Audit Engagement – Secretarial Audit Compliance Management and Due Diligence Important Questions

Question 1.
A firm of Company Secretaries is to be engaged as professional experts in due diligence process. What are the pre-conditions of accepting the professional engagement by the firm to maintain the quality?
Answer:
Pre-conditions of accepting professional engagement by a firm of Company Secretaries : Prior to acceptance of any engagement, the firm, in order to establish whether the preconditions for a professional assignment are present, shall:
(a) Determine whether the reporting framework to be applied in the preparation, audit, review of the secretarial/non-financial statements is acceptable; and

(b) Obtain the agreement of management that it acknowledges and understands its responsibility:

  • For the preparation of the secretarial/non-financial statements in accordance with the applicable reporting framework, including where relevant their fair presentation
  • For such internal control/systems/procedure as management determines is necessary to enable the preparation of secretarial/ non-financial statements that are free from material misstatement, whether due to fraud or error; and

To provide the firm with :

  • Access to all information of which management is aware that is relevant to the preparation/audit/review etc. of the secretarial/non-financial statements such as records, documentation and other matters
  • Additional information that the firm may request from management for the relevant purpose;
  • Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

Question 2.
XYZ Ltd. a public limited company appointed R, a practicing professional, as an Internal Auditor of the company. During its audit procedure, he came to know some material information of the company which was revealed, due to incompetency of his audit staff, to the outsiders. The company filed a suit against him stating that due to his unprofessional and irresponsible behaviour, the company has to bear a huge loss. Explain the auditor’s responsibility & duties in respect of the information acquired while performing the audit assignment.
Answer:
The Auditors of a company while performing the audit assignment accesses various confidential information of the company and it is essential for the auditors to maintain the confidentiality of the auditee information. The principle of confidentiality imposes an obligation on the auditor to refrain from:

  • Disclosing information acquired as a result of professional relationships without proper and specific authority or unless there is a legal or professional right or duty to disclose;
  • Using information acquired as a result of professional relationships to their personal advantage or the advantage of third parties.
  • An auditor should maintain confidentiality even in a social environment. The auditor should be alert to the possibility of inadvertent disclosure, particularly in circumstances involving long association with a business associate or a relative.
  • He should also maintain confidentiality of information disclosed by a prospective client or employer.
  • An auditor should also consider the need to maintain confidentiality of information within the firm or employing organization.
  • An auditor should take all reasonable steps to ensure that staff under the auditor’s control and persons from whom advice and assistance is obtained respect the auditor’s duty of confidentiality.

Question 3.
What are terms and conditions of Audit Engagement?
Answer:
The objective and scope of every audit is dependent on the four corners of the terms and conditions which also include the scope of audit as agreed by and between the auditee and the auditors of the company including following terms and conditions as discussed below:

  • The objective and purpose of the audit
  • The responsibilities of the auditor
  • The responsibilities of management/auditee
  • The audit risk
  • The audit limitation
  • The audit plan.

Question 4.
“Audit fee which is to be charged by the auditor depends on several factors”. What are the governing factors for charging Audit Fee?
Answer:
Governing factors for charging Audit Fees are discussed below: Audit fee which is to be charge by the auditor depends on several factors, which includes:

  • Size of the organization
  • Nature of business
  • Internal Controls systems & Technology adopted
  • Scope of audit
  • Frequency of audit etc.

In nutshell, audit fees should be a fair reflection of the value of the work performed for the auditee taking into account the above mentioned factors.

Question 5.
Write short note on: “Confidentiality”.
Answer:
1. The Auditors of a company while performing the audit assignment access the various confidential information of the company and it is most required for the auditors to maintain the confidentiality of the auditee information.

2. The principle of confidentiality imposes an obligation on the auditor to abstain from:

  • Disclosing information acquired as a result of professional relationships without proper arid specific authority or unless there is a legal or professional right or duty to disclose; and using information acquired as a result of professional relationships to their personal advantage or the advantage of third parties.
  • An auditor should maintain confidentiality even in a social environment. The auditor should be alert to the possibility of inadvertent disclosure specifically in circumstances involving long association with a business associate or a relative.
  • An auditor should also maintain confidentiality of information disclosed by a prospective client or employer.
  • An auditor should also consider the need to maintain confidentiality of information within the firm or employing organization.
  • An auditor should take all reasonable steps to ensure that staff under the auditor’s control and persons from whom advice and assistance is obtained respect the auditor’s duty of confidentiality.

