MCA notifies changes in Audit and Auditor Rules
The Central Government in exercise of its powers provided under the Companies Act, had provided with the Companies (Audit and Auditors) Rules, 2014. The rules specified the following aspects:
- Manner and procedure of selection and appointment of auditors
- Conditions for appointment and notice to Registrar
- Meaning of Class of Companies
- Manner of rotation of auditors by the companies on expiry of their term
- Removal of the auditor before expiry of his term
- Resignation of auditor
- Liability to devolve on concerned partners only
- Disqualifications of auditor
- Other matters to be included in auditors report
- Duties and powers of the company’s auditor with reference to the audit of the branch and the branch auditor
- Reporting of frauds by auditor
- Remuneration of the Cost Auditor
The Ministry of Corporate Affairs (MCA) has notified the Companies (Audit and Auditors) Amendment Rules, 2021 so as to broaden the scope of reporting by Auditors in the Audit report. The notification seeks to amend Companies (Audit and Auditors) Rules, 2014.
Rule 11 pertained to Other Matters to be included in the Auditors Report. MCA omitted clause (d) of Rule 11 of Companies (Audit and Auditors) Rules, 2014 which was – 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 8th November, 2016 to 30th December, 2016 and if so, whether these are in accordance with the books of accounts maintained by the company.
MCA also included Clause (e), (f) and (g) to Rule 11 of Companies (Audit and Auditors) Rules, 2014. Let us see what is mentioned in these new clauses:
As per new Clause (e), it is required to be mentioned in the Board Report:
- whether the management has represented that, to the best of its knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the company to or in any other person(s) or entity(ies), including foreign entities (Intermediaries), with the understanding, whether recorded in writing or otherwise, that the Intermediary shall, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the company (Ultimate Beneficiaries) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries
- whether the management has represented, that, to the best of its knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been received by the company from any person(s) or entity(ies), including foreign entities (Funding Parties), with the understanding, whether recorded in writing or otherwise, that the company shall, whether, directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party (Ultimate Beneficiaries) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries; and
- Based on such audit procedures that the auditor has considered reasonable and appropriate in the circumstances, nothing has come to their notice that has caused them to believe that the representations under the above two sub-clauses contain any material mis-statement.
As per new Clause (f), it is required to be mentioned in the Board Report whether the dividend declared or paid during the year by the company is in compliance with section 123 of the Companies Act, 2013.
As per new Clause (f), it is required to be mentioned in the Board Report whether the company has used such accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has been operated throughout the year for all transactions recorded in the software and the audit trail feature has not been tampered with and the audit trail has been preserved by the company as per the statutory requirements for record retention.
This new proviso will prove to be extremely beneficial as audit trail provides a “baseline” for analysis or an audit when initiating an investigation. The purpose or importance of an audit trail takes many forms depending on the organization. A company may use the audit trail for reconciliation, historical reports, future budget planning, tax or other audit compliance, crime investigation, and/or risk management. This move will also aid curb back-dating of transactions and ensure that the corporate sector maintains books of accounts in true and correct manner.