Chapter 12 Audit Engagement – Secretarial Audit Compliance Management and Due Diligence ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.
Audit Engagement – Secretarial Audit, Compliance Management and Due Diligence Study Material
Comment on the following statements based on legal provisions:
Development of the audit evidence is the basic to the understanding of the audit process. (June 2012, 2 marks) [CMAIG-II]
True: The development of audit evidence is fundamental to understand the audit process. It is the evidence which gives information about the state of affairs of the company. Evidence helps the auditor to decide what is to be audited and how much is to be audited. Evidences are collected through various audit techniques from various sources.
Answer the following:
What do you understand by audit evidence? (Dec 2013, 2 marks) [CMAIG-II]
- Auditing is a logical process. An auditor is called upon to assess the actualities of the situation, review the statements of account and give an expert opinion about the truthness and fairness of such accounts.
- This he cannot do unless he has examined the financial statements objectively.
- Objective examination connotes critical examination and scrutiny of the accounting statements of the undertaking with a view to assessing how far the statements present the actual state of affairs in the correct context and whether they give a true and fair view about the financial results and state of affairs.
- An opinion founded on a rather reckless and negligent examination and evaluation may expose the auditor to legal action with consequential loss of professional standing and prestige.
- Audit evidence may be defined as the information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based.
- Audit evidence includes both information contained in the accounting records underlying the financial statements and other information.
Discuss in brief, the principles, which are useful in assessing the reliability of audit evidence. (June 2014, 4 marks) [CMAIG-II]
Useful principles for assessing the reliability of audit evidence:
Audit evidence refers to any information, verbal or written, obtained by the auditor on which he bases his opinion on financial statements.
The reliability of audit evidence depends on its source-internal or external and on its nature-visual, documentary or oral. While the reliability of audit evidence is dependent on the circumstances under which it is obtained, the following generalisations may be useful in assessing the reliability of audit evidence.
(a) External evidence (e.g. confirmation received from third party) is usually more reliable than internal evidence.
(b) Internal evidence is more reliable when related internal control is satisfactory.
(c) Evidence in the form of documents and written representations is usually more reliable than oral representations.
(d) Evidence obtained by the auditor himself is more reliable than that obtained through the entity.
Answer the question:
What do you understand by Audit Evidence? (June 2016, 2 marks) [CMAIG-II]
- While auditing, the auditor come across various assertions of the management. The auditor has to evaluate these assertions so that he would be able to express his opinion on the financial statements.
- This evaluation can be made in the light of some facts and reasons. These facts and reasons are called ‘Audit Evidence’.
- The auditor should evaluate whether he has obtained sufficient appropriate audit evidence so that reasonable conclusions can be drawn there from.
- It is to be noted that sufficiency and appropriateness are interrelated and apply to evidence obtained from both substantive and compliance procedures.
- Sufficiency refers to the quantum of audit evidence obtained and appropriateness relates to its relevance and reliability.
The following factors influence auditor’s judgement while obtaining audit evidence:
(a) The nature of the item;
(b) The adequacy of internal controls;
(c) The nature and size of the business carried on by the entity;
(d) Situations which may exert an unusual influence on the management;
(e) The financial position of the entity;
(f) The materiality of the item;
(g) The experience gained during the previous audits;
(h) The results of auditing procedures, including fraud or error which may have been found;
(i) The type of information available;
(j) The trend indicated by accounting ratios and analysis.
Define ‘Audit Engagement Letter’. What are the general contents of an audit engagement letter? (June, 2017, 2 + 6 = 8 marks) [CMAIG-II]
In case of a statutory audit the objective and scope of an audit is clearly described in the relevant law. However, in a non-statutory audit it has to be stated with absolute clarity so as to avoid any kind of ambiguity as to the objective and scope of audit. A misunderstanding may arise about the exact scope of the work. For example, the client may be under an impression that while the auditor is preparing the accounts, the audit is also being carried out. Therefore, in order to avoid any kind of misunderstanding or dispute it is in the interests of both the auditor as well as the client to exactly define the scope of the engagement and reduce the same in writing by way of audit engagement letter.
An auditor’s engagement letter signifies the confirmation by the auditor of his acceptance of appointment as auditor, the documentation of the objective and scope of audit or other work, and the extent of his responsibilities to the client and the form of any reports. ICAI (CA) has issued SAS 4410, SRS 4400 and SRE 2400 irt this regard. Although the form and content of the engagement letter differs from client to client but in general the following references should be made in audit engagement letter:
- The objective and the scope of the engagement.
- Management’s responsibility for the financial statements.
