auditor’s reporting requirements under...

Overview of Companies Act 2013

Auditor’s Reporting requirements underCompanies Act, 2013

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C.A. Bhavin Kapadia

Andheri (W) CPE Study

Circle 8th May 2016

What are we covering today?Relevant Standards on Auditing

Independent Auditor’s Report

Companies (Auditor’s Report) Order, 2016

New reporting requirement with respect to Fraud & IFCOFR

Common mistakes while drafting audit report

Other key points

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Standard on Auditing … Guides the Auditor

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Reporting standards

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Repo

rting

Stan

dards SA 700 Forming an Opinion and Reporting on

Financial Statements

SA 705 Modification to the Opinion in the Independent Auditor’s Report

SA 706Emphasis of Matter Paragraphs and Other

Matter Paragraphs in the Independent Auditor’s Report

Draft SA 701

Communicating Key Audit Matters in the Independent Auditors Report

Key points on Reporting Standards

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• Compliance with SA is mandatory u/s 143(9) and (10)Mandatory

• General purpose FS• Not to reviews, compilation etc.Applicability

• Standard format of report with clear headingsConsistency

• Reduces the ‘expectation gap’ in regard to scope of auditor

Management vs Auditors responsibility

• EOM, Qualification or Adverse opinionGuidance

EOM and Other Matters

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EOM

• Going concern assumption• Change in significant accounting policy• Revenue recognition (measurement)• Future outcome of exceptional litigation• Impairment test / long term strategic investments• CFS excludes entities which are fully impaired

Other Matters

• Change in auditor - previous year’s figures• Unaudited accounts of group entities in CFS• Appointment of auditor post year end

Implementation Guide on Reporting Standardsissued by ICAI includes 55 FAQ’s & 26 illustrativeformats of audit report

Impact of qualification in audit report

• As per para A18 of SA 705, if financial statements are subject matter ofqualification, the effect of the qualification on the financial Statements(unless impracticable) individually and also in aggregate.

• Example : - If inventory is overstated- effects on inventory, PAT andreserves to be given

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Individual Aggregate

Impact of going concern assumption (SA 570)

• Impact of Going Concern [SA 570] in Audit Report

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Component Disclosure in Auditor’s Report

Existence of material uncertainity anddisclosure made in financials

Emphasis of Matter [para 19]

Existence of material uncertainity anddisclosure not made in financials

Qualified or Adverse Opinion[para 20]

Use of going concern assumptioninappropriate

Adverse opinion [para 21 andA25]

Management unwilling to make orextend its assessment

Qualified or disclaimer ofopinion [para A27]

Type of Modified OpinionNature of Matter Giving Rise to the Modification

Auditor’s Judgment about the Pervasiveness of the Effects or Possible Effects on the Financial StatementsMaterial but Not Pervasive

Material and Pervasive

• Financial statements are materially misstated

• Qualified opinion

• Adverse opinion

• Inability to obtain sufficient appropriate audit evidence

• Qualified opinion

• Disclaimer of opinion

FS having EOM / Modification are closely looked by stakeholders8

ICAI announcement on Reporting on ComponentsComponent Component is

Material to financial statement

(Yes / No)

Disclosure in Principal Auditor’s Report

Unaudited No Optional disclosure[if reported, ‘OtherMatters’]

Audited by another auditor

No Optional disclosure[if disclosed, ‘OtherMatters’]

Audited by another auditor

Yes Disclosure to be made in‘Other Matters’

Unaudited Yes Report to be modified9

Draft SA 701 KAMNew

dimension to audit report

KAM = EOM ?

Reporting on

-why matter is significant &

- how the matter is resolved

Increase awareness to

users

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Reporting requirements under the Companies Act, 2013

Exceptional reporting based on inquiry 143 (1)

Loans & advances given whether prejudicial to Co.

Merely book entries which are prejudicial to Co.

Investments sold less than cost price

Whether loans & advances shown as deposits

Whether personal expenses shown as revenue

Whether cash received for shares allotted

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Reporting requirement

143(3) Main report

143(11) CARO

143(3)(i) IFC Report

143(12) Fraud

reporting

Reporting requirement u/s 143

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Applicability to standalone / consolidated

Reporting under section 143 (3) Auditor’s Report a) Whether auditor has sought and obtained all information & explanation

and if not, details with the effect of such information on the financialstatements is required to be given

b) Whether proper books of account have been kept by the company / branch(as per Rule 3(5) of Companies (Accounts) Rules, 2014 backup should bemaintained in India)

c) Whether branch audit report received and how it has been dealt withd) Whether balance sheet and profit and loss account dealt with in the report

are in agreement with books of account and returnse) Whether financial statements comply with the accounting standards