Question 6.
What are pre-conditions of accepting/continuing any professional engagement?
Answer:
Pre-conditions of accepting/continuing any professional engagement:
Prior to acceptance of any Audit engagement, the auditor, in order to establish whether the pre-conditions for accepting professional assignment are present, the auditor should check that:

  • Whether the reporting framework as required in the preparation, performance of audit, review of the secretarial/non-financial statements is acceptable; and
  • Whether the management is in agreement to acknowledge and understands its responsibility relating to:
  • Preparation of the secretarial/non-financial statements in accordance with the applicable reporting framework, including their fair presentation.
  • Development of internal control/systems/procedure to enable the preparation of secretarial/non-financial statements which are free from material misstatement, whether due to fraud or error.
  • Providing access to all information of which management is aware that is relevant to the preparation/audit/review of the secretarial/non-financial statements such as records, documentation and other matters, additional information that the auditor may request from management for the relevant purpose and unrestricted access to persons within the company from whom the auditor determines it necessary to obtain audit evidence.

Question 7.
Draft Model Engagement Agreement for Secretarial Auditor.
Answer:
Model Engagement Agreement for Secretarial Auditor
On this ______ day of ______, __________________, Auditor: ____________________ Auditor Mailing Address: __________________ Hereinafter referred to as the Auditor and __________________ Board(s) of __________________ hereinafter referred to as:
The “Company”, agree as follows:
1. The Auditor shall audit all records and disclosures as contemplated by Secretarial Standards and additional documents required legal statements and disclosures of the Company for the period beginning ______, ______, and ending ______, ______.

2. At a minimum, the Auditor shall conduct his/her audit and render his/her report in accordance with Secretarial Audit standards. The Auditor shall perform the audit as required by the Companies Act, 2013. If the audit and/ or work papers are found in this review to be sub-standard, the results of the review may be forwarded to the Central Govt.

3. If an entity is determined to be a component of another company the auditor will make a good faith effort to comply in a timely manner with the requests of the group auditor.

4. This contract contemplates an unqualified opinion being rendered. The audit shall include such tests of the records and such other auditing procedures as are considered by the Auditor to be necessary in the circumstances. Any limitations or restrictions in scope which would lead to a qualification should be fully explained in an attachment to this contract.

5. If this audit engagement is subject to the standards for audit as defined by ICSI, then by accepting this engagement, the Auditor warrants that he has met the requirements for a peer review and continuing education as specified by ICSI. The Auditor agrees to provide a copy of their most recent peer review report regardless of the date of the prior peer review report to the Company.

6. It is agreed that time is of the essence in this contract. All audits are to be performed and the report of audit submitted to the Company within four months of fiscal year end. Audit report is due on: ______, ______. If it becomes necessary to amend this due date or the audit fee, an amended contract along with a written explanation of the delay must be submitted to the Board for approval.

7. The circumstances disclosed by the auditor which call for a more detailed investigation by the Auditor than necessary under ordinary circumstances, the Auditor shall inform the Board in writing of the need for such additional investigation and the additional compensation required therefore. Upon approval by the Board, this contract may be varied or changed to include the increased time and/ or compensation as may be agreed upon by the Board and the Auditor.

8. The audit should not be started before the contract is approved.

9. There are no other agreements between the parties hereto and no other agreements relative hereto that shall be enforceable unless entered into in accordance with the procedure set out herein and approved by the Board.

10. All of the above paragraphs are understood and shall apply to this contract. Communication regarding audit contract requests for modification or official approvals will be sent to the addresses provided in the spaces below.

Company Signatures: __________

Audit Firm Signature: ______
Name of Audit Firm: ______
Authorized Audit firm representative name:
(Signature of authorized audit firm representative)
Email Address of Audit Firm: __________________
Date: ______

Question 8.
What documents are required to be examined while conducting Secretarial Audit?
Answer:
Following documents to be examined while conducting Secretarial Audit:

  1. As per Section 2(12) of Companies Act, 2013, “book and paper” and “book or paper” include books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form.
  2. Memorandum of Association.
  3. Articles of Association.
  4. Certificate of Incorporation.
  5. Audited Balance Sheet(s).
  6. Details of E-forms filed during the period.
  7. Notice of calling Board Meetings.
  8. Notice of calling Extraordinary General meeting, Annual General Meeting along with the explanatory statement.
  9. Minutes of the Board meetings, Extraordinary General meeting, Annual General Meeting, Audit Committee Meetings, Nomination & Remuneration Committee Meetings, etc.
  10. Notices of disclosure of directors’ interests in Form No. MBP-1 as well as specific notices received from time to time from the directors and recorded in the minutes of Board meetings.
  11. Copy of documents related to the appointment/Resignation of Statutory Auditor of the company.
  12. Copies of contracts made between the company and any of the related parties under section 188 of Companies Act, 2013.
  13. Details of inter-corporate investments/loans/guarantees/securities etc.
  14. Copy of Internal Audit Report given by Internal Auditor appointed under section 138 of Companies Act, 2013.

