This article aims to address a significant anomaly and a practical issue concerning “Statutory Auditors” in the “Companies Act” (both past and present). Specifically, it highlights the fact that the “Director/s” of a company sign and adopt the Balance Sheet, Statement on Profit & Loss A/c, Notes to the accounts, accounting policies, Board report, and other relevant documents, while the same set of Balance Sheet is signed by the “Statutory Auditor/s” on the same date.
Page Contents
Description of anomaly addressed:
For the sake of clarity, it would be beneficial to elaborate on the “anomaly” with its corresponding legal provisions. As per the Companies Act, any statutory auditor must sign and provide their opinion on the “Final Accounts” of a company. These accounts must first be adopted and approved by the company’s board of directors, as stipulated in Section 134(1) of the Companies Act, 2013 (CA, 2013). Furthermore, the accounts must be duly approved by the board in a meeting held on the same date as the auditor’s signature. This raises the question of how the auditor is able to sign such a significant statement within a few hours of the board’s signing, given that the dates of signing for both the auditor and the directors are identical.
Recently, on April 22, 2024, the balance sheet for the fiscal year 2023-24 was signed by both Mr. Mukesh Ambani, Managing Director of Reliance Industries Limited, and Deloitte Haskin, the company’s statutory auditors. This raises a valid question regarding the speed at which the statutory auditors were able to review and sign off on the adopted final accounts provided by RIL on the same date.
Brief of Practical Problem Faced by Auditors:
Recently, it has become common for investigative authorities, regulatory bodies such as NFRA, and disciplinary committees of accounting to scrutinize practicing professionals for significant or minor issues or conventional practices that have been followed for years and are generally accepted in accounting and management principles. Notably, government agencies have been questioning statutory auditors about how they have signed substantial financial statements within a short time frame. Despite the best efforts of professionals and company management to provide practical solutions for various anomalies in applicable laws, these entities continue to focus on such matters. Even defense attorneys for auditors in legal proceedings raise the same question – how is it possible to audit and sign the balance sheet within hours of the company signing and adopting it?
To further categorize the aforementioned general practice as an anomaly, an example of the common practice of signing balance sheets by both directors and statutory auditors within 21 days of a company’s Annual General Meeting (AGM) can be illustrative. Let’s assume the audit and board signatures are completed on September 4th to 5th, and the AGM is scheduled for September 25th to 29th. In this scenario, two conditions are satisfied: the accounts presented at the AGM should not be older than 6 months, and a 21-day notice period should be provided before the AGM, along with audited and approved final accounts from the company’s management.
Legal boundaries of statutory auditors & management of the company:
With regard to statutory auditors, specific sections in the Companies Act, 2013, Companies Auditing Rules, Auditors reporting formats and various Accounting Standards and Standards on Auditing have already been established. A few relevant sections are listed below:
Referring, stat auditors report format – starts from below para –
“We have audited the accompanying financial statements of M/s. XYZ Private Limited(“the Company”) which comprises the Balance Sheet as at March 31, 2024, the Statement of Profit and Loss, (statement of changes in equity)[i]and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information [in which are included the Returns for the year ended on that date audited by the branch auditors of the Company’s branches located at (location of branches)].[ii]”
Here as per the code of conduct & ethics – a stat auditor again say in his report the following para –
We conducted our audit in accordance with the Standards on Auditing (SAs) specified under section 143(10) of the Companies Act, 2013. Our responsibilities under those Standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the Code of Ethics issued by the Institute of Chartered Accountants of India together with the ethical requirements that are relevant to our audit of the financial statements under the provisions of the Companies Act, 2013 and the Rules thereunder, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
At the same time in stat of report “Responsibility of management” paragraphs covered as under:
The Company’s Board of Directors is responsible for the matters stated in section 134(5) of the Companies Act, 2013 (“the Act”) with respect to the preparation of these standalone financial statements that give a true and fair view of the financial position, financial performance, (changes in equity)[iii] and cash flows of the Company in accordance with the accounting principles generally accepted in India, including the accounting Standards specified under section 133 of the Act. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act …………………………………………
Hence, a thorough examination of the financial report is crucial, as both auditors and directors bear significant responsibility for ensuring the accuracy and correctness of the final accounts. Any deviations identified should be promptly reported, and if they are material, their financial impact should be quantified.
Suggestive practical solution & documentation:
In order to fully grasp the appropriate scenario and methodology, I engaged in discussions with senior personnel, subject matter experts, and ethics professionals. Based on these consultations, I am presenting a practical solution supported by relevant documentation. It is important to note that auditors are often invited to conduct audits well before the board of directors has prepared and approved/adopted the balance sheet.
Once statutory auditor is invited to audit and even as per the practical experience says – like in RIL audit the big auditors audit in two phases one from April to December and then from Jan to March, even when they about to finish their audits up to Dec till then mid of Jan or end already passed so they also check till date transactions and in ERP coverage is easy so like RIL they were able to completed and signed the audit with report as on 22-4-24 for F.Y. 23-24.
But question is still stands that until board has adopted the final accounts till then how can you start audit of the Final Accounts? This is the practical anomaly of the Act.
So, it means stat. auditor cannot start audit till the balance sheet is finalized by the board – because stat auditors’ appointment is to examine the “Financial Statements” not the books – and “Financial Statements” are responsibility of management. Further, CA, 2013 u/s 144 debarred any other services by stat auditors. Therefore, as stat auditor you can not involve in preparing or consulting for preparing the balance sheet.
In reference to sections 139 (1) and 143 (1) to (12) of the Companies Act, 2013, the solution to this issue can be found and also in the Rammaiya commentary on the Companies Act. These provisions and concepts will assist in resolving the problem at hand. It is important to note that the crores of balance sheets have been signed by Indian Chartered Accountants based on these assumptions. However, to ensure protection in the current legal scenario, the following suggestions are recommended:
Reproducing section 139(1) of CA, 2013 –
Subject to the provisions of this Chapter, every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed:
Reproducing part of clauses of section 143 of CA, 2013 –
(1) Every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor ……………….
(2) The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of this Act or any rules made thereunder or under any order made under sub-section (11) and to the best of his information and knowledge, the said accounts, financial statements give a true and fair view of the state of the company‘s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.
(3) (d) whether the company‘s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns;
These two sections provide some relief to the auditors. Section 139 (1) of CA, 2013 states that an auditor’s appointment is not on a financial year-to-financial year basis, but rather from one Annual General Meeting (AGM) to the next. This means that after the conclusion of an AGM, auditors have the right to access the company’s accounts for next year also and so on.
The audit report covers various issues, including whether loans and advances are prejudicial to the company, whether any transactions entered into are prejudicial to the company’s interests, whether loans and advances have been shown as deposits, and whether personal expenses have been debited to the Profit and Loss Account. Auditors must also assess the True and Fair view of the balance sheet and provide an opinion on it.
All these matters can be checked without obtaining a board-approved balance sheet. Auditors will need to thoroughly review the books of accounts to complete their work. Auditing is a time-consuming process that requires sufficient manpower, depending on the size of the entity. Accordingly, an audit plan must be developed.
Potential Solution to these issue & appropriate responses when authorities unexpectedly ask irrelevant or illogical questions:
1. Take a valid letter for invite to conduct stat audit of the concerning financial year from the valid authority. If there is Audit Committee by virtue of mandatory provisions of the statute or there is formal audit committee exists in the company then letter should be approved from them too.
2. This letter should contain the information like- what is the stage of accounts, books completion status, details of branches awaited/already received etc – it should be thoroughly covered all aspects of the company.
3. On the basis of this letter stat auditors can make their time bound audit plans and in advance must inform to the company their requirements to conclude audit for a certain period or year.
4. These all information regarding time bound audit requirement should be communicated to the company by a reciprocating letter and keep proper acknowledgement. This will help to stat auditors to show authorities that at what stage they have covered what and how they have executed the audit.
5. When you cover all aspects of your audit for complete year you must take a copy of certified draft Trial Balance of the company (detailed – open till the last basic account); This trial may also be taken stage wise; then you have to compare when you come in second phase of audit.
6. As a practice – after giving final stage trial, certified by the management, by software final accounts automatically comes out – this may be a “Draft Balance Sheet”.
7. Take care, always take draft balance sheet with notes of account duly signed by the management – may by CFO/CS/one of director.
8. It is assumed here that your audit observations – agreed by management too, which has some corrections in books of accounts have already been corrected in final trial as well in draft balance sheet.
9. These all-working papers with final conclusions must be in your audit files. All correspondence in separate files.
10. The letters which stat auditors send for balance confirmation/MSME status etc are most important and that should be communicated within financial year or before finalizing accounts as per the possible scenario.
Next important event occurred when Directors finalized the balance sheet and authenticate it as per the requirement of CA, 2013 section 134(1) and supplied to the Auditors:
11. In addition to the final adopted balance sheet, a letter from the directors should be obtained as a “management representation letter” (MRL). This letter should include any significant changes from the draft balance sheet, along with the reasons for such changes in addition to other general/specific points covered in MRL.
12. As the statutory auditor, if there are any points that could not be accounted for in the final balance sheet due to a difference of opinion, the reasons for such differences should be clearly stated, along with the quantification of their impact on the balance sheet.
13. When performing an audit, it is essential to ensure that all arithmetical calculations, financial statements, cash flow statements, and other relevant documents are in agreement with the final certified trial balance. Any discrepancies or omissions should be noted in the audit report as either informative comments or qualifications, as appropriate, if not agreed or corrected by management.
14. To ensure the accuracy and reliability of the financial statements, the statutory auditor may sign the balance sheet within one or two days of the board of directors’ approval. This allows the auditor to verify that all information is correct and complete. The auditor should provide a formal acknowledgment to the company’s management, indicating the date and time of the board-approved balance sheet.
15. In the scenario described in point 14, the auditor should obtain a written representation from management stating that no significant events have occurred between the date the board of directors signed the balance sheet and the date the auditor signs the financial statements. This representation should be clear and separate from other correspondence and should be retained by the auditor.
16. If it is not possible to follow the action as described in point 14 and you are signing on the same date, the auditor should acknowledge the receipt of the signed and adopted balance sheet from the board of directors, noting the date and time of receipt. This acknowledgement will provide evidence that the auditor had sufficient time to review the balance sheet from its draft version to its final version and that the auditor’s signature was affixed after due care and consideration, with an appropriate time lapse after the board’s adoption of the financial statements.
All these documents should be organized and filed appropriately. You may even consider hiring a secretarial assistant to help with this task. These documents should be retained for at least eight years from the date of signing the balance sheet.
If stat. auditor follow the guidelines as published by Institute from time to time and as practically explained above for a particular one matter, you can protect yourself and your client. Remember, the primary responsibility for preparing accurate and correct balance sheets lies with the company’s board of directors. As an auditor, your role is to provide an independent review and assessment in forming your opinion the accounts.
[i] Where applicable
[ii] Where applicable
[iii] Where applicable
*****
Note: For any letters’ template you can write me – at rajiv@rajivnigamca.com or call me at 9811100737;
Thank you for taking the time to read this article. I hope that you find it informative and useful in your role as a statutory auditor. Please note that these are my own personal views and opinions, and you may choose to adopt other practices that are more suitable for your specific assignment.
Author Bio
