Give the auditor the complete population
Section 143(1) of the Companies Act, 2013 gives the statutory auditor access at all times to company books and vouchers, wherever kept, and the right to require necessary information and explanations from company officers. For an auditor of a holding company, the proviso also gives access to subsidiary and associate records insofar as they relate to consolidation. It specifically requires inquiry into six matters. The company should provide source records and exceptions, not simply certify each matter as satisfactory. This is a statutory inquiry working, not an automatic finding that every issue requires a modified opinion.
Read the applicable text: MCA: Companies Act, 2013, section 143.
Document security, entries and securities sales
For secured loans and advances, test both proper security and whether terms prejudice the company or its members. For transactions represented merely by book entries, identify their actual substance and whether they prejudice the company. For a company other than an investment company or banking company, identify shares, debentures and other securities sold below their purchase price, not below their latest carrying amount, and support the circumstances. A below-purchase-price sale is the subject of the inquiry; it does not itself establish misconduct.
Separate classification, personal expenditure and allotment cash
Identify whether loans and advances made by the company are shown as deposits, and whether personal expenses were charged to revenue. Where books or documents state shares were allotted for cash, verify whether cash was actually received; if not, assess whether the position in the books and balance sheet is correct, regular and not misleading. Use external records to reconcile the assertion and do not infer cash from a receivable or journal alone.
Escalate actual exceptions rather than merging them
Keep each inquiry linked to the population, evidence, exception, response and auditor discussion. Distinguish factual corrections from reporting questions under section 143(3), auditing standards or other provisions. The illustrations quantify possible exceptions without presuming the legal or audit outcome.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Secured advance
A ₹60 lakh advance has verified collateral value of ₹42 lakh. The ₹18 lakh difference is a starting point for inquiry; verify enforceability, valuations and terms before deciding whether it is properly secured.
Illustrative example 2: Book-only settlement
A ₹20 lakh receivable is reduced by a journal of ₹6 lakh without a documented settlement. ₹14 lakh remains in the ledger, and ₹6 lakh requires evidence of the transaction’s substance and effect on the company.
Illustrative example 3: Sale below purchase price
Assume an in-scope company bought 2,000 securities at ₹120 and sold them at ₹95. Cost is ₹2.40 lakh, sale value ₹1.90 lakh and the difference ₹50,000. Retain evidence of the actual transaction and reasons.
Illustrative example 4: Advances shown as deposits
A ₹35 lakh deposit line includes ₹12 lakh that records show to be an advance by the company. Isolate the ₹12 lakh classification exception and reconcile the remaining ₹23 lakh.
Illustrative example 5: Personal items in revenue expense
A travel account of ₹4.80 lakh contains ₹0.65 lakh of identified personal items. The remaining balance is ₹4.15 lakh before other tests. Review recovery and correction separately.
Illustrative example 6: Cash allotment shortfall
The books say 10,000 shares were allotted for cash at ₹20 each. Bank evidence supports ₹1.70 lakh of the stated ₹2 lakh. Investigate the ₹30,000 difference before accepting the recorded cash assertion.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Define the company and audit populations | Group and accounting records |
| 2 | Collect books, vouchers and access evidence | Ledger and document inventory |
| 3 | Reconcile secured loans and security | Agreements, valuations and approvals |
| 4 | Identify book-entry-only transactions | Journal list and substance evidence |
| 5 | Review applicable securities sold below cost | Broker notes and purchase records |
| 6 | Test loans and advances labelled deposits | Contract and ledger classification |
| 7 | Identify personal charges to revenue | Expense and recovery analysis |
| 8 | Verify receipt for cash allotments | Bank and allotment records |
| 9 | Log exceptions and corrections separately | Dated issue and remediation record |
| 10 | Submit the supporting file for audit inquiry | Evidence index and management explanations |
Sixteen practitioner FAQs
1. Who makes the statutory inquiries?
The company’s statutory auditor. Management provides evidence and explanations.
2. Does the requirement concern only year-end balances?
Identify the relevant transaction populations and evidence, including movements during the year.
3. Does a collateral valuation prove proper security?
Check legal enforceability, priority and terms as well as value.
4. Does a book-only transaction automatically prejudice the company?
No. Examine the substance and actual effect.
5. Does the below-cost securities branch apply to a banking company?
Section 143(1)(c) excludes banking and investment companies from that inquiry.
6. Is a market sale below purchase price automatically improper?
Quantify the difference and document the actual circumstances.
7. Does an advance booked as a deposit disappear on reclassification?
The underlying balance remains; correct classification on the evidence.
8. How are mixed personal and business expenses reviewed?
Identify and support the components separately.
9. Does reimbursement make an original charge immaterial to inquiry?
Preserve both the original entry and the reimbursement for assessment.
10. What if cash for an allotment comes from another account?
Trace identity and entitlement and reconcile the actual receipt.
11. Does share application money automatically prove receipt for the allotted shares?
Match actual cash to the specific allotment and terms.
12. What if no cash was received?
Examine whether the stated position in the records is correct, regular and not misleading.
13. Should a numerical exception determine the audit opinion?
No. Apply the applicable reporting requirements and professional judgement separately.
14. Can management provide only a summary answer?
Support answers with the source documents and reconciliations.
15. What if records are held at a branch?
The access right includes records kept at a branch. Where a branch auditor is involved, also review section 143(8) on the branch audit and transmission of its report.
16. How should later corrections be preserved?
Keep the original exception, correction date and supporting records together.