Module: | SEBI LODR & Corporate Governance Frameworks
Q22: Consider the following statements regarding the applicability of Internal Financial Controls (IFC) for private limited companies in 2025:
1. A private company is completely exempt from the legal responsibility of designing and maintaining Internal Financial Controls if its turnover is below Rupees 50 Crore.
2. The statutory auditor of a private company with a turnover below Rupees 50 Crore and borrowings below Rupees 25 Crore is exempt from reporting on the adequacy of the company's IFCs.
3. A private company loses its exemption from auditor reporting on IFCs if it commits a default in filing its financial statements or annual return with the Registrar of Companies.
Which of the above statements is/are incorrect?
2. The statutory auditor of a private company with a turnover below Rupees 50 Crore and borrowings below Rupees 25 Crore is exempt from reporting on the adequacy of the company's IFCs.
3. A private company loses its exemption from auditor reporting on IFCs if it commits a default in filing its financial statements or annual return with the Registrar of Companies.
Which of the above statements is/are incorrect?
✅ Correct Answer: A
🎯 Quick Answer:
A. Only 1 is incorrect.Structural Breakdown: Statement 1 is incorrect; while auditor reporting may be exempt, Section 134 strictly holds the Board of Directors of ALL companies responsible for ensuring that adequate internal financial controls exist.
Statement 2 is correct; this specific turnover and borrowing threshold grants an exemption from the auditor's separate reporting duty under Section 143(3)(i). Statement 3 is correct; the MCA notification clearly revokes this auditor reporting exemption if the company fails to maintain basic statutory filings.
Historical/Related Context: The MCA introduced the auditor reporting exemption to ease the heavy compliance and audit fee burden on small private enterprises and startups, without absolving the founders of their fundamental fiduciary duties.
Causal Reasoning: By maintaining the directors' responsibility while removing the auditor's reporting duty, the law attempts to balance the need for internal corporate discipline against the high costs of formal external assurance for small businesses.