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17 August 2017

Issues in reporting - Guidance Note on CARO 2016, Guidance note on Reports or Certificates for special purposes and other areas. 17 August 2017. Contents. Guidance Note on Companies (Auditor’s Report) Order, 2016 (CARO 2016) Salient features and a pplicability of CARO

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17 August 2017

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  1. Issues in reporting - Guidance Note on CARO 2016,Guidance note on Reports or Certificates for special purposes and other areas 17 August 2017

  2. Contents • Guidance Note on Companies (Auditor’s Report) Order, 2016 (CARO 2016) • Salient features and applicability of CARO • Matters to be included clause wise and related implementation issues • Guidance Note on Reports or Certificates for special purposes (Revised 2016) • Challenges and reporting issues • MCA provides exemptions to private companies - Auditor’s reporting on IFC • Auditor’s Report under Rule 11(d) of Companies (Audit and Auditors) Amendment Rules, 2017 – Specified bank notes post demonetisation

  3. Salient features of CARO • Central Government in exercise of powers conferred under section 143(11) of Companies Act, 2013 (Act) issued the Companies (Auditor’s report) Order, 2016 (‘CARO’ or ‘the Order’) containing matters on which auditors of companies (except certain categories) to make a Statement in audit report Final Rules released • Order is supplemental to the existing provisions of Section 143 of the Companies Act, 2013 (‘the Act’) • CARO requires a statement to be included in audit report in respect of matters specified therein Final Rules released • Order exempts certain classes of companies • Order contains several changes and new reporting requirements not covered in earlier CARO Final Rules released • Order does not limit the duties and responsibilities of the auditors • ICAI issued a Guidance Note on CARO in 2016 Final Rules released Final Rules released

  4. Applicability of CARO • CARO applies to all companies except the following • a banking company as defined in the Banking Regulation Act, 1949; and • an insurance company as defined in the Insurance Act, 1938 ; and • a company licensed to operate under Section 8 of the Act ; • One person company as defined under section 2(62) of the Act and a small company as defined under 2(85) of the Act ;and • a private limited company • not being a subsidiary or holding company of a public company with a paid-up capital and reserves & surplus not more than INR one crore as on the balance sheet date and • which does not have total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year and • which does not have a total revenue as disclosed in Schedule III to the Act, (including revenue from discontinuing operations) exceeding rupees ten crores during the financial year as per financial statements Also applies to foreign companies defined in section 2(42) of the Act

  5. Other Issues related to applicability of CARO • For determining applicability of CARO to a private company: • Both capital as well as revenue reserves to be considered (revaluation reserve also to be considered for determining applicability) • Debit balance of profit and loss to be netted off for computing reserves and surplus • Borrowings include terms loans, demand loans, export credits, cash credits, overdraft facilities, bills purchased or discounted, guarantees invoked and encashed, interest accrued and due • Loans taken from a private bank or a foreign bank to be considered • Revenue is total revenue (including other income and revenue from discontinuing operations) as per Schedule III • Applicable to audits of branches of a company also • Order not applicable to auditor’s report on consolidated financial statements • Period of compliance – better view to consider that auditor reporting on state of affairs as they existed during the accounting year; compliance to be judged with reference to the whole accounting year and not merely with reference to position existing at balance sheet date or date of audit report

  6. Matters to be reported and related implementation issues

  7. Clause 3(i)(c) – Reporting on title deeds of immoveable properties Whether the title deeds of immovable properties are held in the name of the company. If not, provide the details thereof (Clause 3(i)(c) of the 2016 order). • The clause requires reporting with respect to title deeds to the immovable properties (leasehold land and building)reflected in the fixed assets schedule of the financial statements of the Company • Immoveable property to include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to earth • Title deeds – registered sale deed/transfer deed/conveyance deed etc.; in case of leasehold land, examine whether lease agreement duly registered with appropriate authority • Auditor to perform procedures including • obtain sufficient appropriate evidence, including legal opinion if required, for verification of the original title deeds of the immovable properties reflected in the books of accounts including verification of documentation for charges against such property. • Check whether in case of transfers/conversions, title deeds may be in name of erstwhile entity • If title deeds mortgaged with banks/financial institutions etc., obtain confirmation • In case of loss of original title deeds, obtain certified copies of the documents and details about FIR filed for loss of such documents; obtain management representation • Auditor to report any known ongoing legal disputes against the Company to the title of the immovable properties.

