Is The Audit Profession At Crossroads?

Recent amendments to the Act, the audit rules and the notification of the Companies (Auditor’s Report) Order, 2020, have significantly increased the statutory responsibilities of auditors, by prescribing additional matters on which a statement should be made by the auditor in the auditor’s report.

Section 143(12) – Reporting of fraud:

Section 143(12), read with Rule 13 of the audit rules, provides that if the auditor of the company, in the course of performance of his duties as an auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount exceeding Rs. 1 crore is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government.

Section 197(16) – Certification of the managerial remuneration paid by the company:

Section 197(16) of the Act, as inserted vide the Companies (Amendment) Act, 2017, provides that the auditor’s report shall make a statement as to whether the remuneration paid by the company to its directors is in accordance with the provisions of Section 197, and whether remuneration paid to any director exceeds the limit prescribed under Section 197.

Amendments made to the Audit Rules:

On March 24, 2021, the MCA notified the Companies (Audit and Auditors) Amendment Rules, 2021, which amended Rule 11 of the audit rules, to prescribe additional matters that should be included in the auditor’s report.

Rule 11(f) of the audit rules (as inserted vide the audit amendment rules) provides that the auditor’s report shall include the views and comments of the auditor on whether the dividend declared or paid during the year is in compliance with Section 123 of the Act. Further, Rule 11(g) provides that the auditor’s report shall also include a statement on whether the company, for financial years commencing on or after April 1, 2022, has used such accounting software for maintaining its books of account, which has a feature of recording audit trail facility and the same has been operated throughout the year for all transactions recorded in the software, and:

CARO 2020:

CARO 2020, which is applicable w.e.f. April 1, 2021, has also imposed multiple new obligations on auditors, which were absent in the Companies (Auditor’s Report) Order, 2016. Rule 3 of CARO 2020 has enumerated multiple matters relating to compliance with the Act, which should be covered in the CARO 2020 Report. The matters relating to compliance with the Act include:

  • Whether inter-corporate loans comply with Sections 185 and 186 of the Act, and whether the grant of such loans, security, etc., is prejudicial to the company’s interest, etc.

  • Whether related party transactions comply with Sections 177 and 188 of the Act.

  • With respect to deposits/ deemed deposits, whether Sections 73 to 76 of the Act and the RBI Directives have been complied with.

  • Whether private placement or preferential allotment of securities has complied with Sections 42 and 62 of the Act.

  • whether the unspent CSR funds, for a financial year, are transferred to the Schedule VII Fund or the Unspent CSR Account, pursuant to Sections 135(5) and 135(6) of the Act.

  • Whether any fraud by the company has been noticed, and whether any Report has been filed pursuant to Section 143(12) of the Act.

Along with certifying compliance with various provisions of the Act, CARO 2020 also requires the auditor to certify on issues arising under other statutes, such as whether any proceedings have been initiated or are pending against the company for holding benami property under the Benami Transactions (Prohibition) Act, 1988, and if yes, whether the company has appropriately disclosed the details in its financial statements.

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