CHAPTER 5 – COMPANY AUDIT

CHAPTER 5 – COMPANY AUDIT

NOTE- Refer below links for CARO 2020

VIDEO- https://youtu.be/a4IYoNgjPG0

NOTES- https://t.me/AuditGuru/1352

CHAPTER 7 -- AUDIT COMMITTEE AND CORPORATE GOVERNANCE

APPLICABILITY OF LODR REGULATIONS

Listed Entities Unless otherwise provided, these regulations shall apply to the listed entity who has listed
any of the following designated securities on recognized stock exchange(s):
(That means Approved by Central Government under SCRA)

Designated Securities

 Popular Securities
 Specified securities listed on
 Main board (Simply means having Nationwide Trading Terminal) or
SME Exchange or
 Innovators Growth Platform (Also Known as Institutional Trading Platform)
(‘Specified securities’ means ‘equity shares’ and ‘convertible securities)

 Other Securities (NISSU)

 Non-convertible securities;
 Indian depository receipts;
 Security Receipts (Securities issued by Asset Reconstruction Company giving
ownership of Bad Loans as discussed under SARFESI Act)
 Securitised debt instruments; (Generally gives ownership of good quality Loan
Assets)
 Units issued by mutual funds;

 Any other securities as may be specified by the Board.

Market The provisions of these regulations which become applicable to listed entities on the
Capitalisation basis of market capitalisation criteria shall continue to apply to such entities even if
Based they fall below such thresholds.
Requirements (For E.g. There are certain requirements only for Top 500,1000,2000 entities based on
market capitalisation as on last day of Previous Financial year)

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High Value Debt The provisions of these regulations which become applicable to listed entities on the
Based basis of the criterion of the value of outstanding listed debt securities shall continue
Requirements to apply to such entities even if they fall below such thresholds ( E.g Entities having
NCDs 500 Cr & above as on 31st March of Last Financial Year are called High value Debt
Listed Entities)
Note: Chapter IV of LODR covers regulation 15 to regulation 48, out of these regulation 15
to regulation 27 deal with corporate governance matters. Chapter IV was formed for
companies whose equity shares and convertible securities were listed, now regulation 15
to 27 is also applicable to HVD listed entities, that means all corporate governance
regulations unless specified only for equity are applicable to them also.

ROLE OF AUDIT COMMITTEE

Consider & Consider and comment on rationale, cost-benefits and impact of schemes involving
Comment on merger, demerger, amalgamation etc., on the listed entity and its shareholders.
Mergers,
Demergers etc.

OBLIGATIONS WITH RESPECT TO EMPLOYEES INCLUDING SENIOR MANAGEMENT, KEY MANAGERIAL

PERSONS, DIRECTORS AND PROMOTERS
Deleted from Non-executive directors shall be required to disclose their shareholding (both
Obligation of own or held by / for other persons on a beneficial basis) in the listed entity in which
NED but doesn’t they are proposed to be appointed as directors, prior to their appointment. These
have any details should be disclosed in the notice to the general meeting called for appointment
Significant of such director
Impact
Clarificatory A director shall not be a member in more than ten committees or act as chairperson
Nature Change - of more than five committees across all listed entities in which he /she is a director
HVDs won’t be which shall be determined as follows: (a) the limit of the committees on which a
considered for director may serve in all public limited companies, whether listed or not, shall be
Committee included and all other companies including private limited companies, foreign
Limits. companies, high value debt listed entities and companies under Section 8 of the
Companies Act, 2013 shall be excluded; (b) for the purpose of determination of limit,
chairpersonship and membership of the audit committee and the Stakeholders'
Relationship Committee alone shall be considered
D &O Insurance  Top 500 listed entities by market capitalization calculated as on March 31 of the
Requirement preceding financial year, shall undertake Directors and Officers insurance (D and O
insurance) for all their independent directors of such quantum and for such risks
as may be determined by its board of directors.

 A ‘high value debt listed entity’ shall undertake Directors and Officers insurance (D
and O insurance) for all its independent directors for such sum assured and for
such risks as may be determined by its board of directors
Meeting of The independent directors of the listed entity shall hold at least one meeting in a
ONLY financial year, without the presence of non-independent directors and members of the
Independent management and all the independent directors shall strive to be present at such
Directors meeting

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SUBSIDIARY OF LISTED ENTITY

Change from A listed entity shall not dispose of shares in its material subsidiary resulting in
Less than 50% reduction of its shareholding (either on its own or together with other subsidiaries) to
to Less than or less than or equal to 50% or cease the exercise of control over the subsidiary without
equal to 50% passing a special resolution in its General Meeting except in cases where such
divestment is made under a scheme of arrangement duly approved by a
Court/Tribunal, or under a resolution plan duly approved under section 31 of the
Insolvency Code and such an event has been disclosed to the recognized stock
exchanges within one day of the resolution plan being approved.