Note : These points are inclusive and not exhaustive

Question 9.
Write short note on: “Forms and Content of Audit Engagement Letter”.
Answer:
The form and content of audit engagement letter may vary for each audit engagement, but it would generally include reference to:

  1. Explanation of the scope of audit, including reference to applicable legislation, regulations and ethical and other pronouncements of professional bodies to which the auditor adheres.
  2. The form of any other communication of results of the audit engagement.
  3. Arrangements regarding the planning and performance of the audit, including the composition of the audit team.
  4. Written representations to be provided by the management to the auditor.
  5. The agreement of management to make available to the auditor adequate records, reports and other information in time to allow the auditor to complete the audit in accordance with the proposed time-table.
  6. The agreement of management to inform the auditor of events occurring or facts discovered subsequent to the date of the financial statements, of which management may become aware, that may affect the status of compliance by the under any law.
  7. The Period within which audit report should be submitted by the auditor.
  8. Audit fees and any billing arrangements including out of pocket expenses for site visit etc.

Question 10.
What are limits on Audit Engagements?
Answer:
Following are limits on Audit Engagements:
1. An auditor shall not accept audit engagement beyond the limits of number of audits, if any, as may be specified under applicable laws or any other body governing such profession. The violation of the limits by the auditor may attract disciplinary actions against the auditor.

2. Due to inherent limitations of an audit together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements or material non-compliance may not be detected even though the audit is properly planned and performed in accordance with the applicable auditing standard.

3. An independent audit conducted in accordance with the applicable auditing standards does not act as a substitute for the maintenance of internal control mechanism in the organization. However, the agreement required does not mean that the auditor will find that internal control maintained by management has achieved its purpose or will be free of deficiencies.

4. Internal control can provide an entity with only reasonable assurance about achieving the entity’s reporting objectives/compliance objectives due to the inherent limitations of internal control. Such Internal control systems and processes are responsibility of the management.

Question 11.
What are criteria for declining and withdrawing from an Engagement?
Answer:
After evaluation of client information and the following factors the auditor should determine and document the conditions beyond which it would be prudent to decline or withdraw from an engagement:

  • Client’s status/information that is likely to impact adversely on the independence of the firm.
  • Ability of the firm to provide appropriate service to the client, considering needs for technical skills, knowledge of the industry and personnel.
  • Considering circumstances which would cause the firm to regard the engagement as one requiring special attention or presenting unusual risks.

Question 12.
Write short note on: “Agreement on Engagement Terms”.
Answer:
The agreed terms of the engagement should be recorded in an engagement letter or other suitable form of written agreement and includes:

  1. The objective and scope of engagement;
  2. The responsibilities of the firm;
  3. The responsibilities of management;
  4. Identification of the applicable financial reporting framework; and
  5. Reference to the expected form and content of any reports and a statement that there may be circumstances in which a report may differ from its expected form and content.

Question 13.
Draft of Model Audit Engagement Letter?
Answer:
Model Audit Engagement Letter
To,
XYZ Associates (Name of Audit Firm)
Company Secretaries
(Address)
Dear Sir,
This engagement letter is provided in connection with your audit of the Secretarial Records of PQR Co. Ltd. The Scope of work of Secretarial Audit to be conducted for the F.Y. 20** – 20** are as follows: The Secretarial Auditor has to check compliances by the company under the following laws and rules made there under:
a. The Companies Act, 2013 (the Act) and the rules made thereunder;

b. The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made thereunder;

c. The Depositories Act, 1996 and the Regulations and Bye-laws framed there under;

d. Foreign Exchange Management Act, 1999 and the rules and regulations made there under to the extent of Foreign Direct Investment, Overseas Direct Investment and External Commercial Borrowings;

e. The following Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):

  • The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
  • The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015;
  • The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
  • The Securities and Exchange Board of India (Employee Based Share Benefit Scheme) Regulations, 2014;
  • The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;
  • The Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents)
  • Regulations, 1993 regarding the Companies Act and dealing with client;
  • The Securities and Exchange Board of India (De listing of Equity Shares) