highlights on changes in audit formalities under new companies act 2013

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Highlights on Changes in Audit Formalities under Companies Act 2013

Mehul Pawani

http://www.mymuneemji.com/

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Matters Covered

I. Fundamental Shifts in The Companies Act

II. Changes in Auditor’s ResponsibilityIII. Process flow for AppointmentIV. Highlights of Appointment ProcessV. Appended Engagement LetterVI. Key Points in Audit ReportVII. Key Additions to Audit ReportVIII. Applicability of CARO, 2015IX. Changes in CARO, 2015X. Tips for Implementation




Fundamental shift in Companies Act

Driving through rules model instead of hard coded Act.◦ Sections to be read with Rules and thereby

circulars to form a view. Standards on Auditing prescribed in the Act

for Auditors New-age transaction models taken into

consideration.◦ One Person Company (OPC)◦ Small Company◦ Disclosures enhanced

in Directors Report Cashflow part of Financial Statements




Changes in Auditor’s Responsibility

Operational parameters made important for Auditors◦Controls◦Systems◦Processes

Certification of the Financial Statements which includes the Cash flow statements

Fraud Detection




Process flow for appointment Board / Audit Committee recommends the

Auditor Auditor communicates the qualification

about the Companies Act and limits specified for Audits

EGM / AGM is called for and Auditor is informed about his “appointment” via a letter

Auditor shares the engagement terms with the members through “Engagement letter”

Company intimates the MCA




Highlights of appointment process

Sections applicable for Auditors appointment Sec 139

Qualification of Auditor (take this every year) as per Sec 141

Appointment for 5 years at a time with ratification in each meeting – for specific companies (Form ADT1 every 5 years only on fresh appointment)

Remuneration has be approved in the shareholders meeting specifically

Intimation to MCA of the Auditors’ appointment by the Company NOT by Auditor himself




Appended engagement letters

Cashflow is part of Financial Statements – Exempt for OPC & small companies

Internal Financial Controls w.e.f. from FY 15-16 (optional for FY 14-15 report)

Update sections of Companies Act 2013

Reporting of Frauds Sec 143 (12)




“Key Points” in the Audit Report

Director’s responsibility has increased drastically while some supplementary relief comes on way for the Auditors in CARO.

Enabling section 143 (1) instead of Sec 227 (1A) of the Companies Act.

Directors’ declaration for not being disqualified – Form DIR 8.

Existence of Internal Financial Control with Operating Effectiveness

Receipt Branch Audit Report by the Statutory Auditor




Management Responsibility◦Safeguarding of assets◦Preventing and detecting Frauds and

other Irregularities◦Judgements and Estimates◦Internal Financial Controls◦Selection and application of

Accounting policies

Key additions to Auditors’ report




Key additions to Auditors’ report

Auditors Responsibility◦ Reporting of Frauds◦ Adherence to Standards on Auditing

thereby Quality Control standards as wellChanges in Reporting as per Sec 143(3)

◦ Information - Sought AND ObtainedCompanies Audit and Auditors Rules,

2014 Dt. 31st March 2014◦ Impact of Litigations◦ Impact of Long term contract including

derivatives◦ IEPF




Applicability of CARO, 2015Includes: Foreign Companies under Section 2(42)Excludes: Banking and Insurance Companies One Person Company [OPC u/s 2(62)] Companies with Charitable Objects u/s 8 Private Companies (AND condition)

◦ Capital + Reserve < Rs. 50 Lakhs◦ Outstanding Loans < Rs. 25 Lakhs◦ Turnover < Rs. 5 Crores (Any given point in

time) Small Companies u/s 2(85)




Continued with Modifications

Related Party Loans◦ Only Granted NOT Taken

Internal Control – includes services and talks about systems apart from Controls

Deposits : Previously order was being passed by company law board, now RBI, National Company Law Tribunal or any other Board or Tribunal.

Statutory Dues Section both for routine and Disputes ◦ Should include Service Tax and VAT◦ An additional point for Investor Education

Protection Fund (IEPF) is added




Deletions / Removal Substantial part of Fixed Assets disposed,

whether it affects the going concern Related Parties

◦ Rate of interest are Prima-Facie prejudicial to the interest of the Company

◦ Related parties dropped for Loans or Contracts (u/s 301)even if transaction > 5Lakhs

Maintenance of documents and records for grant of loans & Advances

Internal Audit System Commensurate with size and Nature(Share holders fund>50L or Turnover> 5CR for 3 preceding FY.

Requirement specific to Chit-Fund/Nidhi/Mutual Benefit Fund/Societies




Tips for Implementation in Spirit

Upgrade the Quality Control manualUpgrade the Audit Program

◦ Team Training◦ Categorize you Audits in ‘A’, ‘B’, ‘C’ and divide

attention accordingly. ‘A’s may need dual reviews + expert review.

◦ Update checklists for the team◦ Update the standards Management

Representation letter formats MRL◦ Include a review from in house Company Law

expertClient Awareness program

◦ Change in Responsibility of Directors◦ New Audit Report requirements



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