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Reporting under section 143 (3) Auditor’s Reportf) The observations or comments of the auditors on financial transactions or

matters which have any adverse effect on the functioning of the company–GN issued by ICAI

g) Whether directors is disqualified from being appointed as director u/s164(2)

h) Any qualification, reservation or adverse remark relating to themaintenance of accounts and other matters connected therewith–GN issued by ICAI

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Reporting under section 143 (3) Auditor’s Reporti) Whether company has adequate internal financial controls in place and

operating effectiveness of such controls–Mandatory from year 15-16 onwards– As per GN separate report to be issued for IFC and reporting is onlyover financial reporting

j) Others matters prescribed–Whether company has disclosed effect of pending litigation onfinancial position

–Whether company has made provision for foreseeable losses on longterm contract, including derivative contracts

–Whether any delay in depositing money in IEPF16

CARO 2015 Reporting under section 143 (11)

• Broadly same as CARO 2003

• Exemption given to OPC, small company, Pvt Co. (no change in threshold limit)

• Also applicable to CFS

• 12 clauses (earlier 21)

• IEPF added (though broadly not relevant for private entity)

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What next ?

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CARO 2016

Applicable to FY 1516

& onwards

Not apply to CFS

16 clauses (earlier 12 (-) 3 + 7)

Changes in applicability to Pvt. Co.

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• There was mixed practice – some auditors mentioned non-applicabilityfor each clause separately, and others clubbed all non-applicable clausesin an opening paragraph. ICAI permits both practices.

CARO 2016 – Applicability to Pvt. Co.

Applicable toPvt co. which issubsidiary orholding co. ofpubliccompany

• Newrequirementadded

Limit of paid upshare capital +reserves (as atbalance sheetdate)• Increased from

Rs. 50 lacs toRs. 1 crore

• Earlier it wasany time duringthe year

Limit for loanfrom bank andfinancialinstitution• Increasedfrom Rs. 25lacs to Rs. 1crore at anypoint of timeduring theyear

‘Turnover’replaced to ‘totalrevenue’ (as perSch III)• To include

other income

• Limit increased from Rs. 5 crore to Rs. 10 crore

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Reporting requirements and changesArea Reporting requirement (CARO

2016)Changes

Fixedassets

• Maintenance of records• Physical verification process• Title deeds of immovable

properties in the name ofcompany

Reporting on titledeeds of immovableproperties has beenadded. Format givenin GN for disclosure oftitle deeds not in thename of company

Inventories

• Physical verification whetherconducted at reasonableintervals

• Material discrepancies

No need to commenton physicalverification processand maintaining therecords

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2016)Changes

Loan granted to related parties [u/s 189]

• Terms and conditions of the loangranted whether prejudicial

• Schedule of repayment ofprincipal and payment of interestwhether stipulated

• Whether receipt of repayment ofprincipal and interest are regular

• Reasonable steps taken torecover principal and interestwhen they are overdue for morethan 90 days

• Reporting on termsand conditions ofthe loan, schedule ofloan repayment isadded

• Reporting is nowonly for amountsoverdue for morethan 90 days. Earlierlimit was amount inexcess of Rs. 1 lac

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2016)Changes

Loans, investments, guarantees and security

Reporting on the compliancewith the provision of section 185and 186. Details to be given incase on non-compliance

New clause added

Deposits Same as CARO 2015 No change inrequirement

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2016)Changes

Default in repayment of instalment

Default in repayment of dues tobanks / financial institution /debenture holders / government.Details of the default needs to begiven lender wise in case wherethere is default in repayment ofdues to banks / financialinstitutions and government.

Lender wise details ofdefault has beenadded. Also earlierclause did not coverreporting on loansfrom government.

Cost record

Same as CARO 2015 No change in therequirement.

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2016)Changes

Statutory liabilities

• Whether company is regular inpaying statutory dues

• Disclosure of statutory duesnot paid for 6+ months ando/s as balance sheet date

• Specified statutory disputeddues not deposited

The clause ofdepositing amount toIEPF account hasbeen withdrawn.Disputed wealth taxand cess are now notrequired to report.

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2016)Changes

Application of money raised

Need to report that money raisedby public issue / follow-on offer(including debt instruments) /term loan has been applied for thepurpose for which those are raised

Details of delay / default andsubsequent rectification needs tobe given.

Earlier only term loanswere covered and nowit is extended to publicissue / follow-on offer

Fraud Report on fraud by the Companyor fraud on the Company by itsofficers / employees.

