IFC, CARO, SA700 and other reporting requirements by auditor

Engagement and Quality Control Standards

Engagement and Quality Control Standards comprises the following Standards:

 1 Standards on Auditing (SAs), to be applied in the audit of historical financial information.

2 Standards on Review Engagements (SREs), to be applied in the review of historical financial information.

3 Standards on Assurance Engagements (SAEs), to be applied in assurance engagements, other than audits and reviews of historical financial information.

 4 Standards on Related Services (SRSs), to be applied to engagements involving the application of agreed-upon procedures to information, compilation engagements, and other related services engagements, as may be specified by the ICAI.

The aforesaid Standards are collectively known as Engagement Standards.

 5. Standards on Quality Control (SQCs) – These Standards are to be applied for all services covered by the Engagement Standards as described above.

 As of October 2017 ICAI has issued 46 Engagement and Quality Control Standards (formerly known as Auditing and Assurance Standards) covering various topics relating to auditing and other engagements. These standards have been harmonized with the International Standards issued by the IAASB of the IFAC except for two standards i.e. ISA 600 and ISAE 3000

Revised Auditor Report: Key Changes (Applicable for the financial year 2018-19)

(Published in Chartered Accountants Association Ahmedabad May 2019 Journal)

The auditor’s report is the key deliverable communicating the results of the audit process. The Standard on Auditing (SA) 700 deals with the auditor’s responsibility to form an opinion on the financial statements. It also deals with the form and content of the auditor’s report, issued based on audit of the financial statements. In accordance with the revision in ISA 700 by The International Federation of Accountants, ICAI has made corresponding revisions to SA 700. Accordingly, the format of auditor’s report has been changed.

What are the Intended Benefits of revision in auditor report format?

• Enhanced communication between auditors and investors, as well as those charged with corporate governance
• Increased user confidence in audit reports and financial statements
• Increased transparency, audit quality, and enhanced information value
• Increased attention by management and financial statement preparers to disclosures referencing the auditor’s report
• Renewed auditor focus on matters to be reported that could result in an increase in professional skepticism
• Enhanced financial reporting in the public interest

The following Standards of Auditing have been revised and shall be effective/applicable for audits of financial statements for periods beginning on or after April 1, 2018 (deferred by one year from earlier date of April 1, 2017):

• SA 701 Communicating Key Audit Matters in the Independent Auditor’s Report
• SA 705 Modifications to the Opinion in the Independent Auditor’s Report
• SA 706 Emphasis of Matter paragraph & Other matter Paragraph in Independent Auditor’s Report
• SA 720 The Auditor’s Responsibilities Relating to Other Information

COMPARISON OF AUDITOR’S REPORT: OLD V NEW

Seq. No.	Old Format	New Format
1.	Title and Addressee	Title and Addressee
2.	Subtitle: Report on the Financial Statements	Subtitle: Report on the Audit of the Financial Stat.
3.	Introductory Paragraph	Auditor’s opinion (including introductory paragraph)
4.	Management’s Responsibility	Basis for opinion (mandatory)
5.	Auditor’s Responsibility	Emphasis matter (SA 706)
6.	Basis for modified opinion, if any	Material Uncertainty relating to Going Concern, if applicable (SA 570)
7.	Auditor’s opinion	Key Audit Matters, if applicable (SA 701)
8.	Emphasis of matter	Other Information if applicable (SA 720)
9.	Other matter	Management’s Responsibility
10.	Report on other legal and regulatory requirements	Auditor’s Responsibility for the Audit of the Financial Statements
11.	Signature, date of the report and membership number and place of signature	Other matter
12.	-	Report on other legal and regulatory requirements
13.	-	Signature, date of the report and membership number and place of signature

KEY CHANGES IN AUDITOR’S REPORT

1. Opinion:

The most important part of the auditor’s report i.e. Opinion is now required to be positioned at the beginning of the audit report, followed by the Basis for Opinion.

2. Basis for Opinion (now Mandatory):

• The Basis for Opinion section previously was required only when the auditor’s opinion was modified. Now, this section will be required for all auditor’s reports and will explain that the audit was conducted in accordance with the SAs and whether the audit evidence obtained is sufficient and appropriate to provide a basis for the opinion.

• The Basis for Opinion section will also include a new affirmative statement that the auditor is independent of the entity and has fulfilled the auditor’s other relevant ethical responsibilities relating to the audit, which includes the Code of Ethics issued by the ICAI together with the ethical requirements that are relevant to the audit of the financial statements under the provisions of the Companies Act, 2013 and the Rules thereunder.

3. Material Uncertainty relating to Going Concern (where applicable)

When a material uncertainty related to going concern exists and disclosure in the financial statements are adequate, than separate section “Material Uncertainty relating to Going Concern” is required with explanation. Earlier this was reported within an Emphasis of Matter Paragraph.

Illustrative Paragraph of Material Uncertainty relating to Going Concern:

We draw attention to Note XX in the financial statements, which indicates that the company has accumulated losses and its net worth has been fully / substantially eroded, the Company has incurred a net loss/net cash loss during the current and previous year(s) and, the Company’s current liabilities exceeded its current assets as at the balance sheet date. These events or conditions, along with other matters as set forth in Note XX, indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Also, following point may be included in Report on Other Legal and Regulatory requirements paragraph.

As required by Section 143(3) of the Act, we report that: (f) The going concern matter described in material uncertainty related to going concern paragraph above, in our opinion, may have an adverse effect on the functioning of the Company.

If the auditor concludes that there is a material uncertainty and the disclosure given in the financial statements are inadequate, the auditor should modify the audit report in accordance with the requirements specified in SA 705(Revised).

4. Key Audit Matters (mandatory for listed companies)

A new Key Audit Matters (KAMs) section for audits of listed entities and circumstances when the auditor otherwise decides to communicate key audit matters in the auditor’s report; and when the auditor is required by law or regulation to communicate key audit matters in the auditor’s report. The auditors have to describe in their public reports what they saw as the matters of most significance in the audit, and how those matters were addressed in the audit.  The new Key Audit Matters section is the centerpiece of the revised auditor’s report, and the subject of a new separate standard, SA 701.

Extract from Raymond Limited 2018-19 Auditor Report 

We have determined the matters described below to be the key audit matters to be communicated in our report.

Key audit matter	How our audit addressed the key audit matter
Impairment testing of investments in joint venture

Refer Note 5, 14 and 34 to the accompanying standalone financial statements As at 31 March 2019, the carrying amount of investment in a joint venture company viz. Raymond UCO Denim Private Limited (the ‘joint venture’) is ` 4,420.79 lakhs (net of provision for diminution in the value of investment of ` 13,800 lakhs). Further, the Company has also invested in preference share capital of the joint venture, the carrying amount of which as at 31 March 2019 is ` 8,378.19 lakhs.

The net worth of the joint venture as at 31 March 2019 is fully eroded. Management has considered that the losses suffered by the joint venture and erosion of its net worth indicates a possible impairment in the carrying value of investment.

Accordingly, the management has performed an impairment assessment and has estimated the recoverable amount of its investment in the joint venture using ‘Discounted Cash Flow valuation model’, which is complex and involves the use of significant management estimates and assumptions that are dependent on expected future market and economic conditions.

As per such assessment done by the management, the carrying value of the investment was impaired by ` 2,000 lakhs in the current year, as disclosed in Note 34 to the financial statements.

Considering the materiality of the amounts involved, the significant management judgement required in estimating the quantum of diminution in the value of investment and such estimates and judgements being inherently subjective, this matter has been identified as a key audit matter for the current year audit.Our procedures included, but were not limited to the following:

• Obtained an understanding of management’s process and evaluated design and tested operating effectiveness of controls around identification of indicators of impairment under Ind AS, and around valuation of the business of the joint venture to determine recoverable value of the said investment;

• Assessed the appropriateness of methodology and valuation model used by the management to estimate the recoverable value of investment in the joint venture;

• Assessed the professional competence, objectivity and capabilities of the valuation specialist engaged by the management;

• Assessed the reasonableness of assumptions relating to revenue growth rate, gross margins, discount rates etc. based on historical results, current developments and future plans of the business estimated by management using expertise of our valuation specialist on required parameters;

• Assessed cash flow forecasts to ensure consistency with current operations of the Company and performed sensitivity analysis on key assumptions used in management’s calculated recoverable value.

Based on our procedures, we also considered the adequacy of disclosures in respect of investment in the said joint venture in the notes to the standalone financial statements.

5. Other Information (where applicable)

A new section on Other Information (where applicable) in accordance with requirements of SA 720(Revised), The Auditor’s Responsibilities relating to other Information. Other information is referred as Financial or non-financial information (other than financial statements and the auditor’s report thereon) included in an entity’s annual report.

Examples of amounts and other items that may be included in other information:

• Items in a summary of key financial results, such as net income, earnings per share, dividends, sales and other operating revenues, and purchases and operating expenses.
• Capital expenditures by segment or division
• Explanations of critical accounting estimates and related assumptions
• Amounts involved in guarantees, contractual obligations, legal or environmental claims, and other contingencies
• Identification of related parties and descriptions of transactions with them.
• Explanations of critical accounting estimates and related assumptions.
• General descriptions of the business environment and outlook.

Extract from Infosys Limited 2017-18 Auditor Report

Information Other than the Standalone Financial Statements and Auditor’s Report Thereon

The Company’s Board of Directors is responsible for the preparation of the other information. The other information comprises the information included in the Management Discussion and Analysis, Board’s Report including Annexures to Board’s Report, Business Responsibility Report, Corporate Governance and Shareholder’s Information, but does not include the standalone financial statements and our auditor’s report thereon.

Our opinion on the standalone financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the standalone financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the standalone financial statements or our knowledge obtained during the course of our audit or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

6. Management’s Responsibility

This section of the auditor’s report is expanded to also identify those responsible for the oversight of the financial reporting process, when those responsible for such oversight are different from those who fulfill the responsibilities for preparing financial statements (in many cases, the audit committee). In this case, the heading of this section shall also refer to “Those Charged with Governance” or such term that is appropriate in the context of the legal framework applicable to the entity.

7. Auditor’s Responsibility

The detailed description of the auditor’s responsibilities is included in relation to specific matters, including fraud, internal control, accounting policies and accounting estimates, evaluating the overall presentation, structure and content of the financial statements and disclosures, group audits, and communications with those charged with governance.

Because of the increased length of this section, SA 700(Revised) includes a provision that certain components of this description may be presented in an appendix to the auditor’s report or, where law, regulation or applicable auditing standards expressly permit, by reference to a website of an appropriate authority.

EMPHASIS OF MATTER v. KEY AUDIT MATTER v. OTHER MATTER

Emphasis of Matter	Key Audit Matter	Other Matter
A matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements.	A matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.	Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period
Examples:

• § Change in significant accounting policy
• § Revenue recognition (measurement)
• § Future outcome of exceptional litigation
• § Impairment test

Examples:

• Change in Auditor: previous year figures are audited by previous auditor
• Unaudited accounts of group entities in CFS
• Appointment of auditor post year end

Examples:

• Asset Impairment
• Revenue
• Allowance for doubtful debt
• Goodwill impairment
• Valuation of inventories
• Fixed assets including depreciation

 Conclusion:

As there is a major change in the auditor report, the auditors need to be careful in first year while issuing audit report for the year 2018-19. In case of listed companies, special attention is required of reporting Key Audit Matters. Overall, the changes in the audit report is a welcome step and will enhance communication between auditors and stakeholders.

 IFC : existence, adequacy and operating effectiveness of an internal financial control system

IFC definition as per Companies Act

Internal financial controls means Policies and procedures adopted by the company for ensuring orderly and efficient conduct of its business

Including

– Adherence to company’s policies

– the safeguarding of its assets

– the Prevention and detection of frauds and errors

– the accuracy and completeness of the accounting records, and

– The timely preparation of reliable financial information

What is required?

