents OPC – INC-2;

Others – INC-7

Company Incorporated

– INC 11

Find RO – 15 days

Submit R.O. verification –INC 22 - 30

Days

File declaration INC 21 - subscribers have paid & RO statement

filed

Commence Business

Lunawat & Co.

Commencement - penalties

Name obtained by wrong particulars

[4(5)(ii)]

If incorporated

• Strike off/remove• Action u/s 447 / 448

If not incorporated

• Cancel name• Penalty upto 1 L

Start of business / borrowing without filing statements

[11(2)]

P – Co -5 k

OID - F upto 1k p.d.

Removal of name if subs. do not pay in 180

days & Declaration not filed [248(1)(b)]

Lunawat & Co.

Important issues - incorporation

• Main ObjectsMOA

• Entrenchment ClausesAOA

• Letter, bill, notice, official publication • Name, Address, CIN; Tel, fax, e-mail, website

(if any) • Penalty: Co + OID –1K p.d.– max– 1 L

Documents

• If proved at any time that co was incorporated with false particulars – promoters, 1st directors, declarants - 447

After Inc.

Lunawat & Co.

Name reservation - Rules� Name guidelines

� If company has changed its activities & change is not reflected in its name – change name -6mnths

� If you use name of other than promoter or their close blood relative – no objection from them

� If you use name of relatives – proof of relation to be attached.

� Mandatory to furnish the significance and proof for use of coined words made out of the name of the promoters or their relatives.

Lunawat & Co.

Name reservation� To declare in affirmative or negative whether

they are using or have been using in the last 5 years in prop. or partnership – NOC.

� INC 1 - Attention is drawn to provisions of ss. 7(5) & 7(6) which, inter-alia, provides that furnishing of any false or incorrect particulars of any information or suppression of any material information shall attract punishment for fraud under section 447.

� Attention is also drawn to provisions of section 448 and 449 of the Co. Act, 2013 which provide for punishment for false statement and punishment for false evidence respectively

Lunawat & Co.

Documents for incorporation� MOA & AOA

� Declaration by Professional in INC – 8

� Affidavit from subscribers & 1st Directors –INC - 9

� Particulars of Subscribers to include – Photo, Date & Place of Birth, educational qualification, PAN, 1 ID proof , residential proof, if duration of stay at present address <1 Yr prev. address

� Specimen signature & latest photo duly verified by banker or notary in INC – 10

� Director’s interest in other concerns and consent in DIR – 2 & DIR - 12

Lunawat & Co.

Lunawat & Co.

Private placement

Special Resolution –MGT -14 (earlier offer should be

complete)

Send letter of offer to persons from

whom money to be raised < 50 persons

> 200 per yr

Send the detail of persons to whom offer sent to ROC

within 30 days

On receiving amount, allot within

60 days

If not allotted refund within 15

days

If not refunded pay intt @ 12%

Lunawat & Co.

Private placement - procedure

� Offer letter in PAS 4 + application form serial numbered + addressed to specific person – to be sent in writing or electronic mode

� While passing special resolution – basis or justification of pricing (including premium) to be made in explanatory statement

� Offer per person can not be for < Rs. 20K

� Payment to be made from bank A/c of person subscribing

� Company to keep record of such Bank A/c

� To maintain complete record in PAS – 5 and PAS 4 to be filed with ROC

Lunawat & Co.

Private placement – offer letter

� Business carried out by Co & subsidiaries

� Management’s perception of risk factors

� Details of default including interest – statutory dues, deposit, loan, etc

� Time schedule for which offer is valid

� Price of offer and its justification

� Name & Address of the valuer

� Purpose and object of offer

� Contribution by promoters or directors

� Disclosure of interest - director promoter/KMP

� Details of litigation pending

Lunawat & Co.

Private placement – offer letter� Remuneration of directors for current +

last 3 yrs

� Related party transaction for last 3 years relating to loans, guarantee or securities

� Auditors’ reservations or qualifications or adverse remarks for last 5 years – its impact on FS & corrective action taken / proposed for each comment

� Material frauds last 3 years

Lunawat & Co.

Private placement – offer letter

� Financial position –

� Capital structure before & after;

� Profit before & after tax for 3 years

� Dividend last 3 years

� Interest coverage ratio for last three years (Cash profit after tax plus interest paid/interest paid)

� Summary of financial position including Cash Flows - last 3 years – audited

� Change in Accounting policies in last 3 years and its effect on profits & Reserves

� Declaration by director of compliance

Lunawat & Co.

Private placement - caution� Money to be kept in separate bank

A/c

� On allotment file PAS -3 in 30 days, detail to include PAN & e-mail id

� Cannot be in cash

� If not followed - Penalty on company, promoters and directors

� Amount involved or 2 Cr, whichever is high

� Refund money within 30 days of imposing penalty

� Effective from 01.04.2014

Lunawat & Co.

