Director remuneration audit under the Companies Act

Auditing director remuneration under the Companies Act means confirming the remuneration paid is within the limits and approval structure the Act prescribes for managerial personnel, that it was actually approved by the board, and by shareholders or the central government where the Act requires that additional layer, and that the financial statements disclose it the way Schedule III and the relevant accounting standard on related party and managerial remuneration disclosure require. Unlike most payroll testing, the primary evidence here is the resolution, not the payslip.

Why this sits inside the payroll cluster but reads differently

Director remuneration is still a payroll cost, but the controls around it come from company law rather than from HR process — a director's pay is set and changed by board and shareholder action, not by an HR salary revision cycle, and the amounts are subject to statutory ceilings that an ordinary employee's pay is not. This article is written as the reference point that ties the payroll-audit cluster together: most of the procedural detail for the underlying payments — TDS, PF where applicable, bonus-like payments — is in the other articles in this cluster, and this one focuses on the Companies Act layer that sits on top of them specifically for directors and other managerial personnel.

Managerial remuneration limits and approval requirements

The Companies Act caps the total managerial remuneration a company can pay to its directors and managers, expressed as a percentage of net profits computed in the manner the Act prescribes, with a further limit on what any one managing director, whole-time director or manager can draw. Public companies and private companies that are subsidiaries of public companies face this ceiling directly; the exact percentages, the additional approval route available when a company wishes to pay beyond the ceiling, and the categories of companies exempted have all been subject to amendment, so confirm the current section numbers and percentages rather than relying on a figure used in a prior audit file.

Testing payments against board and shareholder resolutions

1. 01Obtain every resolution relevant to remuneration for each director and managerial person in the audit periodNot just the resolution appointing them, but every subsequent revision — a director's pay rarely stays on the original appointment terms for the whole of their tenure.
2. 02Build a schedule of approved remuneration terms by director, by effective dateThis becomes the benchmark the rest of the testing is recomputed against, the same way a salary structure is the benchmark for an ordinary employee.
3. 03Recompute actual remuneration paid or accrued for each director against the scheduleInclude fixed salary, commission (often a percentage of profits, which needs its own recomputation against the Act's profit computation rules), perquisites, and sitting fees, since each component can have a different approval basis.
4. 04Check the effective date of any revision was actually honored in the payroll, not applied early or carried on past a lapsed approvalA resolution approving remuneration for a fixed term that payroll continued to apply after the term expired is a common gap, especially where the term was for a limited number of years and nobody flagged the expiry.
5. 05Recompute the net-profit-based ceiling for the company as a whole and compare total managerial remuneration against itThis is a company-level test in addition to the director-level test above — a company can have every individual director's pay correctly approved and still breach the aggregate ceiling.

Disclosure in the financial statements

Director remuneration disclosure requirements sit across more than one place in the financial statements — Schedule III disclosure requirements for managerial remuneration, related party disclosure under the applicable accounting standard since directors are related parties, and the computation of managerial remuneration that is often appended as a note for companies required to show it. Check all three are present and consistent with each other, since they are frequently prepared by different people within the client's finance team at different times.

• Agree the total remuneration disclosed to the schedule built from the resolutions and recomputed above — a disclosure note prepared independently by the finance team, without reference to the resolution schedule, is where small inconsistencies creep in.
• Confirm all components are included in the disclosure: salary, commission, perquisites valued correctly, and contribution to provident fund or superannuation where the Act requires those to be stated separately.
• Check the related party disclosure captures remuneration paid to directors and their relatives consistently with the managerial remuneration note, rather than treating them as two unconnected disclosure exercises.
• Where remuneration is linked to profit, confirm the profit figure used for the commission computation is computed under the Act's specific rules for that purpose, which differ from accounting profit in several respects, and not simply the profit as reported in the statement of profit and loss.

How this ties back to the rest of the payroll audit cluster

A director who also draws a salary-like payment as an employee of the company, rather than purely as managerial remuneration, brings in the testing covered elsewhere in this cluster — TDS on salary recomputation, PF and ESI applicability where it genuinely applies to a director in an employment capacity, and gratuity or leave encashment if the director participates in those schemes. The approval and ceiling testing in this article does not replace that work; it sits above it, confirming the quantum itself was validly authorized before the downstream payroll mechanics are tested.