The Companies Act 2013 defines a Private Limited Company as an incorporated company, generally under private ownership, with restrictions on the transfer of its shares. Such companies, as per section 2(68), have 2 to 200 members, excluding employees. A private company cannot invite the general public to subscribe for its share or debenture. Hence, it is shielded from specific provisions applicable to public companies.
The Act favours lesser disclosure, easier compliance, and flexibility in its provisions, making it an attractive proposition for startups and popularly family-owned enterprises.
Audit – Meaning, Types and Applicability for a Private Limited Company
The audit is an objective examination of the financial records, statements, and legality of a corporation with the aim of determining correctness, transparency and fairness. Among its primary purposes is that of verifying the existence of fraud, misrepresentation, or error in the financial report, thus availing reasonable assurance to stakeholders, investors, shareholders, and regulatory agencies. In India, audits are regulated under the Companies Act, 2013, the Income Tax Act, 1961, and the Goods and Services Tax Act, 2017, with respect to tax audits.
Depending on the industries, sizes, and financial positions, the nature of the audit may differ for a private company. However, the Statutory Audit has to be carried out for all private companies, whereas Tax Audit, GST Audit, Internal Audit, Secretarial Audit, and Cost Audit depend on applicability based on prescribed limits and activities undertaken. The other audit activities help organisations ensure the proper functioning of their financial performance, tax compliance, risk management, and corporate governance.
1. Statutory Audit (i.e., mandatory for all private companies) under the Companies Act 2013:
Appointment of Chartered Accountant by the Board is required for statutory audits, verification of financial statements & accounting records as well as compliance with company laws. The auditors submit the audit report to the shareholders, and also to the Ministry of Corporate Affairs (MCA). It ensures greater financial transparency through the detection of fraud and compliance with accounting standards.
2. Tax Audit under Income Tax Act, 1961
This applies when a company’s turnover surpasses ₹1 crore or ₹10 crore if 95% of transactions are conducted digitally. Professionals are subject to a threshold of ₹50 lakh. A Chartered Accountant is responsible for ensuring adherence to income tax regulations. The auditor is required to submit Form 3CA/3CB and Form 3CD to the Income Tax Department. This process involves assessing tax liabilities, allowable deductions, and compliance with tax legislation.
3. GST audit under the GST Act 2017
This is for businesses whose annual turnover does not exceed ₹5 crore. The purpose of the audit is to ensure compliance with the regulations of GST, timely payment, and accurate records keeping. The GSTR-9C reconciliation statement must be filled up before the GST department. The audit is performed by either a Chartered Accountant or Cost Accountant.
4. Internal Audit u/s 138 of Companies Act, 2013
An audit of internal control systems is mandatory in the following situations:
- When the annual turnover exceeds ₹200 crore;
- Where outstanding loans or debts exceed ₹100 crore;
- Where business operations correspond substantially with operational efficiency, risk management, and internal control systems;
- The work is carried out by an internal auditor appointed by the client.
5. Secretarial Audit u/s Section 204 of Companies Act, 2013
This secretarial audit is mandatory for private companies that are subsidiaries of public companies subject to:
- A paid-up capital of ₹50 crore or more;
- An annual turnover of ₹250 crore or more;
- Conducted by a Company Secretary ensuring compliance with company related laws, filings, and governance standards.
6. Cost Audit u/s 148 of Companies Act 2013
Cost audit is necessary in regulated sectors – pharmaceuticals, cement, and telecommunications, where audit of costs is mandated by the government. A Cost Accountant checks cost records and pricing methods and is mandatorily based on the turnover threshold of the company as established in government notifications.
Under What Conditions Will a Private Limited Company Need an Audit?
The mandate of auditing every private limited company, whether its turnover or profit, is by the Companies Act, 2013. The common audit types that will bring the necessary judgements include:
- Statutory Audit: All private limited companies, irrespective of their size, were mandated by the law to have their accounts audited by a Chartered Accountant. The appointment of an auditor should be made within 30 days of the incorporation of the Company, and the auditor reports directly to shareholders.
- Tax Audit: This audit triggers when a company has a turnover above ₹1 crore for companies and ₹50 lakh for professionals per the Income Tax Act, 1961.
- GST Audit: It becomes obligatory if the aggregate turnover of the company in a financial year crosses ₹5 crore on the basis of the Act.
Appointment of Auditor in A Private Company
The appointment of an auditor in a private limited company is, therefore, a specified process to secure transparency and adherence to the regime, which would normally be because the auditor is mandatory for statutory audit purposes. Other facets, such as rotation, removal, and resignation of an auditor, depend on the size and financial conditions of the organisation itself. Filing important documents with the MCA secures statutory compliance, while the advice of a practicing accountant helps keep the integrity of finances.
Every company, including private limited companies, must appoint an auditor to ensure that they meet the financial and accounting standards as stipulated under the Companies Act, 2013. The auditor is, therefore, to ensure that the financial statements of the company are correct and lawfully prepared. The actual appointment procedure of auditors comes under sections 139 to 148 of the Companies Act, 2013, along with rules contained in the Companies (Audit and Auditors) Rules, 2014.
Types of Auditor Appointments
1. First Auditor (post incorporation) u/s 139(6)
First Auditor must be appointed by the Board of Directors (BOD) within 30 days from the date of incorporation. If BOD fails to appoint any Auditor, the shareholders will appoint an Auditor in an Extra Ordinary General Meeting (EGM) within 90 days. The first Auditor shall hold office till the first Annual General Meeting. The appointment of a first auditor for the first year does not require the approval of the shareholders.
