Secretarial Audit Taxation

A Complete Guide on Auditing Standards Issued by ICSI: Applicable from 1st April 2020

The Institute of Company Secretaries of India or commonly referred to as ICSI provides guidelines on auditing standards. The primary aim of ICSI auditing standards is to support the company secretaries (CS) in getting expertise in auditing techniques and tools. It also imparts the best auditing practices while performing the audit and also promoting standardisation and uniformity in maintaining the professional standards of the Company Secretary (CS). The ICSI issued the first four auditing standards, which will be applicable mandatorily on the audit assignments accepted by the auditor on or after 1^st April 2020. These auditing standards issued by ICSI will bring significant changes in the quality of audits performed by the company secretaries and will also bring uniformity and consistency.

What is the Aim behind Reconstructing the Auditing Standard Issued by ICSI?

The basic aim behind reconstructing the auditing standards by ICSI is as follows:

• To create uniformity amongst its members while conducting the audit.
• Varied auditors are involved in a single audit. The new auditing standards issued by ICSI will help in bringing synchrony amongst them.
• All the practising company secretaries will have a common outlook towards conducting of audits and all of them will have a common standard for preparing the reports which must be submitted to the authorities.
• By the introduction of auditing standards by ICSI, it is expected that there will be solidarity in corporate governance practices.
• Improvement of the level of applicability of laws regulations while conducting the audit.

Types of Auditing Standard Issued by ICSI

The auditing standard issued by ICSI has been divided into four parts, as shown below:

CSAS-1: Auditing Standard Issued by ICSI on Audit Management

This Auditing Standard applies to the Auditor undertaking audit engagement under any statute. The auditing standard on Audit engagement deals with the auditor’s role and responsibilities relating to an audit engagement and also the process of entering into an understanding or an agreement with the appointing authority for auditing purpose. The Auditing Standard on Audit Engagement (CSAS-1) applies to the practising Company Secretaries or PCS as defined in the Company Secretaries Act, 1980, who commences the audit assignment as per:

• Companies Act, 2013,
• Securities and Exchange Board of India (SEBI) Act, 1992
• Any other law prevailing in India.

The fundamental objective of the auditing standard is to lay down for the auditor basic principles and procedures which must be followed while accepting or continuing with the Audit Engagement by agreeing to the terms of engagement with the Appointing Authority or any changes therein and matters related thereto.

Coverage of CSAS-1 Accounting Standard

Applicability of CSAS-1

This auditing Standard issued by ICSI is applicable to the Auditors in the following situations:

New Audit Engagement

• It covers audit that is being conducted for the first time and therefore the appointment of the auditor is required here.
• In case the audit in the previous period was done by another auditor, it will also be covered here.

Recurring Audit Engagement

• It covers the situation where the same auditor is requested to conduct audit for the subsequent period as well.
• In this type of cases, the auditor must obtain recent Audit Engagement letter in case the period of engagement has expired, which must also include all the revised terms if the circumstances so require the auditor shall follow the auditing standard even if the audit engagement continues.

Read, More: Why Secretarial Audit is Mandatory for Companies?.

Changes in Terms of Audit Engagement

In case there is any change in terms of audit management in the middle of the ongoing audit, the auditor shall follow the standard and also initiate a revised engagement letter following the terms of the standard prescribed.

Note: Audit Engagement means all the detailed terms of reference of appointment, which will include the scope of audit, remuneration and also the limiting conditions if any.

What are the steps to be taken by the auditor with respect to Audit Engagement?

The auditor shall follow the following steps with regard to the Audit Engagement:

Appointment

• The appointment of the auditor shall be made in the manner prescribed in the applicable laws, acts, rules or regulations or standards in case no such methods has been prescribed by the appointing authority.
• A certificate confirming the eligibility for appointment as an auditor must be submitted to the concerned authority by the auditor.
• An audit engagement letter along with a copy of the resolution must be obtained by the auditor.

Audit Engagement Letter

The audit engagement letter shall include the following points:

1. Objective and scope of the audit.
2. Responsibilities of the auditor and the auditee.
3. Written representations to be provided by the auditor including particulars of the previous auditor.
4. Period within which the audit report shall be submitted by the auditor.
5. All the commercial terms regarding the fees and reimbursement out of pocket expenses.
6. Limitations of the audit, if any.

Communication to the Predecessor or Previous Auditor

Communication shall be done by the auditor to the previous auditor if any before accepting the audit engagement.

Limiting the Audit Engagement

The auditor shall accept the audit engagement within the limit of a number of audits.

Conflict of Interest

The auditor must not have any substantial conflict of interest with the auditee. In case there is any conflict of interest, it must be disclosed by the auditor before accepting the audit engagement. The following points will be considered as substantial conflict of interest:

• The auditor who holds paid-up share capital up to 2% or share of nominal value of Rs. 50,000, whichever is lower.
• An auditor who is indebted to the auditee for an amount not exceeding Rs. five lakhs.
• An auditor who was once in employment of the auditee before two years.