• A demonstrable documented framework for internal financial controls

• Documentation of controls that actually mitigate the risk of significant misstatements

• Requisite accountability for financial reporting structure

• Fraud risks and controls at the process level to be understood and are demonstrable

• Testing of operating effectiveness of controls

Statutory Provisions under Companies Act 2013 related to Internal Financial Control

Statutory Provisions	Area	Regulatory mandate	Applicability
Section 134 (5)(e) of Companies Act 2013	Directors Responsibility Statement	Board of Directors have to confirm that they have laid down IFC and that such IFC are adequate and were operating effectively.	Listed Entities
Section 177 of Companies Act 2013	Audit Committee	Should evaluate IFC and risk management systems. Call on the auditors to comment on IFC.	All Entities having an Audit committee
Section 149 (7), Schedule IV of the Companies Act 2013	Independent directors	Should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible	All Entities having independent directors
Section 143 (3)(i) of Companies Act 2013*	Auditors Report	Auditors have to report whether the company has adequate internal financial controls and the operating effectiveness of such controls	All Entities (Listed/ unlisted)
Rule 8 (5) of Companies Accounts Rules	Board of Directors report	The details in respect of adequacy of internal financial controls with reference to financial statements	All Entities (Listed /Unlisted)

Comparison of Provisions with Companies Act 2013

Analysis

Directors of listed companies and auditors of every company have to confirm/ report the existence, adequacy and operating effectiveness of an internal financial control system. This could be viewed as an extension of the requirement under the amended CARO -Companies (Auditor’s) Report 2004 to make directors and auditors directly responsible.

The provisions related to internal financial control bear a striking resemblance to the Assessment of Important Financial Manual and Automated Controls under the US Public Company Accounting Reform and Investor Protection Act.

However, there is a stark contrast too, as the latter applies only to large publicly-listed companies while the former applies to the audit of every company. As the cost of testing such controls is disproportionately higher for smaller companies, the US Securities and Exchange Commission has exempted listed companies that are neither accelerated nor large accelerated filers.

Implementation of the provision in its current form would lead to chaos as there are no standards yet for auditing the existence and operating effectiveness of controls and the reporting obligations of auditors. The Ministry of Corporate Affairs needs to rethink and go in for phased implementation.