  8. Clause 3(i)(c) – Illustrative wordings Qualified • According to the information and explanations given by the management the title deeds of immovable properties included in property, plant and equipment/ fixed assets are held in the name of the company except __ number of immovable properties aggregating XXXX as at March 31, 2016 for which title deeds were not available with the Company and hence we are unable to comment on the same. • According to the information and explanations given by the management, the title deeds of immovable properties included in fixed assets are held in the name of the Company, except for land aggregating to Rs XXXX, taken on lease during the year and land on which the lease deeds have expired during the year. As explained to us, the Company is in the process of entering into new lease deeds for land taken on lease during the year and also renewal of expired lease deeds.

  9. Clause 3(iv) – Loans, investment, guarantees and security in compliance with Section 185 & 186 In respect of loans, investments, guarantees, and security whether provisions of section 185 and 186 of the Companies Act, 2013 have been complied with. If not, provide the details thereof • Auditor required to report on compliance with Section 185 and 186 of the Act • Auditor to ensure that no loans, including loans represented by book debts, is made to directors and their interested entities as given in explanation to Section 185 subject to certain exceptions • Loans given to subsidiary companies by a holding company (exemptions from Section 185) • Any loan made by a holding company to its wholly owned subsidiary company or any guarantee or security given by a holding company in respect of any loan made to its wholly owned subsidiary company; and • Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company Above exemptions are however subject to the condition that the loans referred to above should be utilised by the subsidiary company for its principal business activities– auditor to ensure compliance • Since the penal provisions for non-compliance with the requirements of section 185 extend not only to the lending company but also to the borrower (including a borrowing company), compliance should be ensured by both the lender and the borrower

  10. Clause 3(iv) – Loans, investment, guarantees and security in compliance with Section 185 & 186 • Detailed audit procedures to be carried out • Obtain details of directors/any other person on whom director is interested; check details from MBP-1 (general notice received from a director under Rule 9(1) of The Companies (Meetings of Board and Power) Rules, 2014) and from register maintained u/s 189 of the Act • Check details of transactions including any guarantee given and security provided • Auditor may consider obtaining independent statutory auditor certificate from subsidiary company regarding utilization of loan • Examine compliance with limits prescribed by Section 186 • Check whether company has made investments through more than two layers of investment companies • Obtain management representation • Auditor to report the nature of non-compliance, the maximum amount outstanding during the year and the amount outstanding as at the balance sheet date in respect of • the Directors; and • persons in whom directors are interested (specify the relationship with the Director concerned • Auditor to evaluate reporting any exceptions in main report depending on complexities, facts and circumstances of the case • Assess implications under SA 250 Consideration of Laws and Regulations in an Audit of financial statements

  11. Clause 3(iv) – Illustrative wordings • Unqualified • In our opinion and according to the information and explanations given to us, provisions of section 185 and 186 of the Companies Act 2013 in respect of loans to directors including entities in which they are interested and in respect of loans and advances given, investments made and, guarantees, and securities given have been complied with by the company. • Qualified • In our opinion and according to the information and explanations given to us, the Company has not advanced loans to directors / to a company in which the Director is interested to which provisions of section 185 of the Companies Act, 2013 apply and hence not commented upon. In our opinion and according to the information and explanations given to us, the company has made investments which is in excess of specified limits without getting any prior approval by means of special resolution passed by members at a general meeting and which are detailed below. The Company has not given any loans /guarantees/ provided security to which the provisions of section 186 of the Companies Act 2013 apply.

