20 checklist points for Company Audits Finalization

The Ministry of Corporate Affairs (MCA) has introduced amendments in Schedule III to the Companies Act, 2013 vide its notification G.S.R. 207(E) dated 24 March 2021 and also introduced changes to audit reporting vide the Companies (Audit and Auditors) Amendment Rules, 2021 G.S.R. 206(E) dated 24 March 2021 and the Companies (Auditor’s Report) Regulations 2020. These amendments apply to accounts prepared for the financial year 2021-2022 onwards. In this article, let us have a look at the changes in Company Audit Report for Financial Year ending on 31st March 2022 & let’s have a look at 20 checklist points for Company Audits Finalization.

Schedule III of Companies Act 2013

Schedule III of the Companies Act 2013 contains general guidelines for the preparation of a company’s balance sheet and profit and loss account. 

Following are the changes made in the financial Annexures to Accounts based on the amendments in Annexure III brought by MCA: 

• Companies are now required to round off the figures given in the financial statements, till now it was voluntary. Further, the rounding criteria will be based on “total income” instead of “turnover”. 
• The company will publish the shares of the applicants. 
• Current maturities of long-term loans are published separately. 
• The aging schedule of trade payables shall be indicated.
• The aging schedule of trade receivables will be indicated. 
• Security deposits are not reported under “Long-term loans and advances” but are reported under “Other non-current assets”. 
• The company shall state the reason for using the funds for purposes other than those for which they were borrowed, and shall also state the purposes for which the funds were used. 
• The company must disclose whether the books of accounts tally with the quarterly or monthly returns filed by the bankers in cases where the company has borrowed funds from banks based on current asset securities or whether a separate reverse statement must be provided. 
• The company shall provide information on all immovable property (except real estate where the company is the lessee and the leases are properly concluded in favor of the lessee) for which title deeds are not held and where the such immovable property is jointly held with others, information on the extent of the share must be provided companies. 
• In cases where a revaluation has been carried out in the case of immovable property, the company will publish whether the valuation was carried out by a registered appraiser. 
• Disclosure if loans or advances are made in the form of loans to promoters, directors, KMP, and related parties (loans made to promoters as a percentage of total loans) 
• For capital in progress, the aging schedule shall be given. 
• For intangible assets under development, scheduled to be provided aging.
• Disclosure of any proceedings instituted or pending against the company for possession of any Benami property under the Benami Transactions (Prohibition) Act, 1988. 
• If the company is declared a willful defaulter by any bank, financial institution, or other creditors, the details of it. 
• Disclosure of all transactions with Dissolved Companies
• In the case of any charges or satisfactions to be registered with the Registrar of Companies after the expiry of the statutory period, the details and reasons thereof will be published. The following ratios are to be disclosed: 
• current ratio, 
• debt to equity ratio, 
• debt service coverage ratio, 
• return on equity ratio, 
• inventory turnover ratio, 
• trade receivables turnover indicator, 
• trade payables turnover indicator, 
• net capital turnover indicator, 
• net profit indicator, 
• return on invested capital, 
• return on investment 
•  Disclosure of the use of borrowed funds and share premium will be given if there is a change of more than 25% compared to the previous financial year, an explanation is required.
• Additional information will be disclosed if the company has received funds from any persons or entities, including foreign entities, to further lend or invest or provide any guarantee, or security to third parties. 
• Where a scheme of settlement has been approved, its effects on the books of accounts and any deviation from accounting standards for the same must be disclosed.

MCA Notification for Schedule III

On 24 March 2021, the Ministry of Corporate Affairs amended Schedule III of the Companies Act 2013 to increase transparency and provide additional information to users of financial statements. The amendments came into effect on 1 April 2021. Since the auditor is required to give a true and fair view of the financial statements, the additional disclosures as prescribed in Annex III will form part of the financial statements and will therefore be covered by the auditor’s report. 

With the introduction of CARO 2020, the auditor’s responsibility to disclose the required details as specified in the order increases. However, all this information can be obtained from the financial statements, and therefore the financial reporting framework needed to be aligned with the reporting under CARO 2020. Accordingly, necessary changes were made in Schedule III to the Companies Act, 2013. The main reason for these changes in Schedule III is to align the financial reporting framework in line with the reporting structure required in CARO 2020 and increase the transparency of financial statements.

Auditor’s Responsibility for Auditing the Financial Statements 

The objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but does not guarantee that an audit performed under SA will always detect a material misstatement if any. Misstatements may arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to affect the economic decisions of users made based on these financial statements.

Analysis of Financial Statement

• Assess and identify the risks of material misstatement of the financial statements, design, and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for the view. The risk that it fails to detect a material misstatement due to fraud is greater than the risk of misstatement due to error because fraud may involve collusion, forgery, intentional misrepresentations, or the omission of internal control. 
• Familiarize yourself with internal control relevant to the audit to design audit procedures that are appropriate in the circumstances. 
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related information disclosed by management. 
• Conclude on the appropriateness of using the going concern basis of accounting and based on the evidence obtained. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related information in the financial statements or, if that information is insufficient, to modify our opinion. The conclusions are based on audit evidence. However, future events may cause the Company to stop continuing as a going concern. 
• Evaluate the overall presentation, structure, and content of the financial statements, including disclosures, and whether the financial statements present the underlying transactions and events in a manner that provides a true and fair view.

Independent Auditor’s Report 

To the members of ABC PRIVATE LIMITED Audit Report on the Financial Statements Opinion 

We have audited the financial statements of ABC PRIVATE LIMITED (the “Company”), which include the balance sheet as of 31 March 2022 and the statement of profit and loss, and the statement of cash flows for the year ended as of this date, and the notes to the financial statements, including a summary of significant accounting policies and other explanatory information. In our opinion and to the best of our information and according to the explanations given to us, the above financial statements provide the information required by the Companies Act 2013 in the manner required and give a true and fair view under the accounting principles generally accepted in India, the state of affairs of the Company as on March 31, 2022, and its financial performance and its cash flows for the year then ended.

Final words

The auditor is responsible for forming an opinion on the accounts of the entity being audited. The objective of an audit is to determine whether the financial statements as a whole are free from material misstatement, whether due to fraud or error and to issue an auditor’s report that includes our opinion. ICAI has issued a Standard of Auditing that should be followed by every member to form an opinion and issue an audit report.