Financial reporting Controls VS  Operational Controls

CARO

Particulars	CARO, 2015	CARO, 2016	Change	Remark
Fixed Assets	i(a) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets;	i(a) Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets;	No Change	------
	i(b) whether these fixed assets have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account;	i(b) Whether these fixed assets have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account;	No Change	------
	No clause	i(c)Whether title deeds of immovable properties are held in the name of the company. If not, provide details thereof.	New clause is introduce for immovable property only	Cases may be arises in which title deeds are registered in the name of holding company and used by the subsidiary company.
Inventories	ii(a) whether physical verification of inventory has been conducted at reasonable intervals by the management; ii(b) are the procedures of physical verification of inventory followed by the management reasonable and adequate in relation to the size of the company and the nature of its business. If not, the inadequacies in such procedures should be reported; iii(c) whether the company is maintaining proper records of inventory and whether any material discrepancies were noticed on physical verification and if so, whether the same have been properly dealt with in the books of account;	ii(a) Whether physical verification of inventory has been conducted at reasonable intervals by the management and whether any material discrepancies were noticed and if so, how they have been dealt with in the books of account;	1. No need to comment on procedure followed by the management is reasonable or not according to the size of the company. 2. no need to comment on company is maintaining proper records of inventory or not.	Auditor need to collect necessary evidences to ensure that physical verification of inventory has been conducted at reasonable intervals by the management and discrepancies were noticed has been dealt with in the books of account.
Loan Granted	iii. whether the company has granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained under section 189 of the Companies Act. If so,	iii. Whether the company has granted any loans, secured or unsecured to companies, firms or other parties covered by clause (76) of Section 2 of the Companies Act, 2013. If so,	Register maintained under section 189 is replaced by clause (76) of Section 2	------
	No Cause	iii(a) Whether the terms and conditions of the grant of such loans are not prejudicial to the company’s interest;		Auditor verify loan agreement, resolution passed and various other documents related to loan granted like adequate margin for security of loan etc
	iii(a) whether receipt of the principal amount and interest are also regular; and	iii(b) Whether receipt of the principal amount and interest are regular. If not provide details thereof; and
	iii(b) if overdue amount is more than rupees one lakh, whether reasonable steps have been taken by the company for recovery of the principal and interest;	iii(c) If overdue amount is more than rupees five lakhs, whether reasonable steps have been taken by the company for recovery of the principal and interest;	Overall limit increased from one lakh to five lakhs	Auditor of the company need to verify terms & conditions mentioned in loan agreements, resolutions passed to check overall limits.
Loans, Investments and gurantees	No Clause	(iv) In respect of loans, investments and guarantees, whether provisions of Section 185 and 186 of the Companies Act, 2013 have been complied with. If not, provide details thereof.	New clause	Auditor need to examine minutes of the Board meetings and related parties register and other documents.
Internal Control	(iv) is there an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services. Whether there is a continuing failure to correct major weaknesses in internal control system.	No Clause	Clause not included	ICAI release guidance notes on Internal Financial Control.
Deposit	in case the company has accepted deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act and the rules framed thereunder, where applicable, have been complied with? If not, the nature of contraventions should be stated; If an order has been passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any court or any other tribunal, whether the same has been complied with or not?	in case the company has accepted deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act, 2013 and the rules framed thereunder, where applicable, have been complied with? If not, the nature of such contraventions be stated; If an order has been passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any court or any other tribunal, whether the same has been complied with or not?	No change	Definition of the deposit as per companies act is so wider like advance received from customers and not adjusted up to or more than 365 days become included under the definition of deposit. Various other transactions are fall under that category.
Cost Records	(vi) Where maintenance of cost records has been specified by the Central Government under sub-section (1) of section 148 of the Companies Act, whether such accounts and records have been made and maintained;	(vi) Whether maintenance of cost records has been specified by the Central Government under sub-section (1) of section 148 of the Companies Act, 2013 and whether such accounts and records have been so made and maintained;	No Change	Companies(Cost Records and Audit) Rules, 2014
Statutory dues	(vii)(a) is the company regular in depositing undisputed statutory dues including provident fund, employees’ state insurance, income-tax, sales-tax, wealth tax, service tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated by the auditor.	(vii)(a) whether the company is regular in depositing undisputed statutory dues including provident fund, employees' state insurance, income-tax, sales-Lax, , service tax, duty of customs, duty of excise, value added tax, and any other statutory dues with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated by the auditor.	No Change	------
	(vii)(b) in case dues of income tax or sales tax or wealth tax or service tax or duty of customs or duty of excise or value added tax or cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned. (A mere representation to the concerned Department shall not constitute a dispute).	(vii)(b) Where dues of income tax or sales tax or service tax or duty of customs or duty of excise or value added tax have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned. (A mere representation to the concerned Department shall not be treated as a dispute).	No Change	------
	(vii)(c) whether the amount required to be transferred to investor education and protection fund in accordance with the relevant provisions of the Companies Act, 1956 (1 of 1956) and rules made thereunder has been transferred to such fund within time.	No Clause	Clause not included	Auditor need to take written representation from management to ensure that appropriate amount required to transfer is transferred to comply provision of the Act.
Net Worth	(viii) whether in case of a company which has been registered for a period not less than five years, its accumulated losses at the end of the financial year are not less than fifty per cent of its net worth and whether it has incurred cash losses in such financial year and in the immediately preceding financial year;	No Clause	Clause not included	Auditor of the company need to comment on going concern of the company.
Default in Repayment	(ix) whether the company has defaulted in repayment of dues to a financial institution or bank or debenture holders? If yes, the period and amount of default to be reported;	(viii) Whether the company has defaulted in repayment of dues to a financial institution or bank or debenture holders? If yes, the period and amount of default to be reported (in case of banks and financial institutions, lender wise details to be provided).	(in case of banks and financial institutions, lender wise details to be provided)	Auditor of the
Guarantee	(x) whether the company has given any guarantee for loans taken by others from bank or financial institutions, the terms and conditions whereof are prejudicial to the interest of the company;	No Clause	Clause not included	------
Term Loan/ Money raised	(xi) whether term loans were applied for the purpose for which the loans were obtained;	(ix) Whether moneys raised by way of public issue/ follow-on offer (including debt instruments) and term loans were applied for the purposes for which those are raised. If not, the details together with delays / default and subsequent rectification, if any, as may be applicable, be reported;	Whether moneys raised by way of public issue/ follow-on offer (including debt instruments). Further details together with delays / default and subsequent rectification, if any, as may be applicable, be reported;	Auditor comment on continues default as well as defaults rectified by the company
Fraud	(xii) whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated.	(x) Whether any fraud by the company or any fraud on the Company by its officers/ employees has been noticed or reported during the year; If yes, the nature and the amount involved be indicated.	Under the CARO, 2016 specified that fraud by its officers/ employees.	ICAI issued Revised Guidance Note on Reporting on Fraud under Section 143(12).
Managerial Remuneration	No Clause	(ix) Whether managerial remuneration has been paid / provided in accordance with the requisite approvals mandated by the provisions of section 197 read with schedule V to the Companies Act? If not, state the amount involved and steps taken by the company for securing refund of the same.	New Clause	Special take care is taken in case of private limited company.
Nidhi Company	No Clause	(xii) Whether the Nidhi Company has complied with the Net Owned Fund in the ratio of 1: 20 to meet out the liability and whether the Nidhi Company is maintaining 10% liquid assets to meet out the unencumbered liability.	New Caluse	------
Related Parties Transactions	No Clause	(xiii) Whether all transactions with the related parties are in compliance with Section 188 and 177 of Companies Act, 2013 where applicable and the details have been disclosed in the Financial Statements etc as required by the accounting standards and Companies Act, 2013.	New Clause	Auditor of the company verify AOC-2, minutes of the board meeting and other documents to ensure that all related parties transaction are disclosed in Financial Statement
Preferential allotment / Private placement	No Clause	(xiv) Whether the company has made any preferential allotment / private placement of shares or fully or partly convertible debentures during the year under review and if so, as to whether the requirement of Section 42 of the Companies Act, 2013 have been complied and the amount raised have been used for the purposes for which the funds were raised. If not, provide details thereof.	New Clause	Companies Act, 2013 has made various new changes to allot securities of the company like offer letter requirements etc.
Non-cash Transactions	No clause	(xv) Whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether provisions of Section 192 of Companies Act, 2013 have been complied with.	New Clause	All non-cash transaction are covert under this clause like Car, flats etc given by company.