Reporting of fraud onthe Company hasbeen restricted toofficer / employees.

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2016)Changes

Managerial remuneration

Payment / provision ofmanagerial remuneration as persection 197. In case of default,need to report the amount ofdefault and steps taken by theCompany for securing the refund.

New reporting hasbeen added

Nidhi company

Compliance with net owned fund(1:20) & 10% liquid assets

New reporting hasbeen added(reintroduced fromCARO 2003 withcertain modifications)

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2016)Changes

Related party transactions

• Compliance with the section177 and 188 of the CompaniesAct, 2013

• Related party transactionsdisclosed in the financialstatement as required byAccounting Standards

New reporting hasbeen added. Thisreporting was partlycovered in CARO2003

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2016)Changes

Preferential allotment / private placement

Compliance with section 42 of CA2013 and the amount have beenapplied for the purpose for whichfunds were raised.

New reporting hasbeen added(reintroduced fromCARO 2003).Reporting nowextended to coverfully or partlyconvertibledebenture

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2016)Changes

Non cash transactions

Need to report that section 192 ofthe Companies Act have beencomplied when the Company hasentered into non-cashtransactions with directors orperson connected to him.


Registration under RBI Act

• Whether the company isrequired to register undersection 45-IA of the ReserveBank of India Act, 1934 and ifso, whether the registration hasbeen obtained


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Clause deleted as compared to CARO 2015Area Particulars

Internal control systems

This deletion would be due to separate reportingunder IFC

Net worth Whether accumulated losses exceed 50% of networth and whether the Company has incurredcash loss in current year and in the previous year.

Giving of guarantee

Reporting has been deleted (since coveredseparately u/s 185 / 186)

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Few Thoughts

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Lack of comprehensiveness –N.A to CFS

CARO 2016 –doesn’t add value

Extra efforts to fulfil the duties

Title deeds vs property card

Duplication with IFC [FA, stock]

Why comment on RPT –Approved by shareholders

Fraud by customers / vendors why not covered….

…..Whether to report on fraud by contract employees & in-house consultants

Fraud Reporting

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As per section 143(12), all frauds against the company by its officers or employees to be reported by auditors to Board or

Audit Committee in 2 days

Fraud amount => Rs. 1 Crores

Company to respond to auditors within 45 days

Auditors to report to Central Government upto 60 days (whether or not reply is received from company).

Fraud amount < Rs. 1 Crores

Company to report each fraud details in Board's report

Overview

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Few Thoughts

Reason to believe

Individual fraud – need clarity

What if fraud is informed by co. to auditors

Legal support may be sought

2 days is impracticable to quantify and identify parties

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Fraud reporting under section 143(12)• Fraud as defined in the Explanation to Section 447 of Companies Act, 2013 –“Fraud” in relation to affairs or any body corporate, includes

• any act, omission, concealment of any fact or abuse of position• committed by any person or any other person with the connivance in anymanner,

• with intent to deceive, to gain undue advantage from, or to injurethe interests of, the Company or its shareholder or its creditors or anyother person,

• whether or not there is any wrongful gain or wrongful loss.

• ‘wrongful gain” means the gain by unlawful means of property to which theperson gaining is not legally entitled.

• “wrongful loss” means the loss by unlawful means of property to which theperson losing is legally entitled

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One more annexure to main audit report……IFC

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• Introduction para• Management responsibility for IFCOR

• Framework followed by the management [COSO, SIA 315 etc.]• Auditors responsibility• Meaning of IFC over financial reporting [IFCOR]• Inherent limitations of IFCOR

• Possibility of collusion or improper management override of controls• Projections of any evaluation of IFCOR to future periods are subject to riskthat the controls would become inadequate because of changes inconditions or degree of compliance would deteriorate

• Opinion para• Cross referencing to the main report would be required if separate reportsare being issued

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Contents of IFC report

- will lead to modification in audit report Material weakness

• Deficiency or a combination of deficiencies in IFCOR as a result of whichthere is a reasonable possibility that material misstatement in financialstatements will not be detected

- important enough to merit attention of management Significant deficiency

• Deficiency or a combination of deficiencies in IFCOR as a result of which there is a reasonable possibility that misstatement in financial statements will not be detected on a timely basis.

- needs to be evaluated whether significant or leads to material weaknessDeficiency

• Design or operation of the control does not allow the management or employees to prevent or detect misstatement on a timely basis

• Deficiency could be in design or in operation of the control

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Evaluating identified deficiencies

Other KEY Points

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Companies (Amendment) Bill, 2016

Auditor has right to access records of associates (earlier only subsidiary)

IFC Reporting restricted to “financial statements”

To report whether directors remuneration is within limits

Other relaxations [reduction in penalty / fine & narrowed scope of damages to members or creditors of the Co.]