  12. Clause 3(viii) – Default in repayment of loans or borrowings Whether the company has defaulted in repayment of loans or borrowing to a financial institution, bank, government or dues to debenture holders? If yes, the period and the amount of default to be reported (in case of defaults to banks, financial institutions, and government, lender wise details to be provided)? • Auditor to report whether company has • Defaulted in repayment of loans or borrowings to a financial institution or bank or Government • Defaulted in repayment of dues to debenture holders • Auditor to undertake detailed audit procedures including: • Obtain schedule of repayments to banks, financial institutions, government and debenture holders from management of company (indicating amount and due date of payments that company is required to make) • Examine agreements or other documents containing the terms and conditions of loans and borrowings • Obtain confirmation from bank/financial institution as to status of loan account including overdue position as at balance sheet date • In case of dispute between company and lender on issues relating to repayment, auditor to consider prevailing terms and conditions; auditor may give a brief nature of dispute • Give lender wise details

  13. Clause 3(viii) – Default in repayment of loans or borrowings Reporting issues • Auditor to report all defaults existing at the balance sheet date irrespective of when defaults have occurred • Defaults committed in previous years and continuing until the year end also to be covered • Default implies payments made beyond last date prescribed for repayment • Submission of application for reschedulement/restructuring proposals to lenders OR if default made good during the year covered by auditor’s report does not mean that no default occurred • Auditor to state in report the fact of reschedulement of loan or fact of default having been made good • Definition of borrowings • As per guidance in clause 3(viii) - Borrowings construed as principal amount only • GN refers to definitions of borrowings given in ‘General provisions regarding Auditor’s report’ • In case of terms loans, interest accrued and due considered as a borrowings whereas interest accrued but not due not considered as borrowings Inconsistency in reporting – ‘Principal amount’ vs. ‘Principal amount & interest accrued and due’ • Dues to debenture holders construed as principal and interest

  14. Clause 3(viii) – Illustrative wordings Qualified • According to the information and explanations given by the management, the Company has defaulted in repayment of dues to debenture holders. Debentures amounting to Rs. 50,00,000/- became due for redemption on XX May 20XX which were redeemed by the Company on XX March 20XX. The Company did not have any loans or borrowing in respect of a financial institution or bank or to government during the year. • According to the information and explanations given by the management, the Company has delayed in repayment of loans or borrowings to financial institutions, banks or government and dues to debenture holders during the year to the extent of Rs. XXX (the delay in such repayments being for less than xx days in each individual case) and Rs. XXX of such dues were in arrears as on the balance sheet date. The lender wise details are tabulated as under :

  15. Clause 3(ix) – Reporting on funds raised through IPO/FPO Whether moneys raised by way of initial public offer or further public offer (including debt instruments) and term loans were applied for the purposes for which those are raised? If not, the details together with delays or default and subsequent rectification, if any, as may be applicable, be reported. In case company has made an IPO/FPO, auditor required to report whether money raised and term loans utilized for the purposed for which those were raised. Audit procedures include: • Examination of prospectus – proposed end use stated therein • Checking whether amount of end use of money disclosed in financial statements not different from actual end use • Obtain management representation • In case unable to verify the end use, auditor to state clearly – not able to comment upon • Auditor to assess reporting implications under sec 143(3) regarding obtaining all information and explanations which to the best of our knowledge and belief for the purpose of audit • Auditor to assess fraud risk implications under Sec 143(12) • Temporary utilization of surplus finds – to be reported adequately • Listing regulations require to make arrangements for use of proceeds of the issue to be monitored by financial institution – examine reports of monitoring agency, if any • Terms loans obtained from entities/persons other than banks/financial institutions also to be examined • Compare terms and conditions of loans with actual utilization of loans

  16. Clause 3(ix) – Illustrative reporting Unqualified • In our opinion and according to information and explanations given by the management, monies raised by the company by way of initial public offer / further public offer and term loans were applied for the purpose for which they were raised, though idle/surplus funds which were not required for immediate utilization have been gainfully invested in [liquid investments payable on demand]. The maximum amount of idle/surplus funds invested during the year was Rs XXX, of which Rs XXX was outstanding at the end of the year. Qualified • In our opinion and according to the information and explanations given by the management, we report that in absence of any stipulation regarding the utilization of loans from the lender, we are unable to comment as to whether the term loans have been utilized for the purposes for which they were obtained. • We were not provided with the information and explanation regarding utilisation of moneys aggregating to Rsxxxx raised by way of initial public offer /term loan and accordingly we are not able to verify the end use of moneys raised from initial public offer and hence we are unable to comment as to whether the moneys raised from the initial public offer/term loan has been utilized for the purposes for which it was obtained.