CARO 2015

Clauses Removed

Particulars	CARO, 2015	Comparison with CARO 2003
(i) Reporting on maintaining, verifying and disposing off the fixed assets	(a) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets; (b) whether these fixed assets have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account;	Requirement to report disposing off of substantial part of fixed assets during the year, if any, has been done away with.
(ii) Physical Verification and maintenance of records of Inventories	(a) whether physical verification of inventory has been conducted at reasonable intervals by the management; (b) are the procedures of physical verification of inventory followed by the management reasonable and adequate in relation tothe size of the company and thenature of its business. If not, the inadequacies in such procedures should be reported; (c) whether the company is maintaining proper records of inventory and whether any material discrepancies were noticed on physical verification and if so, whether the same have been properly dealt with in the books of account;	Same Provision
(iii) Reporting on repayment of loans granted by the Company	Whether the company has granted any loans, secured or unsecured to companies, firms or other parties covered in the register maintained under section 189 of the Companies Act. If so,(a) whether receipt of the principal amount and interest are also regular; and  (b) if overdue amount is more than rupees one lakh, whether reasonable steps have been taken by the company for recovery of the principal and interest;	·   Reporting of loans taken by the Company not included in CARO, 2015.   Reporting on rates charged not required under CARO, 2015 as company will charge as per Section 186 (7).
(iv) Internal control System	Is there an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services. Whether there is a continuing failure to correct major weaknesses in internal control system.	Reporting on adequate internal control procedure for sale of services also included under CARO, 2015
Transactions entered by the company in which the director(s) is/are interested	No such provision	·         Reporting on whether transactions in which directors are interested and pricing of these transactions are not required.·        Act, 2013 mandates Audit Committee to review all related party transactions inter-alia determining whether the same has been conducted on arm’s length basis on not. Merely charging at prevailing market price is no more the criteria. Entire transaction needs to be on arm’s length basis.
(v) Acceptance of deposits	In case the company has accepted deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act and the rules framed there under, where applicable, have been complied with? If not, the nature of contraventions should be stated;If an order has been passed by   Company Law Board or National Company Law Tribunal or Reserve Bank of India or any court or any other tribunal, whether the same has been complied with or not?	Same provision
Internal Audit System	No such provision	The purpose of internal audit is to identify that whether the compliance system is adequate commensurate with the size of the company. Act, 2013 mandates the Directors to report the same under Director’s Responsibility Statement under Section 134.
(vi) Cost Records	Where maintenance of cost records has been specified by central Government under sub-section (l) of section 148 of the Companies Act, whether such accounts and records have been made and maintained.	Same Provision
(vii) Payment of applicable taxes	(a) is the company regular in depositing undisputed statutory dues including provident fund, employees’ state insurance, income-tax, sales-tax, wealth tax, service tax, duty of customs, duty of excise, value added tax cess and any other statutory dues with the appropriate authorities and ii not, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated by the auditor.(b) in case dues of income tax or sales tax or wealth tax or service tax or duty of customs or duty of excise or value added tax or cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned. (A mere representation to the concerned Department shall not constitute a dispute) (c) whether the amount required to be transferred to investor education and protection fund in accordance with the relevant provisions of the Companies Act, 1956 (1 of 1956) and rules made thereunder has been transferred to such fund within time.	CARO, 2015 mandates the reporting whether amount required to be transferred to investor education and protection fund in accordance with the relevant provisions of   the Companies Act, 1956 (1 of 1956) and rules made thereunder has been transferred to such fund within time.
(viii) Accumulated losses	Whether in case of a company which has been registered for a period not less than five years, its accumulated losses at the end of the financial year are not less than fifty per cent of its net worth and whether it has incurred cash losses in such financial year and in the immediately preceding financial year;	Same Provision
(ix) Default in repayment of dues	Whether the company has defaulted in repayment of dues to a financial institution or bank or debenture holders? If yes, the period and amount of default to be reported.	Same Provision
Records required to be maintained by the company	No Such Provision	CARO, 2015 does not mandate reporting of the same as pledge of shares has been included in the definition of charge and the   auditor can assess the same by viewing relevant forms for the same.
Compliance of special statue provisions	No such provision
Records maintained	No such provision
(x) Guarantee for loan taken	Whether the company has given any guarantee for loans taken by others from bank or financial institutions, the terms and conditions whereof are prejudicial to the interest of the company.	Same Provision
(xi) Applicability of term loan	Whether term loans were applied for the purpose for which the loans were obtained.	Same Provision
Details of funds raised	No such provision
Preferential Allotment and determination of arm’s length price	No such provision	Act, 2013 mandates under Section 62 (1) (c) obtaining valuation report for preferential allotment made, which takes care of pricing issue. Thus, the same has not been included under CARO, 2015
Creation of security	No such provision
End-use of money raised	No such provision
(xii) Reporting of fraud	Whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated.	Same Provision
Reasons to be stated for unfavourable or qualified answers	·     Where, in the auditor’s report, the answer to any of the questions referred to in paragraph 3 is unfavorable or qualified, the auditor’s report shall also state the reasons for such unfavorable or qualified answer, as the case may be.·          Where the auditor is unable to express any opinion in answer to a particular question, his report shall indicate such fact together with the reasons why it is not possible for him to give an answer to such question.	Same Provision

Auditing Standards

New Companies Act Compliance Check List

Other Reporting Requirements by Auditors 

 AUDITOR’S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS UNDER THE COMPANIES ACT, 2013 -ANNOUNCEMENT BY ICAI

The Auditing and Assurance Standards Board, under the authority of the Council, has already issued the illustrative formats of the auditor’s report on standalone financial statements of a company under the Companies Act 2013 in December 2014. While reporting on the consolidated financial statements (CFS) of a company under the Companies Act 2013, the auditors may draw guidance from the aforementioned formats and suitably reword the same, as required, to meet the circumstances of audit of CFS. The auditors of CFS, while reporting in respect of the provisions of, inter alia, section 143(3) and section 143(11) of the Companies Act, 2013 in their report on CFS, are also advised to:

• consider the observations and comments as given in this regard in the auditors’ reports of the component auditors. 
• include in their report or draw suitable reference to, negative/adverse comments, if any, in respect of section 143(3) and section 143(11) of the Act relating to a component, as appearing in the component auditors’ report.

The auditors of CFS are also advised to apply concept of materiality and professional judgment as provided in the Standards on Audit while reporting on the Consolidated Financial Statements.

The following illustrative formats of an auditors’ report on CFS, covering some of the clauses of section 143(3) of the Companies Act, 2013 (and where the auditor does not have the responsibility for reporting on internal financial controls over financial reporting under section 143(3)(i) of the Companies Act, 2013), are being issued herewith just to provide a broad guidance on how such a report may be prepared. These formats may be applied for the FY 2014-15 and until further announcement. It is reiterated that the auditors of CFS may suitably reword/redraft these formats to suit the circumstances of their audit engagement.

Type of Format
Unmodified opinion on the consolidated financial statements (click here to download the format)	This format will be added in the Appendix to SA 700
Modified opinion on the consolidated financial statements (click here to download the format)	This format will be added in the Appendix to SA 705

Guidence Note on Reporting of Fraud by statutory auditors to central government under 
section 143(12)

Under section 143(12) of the Act, statutory auditors are required to report to the central government about a fraud or suspected fraud committed against the company by the officers or employees of the firm. 

In a detailed guidance note on reporting on fraud by auditors under the Companies Act, the apex body of chartered accountants ICAI has said they should "apply professional skepticism" while dealing with such matters. 

