Chapter 8 Audits – Secretarial Audit Compliance Management and Due Diligence ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.
Audits – Secretarial Audit, Compliance Management and Due Diligence Study Material
Question 1.
Answer the questions:
What are the advantages of Social Audit? (Dec 2016, 2 marks)
Answer:
The advantages of Social Audit may be enumerated as below:
- Encourages community participation among different business entities.
- Ensures continuous efforts towards environmental protection and use of environment friendly production processes.
- Builds customer satisfaction and trust through ethical business practices.
- Promotes collective decision making and sharing responsibilities.
- Develops human resources by working towards improvement of workers and the underprivileged persons’ working/living conditions.
Question 2.
A series of financial crimes and frauds by some of its employees is alleged by a company. It is desiredrto gather legally tenable evidence and to fix the negligence and responsibility within the company, before taking action in the court of law. Which type of audit will you suggest in this case? Explain. (Dec 2020, 5 marks)
Answer:
Forensic Audit is a dynamic and strategic tool in combating corruption, financial crimes and frauds through investigations and resolving allegations of fraud and embezzlement. It may be conducted to determine negligence. Forensic is the application of science to crime concerns. Forensic science is science which is applied to legal matters especially criminal matters.
Due to recent corporate accounting scandals at various corporates forensic auditing has now considered as new area of auditing to detect the frauds in companies that suspected fraudulent transactions.
A Forensic Audit is a comprehensive and systematic process involving a series of activities and tasks undertaken for establishing the accuracy and authenticity of the transactions under review.
The term Forensic Audit refers to the specific guidance carried out in order to produce evidence. Forensic Audit task involves an investigation into the financial affairs of the entity and is often associated with investigation into the alleged fraudulent activity. The.object of forensic auditing is to relate the findings of audit by examining and gathering legally tenable evidence and producing it to the Court. In the process the corporate veil is lifted in case of corporate entities to identify the fraud and the persons responsible for it. Forensic auditing involves application of audit skills to legally determine whether fraud has actually occurred. The entire process includes planning, gathering evidence, reviewing the evidence and reporting of the same. In the process it aims at naming the person(s) involved in the fraud with a view to take legal action.
Forensic Audit Report is statement of observation gathered & considered while proving conclusive evidence. It is a medium through which an auditor expresses his opinion under audit after the forensic audit investigation is completed.
Question 2.
“Audit as a monitoring device is essential in corporate governance also”. Substantiate the statement. (Dec 2020, 5 marks)
Answer:
Corporate Governance is a strategic activity that ensures that all the processes that are necessary for directing and controlling a business enterprise are implemented effectively. It is about ethical conduct in business. Corporate Governance deals with conducting the affairs of a company such that there is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders. It is about openness, integrity and accountability.
Recent scandals in Indian Corporates have raised questions not only about the practices adopted by companies to solicit business but also about the standards of accountability in public administration including within the government machinery and institutions.
Corporate Governance provisions under the erstwhile listing agreement popularly known as the Clause 49 requirements have been overhauled by the Companies Act 2013, recent adoptions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). Schedule II of the said regulations have elaborated on the Corporate Governance measures and are applicable to the entities which are listed with recognized stock exchange(s). These regulations have aligned India’s corporate governance regime with the developed countries.
Audit of corporate governance processes provides assurance to various stakeholders that all the required governance activities have been accomplished. The Stakeholders do not like to receive surprises and audit of corporate governance activities shall ensure the effective check mechanism on the supervisory and managerial layers of a business enterprise. Corporate Governance Audit mechanism works primarily through Audit Committee and the Auditor.
Need for Corporate Governance Audit (CGA):
The audit serves as a monitoring device and is essential in corporate governance also. The auditors view management as the primary driver of corporate governance and to ensure commitment of the Board in managing the company in a transparent manner.
The history indicates that well-governed companies receive higher market valuations. Improving corporate governance will also increase capital flows to companies; from domestic and global capital; equity and debt; and from public securities markets and private capital sources even the increased customer base. Therefore, the Corporate Governance Audit is essential in Corporate Governance.
Question 3.