SECRETARIAL AUDIT AND SECRETARIAL COMPLIANCE REPORT OF LISTED ENTITY AND ITS MATERIAL
UNLISTED SUBSIDIARIES
Secretarial Every listed entity and its material unlisted subsidiaries incorporated in India shall
Audit undertake secretarial audit and shall annex a secretarial audit report given by a
company secretary in practice, in such form as specified, with the annual report of the
listed entity. (Covers all the Laws applicable to Company, gets more time & it is sent to
Shareholders along with annual report.)
Secretarial Every listed entity shall submit a secretarial compliance report in such form as
compliance specified, to stock exchanges, within sixty days from end of each financial year.(Covers
report only SEBI Act, Regulations etc gets only 60 Days & it is sent to Stock Exchange)

RISK MANAGEMENT COMMITTEE [REGULATION 21]

Applicability The provisions of this regulation shall be applicable to top 1000 listed entities, determined
on the basis of market capitalisation, as at the end of the immediate previous financial
year.
Constitution  The Board of Directors shall constitute a Risk Management Committee.
 The Risk Management Committee shall have minimum three members with
majority of them being members of the board of directors, including at least
one independent director and in case of a listed entity having outstanding SR
equity shares, at least two thirds of the Risk Management Committee shall
comprise independent directors.
 The Chairperson of the Risk Management Committee shall be a member of the
Board of Directors and senior executives of the listed entity may be members
of the committee.

Meetings  The risk management committee shall meet at least twice in a year.
 The meetings of the risk management committee shall be conducted in such
a manner that on a continuous basis not more than 180 days shall elapse
between any two consecutive meetings.
 The quorum for a meeting of the Risk Management Committee shall be
either two members or one third of the members of the committee,
whichever is higher, including at least one member of the board of directors
in attendance.

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Roles &  The Board of Directors shall define the role and responsibility of the Risk
Responsibilities Management Committee and may delegate monitoring and reviewing of the
risk management plan to the committee and such other functions as it may
deem fit and such function shall specifically cover cyber security.
 It may be noted that the role and responsibilities of the Risk Management
Committee shall mandatorily include the performance of functions specified in
Part D of Schedule II. (Part D specifies roles of various committees , which include
roles of risk management committees)
Powers  The Risk Management Committee shall have powers to
 seek information from any employee,
 obtain outside legal or other professional advice and
 Secure attendance of outsiders with relevant expertise, if it considers
necessary
Audit  Risk Management Procedures shall be periodically reviewed to ensure that
Procedures executive management controls risk through means of a properly defined
framework.
 A majority of this Committee will be the members of the Board of Directors.
Senior executives of the company may be also be members of the
Committee, but the Chairperson of the Committee shall be a member of the
Board of Directors

RELATED PARTY DISCLOSURE

Submission of  The listed entity shall submit within 30 days from the date of publication of its
Related Party standalone and consolidated financial results for the half year, disclosures of related
Disclosures as party transactions on a consolidated basis, in the format specified in the relevant
per AS accounting standards for annual results to the stock exchanges and publish the same
on its website.
 Provided that a ‘high value debt listed entity’ shall submit such disclosures along with
its standalone financial results for the half year.

REPORT ON CORPORATE GOVERNANCE [REGULATION 27 AND SCHEDULE II]

Discussion The listed entity shall submit a quarterly compliance report on corporate governance in
the format as specified by the Board from time to time to the recognised stock exchange(s)
within 21 days from the end of each quarter.( Earlier it was 15 days from the close of
quarter) The report shall be signed either by the Compliance Officer or the Chief Executive
Officer of the listed entity. The auditor should ascertain whether the Board of Directors
have included in the Annual Report of the listed entity, a separate section on corporate
governance with a detailed compliance report on corporate governance. Any data in the
report on corporate governance should not be inconsistent with that contained in the
financial statements.
CHAPTER 08 —CFS – No Change
CHAPTER 09 —Bank Audit – See Separate Video & Chart on Whole Bank Audit
(Will be released by end of Feb 22 on Ravi Taori YT Channel)
CHAPTER 10 —Insurance —No Change
CHAPTER 11 —NBFC —No Change

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CHAPTER 12 -- TAX AUDIT

GST AUDIT REMOVED

Removed  Government removed requirement of GST Audit, So ICAI in its latest study material
removed unit which was dedicated for GST audit. Hence from May 22 exams it is no
longer applicable.

INCREASE IN LIMIT
Limit increased  With effect from assessment year 2022-23, the threshold limit, for a person carrying
from 1 crores to on business, has been increased from Rs 1 crore to Rs 10 crores in case when cash
10 crores receipts and payments made during the year does not exceed 5% of total receipt or
payment, as the case may be. In other words, 95% or more of the business
transactions should be done through banking channels.

AMMENDMENTS OF NOVEMBER 21 EXAMS

Discussion  Some amendments as given below from Nov 21 exams where incorporated in
latest ICAI study material. Students are advised to cover it from this video
https://youtu.be/DNZmeniEqJk
 Clause 8A/17/18/32 & Tax Audit Report Revision-Changes Covered in Nov 21
Exam Amendments

CLAUSE 44 DEFFERED
Deferral  *Note: Reporting under Clause 44 has been kept in abeyance till 31 March
2022 (Circular No. 05/2021 of the Central Board of Direct Taxes dated 25
March 2021).

CHAPTER 13 —No Change

CHAPTER 14 —No Change
CHAPTER 15—No Change
CHAPTER 16—No Change
CHAPTER 17--Unit 1: Peer Review

STATEMENT ON PEER REVIEW

Revised The Statement on Peer Review has been revised in July 2021

PEER REVIEW PROCESS

Chart The Statement on Peer Review has been revised in July 2021

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APPLICABILITY
Practice Units  Every Practice Unit including its branches, based on their category as determined
subject to below will be subject to Peer Review in accordance with this Statement.
Review
 Level I: A Practice Unit which has undertaken any of the under-mentioned
assurance services in the period under review shall be treated a Level I entity:

Shortcut I made BCP-PLAN2 for Level I

 Statutory Audit of Entities preparing the financial statements as per Ind
AS.

 Statutory Central Audit of any Bank or Insurance Company (SCA in case of

the entities which appoint separate SBA’s and SA’s in case of all other
entities)

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 Statutory Audit of Central or State Public Sector Undertakings and Central

Cooperative Societies having turnover exceeding Rs.250 crores or net
worth exceeding Rs.5 crores.
 Statutory audit of any body corporate including trusts which are covered
under Public interest entities.
 Statutory Audit of enterprises whose equity or debt securities are listed in
India or abroad as defined under SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015.
 Statutory Audit of asset management companies or mutual funds.
 Statutory Audit of entities having turnover of Rs.250 crore or above or
having net worth of more than Rs.100 crore.
 Statutory Audit of Non – Banking Financial Companies (NBFCs) having
deposits of Rs.100 crore, or above.
50 Crore Club
 Statutory Audit of entities which have raised funds from public or banks
or financial institutions or by way of donations/contributions over Rs.50
Crore rupees.
 Statutory Audit of entities which have been funded by Central and / or
State Government(s) schemes of over Rs.50 Crore.

 Level II: A Practice Unit which has undertaken any of the under-mentioned
assurance services in the period under review shall be treated as Level II entity:
 Statutory / Internal / Concurrent / Systems / Tax audit and / or
Departmental Review of Branches / Offices of –
 Any bank
 Any Insurance Company
 Public Sector undertaking
 Statutory Audit of Non – Banking Financial Companies (NBFCs) not covered
in L-1 above,
 UDIN’s generated by the Practice Units more than the specified number
determined by the Board from time to time.
 Any other Practice Unit providing assurance or other services not covered
under (i) (ii), and (iii) hereinabove.
Special Case The Board, based on specific information received from
Review  Any Regulator,
 Secretary, ICAI or
 Disciplinary Directorate or
which in the opinion of the Board requires a special review of the Practice
Unit, may conduct a special review of the Practice Unit for a period to be
determined in each case.

Note : While preparing amendment video we missed below given concepts of

Peer review. We have highlighted changes in bold and italics if you have any
doubt you can ask on Auditguru.in

ELIGIBILITY TO BE A REVIEWER
Discussion 1. A Peer Reviewer shall: -
(a) Shall be a member in practice with at least 7 years of audit experience.

