The document outlines significant changes in audit formalities under the Companies Act 2013, including auditor responsibilities, the appointment process, and key additions to audit reports. It emphasizes the transition to a rules-based model and the increased accountability of directors while providing guidelines for compliance, especially concerning the audit process and reporting of frauds. Additionally, it discusses the applicability and modifications to the Companies Auditor's Report Order (CARO) 2015, urging auditors to enhance their quality control and training.

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Highlights on Changes in Audit
Formalities under Companies
Act 2013
Mehul Pawani

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Matters Covered
I. Fundamental Shifts in The Companies
Act
II. Changes in Auditor’s Responsibility
III. Process flow for Appointment
IV. Highlights of Appointment Process
V. Appended Engagement Letter
VI. Key Points in Audit Report
VII. Key Additions to Audit Report
VIII.Applicability of CARO, 2015
IX. Changes in CARO, 2015
X. Tips for Implementation

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Fundamental shift in Companies
Act
 Driving through rules model instead of hard
coded Act.
◦ Sections to be read with Rules and thereby circulars
to form a view.
 Standards on Auditing prescribed in the Act for
Auditors
 New-age transaction models taken into
consideration.
◦ One Person Company (OPC)
◦ Small Company
◦ Disclosures enhanced
 in Directors Report
 Cashflow part of Financial Statements

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Changes in Auditor’s
Responsibility
 Operational parameters made
important for Auditors
◦ Controls
◦ Systems
◦ Processes
 Certification of the Financial
Statements which includes the Cash
flow statements
 Fraud Detection

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Process flow for appointment
 Board / Audit Committee recommends
the Auditor
 Auditor communicates the qualification
about the Companies Act and limits
specified for Audits
 EGM / AGM is called for and Auditor is
informed about his “appointment” via a
letter
 Auditor shares the engagement terms
with the members through “Engagement
letter”
 Company intimates the MCA

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Highlights of appointment
process
 Sections applicable for Auditors appointment
Sec 139
 Qualification of Auditor (take this every year)
as per Sec 141
 Appointment for 5 years at a time with
ratification in each meeting – for specific
companies (Form ADT1 every 5 years only
on fresh appointment)
 Remuneration has be approved in the
shareholders meeting specifically
 Intimation to MCA of the Auditors’
appointment by the Company NOT by Auditor
himself

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Appended engagement letters
 Cashflow is part of Financial
Statements – Exempt for OPC & small
companies
 Internal Financial Controls w.e.f. from
FY 15-16 (optional for FY 14-15
report)
 Update sections of Companies Act
2013
 Reporting of Frauds Sec 143 (12)

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“Key Points” in the Audit Report
Director’s responsibility has increased
drastically while some supplementary
relief comes on way for the Auditors in
CARO.
Enabling section 143 (1) instead of Sec
227 (1A) of the Companies Act.
Directors’ declaration for not being
disqualified – Form DIR 8.
Existence of Internal Financial Control
with Operating Effectiveness
Receipt Branch Audit Report by the
Statutory Auditor

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 Management Responsibility
◦ Safeguarding of assets
◦ Preventing and detecting Frauds and
other Irregularities
◦ Judgements and Estimates
◦ Internal Financial Controls
◦ Selection and application of Accounting
policies
Key additions to Auditors’ report

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Key additions to Auditors’ report
 Auditors Responsibility
◦ Reporting of Frauds
◦ Adherence to Standards on Auditing thereby
Quality Control standards as well
 Changes in Reporting as per Sec 143(3)
◦ Information - Sought AND Obtained
 Companies Audit and Auditors Rules,
2014 Dt. 31st March 2014
◦ Impact of Litigations
◦ Impact of Long term contract including
derivatives
◦ IEPF

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Applicability of CARO, 2015
Includes:
 Foreign Companies under Section 2(42)
Excludes:
 Banking and Insurance Companies
 One Person Company [OPC u/s 2(62)]
 Companies with Charitable Objects u/s 8
 Private Companies (AND condition)
◦ Capital + Reserve < Rs. 50 Lakhs
◦ Outstanding Loans < Rs. 25 Lakhs
◦ Turnover < Rs. 5 Crores (Any given point in
time)
 Small Companies u/s 2(85)

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Continued with Modifications
 Related Party Loans
◦ Only Granted NOT Taken
 Internal Control – includes services and
talks about systems apart from Controls
 Deposits : Previously order was being
passed by company law board, now RBI,
National Company Law Tribunal or any
other Board or Tribunal.
 Statutory Dues Section both for routine
and Disputes
◦ Should include Service Tax and VAT
◦ An additional point for Investor Education
Protection Fund (IEPF) is added

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Deletions / Removal
 Substantial part of Fixed Assets disposed,
whether it affects the going concern
 Related Parties
◦ Rate of interest are Prima-Facie prejudicial to the
interest of the Company
◦ Related parties dropped for Loans or Contracts
(u/s 301)even if transaction > 5Lakhs
 Maintenance of documents and records for
grant of loans & Advances
 Internal Audit System Commensurate with
size and Nature(Share holders fund>50L or
Turnover> 5CR for 3 preceding FY.
 Requirement specific to Chit-
Fund/Nidhi/Mutual Benefit Fund/Societies

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Tips for Implementation in
Spirit
 Upgrade the Quality Control manual
 Upgrade the Audit Program
◦ Team Training
◦ Categorize you Audits in ‘A’, ‘B’, ‘C’ and divide
attention accordingly. ‘A’s may need dual reviews
+ expert review.
◦ Update checklists for the team
◦ Update the standards Management
Representation letter formats MRL
◦ Include a review from in house Company Law
expert
 Client Awareness program
◦ Change in Responsibility of Directors
◦ New Audit Report requirements

15. THANK YOU
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