Saturday, May 16, 2015

AUDITING - CHANGING LANDSCAPES

The Chartered Accountants community of Auditors is being exposed to new challenges and expectations while they are finalizing audits for the Financial Year ending March 31, 2015. The new provisions will ensure that all the serious and committed professional Chartered Accountants gain substantially as the value of the Audit Report and its credibility will be much higher in the light of new responsibilities and Corporate Governance Mechanism.
Auditors' Appointment: The Auditors have been appointed for the period of five years. Auditors cannot be removed during this period without the approval of Central Government, providing necessary strength to independence, paving way for excellence, effectiveness and efficiency in Audit.

  • Audit Report: Auditors are required to additionally report on the observations or comments on financial transactions or matters which have any adverse effect on the functioning of the companies, including any qualification, reservation or adverse remarks relating to maintenance of accounts and other connected matters. As per ICAI guidance, the Auditors need to report on these aspects in relation to Auditor's Qualification, Modification, Disclaimer and Emphasis of matter paragraph. The Auditors shall also report on disclosure of impact of pending litigation in the financial statement, provision of foreseeable losses on long term contracts including Derivative contracts beside delay in transfer to Investor Education Fund.
  • Adequacy of Internal Financial Control: The Auditors are also required to comment on the adequacy of Internal Financial Control System and whether the controls are operating effectively. This reporting is mandatory w.e.f Financial Year 2015-2016 and is voluntary in current reporting. It will be important for auditors to ensure that the internal control system is documented in writing and written delegation of powers are in place in respect of all the major financial transaction including purchases, sales, revenue, assets and liabilities as per internal control framework.
  • CARO 2015: The new requirement of CARO has been notified on MCA website and the requirements are more focused and specific.
  • Business Relationship: Auditors are now prohibited to have any business relationship with the company or its subsidiary company or its associate company or its holding company. This will necessitate that the auditors or their related parties do not undertake any other business transaction or relation with Auditee Group.
  • Restriction on Non Audit Services: The Auditors cannot offer Non Audit Services as defined and prescribed in the New Companies Act and rules made there under,Accounting/Internal Audit, Financial services and most other non audit services including management services.

In our view the prohibition do not restrict the auditors to undertake tax audit, filing of tax return, undertaking supervision of tax compliance's, certification of MCA forms and similar other compliance's. 
All permitted Non Audit services can only be provided with the approval of Board of Directors/ Audit Committee. The top Management is not authorized to finalize their appointment for permitted Non Audit Services.
  • Depreciation: The New Schedule II mandate 
    component accounting and determination of balance 
    useful life, resulting into substantial change in the 
    depreciation to be charged in the Books of Accounts. 
    The Auditors cannot undertake this calculation and 
    determination but has to verify the correctness of 
    implementation of new changes while framing their 
    audit opinion.
  • Auditors Rotation: Auditor rotation is mandatory, with retrospective effect, after two terms of five year each (one term for sole proprietor) for all the Listed companies, public companies with ` 10 crore or more paid up capital, private companies with 20 crore or more paid up capital and all companies having borrowing from Financial Institution, Banks or Public Deposits of ` 50 crore or more. The compliance of this norm will be effective AGM of 2017 (3 Year Time)
  • Audit Limit: No Auditor can audit more than 20 companies. The wordings of Section 141(3) (g) restrict the limit on number of audit only to Individual Chartered Accountants with no clear application of their limit to a firm of Chartered Accountants. It may be noted that erstwhile Sec 225(1B) provides for per partner limit on macro basis. No such provisions are included in the new law. ICAI has already restricted number of audits to 30 companies per partner in terms of their code of ethics since 2001.Whether the government intention was to provide that, no Chartered Accountant can now sign audit report of more than 20 companies, including small companies, one person companies, is still being debated.
  • Class Action Suit: Minority shareholders can initiate class action suits against the company, its management and auditors.
  • Fraud Reporting: Auditors have been mandated to directly report the frauds coming to the notice of the Auditors during the course of audit to the top management and the government.
  • Penalties and Prosecution: A large number of new penalties and prosecution have been put in place. An auditor is liable to be penalized and punished, refund remuneration and pay damages, for contravention of duties knowingly or willingly with an intention to deceive. The fine for fraud can range between ` 25000 and ` 25 lakh, with imprisonment from 6 months to up to 10 years.
  • NFRA: The National Financial Reporting Authority will monitor and enforce compliance with auditing and accounting standards, oversee the quality of service of the profession, investigate matter of professional misconduct by chartered accountants or firms (not notified).
  • Consolidated Financial Statement: The new Company law mandates preparation of Consolidated Financial Statement for all companies with one or more subsidiaries, associates and joint ventures. This enhances the influence of auditors across group companies. A separate audit report and CARO reporting is to be issued as per draft notified by AASB- ICAI.
  • Tax Audit: The New Tax audit formal comprehensive compliance will be required; Income Computation and Disclosure Standards (ICDS) notified by the tax department w.e.f April 1, 2015 will also complicate tax provisioning and determination of taxable income The auditors undertaking their professional responsibilities diligently, without fear or favour will not only get all necessary respect in the society but will also be financially rewarded with higher valuation without any audit risk. Indian Techniques of audit including ledger scrutiny, vouching, close review of operation and financial control,CAATs and compliance of international level standards of auditing will ensure that the financial statement are free from misstatement due to fraud or error. 
The new opportunities of mandatory consolidation of Financial Statements, adoption of IFRS, ICDS, increased compliance's, internal audit, valuation for issue of shares in terms of Companies Act 2013 and many other new opportunities will bring large demand for Chartered Accountants. This will also ensure that the Chartered Accountants available for undertaking statutory audits functions will be limited in number.

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