Ministry of Corporate Affairs vide Notification G.S.R. 206(E) dated 24th March 2021, introduced an amendment to the Rule 11 of the Companies (Audit and Auditors) Rules, 2014. These rules are called as Companies (Audit and Auditors) Amendment Rules, 2021 and they shall come into force from 1st April 2021.
Vide this amendment notification the MCA omitted clause (d) of Rule 11 and inserted three new clauses i.e. clause (e), clause (f) and clause (g). Rule 11 deals with the “Other matters to be included in the Audit Report”.
The three new clauses inserted via this amendment are as under:
Rule 11 Clause (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;
Analysis: From the above clause it is clear that the Auditor must report in its Audit Report that whether the management has represented/disclosed to the best of its knowledge and belief, whether the company has provided funds if any, (other than those disclosed in notes to accounts) to any intermediaries, for investment in or lending to Ultimate beneficiaries, whether directly or indirectly, or to provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries.
Intermediaries means any person(s) or entity(ies) including foreign entities, to or in whom the company has made investment or has given any advance or loan, with an understanding recorded in writing or not, to provide such funds directly or indirectly by or on behalf of the company to ultimate beneficiaries.
The scope of funds provided to intermediaries may be
- from the borrowed funds or
- share premium or
- any other sources or kinds of funds
(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;
Analysis : From the above clause it is clear that the Auditor must also report in its Audit Report that, whether the management has represented/disclosed to the best of its knowledge and belief, whether the company has received funds if any, (other than those disclosed in notes to accounts) from “Funding Parties”, with an understanding in writing or otherwise, to lend or invest such funds directly or indirectly to other entities or persons as identified by the Funding Party (Ultimate Beneficiaries), or has provided any guarantee, security or the like on behalf of the Ultimate Beneficiaries.
“Funding Party(ies)” means any person(s) or entity(ies), including foreign entities from whom the company has received any funds to provide it to the ultimate beneficiaries.
(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 Clause (f)
Whether the dividend declared or paid during the year by the company is in compliance with section 123 of the Companies Act, 2013.
Rule 11 Clause (g)
Whether the company 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.
From the above amendment it is clear that the scope of reporting in the Audit Report is now broadened and demands transparency from the management as well as Statutory Auditor.
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