The Institute of Chartered Accountants of India has said that such reporting needs to be done only if such frauds would have a material impact on the financial statements. 

"In case a fraud has already been reported or has been identified/detected by the management or through the company's vigil/whistle blower mechanism and has been/is being remediated/dealt with by them and such case is informed to the auditor, the latter will not be required to report the same ...," ICAI said in the note issued recently. 

This is because the auditor has not per se identified the fraud, it added. 

According to the note, the auditor should apply "professional skepticism" to evaluate whether the fraud was indeed identified in all aspects by the management or through the company's whistle blower mechanism. 

ICAI said that such an approach would help in making a between frauds identified due to matters raised by the auditor and those detected by company through its internal control mechanisms. 

Price Waterhouse's Partner Sumit Seth said the guidance note provides clarity on various aspects about reporting of fraud by auditors. 

He said: "It clarifies the definition of fraud, explains when and which frauds are to be reported, the manner of reporting including bringing in the concept of materiality which is fundamental to setting up an appropriate internal control system and audit. 

"...An auditor will report frauds to central government only if he is the first person to identify/note such fraud.

How a CA should Sign

Every time Auditors use the word Auditor's Report. It is the report to be Signed and Issued by Qualified Chartered Accountant who is in Practice. Without signing the report by the Chartered Accountant, it cannot be said that it is an "Auditor's Report"

A Chartered Accountant's pen is the Most Powerful tool. Now,ICAI issued some guidelines on the Manner of Signing of Certificates by Chartered Accountants.

The Council of the Institute of Chartered Accountants of India (ICAI), at its 349th meeting held on 17th and 18th January, 2016 considered an issue relating to manner of signing of certificates by Chartered Accountants. The Council noted that presently different practices were in vogue in respect of the manner of signing of various certificates issued by the members of the ICAI.

On a consideration of the matter, the Council, with a view to bring uniformity in the manner of signing of certificates, has decided to require the members of the ICAI to include (in addition to any other requirements in this regard prescribed by the relevant law or regulation under which the certificate is being issued) the following details in their "Signatures" on the certificates issued by them:

Name of the CA firm* 

Firm Registration Number (FRN)* 

Name of the member Designation (Partner/Proprietor) 

Membership Number

PCAOB proposes significant changes to the auditor's report (No. 2013-40)

DOWNLOAD

What's new?

On August 13, the Public Company Accounting Oversight Board ("PCAOB" or the "Board")proposed for public comment a new auditing standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and related amendments (the "proposed standard") that would require the auditor to disclose additional information in the auditor's report about the audit and the auditor. Among other matters, the proposed standard would require auditors to include in the audit report a discussion of critical audit matters ("CAM") specific to the audit.

The proposal follows up the PCAOB's 2011 Concept Release and public roundtable to seek the views of all stakeholders on potential changes to the auditor's report.

What are the key provisions?

The proposed standard would retain the existing pass/fail model and the basic elements of the auditor's report, but would require the auditor to report a wider range of information specific to the particular audit and auditor.

Communicating critical audit matters

The auditor would be required to communicate in a separate section of the audit report the CAM in the audit of the current period's financial statements based on the results of the audit or evidence obtained. It is expected that in most audits, the auditor would determine that there are CAM. CAM are those matters the auditor addressed during the audit of the financial statements that:

·         Involved the most difficult, subjective, or complex auditor judgments

·         Posed the most difficulty to the auditor in obtaining sufficient appropriate audit evidence

·         Posed the most difficulty to the auditor in forming an opinion on the financial statements

CAM ordinarily are matters of such importance that they are included in the matters required to be (1) documented in the engagement completion document; (2) reviewed by the engagement quality reviewer; (3) communicated to the audit committee; or (4) any combination of the three. It is not expected that each matter included in any one or more of these three sources would be a CAM. The proposed auditor reporting standard identifies factors the auditor should take into account in determining CAM including, for example:

·         The severity of control deficiencies identified relevant to the matter, if any

·         The nature and significance, quantitatively or qualitatively, of corrected and accumulated uncorrected misstatements related to the matter, if any

The auditor's report would (1) identify the CAM; (2) describe the considerations that led the auditor to determine that the matter is a CAM; and (3) refer to the relevant financial statement accounts and disclosures that relate to the CAM, when applicable.

Other proposals

Other provisions of the proposed standard would require:

·         A statement containing the year the auditor began serving consecutively as the company's auditor

·         A statement that the auditor is a public accounting firm registered with the PCAOB (United States) and is required to be independent with respect to the company in accordance with the United States federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission ("SEC") and the PCAOB

·         Enhancements to existing language in the auditor's report related to the auditor's responsibilities for fraud and the notes to the financial statements

·         Communication in the auditor's report related to other information pursuant to another new auditing standard that the PCAOB proposed concurrently, The Auditor's Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor's Report 

    Who's affected?

The proposed standard is applicable to audits conducted in accordance with PCAOB standards; however, the Board is soliciting comments on whether the proposed standard is appropriate for audits of brokers and dealers and audits of emerging growth companies (EGCs).

What's the proposed effective date?

The proposed standard would be effective, subject to approval by the SEC, for audits of financial statements for fiscal years beginning on or after December 15, 2015.

What's next?

Comments on the proposed standard are due on December 11, 2013.




UID PORTAL for CERTIFICATION done by CAs in Practice

Dear All,

It for your information that a very welcome step has been initiated by ICAI. Now the UID portal for issuance of certificates by chartered accountants in practice is enabled and working

http://online.icai.org/uid/?mode=login

We should use this portal for issuance of certificates to avoid any fake certification and also to make certifications transparent and verifiable over internet.

Please use this portal and report any shortcomings / suggestions / bug in portal to Mr. Vivek Gupta, Assistant Secretary, EDP-IT Department, ICAI at his email id:vivek@icai.org

FAQ's for UID portal can be accessed at
http://online.icai.org/uid/FAQ-UID.pdf

Issued Certificates by CA's can be verified at
http://online.icai.org/searchudin.html

Also, please share this post so that it can reach our friends and members at large and they all can use it for betterment of quality of their services.