2. Appointment of an Auditor Subsequent to the First AGM u/s 139(1)
During the first Annual General Meeting (AGM), a statutory auditor is appointed for a term of five years, or until the conclusion of the sixth AGM. This appointment must be sanctioned by the shareholders by passing an Ordinary Resolution. Within fifteen days of making the appointment, the corporation must file Form ADT-1 with the MCA. The auditor’s written assent and a certificate confirming their eligibility must also be made available.
3. Reappointment of Auditors u/s 139(9)
An auditor can be reappointed at the AGM based on fulfilling the conditions of eligibility and willingness. Private companies are not bound by the auditor rotation unless they satisfy certain other conditions.
4. Auditor Rotation (For Certain Private Companies) u/s 139(2)
Private companies that meet the following conditions are required to rotate their auditors:
- Paid-up share capital must be ₹50 crore or more.
- Borrowings from financial institutions, banks, or the public must be greater than ₹50 crore.
- Auditors may serve for a period of five years.
- Audit firms may be appointed for two consecutive terms of five years each.
- Mandatory five years cool off period before reappointment.
5. Casual vacancy of auditor u/s 139(8)
The board of directors must fill up the casual vacancy of the auditor so created within 30 days. If the vacancy occurs due to resignation, the appointment has to be approved by shareholders at a general meeting within three months. An auditor appointed under this provision holds office until the next AGM.
6. Removal of the Auditor before Term Is Completed u/s 140(1)
An auditor can only be removed prior to the end of his term via a special resolution passed at a general meeting. The approval of the MCA is necessary and involves filing Form ADT-2. The auditor should also be given an opportunity to defend his case by way of an explanation.
7. Auditor Resignation
Section 140(2) mandates that the auditors who resign prior to the expiration of their terms must file Form ADT-3 with the Registrar of Companies within 30 days, specifying the reasons for resignation with the Ministry of Corporate Affairs.
Due Dates and Forms Related to Auditing of a Private Company
An audit is the most important compliance requirement for private limited companies per the Companies Act, 2013. Different documents are to be submitted to the Ministry of Corporate Affairs (MCA) regarding the appointment, resignation, and reporting of auditors properly.
Forms for Appointment of Auditor and Alterations, etc:
- Form ADT-1 to be filed with the MCA regarding the appointment of auditor after the first Annual General Meeting (AGM). This would be filed within 15 days of the date of appointment as per the provisions of Section 139(1) of the Companies Act of 2013.
- Where a company seeks to remove an auditor before expiry of term, it must seek the consent of the Central Government by filing Form ADT-2. Application for approval of this will be made prior to consideration of a Special Resolution at the General Meeting as per the provisions of Section 140(1) of the Act.
- Upon resignation, an auditor is required to file Form ADT-3 with the MCA within 30 days so that the resignation can be recorded formally in compliance with the provisions of Section 140(2) of the Act.
Applicability of Forms to Annual Returns and Audit Reports:
- Companies are required to submit their financial statements along with the auditor’s report to the MCA Form AOC-4. This should be done within 30 days of the Annual General Meeting (AGM) as per Section 137 of the Companies Act, 2013.
- For filing the Company’s Annual Return containing financial as well as shareholding and other corporate details, Form MGT-7 should be filled. The time limit for filing Form MGT-7 is 60 days from the date of the AGM, as prescribed by Section 92 of the Act.
Forms for Special Audits (If applicable):
- Companies obligated to conduct cost audits are required to give notice to the MCA about the appointment of the cost auditor in Form CRA-2, within 30 days from the date of the Board meeting on which the appointment was approved, or within 180 days from the commencement of the financial year, which is earlier. This is as per Section 148(3) of the Companies Act, 2013.
- Upon completion of the cost audit, companies are to file the cost audit report with the MCA in Form CRA-4. This should be done within 30 days from the date of receipt of such a cost audit report from the auditor as per Section 148(6) of the Act.
- Companies which are subject to the requirement of Secretarial Audit are also required to attach a Secretarial Audit Report with their annual return to be filed with Form MGT-7. This is given in Section 204 of the Act.
GST and Tax Audit Forms (3CA-3CD and 3CB-3CD):
A tax audit is obligatory under the Income Tax Act, 1961 if the turnover of a business exceeds ₹1 crore (or ₹10 crore, if 95 percent of the transactions are digital) or ₹50 lakh in the case of professional services.The company is required to submit a tax audit report in Forms 3CA-3CD or 3CB-3CD by September 30 of the assessment year unless it is allowed to be extended by the Income Tax Department.
Companies whose annual turnover exceeds ₹5 crore shall carry out a GST audit and file a reconciliation statement with Form GSTR-9C with a deadline of December 31 of the following financial year as stipulated by the GST Act, 2017.
Following these rules and regulations on time prevents private limited companies from the prospect of penalties, good corporate governance, and transparency in financial reporting –
- The auditor’s appointment is to be filed with the MCA on Form ADT-1 within 15 days after the first AGM. Where an auditor resigns or is removed, ADT-2 and ADT-3 are to be filed within the time limits.
- Forms AOC-4 and MGT-7 shall be used to submit annual financials inclusive of audit reports within 30 and 60 days, respectively, after the AGM.
- Companies that are cost-auditable shall file Forms CRA-2 and CRA-4; companies requiring secretarial audits shall file Form MR-3 with their annual returns.
- Audit based on the turnover threshold under tax laws and the GST audit, therefore necessitating the filing of Forms 3CA-3CD / 3CB-3CD (for tax audit) and GSTR-9C (for GST audit).
Conclusion
In India, the auditing process has been made compulsory for private limited firms under the Companies Act, 2013, the purpose of which is to guard financial transparency, regulatory compliance, and good corporate governance. The Companies Act processes must be adhered to with respect to statutory audits, tax audits, and audits under the GST, if any relevant thresholds are applicable, to ensure timely filing with the MCA, accurate reporting of their finances, and accountability to the stakeholders, thus preventing any legal penalties.