Neha, a Practicing Company Secretary was appointed as the Secretarial Auditor of Nex Ltd. Neha was issued an engagement letter, soon after his appointment. Later, the Management of the company reached out to Neha, seeking some changes to the engagement letter. Describe the details which should form part of the engagement letter. Can an engagement letter be changed after being issued? (Aug 2020, 5 marks)
Answer:
The Audit Engagement Letter shall Inter alia include:
(a) The objective and scope of the audit;
(b) The responsibilities of the Auditor end the Auditee;
(c) Written representations provided and/or to be provided by the Management to the Auditor, including particulars of the Predecessor or Previous Auditor;
(d) The period within which the audit report shall be submitted by the
Auditor, along with milestones, if any;
(e) The commercial terms regarding audit fees and reimbursement of out-of-pocket expenses in connection with the audits and
(f) Limitations of audit, if any.
Where the objective and scope of the audit and responsibilities of the Management and of the Auditor have been established by law, the Audit Engagement Letter shall give a reference to the provisions of the relevant law along with a statement that the 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, acts, rules, regulations and standards for the time being in force.
Chances in terms of engagement:
- The Auditor shall not agree to a change in the terms of the Audit Engagement where there is no reasonable justification for doing so.
- If before completion of the assignment, the Auditor is requested by the Appointing Authority to change the scope of engagement, resulting in a lower level of assurance, the Auditor shall consider the appropriateness of carrying out the same.
- If the terms of the Audit Engagement are changed, the Auditor and the Appointing Authority shall agree on the new terms of the engagement by way of a supplementary/revised engagement letter or any other suitable form in writing.
As per Para 5.1 of CSAS-1, unless there is reasonable justification for doing so, the auditor shall not agree to change the terms of Audit Engagement. Further, if before completion of the assignment, the Auditor is requested by the Appointing Authority to change the scope of engagement, resulting in a lower level of assurance, the Auditor shall consider the appropriateness of carrying out the same.
As per Para 5.3’ of CSAS-1, whenever there are changes in terms of Audit Engagement, the Auditor and Appointing authority shall agree on new terms of the engagement by way of supplementary / revised engagement letter or any other suitable form of writing.
Question 4.
Define the term ‘modified opinion and unmodified opinion’ as per Auditing Standard 3-on forming an opinion’ (CSAS-3) issued by the ICSI. (Dec 2021, 3 marks)
Answer:
Modified Opinion
The Auditor shall express modified opinion when the Auditor concludes that:
(a) based on the Audit Evidence obtained, there is non-compliance with the applicable laws in terms of timelines or process; or
(b) based on the Audit Evidence obtained, the Records as a whole are not free from Misstatement; or are not maintained in accordance with applicable laws; or
(c) he is unable to obtain sufficient and appropriate Audit Evidence to conclude that there is due compliance with the applicable laws in terms of timelines and process; or
(d) he is unable to obtain sufficient and appropriate Audit Evidence to conclude that the Records as a whole are free from Misstatement; or are maintained in accordance with applicable laws.
Whenever the Auditor expresses a modified opinion or disclaims an opinion, the text of the opinion shall be either in italics or bold letters.
Unmodified Opinion:
The Auditor shall express an unmodified opinion when based on Audit
Evidence, the Auditor concludes that:
(a) there is due compliance with the applicable laws in terms of timelines and process; and
(b) the records as relevant for the audit verified by him as a whole are free
from misstatement and maintained in accordance with the applicable laws.
Question 5.
Write a short note on “Need for Environmental Audit”.
Answer:
“Need for Environmental Audit”
- Business can assess the environmental impact of their operations.
- To ensure that the corporate decisions are not spoiling company’s market for its products, destroying the source of essential supply, damaging or polluting the very infrastructure that makes usage and demand of the product grow.
- It provides opportunity for business to decrease its wastes output and reduce the cost of waste treatment or waste disposal.
Question 6.
Write a short note on “Forensic Audit”.
Answer:
Forensic Audit is a dynamic and strategic tool in combating corruption, financial crimes and frauds through investigations and resolving allegations of fraud and embezzlement. It may be conducted to determine negligence. Forensic is the application of science to crime concerns. Forensic science is science which is applied to legal matters especially criminal matters.
A Forensic Audit is a comprehensive and systematic process involving a series of activities and tasks undertaken for establishing the accuracy and authenticity of the transactions under review.