Further Issue (62)

�To existing shareholders (Right Issue)�To send letter of offer by notice – time – 15- 30

days (Pvt. Co. - 90%, of members of pvt. Co. give their consents in writing or in electronic mode, for lesser periods – draft notification)

�Notice to be sent at least 3 days before by Registered Post, Speed post or electronic mode

�Renunciation unless articles provide otherwise

�After time board to dispose of them in such manner not disadvantageous to shareholder & Co.

Lunawat & Co.

Further Issue (62)

�ESOP subject to SR and Rules (No SR for Pvt)

�Preferential Issue – to comply with PP

�Not applicable to �Conversion of deb. into equity & earlier SR

already passed

�Conversion when loan or debenture taken from Govt.

Lunawat & Co.

Shares other than cash�No specific provision in the Act (62

(1) (c))

�Form PAS 3 - SR required�Property and assets required

�Goodwill

�Services

�Conversion of debentures

�Conversion of Loans

�Debt structure of co after allotment of securities to be given in PAS 3

Lunawat & Co.

Deposits� Chapter V

� Sections 73-76

� Applicable from 1.4.2014

� Companies (Acceptance of Deposits) Rules, 2013.

Lunawat & Co.

Deposits

� Following may invite, accept or renew deposits :

◦ Banking companies - (RBI);

◦ NBFC – (RBI);

◦ Notified companies;

◦ Public company having net worth > 100 Cr or turnover > 500 Cr (Rules)

� Others – only from its members subject to certain conditions (73(2)). – exemption from circular for pvt. Cos. (Draft Notification)

Lunawat & Co.

Acceptance of deposit rules 2014� Apply to all companies except Bank, NBFC & HFC

� Deposit includes receipt of money by way of loan, deposit or other form, but does not include:

◦ Amount received from CG, SG, L / Stat. Auth.

◦ Amount from foreign govt, bank, etc as per FEMA

◦ Amount received from Banks, PFIs, CPs

◦ ICD

◦ Share appl. money, except not allotted/refunded

◦ Amount received from director out of his own funds

◦ Convertible bond / debenture – shares within 5 yr

◦ Interest free secu. deposit – employee– 1 yr salary

Lunawat & Co.

Acceptance of deposit rules 2014� Interest free amount received in Trust

� Business advances:

◦ Supply of goods / services – within 365 days

◦ Against property – if adjusted as per agreement

◦ Security deposit for performance of contract for supply of goods or provision of services

◦ Advance under long term projects or for supply of capital goods

� If Co. accepting money does not have necessary permission or approval to deal in goods or properties or services -Deposit

Lunawat & Co.

Acceptance of deposit rules 2014� Promoters - stipulation of any FI or a banks:-

◦ loan is brought in pursuance of stipulation imposed by lending institutions on promoters to contribute such finance; and

◦ loan is provided by promoters themselves and/or by their relatives.

◦ Exemption available only till loans are repaid

� Public / Eligible – deposit – 6 m to 36 m

� If <6, 3 months - 10% of capital + free reserves

� Total deposit from members <25% of C + F. Reserve

� Rate of Intt etc. not to exceed NBFC norms

� File annual Return of deposits in DPT 3 by 30th June every year duly audited by auditor.

Lunawat & Co.

Deemed deposits� Deposit would also include:

◦ Amounts received by company, whether in form of instalments or otherwise, from a person with promise or offer to give returns, in cash or in kind, on completion of the period specified in the promise or offer, or earlier, accounted for in any manner whatsoever,

◦ Any additional contributions, over and above the amount received by company, whether in form of instalments or otherwise, made by the company as part of such promise or offer.

Lunawat & Co.

Existing deposits� Prepare a list and file with ROC within 3 months from

1.4.2014 in DPT 4 - Currently as attachment to GNL 2

� Repay to the depositors within 1 year

� Non-compliance (effective from 6th June 2014):

◦ amount to be repaid along with interest

◦ fine on Company –� minimum Rs. 1 Crore,

� Maximum Rs. 10 crore

◦ on every officer in default –� imprisonment upto 7 years or

� fine minimum Rs. 25000,

� maximum Rs. 25 L or both

Lunawat & Co.

Filing Resolutions

Lunawat & Co.

Resolutions to be filed with ROC � Special Resolutions

� Resolutions agreed by all members of Co., butwhich if not so agreed would not have beeneffective unless passed as SR

� Board resolution or agreement relating toappointment, renewal or variation in terms ofappointment of MD

� Resolutions agreed by any class of members ofCo., but which if not so agreed would not havebeen effective unless passed by specifiedmajority or otherwise in some particularmanner

Lunawat & Co.

Resolutions to be filed with ROC

�Resolutions passed u/s 180 (a) & (c) i.e.:� To sell, lease or otherwise dispose whole

or substantially whole of undertaking.

� To borrow money in excess of paid upcapital and free reserves other thantemporary loans

� w.e.f. 12.9.13 – Late filing – F – Co - 5 L -25 L, OID F – 1 L – 5 L

�Voluntary winding up resolutions u/s304

�Others u/s 179 (3)

Lunawat & Co.

