Scope of Reporting of Auditors in Audit Report as per MCA

Ashish M. Shaji

28 Jun, 2021

The Ministry of Corporate Affairs vide notification dated March 24, 2021, notified Companies (Audit and Auditors) Amendment Rules 2021 and has omitted clause (d) of Rule 11 of Companies (Audit and Auditors) Rules, 2014^[1] and added clauses (e) (f) and (g). Now the auditors should deal with numerous new details and disclosures while preparing financial statements and audit reports as the scope of reporting of auditors has enlarged.

Disclosures to be made in the audit report

The amendments in audit reports rules and accounts rules has proposed the following disclosures:

• Investment that means where out bound or inbound loans, advances, and investments are intended to be routed via a conduit entity, thereby masking the identity of the beneficiary;
• Compliance with respect to payment of dividend;
• Requirements of accounting software to maintain an audit trail which is edit log of the primary entries with a view to allow the detection of any changes in the primary entries; and
• Gaps in the valuation of securities to reflect the valuation at the time of borrowing money and at the time of OTS.

Reporting of auditors: Applicability-scope and date

• The changes would be applicable on the auditors’ report and board’s report from the financial year 2021-22;
• Considering that statutory audit is required for all companies, the changes in the auditor’s report will be applicable on all companies;
• It is evident from the amendments that the changes shall apply only for the annual financial statements;
• The changes with respect to the board report would be applicable on all companies as it is mandatory for all; and
• The requirement of audit trail and edit log shall be applicable for companies maintaining their accounts in electronic form. However, it is apparent that every company maintains accounts in an electronic format therefore, it shall also be applicable on all companies.

Duty of the auditor

The provisions cast responsibility not just in directors but the auditors are also required to substantiate the statement of the directors by applying the audit procedures. While auditors can have ways and means to know the instances of outward surrogate lending, how the auditors assure there are no instances of inward surrogate lending will need certain new auditing methods.

What is the reason behind the requirement of reporting of auditors?

The amendments can be seen as a way to ensure that the companies don’t disguise for the purpose of distinguishing identity of the ultimate beneficiary of funds. It may also be to check the instances of money laundering and terrorism financing.

Other additional Disclosures to be made in Audit report

• Compliance with respect to payment of dividend

As per the amended audit rules, the auditor should report on the compliance with Section 123 of the Act by Company where it has declared or paid dividend. This is to ensure that the companies pay dividend based on their profits and satisfies all necessary conditions and not when the company is going through losses and where it’s impossible to pay dividend to the members.

• Proper maintenance of audit trail at all times

The reporting of auditors should be in the maintenance of the audit trails and edit logs by companies that opt to maintain their books of accounts in the electronic mode.

• Accounting in the electronic form

From April 1, 2021, companies that maintain their accounts electronically through accounting software will be required to ensure that the software is able to maintain audit trail and edit logs and that it is not disabled at any time. The auditors should also report on the proper maintenance of the systems, as mentioned earlier.  

Conclusion

The amendments, with respect to audit report, are expected to be beneficial as the audit trail provides a baseline for analysis of an audit when instituting an investigation. The aim or significance of an audit trail takes many forms based on the organization. The company may use the audit trail for reconciliation, historical reports, for future budget planning, for tax or other audit compliance, for investigation of crime, and or risk management. Further, it is expected to aid curb back dating transactions and make sure that the corporate sector maintains proper books of accounts in a fair way. 

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