Testing director remuneration against Schedule V means independently recomputing the company's effective capital as the Companies Act defines it — not simply reading the paid-up capital or net worth off the balance sheet — then applying the remuneration limit tier that effective capital figure falls into, comparing total managerial remuneration actually paid against that limit, and testing whether any excess was properly approved, waived under the prescribed conditions, or recovered from the director.
Why effective capital has to be recomputed, not read off the balance sheet
Effective capital under Schedule V is a defined aggregate — paid-up share capital, reserves (excluding revaluation reserve), long-term loans and deposits repayable after one year, less accumulated losses and preliminary expenses not written off — and it is not the same number as net worth or total equity. Applying the limit tier to the wrong capital figure produces a limit that looks authoritative but is not actually the one that applies.
The testing sequence
- 01Confirm whether the company has adequate profits and which part of Schedule V appliesA company with adequate profits is governed by the limit expressed as a percentage of net profit under section 197; a company with no profits or inadequate profits is governed by the effective capital table instead. Get this branch right before computing anything else.
- 02Independently recompute effective capital from the balance sheetPaid-up share capital, plus reserves excluding revaluation reserve, plus long-term loans and deposits repayable after one year, less accumulated losses and expenditure not written off. Build this from the trial balance rather than accepting the client's summary figure.
- 03Identify the correct limit tier and the maximum remuneration it permitsThe effective capital table sets a maximum monthly or annual remuneration payable without further approval, increasing in bands as effective capital increases. Confirm which band the recomputed figure falls into.
- 04Aggregate total managerial remuneration actually paid or payable for the yearSalary, perquisites, commission and any other form of remuneration to all managerial personnel together, not just the amount shown as 'remuneration' in the P&L note, since perquisites are often tracked separately and missed in the aggregation.
- 05Compare the aggregate to the applicable limit and quantify any excessWhere remuneration exceeds the limit, identify the specific amount in excess, not just a conclusion that the company is or is not compliant.
- 06Test whether any excess was validly covered by shareholder approval, a waiver, or recoveryRemuneration beyond the Schedule V limit requires specific shareholder approval by special resolution and, in some cases, is subject to recovery if paid without the required approvals — trace the actual resolution and its terms, not a general authorisation.
- 07Cross-check the conclusion against the related CARO and secretarial compliance reportingA Schedule V breach has knock-on reporting consequences elsewhere in the audit file, and the conclusion here should be consistent with what is reported in those other sections.
| Step | Evidence |
|---|---|
| Profit adequacy branch | Net profit computation under section 198, recomputed independently |
| Effective capital | Recomputed from the trial balance per the Schedule V definition |
| Applicable limit | Effective capital banded against the current Schedule V table |
| Remuneration paid | Aggregated across salary, perquisites and commission for all managerial personnel |
| Excess, if any, and its approval | Shareholder special resolution or waiver, traced to its actual terms |
Regulatory requirement
Section 197 of the Companies Act and Schedule V set the remuneration limits, the effective capital definition, and the approval route for remuneration above the specified ceiling. Both have been amended more than once. Verify the current text before concluding.
How we think about this
The effective capital computation and the limit comparison are arithmetic that should be rebuilt in full from the trial balance every year, not rolled forward from the prior year's figure. Whether a specific approval genuinely covers the excess paid, and whether it was obtained before or only after the payment, is the judgement that decides whether the breach is a disclosure matter or a recovery matter.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Payroll & employee costDirector remuneration audit under the Companies ActManagerial remuneration limits and approvals, financial statement disclosure, and testing payments against board and shareholder resolutions.
- CARO & Companies ActCARO 2020 reporting checklist for statutory auditorsThe topic areas CARO reporting covers, what evidence each one needs, and how the clauses fit together across the audit file.
- Related parties & disclosuresIdentifying related parties: the audit starting pointA client declaration is a starting point for the related-party list, not evidence of it. How to build and cross-check the list independently.
- CARO & Companies ActSecretarial compliance checklist for a statutory auditorBoard meeting frequency, statutory registers and ROC filing timeliness, read as evidence of compliance culture rather than a secretarial checklist in its own right.
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