Board resolutions [179(3)]

� To make calls on shareholders in respect ofmoney unpaid on their shares;

� To authorise Buy-back of securities u/s 68;

� To issue securities, including debentures,whether in or outside India;

� To approve amalgamation, merger orreconstruction;

� To take over a Company or acquire acontrolling or substantial stake in anothercompany.

Lunawat & Co.

Board resolutions [179(3)]� To borrow monies;

� To invest the funds of the company

� To grant loans or give guarantee orprovide security in respect of loans

� To approve FS and Board’s Report;

� To diversify business of the Company;

� To make political contribution

� To appoint or remove KMP

� To note appointment / removal of 1 levelbelow KMP

Lunawat & Co.

Board resolutions [179(3)]� To appoint internal auditor and secretarial

auditor

� To take note of disclosure of director’s interestand shareholding

� To buy, sell investments (other than tradeinvestments), constituting 5% or more of thepaid up share capital & free reserves of investeeco.

� To invite or accept or renew public deposits;

� To approve quarterly, half yearly & annual FS

� Filing after date with additional fee – penalty ofRs. 5 L – 25 L

� Not applicable to Pvt. Cos (draft notification)

Lunawat & Co.

Transitional period for resolutions

� Applicable to resolutions passed during 1.9.13 to 31.3.14

� If passed under old Act, can be implemented if:◦ Implementation actually commenced before

1.4.2014; and

◦ Transitional arrangement will be available upto:� 1 Year from passing of resolution; or

� 6 months from commencement of corresponding provision under new Act

� whichever is later

� Any amendment of resolution must be in accordance with new Act

Lunawat & Co.

Lunawat & Co.

CLSS 2014 - applicability� From 15.08.2014 to 15.11. 2014

� For default in annual filings and disqualification of Directors u/s 164(2)

� For documents only which were due for filing till 30.6.14:◦ Form 20B

◦ Form 21A

◦ Form 23AC & 23ACA & XBRL Forms

◦ Form 66

◦ Form 23B

Lunawat & Co.

Clss 2014 – non- applicability�CLSS not applicable to following Companies:◦Action u/s 560 for striking already initiated

◦Application already filed for striking off the name of the company

◦Applications have been filed for obtaining Dormant company status u/s 455

◦ Vanishing Companies

Lunawat & Co.

Inactive companies

� Inactive companies also have 2 other options while going for this scheme:1. Apply to be dormant company u/s

455 by paying 25% of the fee payable for form MSC 1; or

2. Apply for striking of the name in form FTE at 25% of the fee payable.

Lunawat & Co.

CLSS 2014� Fee + additional fee of 25% only

� Immunity from prosecution - apply within 3 months from closure of scheme in e-form CLSS 2014.

� No Pre-certification, no fee for e-form

� Default u/s 164(2)(a) for such companies shall be for prospective defaults only

� ROC to take action on defaulting Cos not availing this scheme.

Lunawat & Co.

CLSS 2014 – Pending appeal� If filing any document under this

scheme against which co. has filed any appeal against any notice– it has to withdraw such appeal before applying for immunity certificate & attach such withdrawal letter along with form

� Immunity not available in case of:◦ Appeal pending before any court of law

◦ Management disputes pending before court of law or Tribunal

Lunawat & Co.

CLSS 2014 - procedure

Fill relevant Form

Pay fee and upload

ROC to approve it

Apply for immunity

Order of immunity

Lunawat & Co.

Lunawat & Co.

Books� Permits the maintenance of books of a/cs &

other books & papers in electronic mode ◦ Shall remain accessible in India

◦ Retained completely in the format in which they were originally generated, sent or received

◦ Back up to kept in server located in India

◦ To intimate to ROC along with FS� Name of the service provider;

� IP address of service provider;

� Location of the service provider (wherever applicable);

� Where the books maintained on cloud, such address as provided by the service provider.

Lunawat & Co.

Books� Books on accrual basis and according to the

double entry system of accounting

� To be maintained at R.O. books, papers & FS –Branches – summarized periodical returns

� Summarised returns of books of a/c kept and maintained outside India to be sent to R.O at quarterly intervals

� Preserve books for 8 years – Investigation sep

� Non- compliance – MD, WTD in charge of finance, CFO or other person in charge by Board- Imprisonment upto I yr or Fine – 50 k to 500 k

Lunawat & Co.

Financial statements�Financial Year – 31/3

�Financial Statement defined - Includes notes on B/s, Profit & Loss statement, Cash Flow

�Cash Flow for all except OPC, SC, DC.

�Shall give true and fair view.

�Shall comply with Accounting Standards

�Shall be in form of Schedule III.

�To be laid before AGM

Lunawat & Co.

Financial statements� Has to be AS compliant:

◦ FS to disclose deviation from AS

◦ Reason for deviation

◦ Financial effect arising of deviation

� Non- compliance

◦ MD,

◦ WTD incharge of finance

◦ CFO

◦ Any other person charged by Board

◦ If no one – all directors

◦ Imprisonment upto I yr or F – 50 k to 500 k or both

Lunawat & Co.