CSAS-2: Auditing Standard Issued by ICSI on Audit Process and Documentation

This section covers specific protocols prescribed for the auditors to follow the audit process and documentation. The basic aim of this standard is to prescribe principles to an auditor:

• The auditor must conduct audit as per the specified audit process.
• The auditor must maintain documentation like:
• A sufficient and an appropriate report to form the basis of auditor’s report.
• Must provide evidence that the audit was performed by the applicable auditing standards and as per the statutory requirements.

Note: Audit Documents here is referred to the working papers which is prepared or the reports obtained by the auditor in connection with the audit.

What are the Steps to Conduct Proper Audit Process and Documentation?

The proper steps to conduct an appropriate audit process and documentation have been listed below:

Audit Planning

An audit plan must be prepared by the auditor for conducting audit as per the terms of audit engagement. Audit planning means to establish and develop an overall audit process, including but:

1. Identifying the broad audit areas
2. To look out for previous audit findings and also the observations from the Management, Predecessor or Previous Auditor, in case of change of Auditor
3. Determination of the subject matters and even the audit areas which requires special attention
4. Risk Assessment and Materiality.
5. The technique of conducting audit.
6. Allocation of the audit resources for the purpose of audit
7. Preparing the schedule for conducting audit.
8. The auditor must follow the audit plan.

Risk Assessment

The auditee shall check the risk assessment with respect to the audit engagement considering the following factors:

• Industrial and Business Environment.
• Organisational structure.
• Other Compliance Requirements

Information about the Auditee

The auditor must obtain sufficient information regarding the auditee which will be relevant for conducting of audit and forming an opinion and its expression.

Audit Check-lists

The auditor shall use systematic and comprehensive checklists for auditing and also to verify the compliance requirements.

Collection and Verification of Audit Evidence

• Verification will be done by auditor for compliance with applicable laws, act, rules, regulations and the standards.
• Obtaining complete and relevant evidence by the auditor to support the opinion.
• The process of gathering and evaluating of evidence shall continue till the auditor is satisfied that sufficient and suitable evidence exists to provide a basis for formation of the audit opinion.

Third-Party Confirmation

The auditor shall get confirmations from third parties, wherever it is required, with respect to information which is related to such party.

Analysis of Audit Evidence

The auditor shall check the Audit Evidence before getting into any conclusion.

In case the auditor finds that the audit evidence is conflicting evidence the auditor shall evaluate the extent and credibility of contradictory evidence to reach into any conclusion or collect more evidence to resolve the conflict.

Documentation

• The auditor shall adequately document the audit evidence in the papers, including the basis and extent of planning, work performed and also the findings of the audit.
• The documents must be discussed with the management with respect to significant matters.

Record Keeping and Retention

• The auditor shall set up policies and procedures for maintenance of Audit Documents.
• The Audit Documents shall be collected for records within a period of 45 days from the date of signing of Auditor’s Report.
• The Audit Documents must be maintained in physical or electronic form and also retain for a period of 8 years from the date of signing of Auditor’s Report.

CSAS-3: Auditing Standard Issued by ICSI on Forming of Opinion

This auditing standard issued by ICSI applies to the auditor undertaking audit under any statute. This standard deals with the manner for forming auditor’s opinion on subject matter of the audit. The basic objective of the auditor here is to prescribe the basis and manner for evaluation of conclusions drawn from the audit evidence and also to obtain and express the opinion through a written report.

What does the Auditor Cover through this Reporting Standard?

CSAS-4: Auditing Standard Issued by ICSI on Secretarial Audit

This Auditing Standard issued by ICSI applies to the auditor undertaking Secretarial Audit, which is prescribed under Section 204 of the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements), 2015. The Standard deals with the basis and manner to carry out the Secretarial Audit.

The significant objective of this Standard is to set the principles for evaluation of statutory compliances and also for corporate conduct of auditing.

This standard covers the following:

• Identifying and segregating the applicable laws.
• Verifying the corporate conduct and also compliance of laws.
• Board Composition.
• Board process.
• Systems and process.
• Reporting of fraud.
• Identifying and reporting the events and actions having a major bearing on auditor’s action.

Conclusion

Auditing standards issued by ICSI are introduced with an aim to regularize the audit conducts and also to have a single protocol for the auditors all over the nation. These accounting standards will be applicable with effect from 1^st April 2020. The Company Secretaries will check the applicability of the mentioned auditing standards by ICSI, in every audit as they have expertise in auditing methods, tools and techniques. This will make the audit errorless, professional, uniform and also fast.

Also, Read: An Internal Auditor: Why are they important in a Company?.