Many first-time business owners in Nepal assume that audit requirements — like in several other countries — only kick in once a company grows past a certain size. Nepal's Companies Act, 2063 takes a different approach: there is no small-company exemption. Whether you run a one-person consultancy registered as a private limited company or a large manufacturing house, the law expects an annual independent audit. This guide explains exactly who must be audited, how the auditor is appointed, what the audit report must contain, and what happens if you skip it.
Which Companies Are Legally Required to Be Audited Under the Companies Act
Section 111 of the Companies Act, 2063 mandates that every company registered in Nepal must appoint an auditor and have its accounts audited annually — this applies uniformly to private limited companies, public limited companies, and even single-shareholder companies. There is no carve-out based on legal form: whether you are a small IT consultancy with one director-shareholder or a multi-branch trading company, the statutory obligation is the same. This audit is separate from — and in addition to — any audit required under sector-specific laws, such as the Banks and Financial Institutions Act for BFIs or the Insurance Act for insurers, which layer additional, more detailed requirements on top of the baseline Companies Act audit.
Turnover or Capital-Based Exemption Thresholds for Small Companies
Unlike many jurisdictions where small businesses below a defined turnover or asset threshold are exempt from statutory audit, the Companies Act, 2063 applies its audit mandate universally, with no turnover-based exemption for private limited companies. This surprises many foreign investors and startup founders coming from jurisdictions with small-company audit exemptions. What can genuinely vary by size and sector is the scope and cost of the engagement — very small companies typically undergo a proportionately lighter-touch audit reflecting lower transaction volume and simpler accounting, and separate turnover thresholds under other laws (such as the Income Tax Act's requirements for audited financials to accompany certain tax filings) can add further layers of review as a business grows, but none of that removes the baseline Companies Act obligation to be audited every year from day one.
Auditor Appointment Process — Role of the AGM and Shareholder Approval
The auditor is formally appointed by the shareholders at the company's Annual General Meeting (AGM), which is the mechanism the Act uses to keep the audit function independent of the board that prepares the financial statements being audited. For the very first audit — before a company has held its first AGM — the Board of Directors is empowered under Section 112 to appoint the company's first auditor, who then holds office until the first AGM formally confirms (or changes) that appointment. At each subsequent AGM, shareholders vote to reappoint the existing auditor or appoint a new one, and the appointment (along with the audit fee) is typically documented in the AGM minutes. Private companies, which are not required to hold AGMs in the same formal manner as public companies, generally handle this through board resolution or written shareholder resolution in lieu of a meeting, consistent with the Act's simplified compliance track for private companies.
Auditor Eligibility and Disqualification Criteria Under the Act
Section 112 restricts statutory audit work to Chartered Accountants licensed by the Institute of Chartered Accountants of Nepal (ICAN) — an unlicensed accountant, however experienced, cannot legally sign a statutory audit report. Beyond the licensing requirement, the Act also disqualifies certain individuals from being appointed as a company's auditor even if they hold a valid CA licence, broadly including: a director, officer, or employee of the company (or a close relative of one) at any point during the period under audit; a person who is indebted to the company beyond a normal trading relationship; a partner or employee of a person disqualified on the above grounds; and, in some cases, an auditor who has already served the maximum permitted consecutive term for that company, where rotation requirements apply. Businesses should confirm current disqualification detail with their auditor or legal counsel before appointment, since interpretation of "connected person" and indebtedness thresholds can be fact-specific.
Audit Report Format Expected Under NSA 2024
Nepali statutory audits are conducted under the Nepal Standards on Auditing (NSA), which are substantially aligned with International Standards on Auditing, and audit reports are expected to follow the standard structure these frameworks prescribe: an opinion paragraph stating whether the financial statements present a true and fair view; a basis-for-opinion section; management's and auditor's respective responsibilities for the financial statements; and, where relevant, a Key Audit Matters section highlighting the most significant areas of audit judgment, alongside any emphasis-of-matter or qualified/adverse opinion paragraphs where issues were identified. ICAN periodically updates and reissues the applicable NSA set as new or revised standards are adopted; auditors and finance teams should confirm with their engagement partner which specific version of the NSA framework applies to the reporting period being audited, since transitional provisions can affect exactly which disclosures and report elements are mandatory for a given year.
Filing the Audited Financials With the Office of Company Registrar
Once the audit is complete and the financial statements are approved (typically at the AGM), the company is required to file its audited financial statements — along with the auditor's report and other prescribed AGM-related documents — with the Office of the Company Registrar (OCR) within the statutory timeframe set by the Companies Act. This filing is part of the OCR's broader annual compliance regime, alongside other required filings such as the annual return; companies should track their specific fiscal-year-end and AGM date carefully, since the filing deadline runs from those dates rather than from a single fixed calendar date applicable to every company.
Consequences of Failing to Get Audited or Failing to File on Time
Non-compliance carries real consequences: the Companies Act empowers the OCR to impose fines on the company and, in more serious or repeated cases, on the responsible directors personally, and persistent non-compliance can affect a company's standing with the OCR, including complications when the company later needs OCR clearance for matters like capital changes, mergers, or voluntary winding-up. Beyond the direct legal penalty, unaudited financials also create practical business problems — banks generally will not extend credit facilities without audited financial statements, tax authorities may treat unaudited filings with greater scrutiny, and potential investors or acquirers will treat the absence of audit history as a significant red flag during due diligence.
Frequently Asked Questions
Can a company change its auditor mid-year?
An auditor can generally be removed or replaced before the end of their term, but this typically requires a shareholder resolution and adherence to specific procedural requirements under the Companies Act to protect the outgoing auditor's right to be heard and to prevent audit-shopping used to avoid an unfavourable opinion; this is not a routine administrative step and should be handled with legal guidance.
Does a brand-new company need an audit in its very first year, even before it has significant transactions?
Yes — the audit obligation applies from the company's first fiscal year of operation, and the Board's power to appoint the first auditor before the first AGM exists precisely to make sure this first-year audit can happen even before shareholders have formally convened.
Is an audit still required if the company had no business activity during the year?
Dormant or inactive companies are still required to prepare financial statements and have them audited under the Companies Act, since the obligation is tied to the company's registered status rather than to whether it transacted business during the period.
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