Consolidated Financial statements

� One or more subsidiaries – CFS – Intermediary Subs. not required. No exemption if Foreign Co.

� Subsidiary shall include associate co. & Joint Venture – exemption if no subsidiary till 31.3.15

� Statement to be filed in AOC-1 – of CFS not FS

� In case not required to prepare CFS under AS –just comply with Schedule III - Para 11 of AS 21

� Control intended is temporary – held for subsequent disposal

� Operates under severe long-term restrictions which significantly impair its ability to transfer funds to holding

Lunawat & Co.

Consolidated Financial statements

� Provisions under Companies Act 2013 applicable for:

◦ Preparation

◦ Adoption

◦ Audit

� Appointment in AGM??

� Appointment for 5 Years??

� 20 limit??

Lunawat & Co.

� FS & CF to be approved before signed by BOD by:◦ Chairperson or two directors out of which 1MD

◦ CEO if he is director

◦ CFO

◦ CS

� Every FS to be issued, circulated, published with:◦ Notes

◦ Auditors report

◦ Board Report

� Non- compliance – Co- 25K to 2500K; OID –Imp. upto 3 yrs or fine – 50K to 500k or both

Lunawat & Co.

FS & DR LAYING IN AGM

� To be filed with ROC in Form AOC -4 within 30 days of AGM –To be certified by CA only

� Notified Companies in XBRL

� After 300 days –

� Fine on◦ Company – 1k p. d > 10 L;

◦ MD, etc in charge by Board- if no one – all directors � Imp. upto 6mnths or

� Fine – 1L k to 5L or Both

Lunawat & Co.

FILING OF FS

� Listed company. In case of unlisted public Co:◦ Capital > 50 Cr. in preceding FY; or

◦ Turnover > 200 Cr. in preceding FY; or

◦ Outstanding loans from banks or PFIs > 100 Cr. At any point of time in preceding FY; or

◦ Outstanding deposits> 25 Cr. at any point of time in preceding FY;

� Private Co:◦ Turnover > 200 Cr. in preceding FY; or

◦ Outstanding loans from banks or PFIs > 100 Cr. at any point of time in preceding FY

Lunawat & Co.

INTERNAL AUDIT

� Existing companies covered in said criteria to comply by 30.9.2014 (6 months)

� Internal Auditor may be an employee too

� But has to be a CA or Cost Accountant

� Audit Committee or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit

Lunawat & Co.

INTERNAL AUDIT

Lunawat & Co.

Useful lives1. Buildings

2. Bridges, Culverts, bunders, etc.

3. Roads

4. Plant & Machinery

5. Furniture & Fixture

6. Motor Vehicles

7. Ships

8. Aircrafts & Helicopters

9. Railway sidings, Locomotives, Rolling Stocks, Tramways…

Lunawat & Co.

Useful lives10. Ropeway Structures

11. Office Equipment

12. Computers and Data Processing Units

13. Laboratory Equipment

14. Electrical Installations and Equipment

15. Hydraulic Works, Pipelines & Sluices

� Further several sub-heads

� Double shift – increase by 50%, triple shift –100% - reduction in useful life

� 100% on assets below 5K – not required

Lunawat & Co.

Depreciation� The useful live of asset is period over which

an asset is expected to be available for use or the no of production unit expected to be obtained

� No rate for Intangible assets (except toll) –AS

� Useful lives changed Eg:–◦ Factory Building from 58 Yrs to 30 Yrs:

◦ General FF– 15 to 10

◦ Plant & Mach. General – 20 to 15

◦ Motor Car - 10 to 8

◦ Laptop, computer - 6 app to 3

Lunawat & Co.

What to do??� On commencement – would be depreciated

over remaining useful life

� Where remaining useful live - nil –trf to Surplus

� Three amendments to Schedule II:1. If co. adopts different useful life - to be disclosed in FS

and provide justification duly supported by technicaladvice.

2. Component accounting is voluntary w.e.f. 1.4.14 &mandatory w.e.f. 1.4.15

3. If asset's useful life as on 31.3.2015 is Nil, Co. has now anoption to transfer the balance after retaining residualvalue to Surplus. Earlier it was mandatory.

Lunawat & Co.

AUDITLunawat & Co.

Provisions

� Chapter X

� Sections 139 to 148

� Company (Audit & Auditors) Rules 2014

� 14 Rules

� 4 Forms

Lunawat & Co.

QUALIFICATION

� Must be a CA

� A firm including LLP whereof majority of partners practicing in India are qualified for appointment as auditor

� Where such firm/LLP is appointed as an auditor of a company, only the partners who are CAs shall be authorized to act and sign on behalf of the firm.

Lunawat & Co.

Disqualifications� A body corporate other than LLP;

� An officer or employee of the company;

� A person who, or his relative or partner—

◦ Is holding any security of or interest in Co. or its subsidiary, or of its holding or associate Co. or a subs. of such holding co. Relative – Rs. 1 L

� Corrective action to bring within limits (relative) –60 days

◦ Is indebted to the co…. – Rs. 5 L (ICAI – 10K)

◦ Has given a guarantee /provided security – 1 L

Lunawat & Co.