- The existence of inherent limitations of audit and resulting material misstatements that may remain undiscovered,
- The need for use of services of internal auditors and/ or other experts that may arise during the course of the engagement.
- The requirement of management confirmation letter as regards representations made by them concerning audit.
- Restriction of the auditor’s liability, if any.
- Basis for computation of audit fees and billing arrangements.
- The form of reports or other communication of results of the engagement.
Discuss the various methods of obtaining audit evidences.
How will you assess the reliability of audit evidences obtained? (Dec 2017, 5 + 3 = 8 marks) [CMAIG-II]
An auditor applies the following methods for obtaining sufficient and appropriate audit evidence:
- Inspection: Inspection involves examining records or documents, whether internal or external, in paper form or otherwise or a physical verification of a tangible asset. Inspection can provide reliable audit evidence depending on their nature and source and effectiveness of the internal control over their generation and processing.
- Observation: Observation consists of looking at a process of procedure being performed by others on a real time basis. For example the auditor may observe the inventory counting by the entity’s personnel and obtain evidence that it is done correctly.
- External Confirmation: External confirmation represents audit evidence obtained by the auditor as a direct written response from a third party, in paper form or by electronic or any other medium. For example, confirmation from the customer about the terms of agreement.
- Recalculation: Recalculation consists of checking the mathematical accuracy of documents or records. This may be performed manually or electronically.
- Reperformance: Reperformance involves auditor’s independent execution of procedures or controls that were originally performed as part of entity’s internal control.
- Analytical Procedures: Analytical procedures involve evaluation of financial information by studying possible relationships among both financial and non- financial data and investigating identified fluctuations from previous years that are inconsistent.
- Inquiry: Inquiry consists of seeking information, both financial and noil-financial, from knowledgeable persons within or outside the entity. Inquiries may range from formal written inquiries addressed to external parties to informal inquiries addressed to client’s staff.
As per SA 500, reliability of audit evidence depends on its source (whether internal or external) and nature (whether visual, documentary or oral). However, the following generalizations may be considered useful while assessing the reliability of audit evidence.
- Evidence obtained from independent and external sources are more reliable.
- Internal evidence becomes more reliable when the related internal control over its preparation and maintenance is effective.
- Evidence obtained directly by the auditor is more reliable than those obtained indirectly or by inference.
- Evidence in documentary form is usually more reliable than oral representation.
- Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles or documents that have been filmed or digitized. In order to be certain about the reliability of audit evidence in relation to a particular matter, an auditor should try to obtain evidence from various sources, la case there appears any inconsistency, the auditor must obtain additional evidence by conducting other audit procedures.
Discuss the method of obtaining Audit Evidences. (Dec 2018, 6 marks) [CMAIG-II]
Auditor obtains evidence in performing compliances and substantive procedures by any one or more of the following methods-
- Inspection: It consists of examining records, documents, or tangible assets. Inspection of records and documents provides evidence of varying degrees of reliability depending on their nature, source and the effectiveness of internal controls over their processing,
- Observation: It consists of witnessing a process or procedure being performed by others.
- Inquiry and Confirmation: Inquiry consists of seeking appropriate information from a’knowledgeable person inside or outside the entity, confirmation consists of the response to an inquiry to corroborate information contained in the accounting records.
- Computation: It consists of checking the arithmetical accuracy of source documents and accounting records or performing independent calculations.
- Analytical Review: It consists of studying significant ratios and trends and investigating unusual fluctuations and items.
Explain the term ‘conflict of interest’ regarding audit engagement as per the Company Secretaries Auditing Standard (CSAS)-1. (Dec 2020, 3 marks)
Conflict of Interest as per Company Secretaries Auditing Standard (CSAS-1):
The Auditor shall not have any substantial conflict of interest with the Auditee. Any conflict of interest, other than substantial conflict of interest, must be disclosed by the Auditor before accepting the Audit Engagement or as soon as the Auditor becomes aware of the same, as the case may be.
The term conflict of interest term is defined below. It is expected that the Auditor shall not have any conflict of interest with the Auditee. If the Auditor has any such interest, it is the duty of the Auditor to disclose such interest/conflict of interest to the Auditee before accepting the Audit Engagement.
The conflict of interest with the Auditee explained below shall not be construed as a substantial conflict of interest:
- Auditor holding not more than 2% paid up share capital.or shares of nominal value of ₹ 50,000
- Auditor indebted to the Auditee for an amount not exceeding ₹ 5,00,000
- Auditor was in employment of the Auditee more than 2 years ago In above cases, the Auditor shall be eligible for undertaking the Audit Engagement only if he discloses such fact in writing before accepting the Audit Engagement or as soon as he becomes aware of the same, as the case may be.
State the obligation of the auditor to maintain confidentiality regarding auditee information. (Dec 202, 5 marks)
The Auditors of a company while performing the audit assignment access the various confidential information of the company and it is most required for the auditors to maintain the confidentiality of the auditee information.
The principle of confidentiality imposes an obligation on the auditor to refrain from:
- Disclosing information acquired as a result of professional relationships without proper and specific authority or unless there is a legal or professional right or duty to disclose; and
- Using information acquired as a result of professional relationships to their personal advantage or the advantage of third parties.
- An auditor should-maintain confidentiality even in a social environment. The auditor should be alert to the possibility of inadvertent disclosure, particularly in circumstances involving long association with a business associate or a relative.
- An auditor should also maintain confidentiality of information disclosed by a prospective client or employer.
- An auditor should also consider the need to maintain confidentiality of information within the firm or employing organization.
- An auditor should take all reasonable steps to ensure that staff under the auditor’s control and persons from whom advice and assistance is obtained respect the auditor’s duty of confidentiality.
Gee & Kay Ltd. has appointed Rajshekhar & Co., a Company Secretaries firm as the Secretarial Auditor for the year ended 31st March 2021. The Secretarial Audit of the company for the previous year was performed by Suryadev & Co Is Rajshekhar & Co., required to communicate with the previous auditor before accepting such engagement ? If yes, draft a letter to be addressed to the previous incumbent. (Aug 2020, 5 marks)
Yes, Rajshekhar & Co. is required to communicate with the previous auditor i.e. Suryadev & Co. before accepting such engagement.
A specimen communication in this regard is given as under:
CS Suryadev & Co.
Sub.: Intimation in terms of Clause 8 of the First Schedule to the Company Secretaries Act, 1980
I, CS Rajshekhar Partner, M/s. Rajshekhar& Co., a firm of Company Secretaries have been approached by the Management of M/s. Gee & Kay Ltd. to provide the secretarial audit services (list of professional services) for the FY 2021-22. vide their letter No ……………….. dated We understand that earlier the above mentioned professional services were being rendered by your good self to Gee & Kay Ltd. during the Financial Year 2020-21.
I/We request you to kindly take this communication as an intimation to be given to the previous incumbent in terms of Clause 8 of the First Schedule to the Company Secretaries Act, 1980.
for M/s Rajshekhar& Co.,
Firm Unique Code
Membership No. ACS………………/ FCS……………….
COP No. ………………………
Describe the provisions relating to the Appointment of Statutory auditor, secretarial Auditor, cost Auditor and Internal Auditor.
The appointing authority means the person who is appointing the Auditors of the company. Under the provision of the Section 139 of the Companies Act, 2013 specifically provides that the appointment of the first statutory auditor shall be appointed by the Board of the Company within 30 days of the incorporation of the company, however the subsequent auditors shall be appointed upon the recommendation of the board or the audit committee of the company, if any, by the members at the general meeting of the company.
Whereas, in case of the Secretarial Audit under Section 204 of the Companies Act, 2013, the Section provides for the appointment of the Practicing Company Secretary as Secretarial Auditors and shall be appointed by the board of the company.
In case of the appointment of Internal Audit under section 138 of the Companies Act, 2013, the internal auditor can be appointed by the board to conduct internal audit of the function and activities of the company. It may be noted that the internal Auditor may or may not be the employee of the company.
In case of the appointment of Cost Audit under section 148 of the Companies Act, 2013, Cost Accountant shall be appointed by the Board on such remuneration as may be determined by the members for conducting the audit of cost records.
Draft an Audit engagement letter for the Secretarial Auditor.
ABC Associates (name of Audit firm)
Company Secretaries (Address)
This engagement letter is provided in connection with your audit of the Secretarial Records of XYZ co. Ltd. Scope of work of Secretarial Audit to be conducted for the F.Y. 2015-16 are as follows:
Examine and report on the compliance of the following five specific laws: Secretarial Auditor has to check compliances by the company under the following laws and rules made there-under;
- The Companies Act, 2013 (the Act) and the rules made there-under;
- The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made thereunder;
- The Depositories Act, 1996 and the Regulations and Bye-laws framed there-under;
- Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder to the extent of Foreign Direct Investment, Overseas Direct Investment and External Commercial Borrowings;
- The following Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):-
- The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
- The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015;
- The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
- The Securities and Exchange Board of India (Employee Based Share Benefit Scheme) Regulations, 2014;
- The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;
- The Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 regarding the Companies Act and dealing with client;
- The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009; and
- The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998;
- Other laws as may be applicable specifically to the company.
I. Secretarial Standards & Listing Regulations:
(i) Secretarial Standards 1 & 2 issued by The Institute of Company Secretaries of India
(ii) SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, if applicable;
II. Composition of Board of Directors/Minutes of Directors & Members Meeting:
The Board of Directors of the Company is duly constituted with proper balance of Executive Directors, Non-Executive Directors and Independent Directors.
The changes in the composition of the Board of Directors that took place during the period under review were carried out in compliance with the provisions of the Act.
Adequate notice is given to all directors to schedule the Board Meetings, agenda and detailed notes on agenda were sent at least seven days in advance, and a system exists for seeking and obtaining further information and clarifications on the agenda items before the meeting and for meaningful participation at the meeting.
III. Adequate systems and processes in the company:
Secretarial Auditor also requires to report on whether Adequate systems and processes in the company commensurate with the size and operations of the company to monitor and ensure compliance with applicable laws, rules, regulations and guidelines.
IV. Details of specific events / actions having a major bearing on the company’s affairs:
Secretarial Auditor also requires to report on details of specific events / actions having a major bearing on the company’s affairs in pursuance of the laws applicable on the Company during the audit period the company.
Documents to be examined/verified while conducting secretarial audit (these points are inclusive and not exhaustive):
- Books, Papers, as per Section 2(12) of Companies Act, 2013, “book and paper” and “book or paper” include books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form.
- Memorandum of Association
- Articles of Association
- Certificate of Incorporation
- Audited balance sheet(s).
- Statutory Registers maintained by the Company i.e., Register .of Members/ Register of debenture holder/ Register of Charges/ Register of Directors and Key Managerial Personnel/ Register of Loans, Guarantee, Security etc.
- Details of E-forms filed during the period.
- Notice of calling Board Meetings.
- Notice of calling Extra Ordinary General meeting, Annual General Meeting along with the explanatory statement.
- Minutes of the Board meetings, Extra Ordinary General meeting, Annual General Meeting, Audit Committee Meetings, Nomination & Remuneration Committee Meetings, etc.
- Notices of disclosure of directors’ interests in Form No. MBP-1 as well as specific notices received from time to time from the directors and recorded in the minutes of Board meetings.
- Copy of documents related to the appointment/Resignation of Statutory Auditor of the company.
- Copies of contracts made between the company and any of the related parties u/s section 188 of Act. .
- Details of inter-corporate investments/loans/guarantees/securities etc.
- Copy of Internal Audit Report given by Internal Auditor appointed u/s138 of Companies Act, 2013.
- For Companies having Foreign Direct Investment
(a) Copy of Foreign Inward Remittance Certificate.
(b) Copy of Form FC-GPR.
(c) Copy of Annual return on Foreign Liabilities & Assets (FLA).
(d) Certificates received.from Company Secretary and Chartered Accountant.
(e) Copy of approval of Reserve Bank of India/ Foreign Investment Promotion Board.
Further, the Secretarial Auditor shall review and periodically update (if required) the checklist based Compliance Monitoring System.
For XYZ Limited Director
Audit Engagement Notes
An Audit Engagement is an arrangement wherein an auditor perform an audit of the transaction of the auditee for which he has been engaged by the auditee. The Audit Engagement is a contractual arrangement by way of the Audit Engagement letter between the auditee and the auditor.
Audit fee which is to be charge by the auditor depends on several factors, which includes
- Size of the organization
- Nature of business
- Internal Controls Systems and Technology adopted;
- Scope of Audit;
- Frequency of Audit etc.
The Appointing Authority means the person who is appointing the Auditors of the company. Under the provision of the Section 139 of the Companies Act, 2013 specifically provides that the appointment of the first statutory auditor shall be appointed by the Board of the Company within 30 days of the incorporation of the company, however the subsequent auditors shall be appointed upon the recommendation of the board or the audit committee of the company, if any, by the members at the general meeting of the company.
Audit Engagement Letter:
It is in interest of both the Management and the auditor that the auditor should get an audit engagement letter before the commencement of the audit to help avoid misunderstandings with respect to the terms of engagement. In some entities, however, the objective and scope of an audit and the responsibilities of management and of the auditor may be sufficiently established by law, in that case, the engagement letter may give a reference to the fact that relevant law or regulation applies and that management acknowledges and understands its responsibilities for preparation and maintenance of records and for devising proper systems to ensure compliance with the provisions of applicable laws and regulations.
It should be reviewed every year to ensure that it is up to date but does not need to be reissued every year unless there are changes to the terms of the engagement. The auditor shall obtain a new engagement letter if the scope or context of the assignment changes after initial appointment.