Key Provisions of Audit Under the Companies Act, 2013

Every company registered in India, whether it is a small private limited firm or a listed giant, must get its books checked by someone outside the management. That is the entire idea behind statutory audit under the Companies Act, 2013. The law does not treat audit as a formality to be ticked off before the annual general meeting. It builds an entire framework around who can audit a company, what that auditor is allowed to do, and which additional checks kick in once a company crosses certain financial thresholds. Understanding these provisions is useful whether you are studying company law or plan to work in accounting, compliance, or corporate governance.

Why the act insists on audits 🔗

An audit is essentially an independent examination of a company’s financial statements to confirm they present a true and fair view of its financial position. Left unchecked, company accounts can hide errors, misstatements, or outright fraud from shareholders, lenders, and regulators. The Companies Act, 2013 responds to this risk by making audit compulsory for every company, regardless of size or whether it earns a profit.

This requirement sits within Chapter X of the act, sections 139 to 148, which lays out the entire architecture of audit and auditors. The chapter covers appointment, powers, duties, rotation, removal, and punishment for non-compliance, giving the audit function real teeth rather than leaving it as a symbolic exercise.

Who is qualified to audit a company 🔗

Only a chartered accountant holding a valid certificate of practice, or a firm where the majority of partners practising in India are chartered accountants, can be appointed as a company’s statutory auditor. The auditor can be an individual or a firm, including a limited liability partnership, but internal employees, directors, or anyone with a financial interest in the company are barred from taking up the role to preserve independence.

Appointment and tenure 🔗

Every company appoints its first auditor at the first annual general meeting, and this appointment now runs for a term of five years, subject to shareholder ratification, replacing the earlier practice of annual reappointment under the 1956 act. Listed companies and certain classes of public companies must also follow a mandatory rotation policy, under which an individual auditor is rotated every five years and an audit firm every ten years, so that no single auditor develops an overly close relationship with company management over time, as explained in this detailed breakdown of section 139.

What the statutory auditor actually does 🔗

Section 143 of the act spells out the powers and duties of the auditor. The auditor has a right of access to the company’s books of account and vouchers at all times, and can demand any information or explanation from officers of the company that is necessary for the audit. Where a company has subsidiaries, the auditor of the holding company also has access to records relevant to consolidating financial statements, as detailed in this summary of section 143.

The audit report 🔗

At the end of the exercise, the auditor submits a report to the members stating whether the financial statements give a true and fair view, whether proper books of account have been maintained, and whether adequate internal financial controls are in place and operating effectively. If the auditor identifies suspected fraud involving a specified amount during the audit, the act requires this to be reported to the central government, turning the auditor into an early warning system for regulators rather than a passive record-checker.

Branch audits 🔗

Where a company operates through branch offices, including branches outside India, the accounts of that branch must also be audited, either by the company’s own statutory auditor or by a separately qualified branch auditor, whose report then feeds into the main audit report.

The audit committee: a second layer of oversight 🔗

Beyond the external auditor, the act requires certain companies to set up an internal Audit Committee under section 177. This is a board-level committee, not an outside agency, and it exists to give shareholders extra assurance that financial reporting and auditor independence are being actively monitored from within.

Who must constitute one 🔗

An audit committee is mandatory for every listed public company, and also for unlisted public companies that meet any of the following thresholds during the previous financial year, as clarified in this explanation of section 177:

Composition and role 🔗

The committee must have a minimum of three directors, with independent directors forming the majority, and the members, including the chairperson, must be able to read and understand financial statements. Its responsibilities include recommending the appointment and remuneration of auditors, reviewing financial statements before they go to the board, examining related party transactions and approving them where required, and evaluating the company’s internal financial controls and risk management systems.

Section 177 also requires listed companies, and other prescribed classes, to set up a vigil mechanism that lets directors and employees report genuine concerns about financial irregularities, with safeguards against victimisation and, in serious cases, direct access to the audit committee chairperson, as outlined in this overview of the vigil mechanism. In practice, this mechanism functions like an internal whistleblower channel that feeds concerns directly to the people responsible for financial oversight.

Internal audit: continuous checking, not just an annual event 🔗

Statutory audit happens once a year, after the books are closed. Internal audit, governed by section 138, works differently. It runs through the year and evaluates whether the company’s internal controls, risk management processes, and operational efficiency are functioning as intended, well before the external auditor ever looks at the accounts.

Who must appoint an internal auditor 🔗

Not every company needs one. The requirement, read with Rule 13 of the Companies (Accounts) Rules, 2014, applies to the following classes of companies, as summarised in this analysis of section 138:

• Every listed company, regardless of size.
• Unlisted public companies meeting any one of: paid-up capital of ₹50 crore or more, turnover of ₹200 crore or more, outstanding loans or borrowings from banks or public financial institutions exceeding ₹100 crore, or outstanding deposits of ₹25 crore or more.
• Private companies with turnover of ₹200 crore or more, or outstanding loans or borrowings from banks or public financial institutions exceeding ₹100 crore, as detailed in this guide to internal audit applicability.

An internal auditor can be a chartered accountant, a cost accountant, or another professional decided by the board, and unlike a statutory auditor, this person can even be an employee of the company. The one firm rule is that the company’s statutory auditor cannot double up as its internal auditor, since that would defeat the purpose of having an independent internal check.

Cost audit: checking how efficiently a company spends, not just what it earns 🔗

While a statutory audit looks at whether financial statements are accurate, a cost audit under section 148 looks at something narrower: how efficiently a company is producing goods or delivering services relative to its costs. This applies only to specified sectors, not to companies in general.

Under the Companies (Cost Records and Audit) Rules, 2014, companies engaged in specified regulated sectors, such as electricity, telecommunications, and petroleum, or non-regulated sectors, such as cement, steel, and pharmaceuticals, must maintain cost records once their turnover crosses a prescribed limit, and undergo a cost audit once turnover crosses a higher limit, as explained in this summary of section 148 applicability. Companies with more than 75 percent export revenue, or those operating from special economic zones, are generally exempted from this requirement.

A cost audit must be conducted by a cost accountant in practice, appointed by the board, and just like internal audit, the statutory financial auditor is barred from taking up this role. Importantly, cost audit is an addition to the regular financial audit under section 143, not a substitute for it. Companies covered by both provisions end up with two parallel, independent checks running on their books each year.

What happens if these provisions are ignored 🔗

The act does not leave compliance optional. Under section 147, contravention of the audit provisions in sections 139 to 146 can attract a fine on the company ranging from ₹25,000 to ₹5 lakh, while officers in default can face imprisonment of up to one year or a fine, or both. Auditors who knowingly or wilfully contravene these provisions face their own separate penalties, which is meant to discourage auditors from signing off on statements they have not genuinely verified.

Bringing it together 🔗

Statutory audit, the audit committee, internal audit, and cost audit are not four unrelated rules scattered across the act. They work as layers of the same idea: financial information a company reports should be checked, cross-checked, and monitored continuously rather than trusted at face value. A small private company might only ever deal with the statutory audit, while a large listed company will typically be running all four processes simultaneously, each catching a different kind of risk.

What do you think? If a private company just crosses the ₹200 crore turnover mark this year, which of these audit requirements would start applying to it for the first time? And why do you think the act insists that a statutory auditor can never also serve as the internal or cost auditor of the same company?

References

1. https://blog.ipleaders.in/section-139-of-companies-act-2013/
2. https://ibclaw.in/section-143-of-the-companies-act-2013-powers-and-duties-of-auditors-and-auditing-standards/
3. https://taxguru.in/company-law/audit-committee-section-177-companies-act-2013-rules.html
4. https://blog.ipleaders.in/section-177-of-the-companies-act-2013/
5. https://blog.ipleaders.in/section-138-of-companies-act-2013/
6. https://www.indiafilings.com/learn/internal-audit-applicability
7. https://blog.ipleaders.in/section-148-of-companies-act-2013/