The Auditor requires to report in Independent Auditor’s Report on the clauses covered in sub-section (3) of Section 143 of the Companies Act, 2013. However, The Ministry of Corporate Affairs issued notifications dated 24th March, 2021 to amend Companies (Audit and Auditors) Rules, 2014 to enhance the disclosures in the Independent Auditor’s Report.
The main purpose behind this amendment to increase the reliability and transparency of Audit Reports. The amendment will be effective from 01.04.2021 that means it is applicable for Audit Reports issued for FY 2021-22.
Amendment :
The amendment is specifically in clause (j) of sub section 3 of section 143 of the Companies Act, 2013 read with Rule 11 of the Companies (Audit and Auditors) Rules, 2014. Where in Rule 11 of the Companies (Audit and Auditors) Rules, 2014 –
1. Clause (d) shall be omitted and
2. after clause (d), the following clauses shall be inserted, namely –
(e) (i) Whether the management has represented that, to the best of its knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the company to or in any other person(s) or entity(ies), including foreign entities (“Intermediaries.’), with the understanding, whether recorded in writing or otherwise, that the Intermediary shall, whether, directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the company (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries;
E.g. Suppose ‘Company A’ grants loan to ‘Company B’ and ‘Company B’ further grants that loan to ‘Company C’. In this case ‘Company B’ is an Intermediary and ‘Company C’ is an Ultimate Beneficiary Company. In this case Auditor of ‘Company A’ need to report in Audit Report of Company.
(ii) Whether the management has represented, that, to the best of its knowledge and belief, other than as disclosed in the notes to the accounts, no funds have been received by the company from any person(s) or entity(ies), including foreign entities (“Funding Parties”), with the understanding, whether recorded in writing or otherwise, that the company shall, whether, directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party (“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries; and
E.g. Suppose ‘Company B’ receives loan from ‘Company A’ and ‘Company B’ further grants that loan to ‘Company C’. In this case ‘Company A’ is Funding Party and ‘Company C’ is an Ultimate Beneficiary Company. In this case Auditor of ‘Company B’ need to report in Audit Report of Company.
(iii) Based on such audit procedures that the auditor has considered reasonable and appropriate in the circumstances, nothing has come to their notice that has caused them to believe that the representations under sub-clause (i) and (ii) contain any material mis-statement.
(f) Whether the dividend declared or paid during the year by the company is in compliance with section 123 of the Companies Act, 2013
(g) This clause will be included in Auditors report from FY 2022-23 [Whether the company, in respect of financial years commencing on or after the 1st April, 2022] has used such accounting software for maintaining its books of account which has a feature of recording audit trail (edit log) facility and the same has been operated throughout the year for all transactions recorded in the software and the audit trail feature has not been tampered with and the audit trail has been preserved by the company as per the statutory requirements for record retention.]
Audit Trail means, a step-by-step sequential record which provides evidence of the documented history of financial transactions to its source. An auditor can trace every step of, the financial data of a particular transaction right from the general ledger to its source document with the help of the audit trail.
Reporting for Clause (d):
(d) (i) The management has represented that, to the best of its knowledge and belief, no funds have been advanced or loaned or invested (either from borrowed funds or share premium or any other sources or kind of funds) by the Company to or in any other persons or entities, including foreign entities (“Intermediaries”), with the understanding, whether recorded in writing or otherwise, that the Intermediary shall:
- directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever (“Ultimate Beneficiaries”) by or on behalf of the Company or
- provide any guarantee, security or the like to or on behalf of the Ultimate Beneficiaries;
(ii) The management has represented that, to the best of its knowledge and belief, no funds have been received by the Company from any persons or entities, including foreign entities (“Funding Parties”), with the understanding, whether recorded in writing or otherwise, that the Company shall:
- directly or indirectly, lend or invest in other persons or entities identified in any manner whatsoever (“Ultimate Beneficiaries”) by or on behalf of the Funding Party or
- provide any guarantee, security or the like from or on behalf of the Ultimate Beneficiaries; and
(iii) Based on such audit procedures as considered reasonable and appropriate in the circumstances, nothing has come to our notice that has caused us to believe that the representations under sub-clause (d)(i) and (d)(ii) contain any material misstatement; and
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In addition to the above you may also give a model audit report of a small private limited company which will be useful for many small CA firms