Relatives 2(77)

Father (Step. F) Mother (Step. M)

Brother (Step. B.) Sister (Step. S)

Son (Step Son); Son’s Wife

Daughter ; Daughter’s Husband

Husband / Wife

Lunawat & Co.

Disqualifications� A person or a firm who, whether directly or

indirectly, has business relationship with co., or its ….….. of nature i.e., any transaction entered into for commercial purpose except:

◦ In nature of professional services permitted

◦ In the ordinary course of business of co. at ALP like

� sale of products or

� services

◦ To auditor, as customer, in the ordinary course of business, by companies engaged in business of telecommunications, airlines, hospitals, hotels & such other similar businesses

Lunawat & Co.

Disqualifications� A person who is a partner, or who is in the

employment, of an officer or employee of Co

� A person whose relative is a director or is KMP of the company;

� A person who is in full time employment elsewhere

� A person or a partner of a firm holding appointment as auditor of more than 20 cos

� A person who has been convicted by a court of an offence involving fraud & a period of 10 Yrs has not elapsed from date of such conviction

Lunawat & Co.

Disqualifications� Any person whose:

◦ subsidiary or

◦ associate company or

◦ any other form of entity,

◦ is engaged as on the date of appointment in consulting and specialized services as provided in s. 144.

� If the auditor after appointment incurs any of the disqualifications – vacate his office by casual vacancy

Lunawat & Co.

Other services by auditor

�Auditor not to provide other services directly or indirectly to the company or its holding company or subsidiary company:

◦Accounting and book keeping services;

◦ Internal audit;

◦Design and implementation of any financial IS;

Lunawat & Co.

Other services by auditor◦Actuarial services;

◦ Investment advisory services;

◦ Investment banking services;

◦ Rendering of outsourced financial services;

◦Management services;

◦Others Prescribed

� Cannot be appointed as Cost auditor [148(3)]

Lunawat & Co.


� Other services restriction in case of firm applies to:◦ Audit firm itself

◦ Any of its partners

◦ Its parent, subsidiary or associate entity

◦ Any other entity in which the firm or any of its partners has significant influence / control , or whose name / trade mark / brand, is used by firm or any of its partners

� Compliance to be made by 31.03.2015

Lunawat & Co.


� Other services restriction in case of individual applies to:

◦ himself or

◦ through his relatives or

◦ any other person connected or associated with such individual or

◦ through any other entity whosoever, in which such individual has significant influence or control or whose name, trade mark, or brand is used by such individual.

Lunawat & Co.

Appointment� 1st appointment to be within 30 days by Board,

if not then members in 90 days in EGM

�Appointment of auditor at 1st AGM. To hold office till conclusion of its 6th AGM. To appoint:

◦ An individual, or

◦ A firm including LLP

� Co to inform auditor & ROC in 15 days - ADT-1

� Appointment for 5 Years - to be ratified annually at AGM – Non Ratification – Board to appoint

Lunawat & Co.

Appointment

� Members of the co. may resolve to rotate auditing partner & his team at specific interval

� Casual vacancy other than by resignation to be filled by Board.

� If vacancy caused by resignation to be filled by members in 3 months

Lunawat & Co.

Re-appointment� Retiring auditor may be re-appointed at

AGM, if—

◦ He is not disqualified for re-appointment;

◦ He has not given Co. a notice in writing of his unwillingness to be re-appointed; and

◦ A SR has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed

� Automatic reappointment of existing auditor at AGM if not re-appointed.

Lunawat & Co.

Audit committee� Following Companies to constitute Audit

committee:◦ Listed companies

◦ Public companies having capital > Rs. 10 Crore ;

◦ Public companies having turnover > Rs. 100 Crore;

◦ Public companies, having in aggregate, outstanding loans, borrowings, deposits, etc > Rs. 50 Crore

� Limits as per last audited FS

� Existing Companies to constitute committee within 1 year or if required to have independent director, by that time, whichever is earlier

Lunawat & Co.

Audit committee

Audit Committee to Recommend

to Board

If Board agrees to recommend to

Members

If Board does not agree refer

back to AC citing reasons

AC to agree / disagree

If Board disagrees with AC, note

disagreement and send own

recommendation

Members to Appoint

Lunawat & Co.

Condition for appointment� Board/Audit Committee to consider qualification &

experience of auditor. To be commensurate with size & requirements of co.

� Board/Audit Committee to consider completed and pending proceedings against auditor before ICAI/NFRA/Tribunal/Other Court.

� CA to issue certificate that:

◦ He is eligible for appointment and is not disqualified under the Act, the CA Act, & related Rules

◦ The proposed appointment is within the term allowed

◦ The proposed appointment is within the limit

◦ List of proceedings against auditor pending w.r.t. professional matters of conduct, as disclosed, is true & correct

Lunawat & Co.

Rotation of auditors

� Rotation mandatory if auditor is an individual after 1 term of 5 consecutive yrs; and

� If auditor is firm – 2 terms of 5 consecutive yrs.

� Mandatory for

◦ All listed companies

◦ Unlisted Public Cos. having capital > Rs.10 Crs.

◦ Pvt. Ltd. Cos. having capital > Rs. 20 Crs.

◦ All companies having public borrowings from financial institutions, banks or public deposits of Rs. 50 Crs. or more

� Compliance to be made by 31.03.2017

Lunawat & Co.

Rotation of auditors� Incoming auditor shall not be eligible if such

auditor / firm is associated with outgoing auditor / firm under same network.

� “Same network” includes firms operating or functioning, hitherto or in future, under same:◦ brand name,

◦ trade name

◦ common control

� If a partner, who is in charge of firm & also certifies FS of Co., retires from said firm & joins another firm, such other firm -ineligible for 5 yrs

Lunawat & Co.

Rotation of auditors

� Consecutive years shall mean all the preceding financial years for which the firm has been the auditor until there has been a break by five years or more

� Retiring auditor not to be reappointed for 5 consecutive years

� In case of joint auditors – retirement should be in such way that all of the joint auditors, do not complete their term in the same year

Lunawat & Co.

Auditor to inquire� Whether loans and advances made by co. on basis of

security have been properly secured and whether terms on which they have been made are prejudicial to the interests of the company or its members;

� Whether transactions of co. which are represented merely by book entries are prejudicial to interests of co.;

� Where Co. not being an investment company or a banking company, whether so much of the assets of Co. as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;

Lunawat & Co.

Auditor to inquire

� Whether loans and advances made by the company have been shown as deposits;

� Whether personal expenses have been charged to revenue account;

� Where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading:

Lunawat & Co.

Audit report� Report to state that to the best of auditor’s

information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company’s affairs as at the end of its financial year and profit or loss and cash flow for the year

� Report to include:◦ Matters specified u/s 143(3)

◦ Matters specified in Rules

◦ Any order made u/s 143(3) for specified Companies in consultation with NFRA

Lunawat & Co.

Audit report� Whether he has sought and obtained all the

information…..

� Whether, proper books of a/c as required by law have been kept …& proper returns adequate for purposes of his audit have been received from branches not visited by him

� Whether any director is disqualified u/s 164(2)

� Observation or comments which may have adverse effect on functioning - thick /italics not required.

� Reasons for negative or qualified report

Lunawat & Co.

Audit report - IFC� Adequacy of IFC & operating effectiveness of

such controls –Voluntary for 1 Yr

◦ IFC [Expln. to 134(5)(e)] means policies and procedures adopted by co. for ensuring orderly and efficient conduct of its business, including:

� Adherence to company’s policies,

� Safeguarding of its assets,

� Prevention and detection of frauds and errors,

� Accuracy and completeness of the accounting records, and

� Timely preparation of reliable financial information

Lunawat & Co.

Audit report� Any qualification, reservation or adverse

remark relating to maintenance of accounts

� Company has disclosed effect, if any, of pending litigations on its financial position in its FS

� Provision has been made for foreseeable losses, if any, on long term contracts including derivative contracts

� Is there any delay in transferring amounts, required to be transferred, to IEPF by company

Lunawat & Co.

Auditing standards� Auditor to comply with auditing standards

� NFRA to notify auditing standards. Till NFRA does – as by ICAI

� Total 37 SAs

Lunawat & Co.

SA. No. Sub-division No.

100-199 Introductory Matters 0

200-299 General Principles & Responsibilities 9

300-499 Risk Assessment and Response to Assessed Risks 6

500-599 Audit Evidence 11

600-699 Using Work of Others 3

700-799 Audit Conclusions and Reporting 5

800-899 Specialized Areas 3

Importance of Audit report� Shall be attached to every financial

statement

� Director’s report to contain explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer in the report.

� Management's comments required on every qualification, reservation or adverse remark or disclaimer for last 5 years along with corrective action taken / to be taken –in Offer letter for Private Placement

Lunawat & Co.

Branch auditor� May be different person than company’s

auditor, but should be qualified to be appointed as auditor

� To be appointed u/s 139 as branch auditor

� Company auditor to comply SA 600

� Same duties as that of auditor – ss. 143 (1) to 143(4) applicable

� He has to submit his report to company’s auditor

� Fraud Reporting u/s 143(12) also applicable to him.

Lunawat & Co.

Resignation� Auditor may resign before his term.

� To file a statement with ROC in ADT-3 as well as the Co. within 30 days, indicating reasons

� In case of Government companies to be filed with CAG too.

� Non compliance – fine on auditor:◦Minimum – 50K

◦Maximum - 500K

Lunawat & Co.

Removal before term� Removal before term

◦ Special Resolution; and

◦ Prior CG approval – application in ADT-2 within 30 days of Board resolution & filing fee to be paid:

� OPC & small - < 25 L – 1000; 25 – 50 L – 2500

� Others - < 25 – 2000; 25 to 50 L – 5000; 50L to 5 Cr – 10000; 5 Cr to 10 Cr – 15000; above 10 Cr - 20000

◦ Reasonable opportunity of hearing to be given

◦ Co. to hold GM within 60 days of CG approval for SR

� Special notice required at AGM to appoint other auditor than the retiring auditor except in case of rotation

Lunawat & Co.

Removal by tribunal� Tribunal suo moto or on application of CG or

any person concerned may change auditor if it is satisfied, that auditor has directly or indirectly: ◦ Acted in fraudulent manner, or◦ Abetted, or◦ Colluded in any fraud by or in relation to, Co. or its

directors or officers

� If on CG application –Tribunal on satisfaction change in 15 days. CG to appoint another auditor

� On final order - shall not be appointed for 5 yrsin any other Co. and shall be liable u/s 447

Lunawat & Co.

Rights, Power & duties� To have access to books of accounts &

vouchers� Sign Audit report� Has to attend AGM unless otherwise

exempted� Has to attend EGM unless otherwise

exempted� To report fraud (in course of audit) being or

has been committed against co. by officers or employees – to CG in ADT-4 (on his letter head with address, e-mail, Phn) within 60 days after following procedure.

� Non- compliance fine - Rs. 1 Lac to Rs. 25 Lacs

Lunawat & Co.

Fraud reporting procedure

Send Report to Board / AC

immediately on knowledge give

45 days time

On receipt of reply send report to CG in 15 days

– ADT 4

If no receipt –send the report within 15 days

Send by Regd. Post AD or Speed post followed by

e-mail

Lunawat & Co.

Rights, Power & duties� Cannot be appointed as independent director if

he has been employee / proprietor / partner of audit firm of Co. or its holding, subs. or associate co. in any of 3 FYs immediately preceding FY in which he is proposed to be appointed.

� To comment if required by Audit committee on internal control systems, scope of audit, observations of auditors and review of financial statement before their submission to the Board

� To have a right to be heard in meetings of Audit Committee when it considers auditor’s report but shall not have right to vote

Lunawat & Co.

Rights, Power & duties� To certify DPT -3 – Annual return of Deposits

� Certification in Prospectus

� To report that fund requirements of co. after the corporate debt restructuring (under compromise or arrangements) as approved by Tribunal shall conform to the liquidity test based upon the estimates provided to them by the Board

� To certify that the scheme of compromise or arrangements filed with the Tribunal relating to any accounting treatment, if any, is in conformity with the accounting standards

Lunawat & Co.

Penalties (147)� General – Co - Fine 25 K to Rs. 500K;

OID – imp upto 1 yr or fine 10k to 100k or both

� Auditor – Fine - 25k to 500 k if

◦Wrong appointment (139);

◦ Incorrect contents of audit report & non-compliance of auditing standards (143);

◦ Rendering prohibited services (144); or

◦ Fail to sign audit report (145)

Lunawat & Co.

Penalties (147)� Imprisonment up to 1 yr and fine from 1 L to

25 L in case there is intention to deceive:

◦ Company; or

◦ Shareholders; or

◦ Creditors; or

◦ Tax authorities.

� Where he is convicted for above, then liable to:

◦ Refund the remuneration received to the company;

◦ Pay damages to co, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his report.

Lunawat & Co.

Penalties (147)

� When it is proved that partner or partners of the audit firm has or have acted in fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the co. or its directors or officers, then liability of the firm jointly and severally for civil as well as criminal liability

� Penalties by NFRA

� Can ABC & Co. being statutory auditors issue Form 15CB certificate related to co?

� If yes, what is to be done?

Lunawat & Co.

Penalties (147) –The saving grace

� In case of criminal liability of any audit firm, the liability other than fine, shall devolve only on the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud (Rule 9)

Lunawat & Co.

Lunawat & Co.

LOANS

Debentures, Bonds Deposits

Other than Deposit

ICD Banks, FIsFrom

Director

Loans – taking (179)

Capital -1 L

Free Reserve – 1

L

Existing Loan – 1 L

New Loan –50 K

Board Resolution

- ROC

Lunawat & Co.

Loans – taking (180)

Capital -1 L

Free Reserve – 1

L

Existing Loan – 1

.50L

New Loan –51 K

Special Resolution

Lunawat & Co.

Taking loans (180)

� For s. 180, loans includes loans from bankstoo

� Temporary loans from bankers in ordinarycourse of business not included in limits

� Temporary loans means repayable on:

◦ Demand

◦ Within 6 months – short term

◦ CC, Bill discounting, short term seasonal loans

◦ But does not include loan for capital purpose

Lunawat & Co.

Penalty for delay in filing

� Delay upto 270 days – 12 timesfiling fee

� After 300 days:

� On company – fine Rs. 5 L – 25L; and

� On officer in default – fine Rs. 1L – 5 L

Lunawat & Co.

Other restrictions u/s 180

� To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company. Mortgage??

� To invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation

� To remit, or give time for the repayment of, any debt due from a director.

Lunawat & Co.

Inter Corporate Deposit (icd)

� Can a company take ICD?

� What if the company from whomyou take ICD has same director asyour company?