Compilation Engagements by Accounting and Audit Firms

Exposure Draft Standard on Related Services (SRS) 4410 (Revised) Compilation Engagements The ICAI has issued this exposure draft which deals with the practitioner’s responsibilities when engaged to assist management with the preparation and presentation of historical financial information without obtaining any assurance on that information, and to report on the engagement in accordance with this SRS. The exposure draft is open for public comments till 06 February 2014. Read more

IS THE AUDIT PROFESSION AT CROSS-ROADS

By Bharat Vasani, Esha Himadri & Varun Kannan on July 6, 2021

Introduction

Recent amendments to the statutory framework under the Companies Act, 2013 ("the Act"), have cast focus on the ever-expanding statutory duties of the auditors of a company. The purpose of an audit is to enhance the degree of confidence of users of the financial statements.

 In this regard, Section 129 of the Act provides that the financial statements prepared by a company should comply with three prime conditions:

They should give a true and fair view of the state of affairs of the company/ companies.

They should comply with the accounting standards notified under Section 133 of the Act.

They should be in the form provided in Schedule III of the Act.

The Ministry of Corporate Affairs ("MCA") has notified 39 Indian Accounting Standards (Ind AS), under Section 133 of the Act. 

Further, Section 143(9) of the Act provides that every auditor shall comply with the auditing standards, which are issued by the Institute of Chartered Accountants of India ("ICAI"). The ICAI has, as on date, issued 38 auditing standards, which guide auditors in carrying out their overall responsibilities.

Section 143(2) of the Act provides that the auditor shall make a report to the members of the company, on the accounts examined by him, and on the financial statements prepared in accordance with Section 129 and Schedule III of the Act. In accordance with Section 143(2), the Auditor's Report shall, after taking into account the provisions of the Act, and the applicable accounting and auditing standards, make a statement as to whether the financial statements give a true and fair view of the state of the company's affairs at the end of the financial year.

Section 143(3) of the Act prescribes the matters on which a statement should be made in the Auditor's Report, which include aspects such as whether the balance sheet/ profit & loss account are in agreement with the books of account and returns, whether the financial statements comply with the applicable accounting standards, etc. Rule 11 of the Companies (Audit and Auditors) Rules, 2014 ("Audit Rules"), prescribes additional matters on which the views and comments of the auditors should be included in the Auditor's Report, and includes aspects such as whether the financial statements disclose the impact of pending litigations on the financial position of the company.

Expanding statutory duties of auditors

Recent amendments to the Act, the Audit Rules and the notification of the Companies (Auditor's Report) Order, 2020 ("CARO 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 ("Audit Amendment Rules"), 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:

the audit trail has not been tampered with;

the audit trail has been preserved as per statutory requirements for record retention.

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 ("CARO 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 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.

Increasing risks for auditors

The increase in the statutory duties of auditors has consequentially increased the risks associated with the audit profession, as auditors can now be penalised for failure to detect fraud, and for non-compliance with statutory provisions. The scrutiny on auditors has significantly increased with the constitution of the National Financial Reporting Authority ("NFRA") under Section 132 of the Act, w.e.f. October 1, 2018.

Section 132(4) of the Act confers the NFRA with wide powers to investigate professional and other misconduct of auditors, and allows for the imposition of stringent penalties – which include the power to debar an auditor or an audit firm from undertaking any audit for up to a period of ten years. The NFRA has already invoked the power conferred by Section 132(4), to order the debarment of the statutory auditors of IL&FS Financial Services Limited, for professional misconduct.

These recent developments highlight the skewed risk-reward relationship for auditors. While the recent statutory amendments have disproportionately increased the risks borne by auditors, the remuneration provided to auditors continues to be frugal. The skewed risk-reward relationship reduces the incentive for an auditor to conduct a comprehensive review of a company's affairs, in accordance with the statutory mandate.

The Supreme Court, in S. Sukumar v. the Secretary, ICAI[1] acknowledged the importance of the auditing profession, and highlighted the need for a regulatory framework to maintain oversight of the auditing profession, that is similar to the framework under the Sarbanes-Oxley Act, 2002, and the Dodd Frank Act, 2010, of the US.In this context, a Consultation Paper issued by the MCA on February 6, 2020, had sought public comments on development of a 'Composite Audit Quality Index', for improving accountability of auditors and audit firms.[2] The MCA proposed that this Index shall consist of quantitative and qualitative measures for determining audit quality, and may be made mandatory for listed companies, and voluntary for other classes of companies. However, there has been no further progress on the proposals made in the Consultation Paper.

Coming to Cross-Roads

Recently, auditors have been facing the brunt of enabling corporate frauds and are often penalised heavily. In ICAI v. Mukesh Gang[3], the Hyderabad High Court held the auditors guilty of gross negligence and violation of auditing standards. It was held that if such grave professional misconduct, which affect the confidence of the public, is not dealt with sternly, it would encourage others to indulge in similar acts, and completely erode public faith in the impartiality and integrity of the ICAI members. As a result, the auditor was suspended from practice for a period of three years.

The level of strictness with which auditors are penalised for wrong-doings, such as in Mukesh Gang case, is in stark contrast with decisions in earlier cases, such as in Union of India v. M.N. Basu[4], where the Calcutta High Court had acknowledged that non-reporting of extending loan without passing a resolution under Section 370 of the Companies Act, 1956, by the auditors was not due to gross negligence but due to an erroneous interpretation of law.

The previous proposition of an auditor being a 'watchdog and not a bloodhound' in the landmark case of Re Kingston Cotton Mills[5] has started becoming outdated with the recent changes in the legal framework governing auditors. The ever-increasing duties of auditors, coupled with the costs borne by them in cases of default has resulted in high-level anxiety amongst the professionals in the field. The cautious approach being adopted by auditors in accepting audit matters is testament to the same.

There has also been a sharp increase in the resignation of the auditors. As the regulatory sight on auditors have become sharper, many auditors have started resigning, owing to the associated reputational risks. According to data from nseinfobase.com, the mid-term cessation of auditors in NSE listed companies for the first six months of FY 2019-20 had reached an all-time high of 35. The recent spotlight on auditors have also led to reluctance among Chartered Accountants in joining the audit profession.

