Auditor's Working Sheet

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14th December 2012

Definition of financial year; Section 2 (17) of the Companies Act, 1956 says:

financial year means in relation to any body corporate, the period in respect of

which any profit and loss account of the body corporate laid before it in annual

general meeting, is made up, whether that period is a year or not:

Provided that, in relation to an insurance company, "financial year" shall mean thecalendar year referred to in subsection (1) of section 11 of the Insurance Act,

1938 (4 of 1938);

210 (4) of the Companies Act, 1956: The period to which the account aforesaid

relates is referred to in this Act as a financial year; and it may be less or more

than a calendar year, but it shall not exceed fifteen months: Provided that it may

extend to eighteen months where special permission has been granted in that

behalf by the Registrar.

Hence, financial year of a company need not necessarily be April- March.

But, financial year for Income Tax purposes is April- March.

Section 2 (9) of Income Tax Act, 1961: assessment year means the period oftwelve months commencing on the 1st day of April every year.

Section 3 of Income Tax Act, 1961: For the purposes of this Act, previous yearmeans the financial year immediately preceding the assessment year.

Financial year of a company is generally kept as April-March because of

convenience in complying with the provisions of Income Tax Act and those of the

Companies Act, 1956.

Posted 14th December 2012by Jayesh. M.J.

Should financial year of acompany be only April-March?
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12th December 2012

The principle of ultra vires is a concept which is basic to Corporate law (like

fundamental principles in accounting). There is no provision in Companies Act which

deals with ultra-vires acts of directors.

But, there are case laws in India, which reiterates the concept of UV.

In S Sivashanmugham v. Butterfly Marketing (2001) 105 Comp Cas 763 (Mad HC

DB), the prima facie view expressed was that ultra vires doctrine is one meant toprotect the company and to safeguard its members and creditors. A third party

cannot take advantage of doctrine of ultra viresacts in order to avoid performance

of obligations voluntarily undertaken with full opportunity to know extent of

companys powers before entering into a transaction.

When directors act beyond the objectives of a Company, the Company is at option

to make them void (voidable; but nowhere in the Companies Act it is mentioned that

any act beyond the object clause is void).

In such cases, directors fail to perform their fiduciary duties. Then, the recourse forthe members of the Company will be to take action against the directors - as they

have acted beyond their powers (and beyond the intentions of the members of the

Company as the members of the Company want the Company to act in accordance

with the objectives stated in MOA).


The principle of ultra vires and

recourse to the members when

directors fail in their fiduciaryduties

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10th December 2012

Who appoints branch auditor of a Government company?

Ans: The C&AG.

Who appoints branch auditor of a

Government company? Ans: The

C&AG.
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Section 619 (2) of the Companies Act, 1956 says: The auditor of a Government

company shall be appointed or re-appointed by the C&AG of India (earlier it was the

Central Government on the advise of the C&AG).

Likewise, the CAG appoints branch auditor of a Government company.


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6th December 2012

How long a company can show preoperative expenses in balance sheet stating that

it has not started commercial operations?

Preoperative expenses are those expenses incurred by a company before

commencement of commercial operations; or before starting to earn income.

Preoperative expenses are distinct from preliminary expenses or formation

expenses.

Though no Accounting Standard exclusively deals with preoperative expenses,

paragraph 56 of AS 26 clarifies the issue.

In some cases, expenditure is incurred to provide future economic benefits to an

enterprise, but no intangible asset or other asset is acquired or created that can be

recognized, then such expenditure has to be shown in profit and loss account. E.g.,

expenditure on research, expenditure on start-up activities (start-up costs, unless

this expenditure is included in the cost of an item of fixed asset under AS 10). Start-up costs may consist of preliminary expenses incurred in establishing a legal entity

such as legal and secretarial costs, expenditure to open a new facility or business

(pre-opening costs) or expenditures for commencing new operations etc.

Therefore, a Company cannot wait indefinitely for commercial operations to

commence to draw its profit and loss account. Profit and loss account should be

prepared to give a true picture of the affairs of the Company to its members, though

there would not be any impact on the net figures of the balance sheet.

How long a company can show

preoperative expenses in balance

sheet stating that it has not started

commercial operations?

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