  17. Clause 3(x) – Reporting on Frauds Whether any fraud by the company or any fraud on the company by its officers or employees has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated? • Auditor to report frauds by officers or employees of the company along with frauds by the company • Definition of fraud • “Fraud" refers to an intentional act by one or more individuals among management, those charged with governance, employees, involving the use of deception to obtain an unjust or illegal advantage. • Auditor to focus on fraudulent acts that cause a material misstatement in the financial statements. Misstatement of the financial statements may not be the objective of some frauds • Two types of international misstatements relevant to auditor’s consideration of fraud – misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets • If such frauds are noticed or reported during the year, then the auditor is required to state the amount involved and the nature of fraud • ICAI Guidance Note recognises materiality – materiality of fraud to be considered (outlined in Standards on Auditing) while reporting; no reference of materiality in clause • Fraud committed during the year and rectified during the year also to be reported • Auditor not to discover such frauds; scope of auditor’s inquiry restricted to frauds ‘noticed or reported’ during the year • “Noticed or reported” - management should have the knowledge about the frauds by the company or on the company by its Officer and employees that have occurred during the period covered by the auditor’s report.

  18. Clause 3(x) – Reporting on Frauds • Audit procedures include • Discussion and inquiries with management about known fraud/suspected fraud that company is investing and susceptibility of company to material misstatements in financial statements resulting from fraud • Examine reports of internal auditors, minutes of audit committee/ board meetings of the company • Obtain written representation from management • Management has responsibility for implementation and operation of accounting and internal controls systems that are designed to prevent and detect fraud and error • Any uncorrected misstatements resulting from fraud are in management’s opinion, immaterial, both individually and in aggregate Reporting issues • Auditors do not make legal determinations of whether fraud has actually occurred • Of the frauds covered under sec 143(12) of the Act, only noticed frauds shall be included here and not the suspected frauds • Auditor required to comply with SA 240, The Auditor’s responsibility relating to fraud in an audit of financial statements’ • Auditor also to report on steps taken by management to mitigate fraud

  19. Clause 3(x) – Illustrative wordings Unqualified • Based upon the audit procedures performed for the purpose of reporting the true and fair view of the financial statements and according to the information and explanations given by the management, we report that no fraud by the company or no fraud / material fraud on the company by the officers and employees of the Company has been noticed or reported during the year. Qualified • We have been informed that the accountant of the Company had misappropriated funds amounting to Rupees ten lakhs during the preceding year and the year under audit. Investigations are in progress and the accountant has been dismissed and arrested. The Company has withheld his terminal benefits and it is estimated that the amount misappropriated may not exceed the terminal benefits due to the accountant. The Company is also adequately covered by fidelity insurance cover.

  20. Clause 3(xi) – Reporting on managerial remuneration Whether managerial remuneration has been paid or 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? Auditor to report managerial remuneration paid or provided by the company and if not, report the amount involved along with steps taken to secure refund • Since the order does not clarify what constitutes “amounts involved”, it may be construed as meaning such amount of remuneration that has been paid or provided in excess of the limits prescribed under sec 197 read with Sch V of the Act. Any amount that may have recovered or partially recovered by the company during the year would not be reduced from the “amount involved”. • Auditor to • examine the arrangement or agreements entered by the company in respect of securing refund of excess amount paid and ask the management to give in writing, the steps which have been taken in this regard • obtain sufficient appropriate audit evidence to support the fact that steps have been taken by the company for securing refund of the same • Obtain confirmation for non-refunded balance as at balance sheet date to confirm that amount is held in trust for the company by the director • Obtain letter of representation from the management • Obtain legal opinion/view in complex cases and evaluate reporting implications in auditor’s report • Section 197 not applicable to a private company • The Companies (Amendment) Bill, 2017 passed in Lok Sabha proposes omission of Central Government approval for payment beyond limits prescribed (approval in general meeting suffice)

  21. Clause 3(xi) – Illustrative wordings Qualified • According to the information and explanation given by the management, we report that remuneration of the Managing Director for the year ended March 31, 2016 is in excess of the limits applicable under section 197 of the Act, read with Schedule V thereto, by Rs XX million. We are informed by the management that it proposes to file an application with the Central Government, seeking waiver of excess remuneration paid. • According to the information and explanations given by the management, the Company is in the process of recovering the managerial remuneration which has been paid over and above approvals mandated by the provisions of section 197 read with Schedule V to the Companies Act, 2013, aggregating Rs XXXX as at March 31, 20XX. The default may be reported incorporating following details:-

  22. Clause 3(xiii) – Transactions with related parties Whether all transactions with the related parties are in compliance with sections 177 and 188 of Companies Act, 2013 where applicable and the details have been disclosed in the Financial Statements etc., as required by the applicable accounting standards? • Auditor required to report on following: • Whether all transactions with the related parties are in compliance with sections 177 and 188 of the Act • Whether related party disclosure as required by relevant accounting standards are disclosed in the financial statement. • Open ended clause – ‘completeness’ • Interpretations; notifications • Section 188 applicable to all companies – requires approval of board of directors/approval of shareholders • Approval of board of directors/shareholders not required for related party transactions entered into by the company in its ordinary course of business and on arm’s length basis • Arm’s length – a transaction between two related parties that is conducted as if they were unrelated so that there is no conflict of interest • SA 550, Related parties defines arm’s length as a transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interest • Determination of arm’s length requires consideration of several factors including • Prevalent market/industry practice; economic circumstances • Specific contractual understanding/terms between the parties; similar contracts executed between other unrelated parties • Transfer pricing mechanism in use for Income Tax Act, 1961

  23. Clause 3(xiii) – Transactions with related parties • Ordinary course of business – subjective and involves professional judgment • Cover usual transactions, customs and practices of a business and a company • SA 550 gives examples of transactions outside entity’s normal course of business • Complex equity transactions, such as corporate restructurings or acquisitions • Transactions with offshore entities in jurisdictions with weak corporate laws • The leasing of premises or the rendering of management services by the entity to another party if no consideration is exchanged • Sales transactions with unusually large discounts or returns • Transactions with circular arrangements, for example, sales with a commitment to repurchase • Transactions under contracts whose terms are changed before expiry • Auditor to carry out detailed procedures including • Obtain list of companies, firms or other parties, the particulars of which are required to be entered in the register maintained under Section 189 of the Act • Verify entries made in the register maintained under Section 189 from declarations made by directors in Form MBP-1, general notice received from a director under Rule 9(1) of The Companies (Meetings of Board and Power) Rules, 2014 • Obtain written representation from management • Review previous year working papers, if any, for names of known companies, firms or other parties • Review entity’s procedures for identifications of companies, firms or other parties • In case of listed company, teams to ensure compliance with Regulation 23 of SEBI LODR 2015 and assess implications for issuing corporate governance certificate

  24. Clause 3(xiii) – Illustrative wordings • Unqualified • According to the information and explanations given by the management, transactions with the related parties are in compliance with section 188 of Companies Act, 2013 where applicable and the details have been disclosed in the notes to the financial statements, as required by the applicable accounting standards. The provisions of sec 177 are not applicable to the company and accordingly reporting under clause 3(xiii) insofar as itr elates to section 177 of the Act is not applicable to the Company and hence not commented upon. • Qualified • According to the information and explanations given by the management transactions with the related parties are in compliance with section 177 and 188 of Companies Act, 2013 where applicable and the details have been disclosed in the notes to the financial statements, as required by the applicable accounting standards except for transaction with XXXXX aggregating Rs XXXX, for which, as explained to us, the company is in the process of seeking approval of audit committee under section 177 of the Companies Act, 2013 for subsequent modification to the contract in the current year, as detailed below:

  25. Clause 3(xiv) – Preferential allotment of private placement of shares or convertible debentures Whether the company has made any preferential allotment or 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 with and the amount raised have been used for the purposes for which the funds were raised. If not, provide the details in respect of the amount involved and nature of non-compliance? • Auditor to examine whether funds raised from private placement of shares or fully or partly convertible debentures were applied for purpose for which the securities were issued • Audit procedures include • Obtain and compare information provided by the company in PAS-4 (Private Placement offer letter) with actual utilization of monies as per books of account • Not necessary to establish one-to-one relationship with amount of fund raised and its utilization • Report temporary utilization of funds pending utilization for stated purpose • Funds raised at the fag end of the year - auditor to report that fund raised during the year has not been utilized • In case the specific purpose in not recorded and the general purpose / bona-fide business use etc are stated then in such cases, auditor should verify that the company has invested or utilized the money for general purpose / bona-fide business use of the company • Any offer or invitation not in compliance with Section 42 of the Act shall be treated as public offers and may need to be assessed separately.

  26. Clause 3(xiv) – Illustrative wordings Unqualified According to the information and explanations given to us and on an overall examination of the balance sheet, the company has not made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review and hence, reporting requirements under clause 3(xiv) are not applicable to the company and, not commented upon. Qualified According to the information and explanations given by the management, the Company has complied with provisions of section 42 of the Companies Act, 2013 in respect of the preferential allotment / private placement of shares / fully or partly convertible debentures during the year except provision of section 42(7) of the Companies Act, 2013 regarding delay in filing of offer with Registrar within thirty days of circulation. According to the information and explanations given by the management, the amount raised has been used for the purposes for which the funds were raised.

  27. Clause 3(xvi) – Registration as NBFC Whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 and if so, whether the registration has been obtained? • Auditor to examine whether the company is engaged in the business which attracts the requirements of the registration under the Reserve Bank of India Act, 1934 • Audit procedures include • Examine the transactions of the company with relation to the activitiescovered under the RBI Act and directions related to the Non Banking Finance companies • The financial statements should be examined to ascertain whether company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. • Whether the company has net owned funds as required for the registration as NBFC • Whether the company has obtained the registration as NBFC, if not, the reasons should be sought from the management and documented • Auditor can take legal opinion

  28. Guidance Note on Audit Reports and Certificates for Special Purpose

  29. Certification Engagements – Why the New Guidance Note • Original Guidance Note on Audit Reports & Certificates for Special Purposes - • issued in 1984 – 32 years old • Didn’t take into account the changing environment/relationships/ expectations • Growing complexities of businesses • New types of engagements coming up • Client vis a vis Practitioners relationships • Regulators vis a vis Practitioners expectations • Practitioners vis a vis Professional pronouncements • 1984 – auditing literature was still evolving

  30. Applicability

  31. Certificate –What is the Assurance Level? • New GN works within the parameters of the Framework for Assurance Engagements • Only two types of assurance possible • Reasonable – (highest level possible, but not absolute) • Limited • Different procedures and reporting for different types of assurance • Certificates traditionally linked to “True and Correct” • Should be seen as “Reasonable Assurance” • ALWAYS evaluate the scope of engagement to understand what type of assurance is possible to be given non subject matter • Reasonable or Limited

  32. Implementation issue 1 - Report prescribed by law/ regulation • Doesn’t have some/ all of the essential elements – facts/ information • Evaluate if the users misunderstand the assurance conclusion • Evaluate if additional explanation in report can mitigate this possible misunderstanding • if YES, then do the next • If law/regulation doesn’t permit any change in format, DO NOT accept the engagement, unless required by law/regulation • Discuss with engaging party • Share draft assurance report, duly incorporating the required essential elements to prescribed format • Obtain agreement on the above modifications • Document this agreement and ONLY THEN accept engagement

  33. Authorities reject the so modified assurance report • Obtain & document evidence of such rejection • Issue the report as prescribed under law/ regulation • Should also enclose a statement containing essential elements • Clearly state therein that earlier report containing such elements was rejected by the concerned authority • Past rejections • Consider if above steps are possible • Modification to prescribed format permitted/accepted by authorities, but such modification does not mitigate risk of possible misunderstanding • Bring out the circumstances in the report • Include in the documented scope of work

