Accounting Auditing Rules

Accounting auditing rules are a set of legal and professional guidelines that govern how financial records of companies are examined and verified to ensure accuracy, fairness, and compliance with applicable laws. In India, these rules are primarily derived from the Companies Act, 2013, and are executed by statutory auditors, who are Chartered Accountants in practice.

Legal Framework

 Applicable Laws:

• Companies Act, 2013 (Section 139–148)

• Companies (Audit and Auditors) Rules, 2014

• Indian Accounting Standards (Ind AS)

• Standards on Auditing (SAs) issued by ICAI

Regulatory Bodies:

• Ministry of Corporate Affairs (MCA)

• Institute of Chartered Accountants of India (ICAI)

• National Financial Reporting Authority (NFRA) – for listed & large companies

Objectives of Accounting Auditing:

• To Ensure True and Fair View of Financial Statements

One of the main objectives of accounting auditing is to determine whether the company’s financial statements present a true and fair view of its financial position and performance. The auditor examines balance sheets, profit and loss accounts, and cash flow statements to ensure they are free from material misstatements. This builds trust among stakeholders and supports transparency in financial reporting.

• To Verify the Accuracy of Accounting Records

Auditing ensures that the accounting records maintained by the company are accurate, complete, and consistent with generally accepted accounting principles. The auditor checks the recording of transactions, journal entries, and ledger balances to verify whether the figures reflect the actual business activities. This helps detect and prevent errors, omissions, or manipulation in the accounts.

• To Detect and Prevent Frauds and Errors

A key objective of auditing is to identify any frauds, misappropriation of assets, or intentional errors in financial records. Auditors analyze unusual transactions, internal controls, and authorizations to detect red flags. The auditing process also acts as a deterrent, preventing employees and management from engaging in unethical financial practices due to fear of detection.

• To Assure Compliance with Laws and Standards

Auditors ensure that the company complies with applicable legal requirements, such as the Companies Act, Income Tax Act, GST regulations, and Accounting Standards. By reviewing documentation and transactions, auditors confirm that statutory dues, disclosures, and regulatory filings are in order. This minimizes the risk of penalties, lawsuits, or reputational damage due to non-compliance.

• To Evaluate Internal Controls

Auditing assesses the efficiency and adequacy of internal control systems in place within the organization. Strong internal controls reduce the likelihood of errors, fraud, and financial mismanagement. Auditors test control procedures, segregation of duties, and authorization protocols to ensure that processes are secure and effective in safeguarding company assets.

• To Facilitate Decision-Making by Stakeholders

Audited financial statements provide stakeholders—like investors, creditors, and regulators—with reliable data for making informed decisions. When audit reports confirm the integrity of financial information, stakeholders can evaluate the company’s performance, profitability, and solvency more confidently. This objective supports better corporate governance and builds confidence in business operations.

• To Assist in Tax Assessment and Planning

Auditing supports accurate and legal tax computation by verifying income, expenses, depreciation, and other deductions. It ensures proper tax compliance, reducing the risk of assessments, fines, or litigation. Reliable audited accounts also help businesses plan tax-saving strategies more efficiently while maintaining transparency with tax authorities.

• To Enhance Operational Efficiency

Auditors often suggest improvements in operational and financial processes during their review. By highlighting inefficiencies, redundant practices, or poor documentation, audits help businesses streamline operations and reduce costs. This continuous feedback mechanism encourages better discipline in accounting practices and improves overall performance.

Key Accounting Auditing Rules (India):

1. Appointment of Auditor (Rule 3)

• Every company must appoint an auditor at the first AGM.

• Tenure: 5 years (subject to ratification).

• Appointment must be filed in Form ADT-1 with MCA.

2. Audit Report Requirements (Rule 11)

• The audit report must be as per prescribed formats under Section 143.

• Must state:

  • Whether financial statements comply with accounting standards.

  • Whether books of accounts are properly maintained.

  • Any fraud detected during the audit (Rule 13).

3. Auditor’s Responsibilities (Sec 143)

• Express true and fair view of financial statements.

Verify:

• • Proper books of accounts.

  • Adequate internal financial controls.

  • Statutory dues, loans, investments, and related party transactions.

4. Rotation of Auditors (Rule 5)

Applicable to:

• • Listed companies.

  • Unlisted public companies with paid-up capital ≥ ₹10 crore.

Individual auditor cannot be reappointed after one term of 5 years.

Audit firm rotation allowed after two terms.

5. Reporting of Frauds (Rule 13)

• Auditor must report frauds to the Central Government (above ₹1 crore) or to the board (below ₹1 crore).

• File Form ADT-4 for frauds reported to the government.

6. Joint Audit (Optional)

• Large public sector undertakings (PSUs) may have joint auditors for wider coverage and accuracy.

7. Audit of Branches (Sec 143(8))

• Branch audits can be conducted by branch auditors.

• Their reports are consolidated by the company’s main auditor.

Standards on Auditing (SAs)

Issued by ICAI, these are guidelines that govern how auditors should perform their duties: