A Guide to Core Indian Audit Requirements for US based promoters

Introduction to audit system in India

In layman’s terms, an audit is defined as an official inspection of the organization’s accounts conducted by an external independent auditor under Government regulations. The audit system in India is regulated and governed through the laws, The Companies Act, 2013, is the core regulatory law that highlights the essential processes for conducting an audit for companies that functions under the Indian borders.

For US-based promoters willing to invest in companies situated in India, it needs to understand the audit requirements before incorporation business in India. Audit infuses credibility to the accounting system by ensuring true and fair representation of financial statements. In an audit process, the company’s financial statements are checked including their balance sheet, profit and loss account, cash flow statement, and notes to account. This inspection of books of accounts needs to be independent, unbiased, accurate, precise, and not misleading.

Types of Audits

There are mainly two types of audits in India:

1. Statutory Audit: Statutory Audit in India refers to the audit that is prescribed mainly under Income Tax Act and Companies Act. The statutory audit prescribed under the Companies Act, 2013 is referred to as Company Audit, and the audit prescribed under Income Tax Act, 1961 is known as Tax Audit. These audits are performed by qualified auditors who work as independent parties. It is mandatory for all the companies in India to conduct Company Audit.
2. Internal Audit: Internal Audit is not always mandatory. The purpose of an Internal Audit is to strengthen the Internal Control system of the company. Internal Audit is mandatory only for the below categories of companies as per Section 138 of The Companies Act, 2013:

• Any Companies listed on any stock exchanges
• Any Public Companies that are not listed but meets ‘any’ of these criteria:

1. Paid-up share capital is equal to or more than INR 500 million in the previous financial year.
2. Turnover equal to or more than INR 2 billion in the previous financial year.
3. Outstanding loans or borrowings from banks or public financial institutions exceeding INR 1 billion or more at any given point of time during the previous financial year.
4. Outstanding deposits equal to or more than INR 250 million during the previous financial year.

• Any private company that meets ‘any’ of these criteria:

1. Turnover equal to or more than INR 250 million in the previous financial year.
2. Outstanding loans or borrowings from banks or public financial institutions exceeding INR 1 billion or more at any given point of time during the previous financial year.

Tax audit is a verification and inspection of accounts of the taxpayer to ensure its compliance in adherence to Indian Income Tax Law. It is an audit required under Section 44AB of India’s Income Tax Act, 1961. To understand Section 44AB of the Indian Income Tax Act, we must understand that the definition of the word ‘person’ which is too wide as per the Indian Income Tax Act and it includes an individual, partnership firm, LLP, cooperative society, or any other artificial person. For the purpose of Section 44AB, persons (individual, partnership firms, LLP, Companies, or any other artificial person) are classified into two categories: The person carrying out profession and the person carrying out business. hence, we will discuss the tax audit applicability for persons carrying out the business. As per Section 44AB of Income Tax Act, 1961 any person having turnover or gross receipts of more than INR 10 million in the previous fiscal year are applicable for a mandatory tax audit. The tax audit report in general needs to be furnished by September 30 after the end of the previous financial year.

A company Audit is an audit required as per the Companies Act, 2013. It is mandatory for all the companies of India to conduct company audits, irrespective of Private Limited companies or Public Limited companies. Company audit is compulsory for a listed company as well as an unlisted company in India. As per the law, all companies in India including foreign entities with US-based promoters are required to have their annual accounts audited for each financial year. In short, every company established under the Companies Act, 2013 is required to conduct a company audit annually. The auditors are required to follow practices that are mentioned in the Company Auditor’s Report Order (CARO), 2016. As per CARO, the auditors need to inspect and report on various aspects of the company including fixed assets, inventories, internal audit standards, internal controls, statutory dues, and many more.

Appointment of Auditor for Company Audit

In India, every fiscal year i.e., April 1 to March 31, statutory audits as per the Companies Act, 2013 are conducted. The company needs to appoint its first auditor within 30 days from the date of registration of the company. The first auditor is appointed by the Board of Directors of the company. Apart from the first auditor, subsequent auditors are appointed by the members (shareholders) of the company in the Annual General Meeting. As per the Companies Amendment Act, 2017, an auditor can only be appointed for a maximum tenure of five years.

Who can conduct a Company Audit?

Any Chartered accountant or a chartered accountancy firm is qualified to be appointed as auditors for the company. As per the Companies Act,2013, the following individuals or firms do not qualify for conducting audits:

1. Corporate firms other than the LLP registered under the Limited Liability Partnership Act, 2008.
2. Officer or employee of the company.
3. Partner or employee of the organization.
4. Person in debt of more than INR 1000 with the organization.
5. Person with securities held in the company after one year from the start of the Companies Amendment Act, 2000.
6. Person who is convicted of an offense by a court that involves fraud.

Audit report requirements

As per the Company Auditor’s Report Order (CARO), the auditor is required to report on various aspects of the company including fixed assets, inventories, internal audit standards, internal controls, statutory dues, and many more. The auditing standards in these audits are to be followed as per the Institute of Chartered Accountants of India (ICAI). The audit report is to be submitted to the members (shareholders) of the company.

Conclusion

Consequently, the audit requirements for US-based promoters in India are similar to the auditing process for companies in India as per the government regulations. Auditing is essential for companies to have a true and fair view of the financial statements. Company Audit is mandatory for all companies established in India as per the Companies Act, 2013 while the Tax Audit is mandatory for the businesses that fall under criteria mentioned in Section 44AB of Income Tax Act, 1961. Internal Audit is mandatory for companies if they fall under the criteria mentioned under section 138 of the Companies Act of India, 2013.

Foreign entities in India, similar to the organizations based in India are obliged to follow two different types of auditing systems. The first is a statutory audit and the second one is the internal audit. The internal audit focuses on risk management and implementation of stringent internal controls while the statutory audit is the audit required as per Indian statutes. The internal audit can enhance the capability of a company for building value by enabling management personnel to take financial decisions and govern the internal control system of the company. Hence, even though in the criteria where Internal audit is not compulsory, companies or any other forms of business can voluntarily conduct Internal audits to strengthen their Internal Control System.

References:

https://taxguru.in/company-law/internal-audit-section-138-companies-act-2013.html

https://www.india-briefing.com/news/statutory-audit-companies-india-faqs-19561.html/

https://www.india-briefing.com/news/types-audit-audit-reporting-india-6454.html/

https://www.indiafilings.com/learn/foreign-company-compliance-india/#:~:text=All%20foreign%20companies%20must%20get,LLP%20of%20practicing%20Chartered%20Accountants.

https://www.india-briefing.com/news/internal-audit-foreign-companies-india-8232.html/