  34. Implementation issue 2 – Matters requiring certification • Nature of certification requires technical expertise - e.g. in bidding documents, various certificates required to be given by auditors • Auditors may use work Performed by Practitioner’s Expert • Evaluate competence, capability & objectivity for practitioner’s purposes • Obtain sufficient understanding of field of expertise • Agree on the nature, scope & objective of expert’s work • Evaluate adequacy of expert’s work for practitioner’s purposes

  35. Implementation issue 3 - Reasonable Assurance vs Limited Assurance • Level of assurance obtained in a limited assurance engagement is substantially lower than the assurance that would have been obtained had a reasonable assurance engagement been performed. • In a reasonable assurance engagement, the opinion is expressed in a positive form. In a limited assurance engagement, the conclusion is expressed in a form that conveys whether, based on the procedures performed and evidence obtained, a matter(s) has come to the practitioner’s attention to cause the practitioner to believe that the subject matter information is materially misstated • Few illustrative scenario when acceptance of a reasonable assurance engagement may NOT be appropriate: • If the audited financial statements of the entity are not available, it may not be possible for the auditor to provide reasonable assurance on the subject matter information, if the same is to be traced and agreed to underlying accounting records. However, in case the practitioner/auditor is required to issue a report, a limited assurance report should be issued. However, in exceptional situations wherein the auditor has performed necessary audit procedures on the subject matter information, a reasonable assurance report can be issued subject to prior consultation • Issuance of assurance report on any non- financial information.

  36. Assurance Report - Preparation • In writing • Have contain clear expression of opinion/conclusion • If subject matter has constitutes of multiple aspects, opinion/conclusion on each such aspect • Different aspects may have different levels of assurance, as appropriate to them • Opinion/conclusion to be clearly separated from information that doesn’t impact opinion/conclusion • Guidance Note outlines the essential elements of assurance report • Does not per se prescribe a format

  37. Assurance Report – Contents/ Elements Addressee Title Description of level of assurance Description of subject matter information Identification of Criteria Description of underlying subject matter Respective responsibilities statement If Criteria are specially developed, then a cautionary statement that subject matter info may not be suitable for other purpose Description of significant inherent limitations Statement as to compliance with Guidance Note Opinion or conclusion Statement as to compliance SQC 1 Statement as to compliance withCode of Ethics Summary of work performed Place Date Practitioner’s signature

  38. Unmodified Opinion/Conclusion

  39. Emphasis of Matter/ Other Matter Paragraphs • If not prohibited by law/ regulation • Separate paragraph in report with Clear heading • Statement that EOM/OM does not mean that opinion/conclusion is not modified

  40. Modified Opinion/ Conclusion

  41. MCA provides exemptions to private companies Auditor’s reporting on IFC • MCA provides exemption to private companies meeting specified thresholds • Auditor's reporting on adequacy and operating effectiveness of internal financial controls over financial reporting not applicable for private company which is a one person company or small company or • which has turnover of less than INR 50 crores as per latest audited financial statements, and • aggregate borrowings from banks/financial institutions/any body corporate at any point of time during the financial year less than INR 25 crores

  42. MCA provides exemptions to private companies Auditor’s reporting on IFC Implementation issues • Exemption shall be applicable for those audit reports in respect of financial statements pertaining to financial year commencing on or after 1 April 2016 which are made on or after the date of the notification • Exemption applies only to the auditors reporting u/s 143(3)(i) of the Companies Act, 2013; management’s responsibilities in respect of ICFR and their reporting in the Board’s / Director’s report as required under section 134(5) of the Act continues to apply • Aggregate borrowings include ‘borrowings from any body corporate’; all borrowing, current and non-current, would be included in the aggregation for test of exemption. Any trade payables would not be included for the calculation of aggregate borrowing • Definition of borrowings – reference can be made to Guidance Note on CARO • Reporting requirements in a situation where the reporting under Section 143(3)(i) is not applicable to a private company as per the notification “This report does not include Report on the internal financial controls under clause (i) of Sub-section 3 of Section 143 of the Companies Act, 2013 (the ‘Report on internal financial controls’), since in our opinion and according to the information and explanation given to us, the said report on internal financial controls is not applicable to the Company basis the exemption available to the Company under MCA notification no. G.S.R. 583(E) dated June 13, 2017, read with corrigendum dated July 13, 2017 on reporting on internal financial controls over financial reporting