Given that shareholders and the public rely on financial statements for checking the financial health of a company, the implications of such statements, which are signed by the auditors are far-reaching. During the course of the audit, there may be cross-roads wherein the auditor may have to take a final call on an issue, which needs an application or interpretation of law. Often, auditors in such cross-roads resort to lawyers for taking legal opinions. Attempts are made by auditors to transfer the risks in the positions they have taken. As expected, the legal fraternity has resisted such attempts. The auditor should rather focus on improving the audit quality and raise the bar. Stakeholders have many expectations and rely on the auditor's report in making their financial decisions. It would be unwise to let them down.

[1] (2018) 14 SCC 360.

[2] Ministry of Corporate Affairs, Govt. of India, Consultation Paper to examine the existing provisions of law and make suitable amendments therein to enhance audit independence and accountability, February 6, 2020.

[3] 2016 (6) ALT 606.

[4] 1963 (6) FLR 153.

[5] (1896) 2 Ch 279 at 288, UK Court of Appeal.

Auditor to provide warning signals to regulators of impending disasters in corporates

Published on January 27, 2020 : Developing story as on Jan 2020

The Ministry of Corporate Affairs (MCA) is expected to take a major step to revamp the auditor's report that accompanies company balance-sheets, placing more onus on statutory auditors to fulfill their professional responsibilities. The move is expected in February.

Besides overhauling the Companies Auditors Report Order (CARO), the government is also likely to make changes to the secretarial audit reporting that is mandated under the company law, sources said.

The entire effort will be to provide early-warning signals to policy-makers and regulators of impending disasters in corporates, they said.

Indications are that the MCA may even ask statutory auditors to digitally file the new CARO instead of waiting for the auditor report to form part of the annual report.

The aim is to tighten the working of auditors and also push managements to conform to more elaborate disclosures on their state of affairs.

Draft recommendations

Already, an MCA-appointed Group, which was tasked to look into the current CARO and suggest changes, has submitted the draft recommendations to the Corporate Affairs Ministry. The National Financial Reporting Authority — the regulator of the audit profession — is likely to meet this month-end to deliberate on the changes needed to the existing CARO, the sources said.

Once the NFRA firms up its views and conveys them to the MCA, the new CARO is expected to get notified in February, they added.

The audit profession, which had an exceptionally challenging year in 2019, is hoping that unlike in 2016, when CARO was last revised, the Government will give it enough time to conform to the new norms.

In 2019, the audit fraternity came in for severe criticism for its role in the blowout of IL&FS, collapse of Dewan Housing & Finance Ltd, and the crisis at PMC Bank. Several large divergences were also observed in the audited accounts of YES Bank, SBI and other banks. Year 2019 also saw a spate of resignations by both statutory and internal auditors.

New companies Act 2013 :Cost Audit requirement and Board has to approve cost statements, including other statements to be annexed to the cost audit report before submission to auditors

Companies will now have to ensure that all statements annexed with the cost audit report are first approved by their board of directors before final submission.

Corporate Affairs Ministry, which is implementing the Companies Act, has amended the rules pertaining to cost records and audit in this regard.

Cost audit is mandatory for various classes of companies, including those in the areas of healthcare, construction and education.

As per the rules, cost auditor has to submit the cost audit report to the company's board of directors within 180 days from the close of a particular financial year.

Within 30 days of receiving the report, the company concerned has to submit the same to the ministry along with explanations about any "reservation or qualification" flagged by the cost auditor.

Now, the ministry has made it mandatory that any statement to be annexed with the cost audit report should be first approved by the company's board before being finalised.

"The cost statements, including other statements to be annexed to the cost audit report, shall be approved by the board of directors before they are signed on behalf of the board by any of the director authorised by the board, for submission to the cost auditor to report thereon," as per the revised rules.

Cost audit rules are applicable broadly on four classes of firms including those engaged in an industry regulated by a sectoral regulator or a central government ministry.

It would be in place for companies engaged in the production of goods in strategic sectors such as machinery and mechanical appliances used in defence.

Further, companies operating in areas involving public interest such as railways and firms that are into production, import and supply or trading of certain medical devices come under the cost audit rules.

Among the four categories, there are various thresholds for determining the requirement for maintaining cost records.

Removal of Cost Auditor

According to the ministry, a cost auditor can be removed before the term ends provided there is a board resolution. The entity or person concerned should be given reasonable opportunity to be heard besides recording the "reasons for such removal in writing".

Cost Audit under new Act  does not cover 96% of companies - ICWAI Institute

Suresh Chandra Mohanty, president of the cost accountants' institute, told Corporate Affairs Minister Sachin Pilot in a November 22 letter that the elected members of the institute may resign en masse if the ministry did nothing to protect its interests.

Cost accountants say they feel betrayed by the latest turn of events. An expert panel set up by the ministry in 2008 to review the cost audit mechanism had made certain recommendations about widening the scope of such checks. To start with, only 44 specific industries and businesses - in which administered prices, subsidies, regulation and strategic public interest are involved - had been covered by cost accountants. The field was enlarged through various notifications in 2011 and 2012 as per the suggestions of the expert committee.

However, draft rules issued by the ministry in November under the new Companies Act, roll back these changes. Mohanty described the draft rules as "de-facto withdrawal of recognition" in a November 23 press release.

By definition, this branch of accounting analyses costs such as raw material, wages and marketing that a company incurs and establishes a link with the profit margin it earns. In the process, companies get better clarity on costs, making them easier to control.

Cost accountants say the audit process helps authorities build authentic cost data on industries, which could be used in instances such as controlling drug prices, setting tariffs, plugging tax leakage or sniffing out fraud. Chartered accountants look at the company's books and validate the balance sheet.

Cost accountants feel that their utility won't be realised fully if more than 96% of the corporate sector is kept out of their purview as proposed in the latest draft rules. They believe cost audits play a critical role in ensuring good fiscal behaviour by querying company actions in detail.