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(b) In case a member has moved from industry to practice and is currently in practice
he should have at least 10 years of audit experience in industry and at least 3 years
audit experience in practice.
(c) Should have undergone the requisite training and cleared the requisite test for Peer
Review as prescribed by the Board.
2 A member on being appointed as a Reviewer shall be required to furnish-
(a) a declaration as prescribed by the Board, at the time of Empanelment as a Peer
Reviewer.
(b) a Declaration of Confidentiality as per Annexure A to this Statement while giving
consent for appointment as a Peer Reviewer.
3 A member shall not be eligible for being appointed as a Reviewer of a Practice Unit,
if -
(i) any disciplinary action / proceeding is pending against him;
(ii) he has been found guilty of professional or other misconduct by the Council or the
Board of Discipline or the Disciplinary Committee at any time
(iii) he has been convicted by a competent court whether within or outside India, of an
offence involving moral turpitude and punishable with imprisonment,
(iv) he or his partners have any obligation or conflict of interest in the Practice Unit.
(v) He has undergone training/articleship under any of the partner of Practice Unit.
4. A Reviewer shall not accept any professional assignment from the Practice Unit for
a period of next two years from the date of appointment. Further, he should not have
accepted any professional assignment from the Practice Unit for a period of two years
before the date of appointment as reviewer of that Practice Unit.

Obligations of the Peer Reviewer

Discussion (i) The Reviewer shall not take any extracts of the Practice Units clients’ file or
records examined by him while conducting Peer Review, as a part of his working
papers.
(ii) The Reviewer shall complete the Review within the prescribed time frame
and submit the report to the Board.
(iii) The Reviewer shall document all his working papers and submit a copy of his
working papers to the Board, if called for by the Board within 18 months of
submission of Review Report.

Peer Review Certificate

Discussion On receipt of the Peer Review Report, the Board shall within three months:
(a) Issue a Peer Review Certificate to the Practice Unit mentioning the validity
period.
(b) Inform the Practice Unit that a Peer Review certificate cannot be issued
along with the reasons therefor as well inform the Practice Unit about the due
date for conducting a follow on review.

CHAPTER 17 Unit 2 Quality Review---No Change

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CHAPTER 18 -- Professional Ethics

NON-COMPLIANCE WITH LAWS AND REGULATIONS (NOCLAR)

Meaning of In the course of
NOCLAR  providing a professional service to a client or carrying out professional
activities for an employer,
 a Professional accountant
 may come across an instance of non-compliance with laws and regulations
(NOCLAR) or suspected NOCLAR committed or about to be committed
 by the client or the employer, or by those charged with governance,
management or employees of the client or employer.
Meaning of Non-compliance with laws and regulations (“non-compliance”) comprises of
Non  acts of omission or commission,
Compliance  intentional or unintentional,
 which are contrary to the prevailing laws or regulations committed by:
 A client/professional accountant’s employing organisation;
 Those charged with governance of a client or employing
organisation;
 Management of a client/ employing organisation; or other
individuals working for or under the direction of a client/
employing organisation.
Personal However, NOCLAR under Revised Code of Ethics does not address the personal
Misconduct misconduct unrelated to the business activities of the client/ employing
not Covered organisation and non-compliance by parties other than listed out in the definition
of NOCLAR

Examples of Examples of laws and regulations that would be covered are in the areas of:
Laws  Financial Crimes Related Laws
 Money Laundering / Terrorist Financing;
 Bribery and corruption;
 Insider dealing;
 Fraud (including false accounting, falsification of accounting
records);
 Tax evasion;
 Financial Matters Related Laws
 Financial products and services;
 Data Protection;
 Others Relevant Laws
 Environmental protection;
 Public health and safety.
Objective of The objective of NOCLAR is that - turning a blind eye to potential NOCLAR is not
NOCLAR an appropriate response (Don’t hide behind principle of confidentiality) from
professional accountants, while placing renewed emphasis on the roles of
management and those charged with governance in addressing the matter.
Further, it increases awareness and understanding among Professional
accountant of their legal and regulatory responsibilities when they face NOCLAR

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SOME IMPORTANT FACTS ABOUT NOCLAR ARE GIVEN BELOW:

