ICAI issues Implementation Guide on Reporting under Companies (Audit and Auditors) Rules

The Institute of Chartered Accountants of India (ICAI) issues Implementation Guide on Reporting under Rule 11(e) and Rule 11(f) of the Companies (Audit and Auditors) Rules, 2014.

Introduction to Amendments to Rule 11 of Companies (Audit and Auditors) Rules, 2014

Section 143(3) of the Companies Act, 2013 (“the Act”) provides various matters on which auditors are required to report in their auditor’s report. Clause (j) of Section 143(3) states that auditor’s report shall also state such other matters as may be prescribed. Rule 11 of the Companies (Audit and Auditors) Rules, 2014 specifies such other matters that are to be reported by the auditor.

The Ministry of Corporate Affairs (MCA) vide its notification No. GSR 206(E) dated March 24, 2021 has issued the “Companies (Audit and Auditors) Amendment Rules, 2021” introducing new Rule 11(e), 11(f) and 11(g) and deleting Rule 11(d).

Effective date for reporting in respect of Rule 11(e) and Rule 11(f) of the Companies (Audit and Auditors) Rules, 2014

Auditor’s reporting under Rule 11(e) and 11(f) is effective in respect of financial years commencing on or after 1 April 2021.

Rule 11(e) and (f) are reproduced below:

Rule 11(e) of the Companies (Audit and Auditors) Rules 2014:

“(e) (i) Whether the management has represented that, to the best of it’s 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;

(ii) Whether the management has represented, that, to the best of it’s 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

(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.”

Rule 11(f) of the Companies (Audit and Auditors) Rules 2014:

“Whether the dividend declared or paid during the year by the company is in accordance with section 123 of the Companies Act 2013”.

Scope of the Implementation Guide

The purpose of this Implementation Guide is to enable the auditors to comply with the reporting requirements of Rule 11(e) and Rule 11(f). It should be noted that whilst the guidance given in this Implementation Guide provides the principles for reporting under the aforesaid Rules, the auditors should also exercise their professional judgement and experience on the matters on which they are required to report.

Omission of sub-clause (d) in Rule 11

The MCA vide its notification dated 30 March 2017 had amended Rule 11 of the Companies (Audit and Auditors) Rules, 2014 by inserting following clause, requiring auditors to report in their audit report:

“(d) whether the company had provided requisite disclosures in its financial statements as to holdings as well as dealings in Specified Bank Notes (“SBN”) during the period from 8th November, 2016 to 30th December, 2016 and if so, whether these are in accordance with the books of accounts maintained by the company.”

A clarification dated 01 September 2018 was issued by the Corporate Laws and Corporate Governance Committee (CLCGC) of the ICAI stating that “Since this disclosure requirement was event specific, and hence was relevant for Financial Year 2016-17 only and required disclosure is also for period falling under that financial year. Therefore, in Notes to Account as well as Audit Report, the disclosure requirement relating to SBNs are not applicable for the Financial Year 2017-18 & subsequent years. Consequent disclosures may be made in the Financial Statements/ Audit Reports.” Subsequently, on 23 November 2018 the Auditing and Assurance Standards Board (AASB) of the ICAI had withdrawn “Implementation Guide on Auditor’s Report under Rule 11(d) of Companies (Audit and Auditors) Amendment Rules, 2017 and Amendment to Schedule III to Companies Act, 2013” which was issued by AASB in April 2017.

Above mentioned reporting requirements specified under Rule 11(d) has now been omitted by the Companies (Audit and Auditors) Amendment Rules, 2021 effective from 01 April 2021.

After omission of Rule 11(d), auditors are not required to report on the holdings as well as dealings of the company in Specified Bank Notes.

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