  43. Auditor’s Report under Rule 11(d) of Companies (Audit and Auditors) Amendment Rules, 2017 Rule 11 of the Companies (Audit and Auditors) Rules, 2014 requires: (d) whether the company had provided requisite disclosures in its financial statements as to holdings as well as dealings in Specified Bank Notes during the period from November 8, 2016 to December 30, 2016 and if so, whether these are in accordance with the books of accounts maintained by the company. • Disclosures applicable to financial statements issued after 30 March 2017 and which include the period from 8 November 2016 to 30 December 2016 • Disclosure mandated for those companies which are following Schedule III of the Companies Act, 2013 • Applicable for reporting on the consolidated financial statements and stand alone financial statements • Auditors to comment on financial statements issued after 30 March 2017 and which include the period from 8 November 2016 to 30 December 2016 ICAI issued an Implementation Guide on Auditor’s Report under Rule 11(d) of Companies (Audit and Auditors) Amendment Rules, 2017 and Amendment to Schedule III to Companies Act, 2013 • Guidance in form of FAQs, Illustrative list of audit procedures, written representations • Illustrative reporting scenarios included for auditor’s reporting and provides illustrations of notes to be provided by auditor

  44. Auditor’s Report under Rule 11(d) of Companies (Audit and Auditors) Amendment Rules, 2017 • Auditors to perform detailed procedures including • Obtain cash certificate from the management for the closing cash balances as at November 8, 2016 (the ‘opening specified date’) and December 30, 2016 (the ‘closing specified date’ and together ‘specified dates’), with details on denomination of the cash; • Obtain an understanding of the controls and procedures implemented by the company during the period November 9 2016 to as at December 30 2016 to ensure that there were no payments and receipts made in SBN other than those permitted by regulators from time to time. • Whether the controls (if implemented by the company) were reasonable to prevent and detect any non permitted transactions. • Confirm the balances as certified by the management from the books of accounts as at those dates • Obtain a listing from the management as to how the SBNs available with the company as at closing on November 8, 2016 were dealt with • Obtain bank statement regarding cash deposits made with / withdrawn from the banks • Obtain a reconciliation of the cash balance from the management • Obtain necessary written management representation to support our comment • Evaluate each such transaction judiciously as to whether or not it can be considered as ‘permitted receipt or payment

  45. Auditor’s Report under Rule 11(d) of Companies (Audit and Auditors) Amendment Rules, 2017 • Reported in the section of our report titled Report on Other Legal and Regulatory Requirements • Auditor reporting may include • Not applicable - Where the clause is not applicable to the company (for example, start up entity where there was no cash balance on the specified dates and there were no cash transactions in the covered period), or because Schedule III is not applicable to the company, • Clean/unmodified reporting - The Company has provided all necessary details as required under the amendment to Schedule III and we were able to obtain sufficient and appropriate audit evidence that the disclosure were accordance with the books of accounts maintained by the company and have obtained the management representation for the cash balances as on specified dates, details of cash transaction and other back up information • Modified reporting for scope limitation in verifying the details required - The Company has provided all necessary details as required under the amendment to Schedule III, but we were unable to verify the same as we have not been able to obtain sufficient and appropriate audit evidence that the disclosure were in accordance with the books of accounts maintained by the company and have relied solely on the management representation including for the cash balance certificates and cash transactions • Evaluate impact on main audit report – if non-compliance has an impact on true and fair view, the auditor should modify audit report under SA 705 • Consider including a comment in 143(3)(a) in case of modified reporting– obtained all information and explanations

  46. Questions

  47. Thank You deepa2580@gmail.com deepaagarwal@icai.org

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