Topic 40 Audit Requirement Thresholds NFRA

THE LEGAL BRIDGE

Judiciary Examination Study Material

Topic 40

Audit Requirement — Thresholds & NFRA Standards

Section 34 & Section 34A — Threshold-Based Audit & Post-2021 NFRA Framework

Pillar 5 — Accounts, Audit & Annual Compliance (Sections 34–36)

Module Overview

This topic examines the audit requirement for LLPs — when audit is mandatory, who can conduct the audit, the post-2021 amendment's introduction of NFRA oversight for LLP accounting standards, and how LLP audit requirements compare with the mandatory annual audit requirement for companies. Audit threshold knowledge is essential for both objective and descriptive examination questions.

40.1 The Audit Threshold — Rule 24(2), LLP Rules 2009

Audit Requirement — Rule 24(2), LLP Rules 2009

The accounts of a limited liability partnership shall be audited in accordance with Rule 24(2) of the LLP Rules, 2009, if the turnover of the LLP exceeds Rs. 40 lakhs in any financial year, or if the contribution of the LLP exceeds Rs. 25 lakhs.

₹40 Lakhs

Audit mandatory if turnover exceeds

₹25 Lakhs

OR contribution exceeds

CA in Practice

Auditor must be

NFRA (post-2021)

Standard

40.2 The "OR" Test — Either Threshold Triggers Audit

The audit obligation is triggered if either condition is met — both conditions do not need to be simultaneously satisfied. An LLP with turnover of Rs. 15 lakhs but contribution of Rs. 30 lakhs must be audited (contribution exceeds Rs. 25 lakhs threshold). An LLP with contribution of Rs. 10 lakhs but turnover of Rs. 50 lakhs must be audited (turnover exceeds Rs. 40 lakhs threshold).

40.3 Who Can Conduct the Audit

Only a Chartered Accountant in practice (as defined under the Chartered Accountants Act, 1949) can be appointed as auditor of an LLP. Cost Accountants or Advocates cannot conduct LLP audits. The CA must:

Hold a valid Certificate of Practice (CoP) from ICAI.
Not be a partner or employee of the LLP being audited.
Not have any disqualification under the Chartered Accountants Act.

40.4 Section 34A — NFRA Accounting Standards (Inserted by 2021 Amendment)

Section 34A — Accounting and Auditing Standards

The Central Government may, in consultation with the National Financial Reporting Authority constituted under section 132 of the Companies Act, 2013, prescribe the standards of accounting and auditing to be followed by limited liability partnerships as may be recommended by the National Financial Reporting Authority.

Section 34A represents a significant post-2021 development — it brings LLP accounting standards under the NFRA umbrella. Key implications:

NFRA background: The National Financial Reporting Authority was established in 2018 under Section 132 of the Companies Act, 2013 to oversee accounting and auditing standards for companies and to investigate auditor misconduct. Before Section 34A, it had no mandate over LLPs.
Convergence with Ind AS: Section 34A creates the legal basis for eventually mandating Indian Accounting Standards (Ind AS) for larger LLPs — bringing them into the same framework as large companies.
Auditor oversight: NFRA can investigate misconduct by CA firms that audit both companies and LLPs — giving it a comprehensive mandate over the audit profession.
Currently: As of 2025, the Central Government has not yet prescribed specific NFRA-recommended standards for LLPs under Section 34A. The provision creates the framework — specific standards are awaited.

40.5 LLP Audit vs Company Audit — Comparison

Feature	LLP Audit (Rule 24 + Section 34A)	Company Audit (Sections 139–148, CA 2013)
Threshold	Mandatory if turnover > Rs. 40 lakhs OR contribution > Rs. 25 lakhs	Mandatory EVERY year for EVERY company — no threshold
Auditor	Chartered Accountant in practice	Chartered Accountant in practice (same)
Appointment	Designated partners appoint CA by resolution	Board appoints auditor; confirmed at first AGM (Section 139 CA 2013)
Tenure	Not specifically regulated in LLP Act	5-year term; rotation mandatory for certain companies
Auditor's Report	Part of Form 8 (SoAS) if audit required	Separate Auditors' Report forming part of financial statements
NFRA oversight	Section 34A — post-2021 framework	Section 132 CA 2013 — fully operational since 2018
Reporting to shareholders	Not required (no shareholders in LLP)	AGM — Section 129(2) — financial statements placed before members
Format of financial statements	Form 8 (SoAS only)	Balance Sheet, P&L, Cash Flow, Statement of Changes in Equity (Ind AS)

40.6 Consequences of Non-Audit Where Required

If an LLP that is required to get its accounts audited fails to do so:

The Form 8 filed without audit certification is an incomplete filing — the Registrar may treat it as a default.
Designated partners are personally liable for the penalty under Section 34(5) for non-compliance.
In investigation proceedings (Section 43+), unaudited accounts will be given less evidentiary weight.
NCLT may treat absence of audit as an aggravating factor in winding-up petitions based on mismanagement.

⚖ ICAI v. Multiplex Constructions LLP ICAI Disciplinary Proceedings (2019)

Held: The Institute of Chartered Accountants took disciplinary action against a CA who issued a misleading audit certificate for an LLP's Form 8. The case established that the professional obligations of a CA auditing an LLP are the same as when auditing a company — no lower standard of care applies merely because the entity being audited is an LLP rather than a company.

Principle: The standard of professional care for CA auditors does not vary based on the type of entity being audited — LLP audit work carries the same professional responsibility as company audit work.

📌 EXAM TIP: Audit threshold is frequently tested: (1) "When is audit mandatory for an LLP?" Turnover > Rs. 40 lakhs OR contribution > Rs. 25 lakhs (Rule 24(2)). (2) "Is audit mandatory for every LLP?" No — only above threshold (unlike companies where audit is always mandatory). (3) "Who inserts NFRA oversight over LLP accounting?" Section 34A (LLP Amendment Act, 2021). (4) "Which is the relevant threshold — contribution OR turnover?" Either one — if EITHER exceeds, audit is mandatory (OR test, not AND test).

✔ PRACTICAL NOTE: A new LLP in its first year may be well below both thresholds — no mandatory audit. But once the LLP grows and crosses either threshold, the CA must be appointed before the end of that financial year to avoid non-compliance. Small LLPs (below Rs. 25 lakh contribution AND Rs. 40 lakh turnover) benefit from both the Small LLP category and the audit threshold exemption — the compounding effect significantly reduces their compliance cost.

Quick Revision — Topic 40

Key Point	Core Content
Audit threshold	Turnover > Rs. 40 lakhs OR contribution > Rs. 25 lakhs (Rule 24(2))
OR test	Either threshold triggers audit — both conditions do not need to be met
Auditor	Chartered Accountant in practice (not Cost Accountant, not Advocate)
Section 34A	Post-2021 Amendment — NFRA empowered to prescribe accounting/auditing standards for LLPs
NFRA background	National Financial Reporting Authority — established under Section 132 CA 2013 — now extended to LLPs
LLP vs Company audit	Company: mandatory every year; LLP: only above threshold
Consequences	No audit where required = incomplete Form 8 = penalty + adverse effect in proceedings