Chapter 17 Quality Review – Secretarial Audit Compliance Management and Due Diligence ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.
Quality Review – Secretarial Audit, Compliance Management and Due Diligence Study Material
Question 1.
Write short note on the following:
Scope of peer review (Nov 2013, 4 marks) [CAFG-I]
Answer:
Scope of Peer Review:
Under the scope of Peer review, the following attestation services are covered:
At present the following Attestation and Audit Services are covered under the purview of Peer Review.
(a) Annual Returns Certified/Signed under Companies Act, 2013
(b) Certificates Issued under Regulation 40(9) of SEBI (LODR) Regulations, 2015
(c) Secretarial Audit Reports issued Section 204 of the Companies Act, 2013/Regulation 24A of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
(d) Annual Secretarial Compliance Reports under SEBI (LODR) Regulations, 2015
(e) Internal Audits under-Section 138 of the Companies Act, 2013
(f) Audit Reports issued under Clause 76 of SEBI (Depositories & Participant Regulations) 2018
(g) Certificate issued under Regulation 56 of LODR Regulation 34(3) read with Schedule V, Para C, Clause (b) (i)
(h) Compliance Certificates issued under Clause E, Schedule V of SEBI (LODR) Regulations, 2015
(i) Internal Audit of Registrar and Share Transfer Agent (RTA) under SEBI Circular No. SEBI/HO/MIRSD/CIR/P/2018/73
(j) Interna! Audit of Credit Rating Agencies under SEBI Circular No. SEBI/MIRSD/CRA/Cir-01/2010-11 Issuance of Internal Audit Certificate for operations of the Depository Participants
(k) Half yearly bank due diligence certificates issued.
Question 2.
Write short note on the following:
Areas to be reviewed in the assessment of independence of the practicing unit, while conducting peer review. (May 2016, 4 marks) [CAFG-I]
Answer:
Following Areas to be reviewed in the assessment of independence of the practicing unit:
- Does the practice unit have a policy to ensure independence, objectivity and integrity, on the part of partners and staff? Who is responsible for this policy?
- Does the practice unit communicate these policies and the expected standards of professional behaviour of all staff?
- Does the practice unit monitor compliance with policies and procedures relating to independence?
- Does the practice unit periodically review the practice unit’s association with clients to ensure objectivity and independence?
Question 3.
What are the areas excluded from the scope of peer reviewer? (May 2014, 3 marks) [CAFG-I]
Answer:
Areas excluded from scope of Peer Reviewer are:
- Management Consultancy Engagements;
- Representation before various Authorities;
- Engagements to prepare tax returns or advising clients in taxation matters;
- Engagements for the compilation of financial statements;
- Engagements solely to assist the client in preparing, compiling or collating information other than financial statements;
- Testifying as an expert witness;
- Providing expert opinion on points of principle, such as Accounting Standards or the applicability of certain laws, on the basis of facts provided by the client; and
- Engagement for Due diligence.
Question 4.
Explain the stepwise approach adopted by the Peer reviewer. (May 2015, 4 marks) [CAFG-I]
Answer:
1. The reviewer should gain an under standing of the engagement letter since an assurance engagement or for that matter any other kind of engagement should begin with an engagement letter. Engagement letter is an important document as it defines the nature and scope of the assurance engagement, practice unit’s responsibilities with regard to the engagement. This understanding would help him in planning the review of documentation. The reviewer should focus the review primarily on the key engagement matters. The reviewer should also consider the materiality of the matter while planning the review.
2. The number of assurance engagements to be selected requires the exercise of judgement by the reviewer based on the evaluation of replies given in the questionnaire and the size of the practice unit. The objective is to obtain a reasonable cross-section -of the practice unit’s clients although greater weight may be given to large clients.
3. The practice unit may have policies and procedures for accepting a particular engagement. These policies and procedures may not exist in the form of records in each practice unit. In such a case the reviewer should consider enquiring from the concerned persons about such policies and procedures. The reviewer should, wherever possible, examine that the policies and procedures for acceptance of audit have been complied with necessary documentation with regard to the same exists.
4. The reviewer may follow a combination of compliance procedures and substantive procedures throughout the peer review process. The mix of Compliance and Substantive procedures depends upon the professional judgment of the reviewer.
Question 5.
What is peer review and describe its contents? (June 2019, 5 marks)
Answer:
Peer Review is a process for examining the work performed by one’s equals (peers) and to understand the systems, practices and procedures followed by the Practice Unit and to give suggestions, if any, for further improvement. The Institute of Company Secretaries of India provides a mechanism of Peer Review of their Members in Practice to enhance the quality of attestation services, to enhance credibility and provide competitive advantage and provide a forum for Guidance and knowledge sharing. The peer review includes the following services by the company secretaries in practice:
- Certification/ Signing of Annual Return pursuant to section 92 of the Companies Act, 2013.
- Issuance of Secretarial Audit Report in terms of Section 204 of the Companies Act, 2013
- Issuance of Certificate of Securities Transfers in Compliance with the LODR with Stock Exchanges.
- Certificate of reconciliation of capital, updation of Register of Members etc. as per the Securities and Exchange Board of India’s Circular D & CCCir-16/2002 dated December 31.2002.
- Conduct of Internal Audit of Operations of the Depository Participants.
- Compliance Certification under LODR.
- Attestation services of Form AOC-4, MGT-7, DIR-12, SH-7 and PAS-3 filed with the ROC.
- Such other services as decided by the Council of ICSI under the scope of peer review from time to time.
Question 6.
What are the benefits which a practice unit will obtain in undergoing a peer review ? (Dec 2019, 3 marks)
Answer:
There are significant benefits which a Practice Unit (PU) will obtain in undergoing a Peer Review. These may be summarised below:
- A successful peer review will provide comfort to the PU that he has adhered to various statutory, documentary and other regulatory requirements.
- If deficiencies are noticed and corrective measures suggested, the PU will have an opportunity to correct the deficiencies and thereby enhance his professional competence.
- If a Peer Review Certificate is issued in favour of the PLJ it enhances his credibility in the eyes of the general public.
- Since a Chinese wall exists between the Peer Review Process and the Disciplinary Proceedings, the PU will benefit from peer review without any apprehension of any disciplinary proceedings being initiated against him for any deficiencies noticed on his part.
- Clients of the PU will benefit from knowing that their PU is periodically reviewed by the ICSI. ‘
Question 7.
Write a note on establishment and functions of Quality Review Board under the Company Secretaries (Amendment) Act, 2006. (Dec 2020, 5 marks)
Answer:
Note on Establishment and functions of Quality Review Board under Company Secretaries (Amendment) Act, 2006:
Section 29A. Establishment of Quality Review Board:
- The Central Government shall, by notification, constitute a Quality Review Board consisting of a Chairperson and four other members.
- The Chairperson and members of the Board shall be appointed from amongst the persons of eminence having experience in the field of law, economics, business, finance or accountancy. ‘
- Two members of the Board shall be nominated by the Council and other two members shall be nominated by the Central Government Section 29B. Functions of Board:
The Board shall perform the following functions, namely:
- to make recommendations to the Council with regard to the quality of services provided by the members of the Institute;
- to review the quality of services provided by the members of the Institute including secretarial Audit services; and
- to guide the members of the Institute to improve the quality of services and adherence to the various statutory and other regulatory requirements.
Question 8.
Explain the planning stage of peer review process. (Dec 2020, 5 marks)
Answer:
On acceptance of the peer review by the selected reviewer, the PU will be notified. The reviewer may also require the PU to provide any other information the reviewer considers necessary to facilitate the selection of a sample of attestation services engagements, representative of the practice unit’s client portfolio, for review. .
Sample of Attestation services Engagements:
(a) From the complete attestation services client list, an initial sample will be selected by the reviewer. Practice units will be notified of the selection in writing about two weeks in advance, requesting the relevant records of the selected attestation services clients to be made available for review.
(b) At the execution stage, the initial sample may be reduced to a smaller actual sample for review. However, if the reviewer considers that the actual sample does not cover a fair cross-section of the practice unit’s attestation services engagements, he may make further selections.
Confirmation of visit:
In consultation with the practice unit, date(s) will De set for the on-site review to be carried out. Flexibility will be permitted to ensure that practice units are not inconvenienced at especially busy periods. The on-site review date(s) will be arranged by mutual consent such that the review is concluded within sixty days of notification.
Question 9.
“A Peer Reviewer has to report under certain guidelines as prescribed by ICSI. The reporting is tc done in three different forms”.
Discuss in brief the statement as given in the guidelines. (Aug 2021, 5 marks)
Answer:
Reporting
The Peer Review Guidelines contains following provisions for reports of Peer Reviewer.
The reporting is to be done in three different forms explained as under:
1. Preliminary Report of Reviewer
- At the end of an on-site review, the reviewer shall, before making his report to the Board, communicate a preliminary report to the Practice Unit (in case he/she finds any deficiency in the systems and procedures of the Practice Unit in rendering Professional Services to the clients). The Reviewer shall report on the areas where systems and procedures had been found to be deficient or where noncompliance with reference to any other matter was noticed.
- The Practice Unit shall make submissions or representations, in writing to the Reviewer, concerning the preliminary report within 15 (fifteen) days from the date of receipt of preliminary report from Reviewer.
2. Final Report of Reviewer:
(a) The Reviewer will submit a Final Report to the Board with a copy to the Practice Unit (the Reviewer’s Report), incorporating the findings. The Final Report will be examined/inspected by the Board in terms of the degree of compliance with the Technical Standards by the reviewed Practice Unit. The model forms of such Final Reports shall be communicated to the Reviewer by the Board.
(b) The Board may, if deems fit, issue Peer Review Certificate to the Practice Unit. OR
(c) The Board, having regard to the Report and any submissions or representations attached to it, may make recommendations to the
Practice Unit concerned regarding the application by it of Technical Standards; if it is of the opinion that:
- In case the review is related to a firm, any one or more or all of the partners in the firm may have failed to observe, maintain or apply, as the case may be, Technical Standards;
- In case the review is related to a member practicing on his own account, the member may have failed to observe, maintain or apply, as the case may be, Technical Standards; Then;
- Issue instructions to the Reviewer to carry out, within such period as may be specified in the instructions (which period Shall not commence earlier than six months after the date on which the instruction is issued), a further Peer Review as regards the Practice Unit to which the report relates; and
- Specify in the instruction, the matters as regards which the review is to be carried out;
(d) The Board will make recommendations to the Practice Unit where: Based on the report of the Reviewer, it appears that the Practice Unit has satisfied all key control objectives, which the Board has determined and/or prescribed in respect of maintenance of/ adherence to Technical Standards but where further improvements could be made to internal quality control systems; and Based on the report of the reviewer, it appears that the Practice Unit has satisfied the major key control objectives but some weaknesses exist in others. The Practice Unit is expected to consider the recommendations for rectifying the weaknesses thus identified and informed by the Board and take all necessary actions to ensure that all key control areas are addressed.
(e) A follow up review will be required where the Practice Unit has not . satisfied the Board that all the key control objectives have been maintained and where, in the view of the Board the deficiencies are likely to materially affect the overall quality of engagements of the Practice Unit. In such cases the Board will also make recommendations, which it expects the practice unit to implement in order to ensure the maintenance of Technical Standards. The implementation of these recommendations will be examined during the follow up review.
3. The Reviewer shall not communicate any Report(s) unless the examination of such Report(s) and related records has been made by him/her or by a partner or an employee of his/her firm.
Question 10.
“The methodological approach involved in peer.review can be described in four stages” Explain the planning process of the peer review. (Dec 2021, 5 marks)
Answer:
The methodological approach involved in peer review can be described in terms of four stages viz., preparation, planning, execution and reporting. Planning Process of Peer Review
On acceptance of the peer review by the selected reviewer, the Practice Unit (PU) will be notified. The reviewer may also require the Practice Unit (PU) to provide any other information the reviewer considers necessary to facilitate the selection of a sample of attestation services engagements, representative of the practice unit’s client portfolio, for review.
Sample of Attestation services Engagements:
(a) From the complete attestation services client list, an initial sample will be selected by the reviewer. Practice units wili be notified of the selection in writing about two weeks in advance, requesting the relevant records of the selected attestation services clients to be made available for review.
(b) At the execution stage, the initial sample may be reduced to a smaller actual sample for review. However, if the reviewer considers that the actual sample does not cover a fair cross-section of the practice unit’s attestation services engagements, he may make further selections.
Confirmation of visit:
In consultation with the practice unit, date(s) will be set for the on-site review to be carried out. Flexibility will be permitted to ensure that practice units are not overburdened at especially busy periods. The on-site review date(s) will be arranged by mutual consent such that the review is concluded within sixty days of notification.
Question 11.
“The Peer reviewer is expected to examine the office systems and procedures with regard to compliance of attestation services provided by a practice unit.” Comment. (June 2022, 3 marks)
Question 12.
What are the objectives of Peer Review?
Answer:
The main objective of Peer Review is to ensure that in carrying out their Services, the PCS has complied with the Technical Standards laid down by the Institute and has in place proper systems (including documentation systems) for maintaining the quality of the Services/ work they provide. The Council has specified the Technical Standards in relation to which peer review is to be carried out in the guidelines for Peer Review of Attestation Services by Practising Company Secretaries. Peer Review does not seek to redefine the scope and authority of the Technical Standards specified by the Council but seeks to enforce them within the parameters prescribed by the Technical Standards.
Peer Review is directed towards maintenance as well as enhancement of quality of attestation services and to provide guidance to members to improve their performance and adhere to various statutory and other regulatory requirements. Essentially, through a review of attestation services engagement records, peer review identifies the areas where a practising member may require guidance in improving the quality of his performance and adherence to various requirements as per applicable Technical Standards and regulatory requirements.
Question 13.
What are the benefits of Peer Review?
Answer:
Benefits of Peer Review
- A successful Peer Review will provide comfort to the P.U. that he has adhered to various statutory, documentary and other regulatory requirements.
- If deficiencies are noticed and corrective measures suggested, the P.U. will have an opportunity to correct the deficiencies and thereby enhance his professional competence.
- If a Peer Review Certificate is issued in favour of the P.U. it enhances his credibility in the eyes of the general public.
- Since a Chinese Wall exists between the Peer Review Process and the Disciplinary Proceedings, the P.U. will benefit from Peer Review without any apprehension of any disciplinary proceedings being initiated against him for any deficiencies noticed on his part.
- Clients of the P.U. will benefit from knowing that their P.U. is periodically reviewed by the ICSI.
Question 14.
What are the scopes of Peer Review?
Answer:
Scope of Peer Review
- Signing of Annual Return pursuant to proviso to sub-section (1) of section 92 of the Companies Act, 2013 in form MGT -7.
- Certification of Annual Return pursuant to sub-section (2) of section 92 of the Companies Act, 2013 in Form MGT- 8.
- Issuance of Secretarial Audit Report in terms of Section 204 of the Companies Act, 2013
- Issuance of Certificate of Securities Transfers in Compliance with Regulation 40(9) of the SEBI LODR Regulations.
- Certificate of reconciliation of share capital Audit, updation of Register of Members, etc. as per the Securities & Exchange Board of India’s Circular D & CC/Cir-16/2002 dated December 31,2002.
- Conduct of Internal Audit of Operations of the Depository Participants.
- Compliance Certificate regarding compliance of conditions of Corporate Governance to be annexed with the Director Reports prescribed under Schedule V of the SEBI (LODR) Regulations.
Question 15.
“The nature and complexities of peer review requires the exercise of professional judgment” Comment
Answer:
The nature and complexities of peer review requires the exercise of professional judgment. The reviewer should:
- Be well acquainted with the technical aspects of the attestation services.
- Know the provisions of Code of Conduct of ICSI.
- Have studied various cases decided on Code of Conduct of ICSI.
- Get himself/herself acquainted with decisions of various courts on ‘cases relating to deficiency in service’.
- Be aware of relevant provisions of CS Act 1980, Consumer Protection Act, Evidence Act, IPC, etc.
- Have studied the technical standards like Secretarial Standards, Guidance Notes, Notifications and Guidelines issued by Council of ICSI.
- Be aware of evolving standards and best practices in the field.
- Be good at drafting, written and spoken English.
- Display professional and courteous behavior while on peer review visit.
- Understand his limitations.
- Be clear about what is outside the scope of Peer Review.
Question 16.
What methodology to be followed by Reviewer?
Answer:
Methodology to be followed by Reviewer
(a) Offsite review
This contemplates studying the information given by the PU in the Questionnaire and based on the same make his own observations about possible areas where improvement is possible and to note other aspects to be discussed in personal meeting with PU.
(b) Onsite review
- Verification of information given by the PU.
- Test checks in respect of attestation assignments handled by the PU.
- Interaction with the staff & trainees of PU should be a part of the peer review.
- Calling for the records in respect of the client maintained by the PU to verify whether proper systems arid procedures have been followed.
Question 17.
What are the Leadership Responsibilities covered under the Quality Control Elements within the Firm.
Answer:
Leadership Responsibilities under the Quality Control Elements within the Firm
1. The firm should assign, responsibility for each assignment to one of its partners or the team leader who shall be responsible for overall quality of such assignment.
2. The proprietor of the entity/partners of the firm shall be responsible for quality maintenance and quality improvement of which recommended features are:
(a) Communication of the quality control policies and procedures to all team members / relevant personnel. The methods for communication, scope and frequency thereof should be established.
(b) Establishing a process that encourages personnel to communicate their views or concerns on quality control matters.
(c) Clearly establishing responsibilities of the proprietor of the entity / partners of the firm and other senior personnel for quality control.
(d) Promotion of an internal culture of quality and provision of related practical guidance including coverage in professional development programs.
(e) Demonstration of firm’s overriding commitment to quality, above
commercial considerations through the firm’s policies and procedures.
(f) Addressing performance evaluation, compensation and promotion; and devotion of sufficient resources for the development, documentation and support of quality control policies and procedures.
(g) Ensuring possession of appropriate qualifications, experience, ability and authority of those to whom responsibilities for quality control and performance are assigned.
3. In order to ensure and achieve above quality parameters, it is necessary to set a procedure for documentation, which will cover the following areas-
(a) Documenting quality control policies and procedures of the firm and its circulation to all relevant personnel.
(b) Documenting & circulating policies & procedures whereby individual employees/personnel can communicate their views or concerns on quality control matters.
(c) Documenting responsibilities of the Partner and other senior personnel for quality control and circulation among concerned personnel and Governing Board of the firm.
(d) Documenting and circulating relevant practical guidance (including coverage in professional development programs) for quality control.
(e) Documenting the firm’s requirement of appropriate qualifications, experience, ability and authority of those to whom responsibilities for quality controls and performance are assigned.
4. The firm shall keep and preserve the above documents for prescribed period (unless prescribed by any statute, rules or authority, the firm shall decide and document the period of preservation which should not be less than three years). However, putting those policy documents in public domain is optional.
Question 18.
Describe the quality review guideline on Preconditions of accepting/continuing any professional engagement.
Answer:
Preconditions of accepting/continuing any professional engagement
Prior to acceptance of any engagement, the firm, in order to establish
whether the preconditions for a professional assignment are present, shall:
(a) Determine whether the reporting framework-to be applied in the preparation, audit, review of the secretarial/ non-financial statements is acceptable; and
(b) Obtain the agreement of management that it acknowledges and understands its responsibility:
1. For the preparation of the secretarial/ non-financial statements in accordance with the applicable reporting framework, including where relevant their fair presentation;
2. For such internal control/systems/procedure as management determines is necessary to enable the preparation of secretarial/ non- financial statements that are free from material misstatement, whether due to fraud or error; and
3. To provide the firm with:
- Access to all information of which management is aware that is relevant to the preparation/audit/review etc. of the secretarial/ non- financial statements such as records, documentation and other matters;
- Additional information that the firm may request from management for the relevant purpose; and
- Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.
Quality Review Notes
Peer Review:
Peer Review is directed towards maintenance as well as enhancement of quality of attestation services and to provide guidance to members to improve their performance and adhere to various statutory and other regulatory requirements.
Qualifications for Peer Reviewer:
The eligibility for become a Peer Reviewer need to be a Member of the Institute who should
- Possess at least 10 years of poet-membership experience
- Be currently in whole time practice as a Company Secretary.
Reviewer’s Approach:
The approach of the Reviewer should be courteous, professional and helpful throughout the review process. He should be appreciative of good practices while suggesting areas of improvement and should adopt a collaborative approach with the P.U. during the review process and should ensure minimum disruption to the P.U. during the peer review.
The peer reviewer should able to provide practical and insightful comments in a discussion mode as a Peer during the review process and should provide value addition to P. U. and not merely adopt a tick box approach.
The Review shall focus on
- Compliance with Technical Standards.
- Quality of Reporting or Attestation services.
- Office systems and procedures with regard to compliance of services including appropriate infrastructure.
- Training and capacity building Programs for staff (particularly, the Apprentice Trainees)
Quality Review Board (QRB):
Quality Review Board (QRB) has been constituted by Government of India in exercise of the powers conferred by Section 29 A of the Company Secretaries Act, 1980 (56 of 1980) read with Rules 8, 9 and 10 of the Company Secretaries Procedures of Meetings of Quality Review Board, and Terms and Conditions of Service and Allowances of the Chairperson and Members of the Board Rules, 2006.
The Board has been set up to review and enhance the quality of the services rendered by the members of the ICSi. The Board aims to standardize the practices followed by the Company Secretaries and enhance the quality of the services rendered by the members of iCSI on continuous basis.
Objective of Guidance Manual:
To guide the Company Secretaries to establish policies, procedures and systems to maintain the highest standards of quality in the assignments undertaken by them
To establish and maintain a system of quality control to provide it with reasonable assurance that
(a) the firm and its personnel comply with the technical/professional standards and applicable legal and regulatory requirements; and
(b) the reports or certificates issued by the firm or engagement partners are appropriate in the circumstances.
Quality Management System:
It is important to understand the meanings of Quality Assurance (QA) and Quality Control (QC) as both terms are the integral part of the quality management systems. For an effective operation, it is important to relies the differences between these terms.
An Effective Quality Management Systems (QMS) contribute enormously to the success of an Practicing Unit, whereas when it is poorly understood, the QMS are likely to be weak and ineffective in ensuring the timely delivery and in competent in satisfies the customer’s requirements