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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Reporting requirements and changesArea Reporting requirement (CARO
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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Reporting requirements and changesArea Reporting requirement (CARO
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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Reporting requirements and changesArea Reporting requirement (CARO
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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Reporting requirements and changesArea Reporting requirement (CARO
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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Reporting requirements and changesArea Reporting requirement (CARO
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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Reporting requirements and changesArea Reporting requirement (CARO
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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Reporting requirements and changesArea Reporting requirement (CARO
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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Reporting requirements and changesArea Reporting requirement (CARO
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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Reporting requirements and changesArea Reporting requirement (CARO
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.
New reporting hasbeen added
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
New reporting hasbeen added
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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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Common mistakes (CARO)• Auditors’ comment
• “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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Common mistakes (CARO)• Auditors’ comment
• “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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Common mistakes (CARO)• Auditors’ comment
• “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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Common mistakes (CARO)• Auditors’ comment
• “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
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