During Course NOCLAR will be applicable if a professional accountant encounters, or is made
of Providing a aware of, non-compliance or suspected non-compliance in the course of providing
Service a professional service to a client. He is not required to investigate, nor responsible
for ensuring complete compliance.
Expertise of A professional accountant is expected to apply knowledge and expertise, and
Laws not exercise professional judgment. However, he is not expected to have a level of
Required knowledge of laws and regulations greater than that which is required to
undertake the engagement. Whether an act constitutes non-compliance is
ultimately a matter to be determined by a court or other appropriate adjudicative
body.
Certain Matters that are clearly inconsequential or relating to personal misconduct
Matters pertaining to business activities of the client not covered.
Expressly Out
of Purview
Disclosure, As per IESBA Code, disclosure of the matter to an appropriate authority would be
which is precluded if doing so would be contrary to law or regulation. (If law restricts PA
Contrary to from communication of NOCLAR to authorities, then such communication should
Law not not be done)
Required

NOCLAR vs. SA 250

Discussion  Assignments Covered
 SA 250 is applicable only on Audit, and not on other Assurance
engagements.
 However, NOCLAR is applicable on professional accountants in service,
and in practice. Among those in practice, it applies to Auditors, as well as
professional services other than Audit. However, degree of responsibility of the
professional accountant varies as per the role.

 Laws Covered
 SA 250 talks of auditor’s responsibilities for laws
 having direct effect on the determination of material amounts
and disclosures in the financial statements (such as tax and
labour laws); and
 other laws and regulations that do not have a direct effect on
the determination of the amounts and disclosures in the
financial statements, but compliance with which may be
fundamental to the operating aspects of the business.
 NOCLAR, while being alike to SA 250 till this point, is further ahead of it in
that it takes into account non-compliance that causes substantial harm
resulting in serious consequences in financial or non-financial terms.

 Stakeholders Concerned
 SA 250 does not define stakeholders.
 NOCLAR is related to affect of non-compliance on investors, creditors,
employees as also the general public.

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 Disclosure to Authorities
 As per NOCLAR, in exceptional circumstances, the professional
accountant might become aware of an imminent breach of a law or
regulation that would cause substantial harm to investors, creditors,
employees or the general public. Having first considered whether it
would be appropriate to discuss the matter with management or those
charged with governance of the company, the accountant shall
exercise professional judgment and determine whether to disclose the
matter immediately to an appropriate authority in order to prevent or
mitigate the consequences of such imminent breach. If disclosure is
made, that disclosure is permitted.
 This provision is not existent in SA 250.

It may also be noted that in a situation where disclosure ought to be made by

the Auditor, the “Appropriate authority” for the purpose of disclosure will
depend on the nature of the matter. For example, the appropriate authority
would be SEBI in the case of fraudulent financial reporting.
Appropriate alignment has been made in the Code with regard to
requirements of Confidentiality, as required under Chartered Accountants Act,
1949.
APPLICABILITY OF NOCLAR IN INDIA
Discussion The IESBA Code of Ethics makes NOCLAR applicable to all assignments (in case of
members in practice), and to all employers (in case of members in service).

However, in the ICAI Code, as of now, Institute has restricted applicability of

NOCLAR to Audits assignment of listed entities (in case of members in practice)
and for the members in service applicability has been restricted to employees of
listed entities only. Further Sec 260 to Sec 360 of Code of Ethics issued by ICAI
deals with NOCLAR is applicable from 1st April 2022.

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RESPONDING TO NOCLAR
Discussion

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DOCUMENTATION REQUIREMENTS IN NOCLAR

Discussion  Revised Code over and above require the professional accountant to follow the
additional documents requirements as under:
 How management / those charged with governance have responded to the
matter.
 The course of action the accountant considered, the judgments made and
the decisions that were taken, having regard to the reasonable and informed
third party test.
 How the accountant is satisfied that the responsibility of public interest has
been fulfilled.

 This documentation is in addition to complying with the documentation

requirements under applicable auditing standards. SAs, for example, require a
professional accountant performing an audit of financial statements to:
 Prepare documentation sufficient to enable an understanding of significant
matters arising during the audit, the conclusions reached, and significant
professional judgments made in reaching those conclusions;
 Document discussions of significant matters with management, those
charged with governance, and others, including the nature of the significant
matters discussed and when and with whom the discussions took place; and
 Document identified or suspected non-compliance, and the results of
discussion with management and, where applicable, those charged with
governance and other parties outside the entity

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