� What if the company from whomyou take ICD has a member who isalso a director in your company?

Lunawat & Co.

Loan to director (185)� Co. not allowed directly or indirectly to

advance any loan or any loan represented by book debt or give guarantee or provide security in connection with loan taken to:

◦ Director of lending co or its partner or relative

◦ Director of its holding co or its partner or relative

◦ Firm in which such director or relative is partner

◦ Pvt. Co. in which such director is Dir. or member

◦ Co in which all directors hold >25% voting power

◦ Co. or BOD or MD or Manager acts in direction or instruction of such director or BOD of lending co.

Lunawat & Co.

Loan to director – exceptions� MD or WTD if condition of service - all

employees� Any scheme approved by members by spl

resolution� Co in business of providing loans - Intt rate >

bank rate by RBI� Loan, Guarantee, etc by holding co. to its

WOSC� Guarantee given or security provided by a

holding in respect of loan made by bank or FI to its subsidiary

� However, it should utilised by Subs. Co. for principle business activities

Lunawat & Co.

Exceptions (Draft notification)� Shall not apply to a private company :-

◦ In whose share capital another body corporate has invested any money;

◦ If the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or Rs. 50 Crs, whichever is lower; and

◦ Such a company has no default in repayment of such borrowings subsisting at the time of making transactions under this section.

Lunawat & Co.

Loan to director – penalty

� On Giver i.e., Company:

◦ Minimum Rs. 5 Lacs

◦ Maximum Rs. 25 Lacs

� On Taker i.e., director:

◦ Imprisonment upto 6 months

◦ Penalty - Minimum Rs. 5 Lacs

◦ Penalty - Maximum Rs. 25 Lacs

Lunawat & Co.

Giving Loan & investment (186)

� Company can make investment through notmore than 2 layers of invest. Co. Exceptions:-◦ Acquisition of any other company incorporated outside India if such

other company has investment beyond two layers as per the laws ofthat country.

◦ Investment by subsidiary company in investment subsidiary for thepurpose of meeting any requirement under any law in force.

� Disclosure of details and purposes of loan,guarantee, investment in financial statement.

� Cannot give any loan/investment if companyis in default of paying deposit or interest andsaid default subsists.

Lunawat & Co.

Giving Loan & investment (186)� Giving of loan / investment exceeding limits –

SR required. Intt > govt. security

� Compliance sufficient if SR is passed by31.3.2015.

� Register to be maintained – For old – 372A

� No SR required if a loan or guarantee givenor security provided to its WOSC or a JV orfor purchase / subscription of securities ofWOSC. However disclosure required in FS

� No interest free loans – rate of intt – Govtsecurities

Lunawat & Co.

Giving Loan & investment (186)

� Exemption of provisions to◦ Loan/Guarantee/Security provided by a

Banking Co., Insurance Co., Housing Finance Co., Co. engaged in business of Financing of Cos., a Co. providing Infrastructural facilities

◦ Acquisitions by :-� NBFC whose principal business is acquiring

Securities

� A Company whose principal business is acquisition of securities

� Right Issue.

Lunawat & Co.

PENALTIES

� On company

◦Minimum Rs.25000/-

◦Maximum Rs.5,00,000/-

� On every Officer in Default

◦ Imprisonment up to 2 yrs; or

◦ Fine

� Minimum Rs.25000/-

� Maximum Rs.1,00,000/-; or

◦ both

Lunawat & Co.

137

FRAUDLunawat & Co.

Defined (447)� Any act or omission,

� Concealment of fact or

� Abuse of position of any person (by him orherself or by any other person inconnivance in any manner).

� With the intent to deceive or to gainundue advantage to injure the interest of◦ Company, or

◦ Shareholders, or

◦ Creditors, or

◦ Any other person (whether or not there is anywrongful gain or loss).

Lunawat & Co.

Punishment

� Imprisonment not less than 6months to 10 years

� + Fine not be less than amountinvolved in the fraud which mayextend to 3 times.

� If fraud in question involves publicinterest then the imprisonmentshall not be less than 3 years.

Lunawat & Co.

False statement (448)� If any person makes a false statement

in any:◦ Return

◦ Report

◦ Certificate

◦ FS

◦ Prospectus

◦ Other document under this Act

� Is false in any material particulars, knowing it to befalse

� Omits any material fact knowing it to be material

� Action u/s 447

Lunawat & Co.

False evidence (449)� If any person gives intentionally a false

evidence:◦ Upon examination on

� oath or

� solemn affirmation

◦ In an� Affidavit

� Deposition

� Solemn affirmation

� Imp. 3 years to 7 years; and

� Fine upto Rs. 10 Lacs

Lunawat & Co.

Fraudulently inducing person to invest money

� Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into:

◦ any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities;

◦ any agreement, purpose / pretended purpose of which is to secure a profit to any of parties from yield of securities or by reference to fluctuations in value of securities; or

◦ any agreement for, or with a view to obtaining credit facilities from any bank or financial institution,

� shall be liable for action u/s 447. (36)

Lunawat & Co.