Forensic Audit Report is statement of observation gathered and considered while proving conclusive evidence. It is a medium through which an auditor expresses his opinion under audit after the forensic audit investigation is completed.
Question 7.
Write a short note on CSR Audit.
Answer:
A Corporate Social Responsibility Audit aims at identifying environmental, social or governance risks faced by the organization and evaluating managerial performance in respect of those. Corporate Social Responsibility (“CSR”) is a broad term however, for the purpose of addressing the scope of a CSR Audit, CSR is about managing and taking into consideration organization’s operational, processes and behavioral impact on society and stakeholders from a broad perspective. Contrary to common belief CSR is more than basic legal compliance and is highly connected with and affects organization’s bottom line.
Question 8.
Explain the scope of Corporate Governance Audit.
Answer:
The Scope of Corporate Governance Audit is wide and generally boundary less, as the subject covers:
- Financial and non-financial stakeholders.
- Boards of Directors (Composition, Mix, Independence)
- Committees of the Boards and terms of References
- Control Environment (Accounting, Controls, Internal and External Audit)
- Risk Management
- Transparency and Disclosure of financial information and executive compensation
- Strategic plans, programs and guidance on social responsibilities.
Question 9.
What are the implication of Social Audit?
Answer:
- Social auditing creates an impact upon governance. It values the voice of stakeholders, including marginalized/poor groups whose voices are rarely heard.
- Social auditing is taken up for the purpose of enhancing local governance, particularly for strengthening accountability and transparency in local bodies.
- Social Audit makes it sure that in democracy, the powers of decision makers should be used as far as possible with the consent and understanding of all concerned.
Audits Notes
Purpose of CSR Audit:
- To ensure compliance with the provisions of Companies Act, 2013 with respect to constitution of the Committee, adoption of policy and appropriate spending towards CSR activities.
- To facilitate transparent monitoring mechanism and a mentor for the Company’s CSR activities and implementation of CSR policy.
- To evaluate internal control and governance framework.
- To assess the project life cycle.
- To conduct financial review of projects to confirm the utilization of budgets for achieving desired outcomes.
Labour Law Audit:
Labour Law Audit is a process of facts findings and it is a continuous process. Labour Law Audit ensures a win – win situation for all the stakeholders. Audit under the Labour and Employment laws is an effective tool for compliance management of labour, employment and Industrial laws. Audit helps to detect non – compliance of labour and employment laws applicable to a business and take corrective measures to avoid any unwarranted legal actions by the regulators against the business and its management.
Cyber Audit:
In Cyber Audit team of professional conducts an organizational review to ensure that the correct and most up to date cyber and IT processes and infrastructure are being applied. A cyber audit also includes a series of tests that guarantee that information security meets all expectations and requirements within an organization.
In Cyber Audit the Internal auditors and risk management professionals have key roles to play in the Information Management function of the company. In the era of global digital economy it is critical to protecting enterprise information from the insider as well as the outsider hackers.
Environmental Audit:
Environmental Audit is a general term that can reflect various types of evaluations intended to identify environmental compliance and management system implementation gaps, along with related corrective actions and it has a wide variety of meanings. Environmental Audit refers to verification and assessment of environmental measures in an organisation.
Social Audit:
A Social Audit is a way of measuring, understanding, reporting and ultimately improving an organization’s social and ethical performance. A social audit helps to narrow gaps between vision/goal and reality, between efficiency and effectiveness. It is a technique to understand, measure, verify, report on and to improve the social performance of the organization.
Social Audit is a process of reviewing official records and determining whether the reported expenditures reflect the actual money spent on the ground. A social audit is a formal review of a company’s endeavors in social responsibility.
Takeover Audit:
To provide the desired results to an investor and to ensure that the acquisition is executed in the most effective manner, the concept of the takeover audit has been evolved, the takeover audit provides a cost benefit analysis to suggest a strategic plan for the long term investment strategy. The Audit provides for the Acquisition Audit as well as the Interse Transfer performed by the acquire
Takeover audit for merger/acquisition/ takeover could be done as three parts: pre-acquisition, post-acquisition and sell-side. Internal auditors or professionals with this domain expertise can contribute significant value by ensuring that a vibrant due diligence process is in place and operating as intended.