Key points

Requirement of italic or bold is done away

Provide reasons for qualifications

Auditors to attend AGM unless exempt

Qualification to be read at AGM

QARC will screen the qualifications in FS and refer it to FRRB if company response is unsatisfactory. (Form A and B to SEBI)

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Common Mistakes in Audit Report

(compilation from FRRB)

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Common mistakes• Auditor’s Comment• Signature date prior to director’ssignatureAuditor has signed the Auditor’sreport prior to the date when thefinancial statements were signedand authenticated by the director ofthe company.

• Fellowmember indicatedAuditor has mentioned hismembership number “F” (i.e.represent fellow member) isprefixed to Auditor’s Report.

• Examined vs AuditedOpening paragraphs of the AuditorsReport states to have “examined theattached Balance Sheet…”

• Requirements• SA – 700 (Para – 26) Since theAuditor’s responsibility is to report onthe Financial Statements as preparedand presented by the management,the auditor should not date the reportearlier than that the date on whichthe Financial Statements are signed orapproved by management.

• Institute does not give such prefix

• Auditor should have used the word‘audited’ rather than using the word‘examined’ to reflect his correctresponsibility.

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Common mistakes (contd..)• Auditor’s Comment• Cash flow statement not coveredfor reporting

In the Auditor’s Reports noreference was made to the CashFlow Statement in openingparagraph and opinionparagraph

• Qualifications are not quantified

• Requirements• SA 700 – (Para – 9) The auditor’sreport should identify the cashflow statement as a part offinancial statements and further,also express an opinion on thecash flow statement audited.

• SA 700 – To give reasons forqualification, should also reportthe quantitative impact of such onthe financial statements of each,individually as well as theiraggregate. If impracticable – thenstate it.

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Common mistakes (CARO)• Auditors’ comment

• Silent about applicability of CARO

• None of the fixed assets havebeen revalued during the year.

• Requirement

• If CARO is not applicable it has tobe explicitly stated in audit report.

• The requirement as above wasunder erstwhile MAOCARO.

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• “The management has conductedphysical verification of the fixedassets during the year and we areinformed that discrepancies noticedwere not material.”

• Requirement

• The use of words “We are informedthat…”, prima facie creates animpression that no documentaryevidence was available tosubstantiate the verification andthat the auditor has wholly relied onmanagement’s representation.However, the auditor’s duty us toexpress his opinion and not justdisclose the information given bythe management, hence not as perCARO. [It may start with Accordingto information and explanationgiven to us….]

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• “All assets not verified but there isa regular programme ofverification. The same isreasonable. Management hasexplained that no materialdiscrepancies were noticed.”

• Requirement

• CARO requires that auditor shoulduse his judgment to determinediscrepancy is material or not.Duty has been caste on auditors toexpress his opinion. In the givencase, auditor has relied on themanagement’s explanation andhas not used his judgment.

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• “The company has maintainedproper records of inventory. Nomaterial discrepancies werenoticed on physical verification ofinventory except as recorded byexcise department as per note…”

• Requirement

• CARO requires the auditor tocomment on whether thediscrepancies noticed have beenadequately dealt with. Here, theauditor has only reported ondiscrepancies by referring to thenote but he has omitted tocomment on whether thosediscrepancies were properly dealtwith in the books of accounts.

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Common mistakes (CARO)• Auditors’ comment• “The company is regular indepositing undisputed statutorydues including provident fund,investor education and protectionfund, employee state insurance,income tax, sales tax, wealth tax,custom duty, excise duty, Cess andother statutory dues with theappropriate authorities. Latedeposit if any has been attached inthe Form 3CD attached.”

• Requirement• It is noted that whereas CAROrequires ‘disclosure of amount’which are in arrears for the periodof more than 6 months, theauditor has simply reported themeans i.e. Form 3CD where suchinformation is available. It wasfurther viewed that Form 3CD is apart of Tax Audit Report andhence the requisite informationfor neither available in CAROreport or in the financialstatements attached. Accordingly,the auditor has not complied withthe reporting requirement

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• “The company has not made anypreferential allotment of sharesduring the year”

• Requirement

• However during the year sharesare allotted to KMP (directors) asper related party disclosures.

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Practical Tips

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Quality check

Use of checklist

Interim audits

Standard paragraphs (uniform drafting)

Staff training

Avoid copy paste

AASB issued illustrative formats of reports on standalone and CFS

Thank you

C.A. Bhavin Kapadia

[email protected]

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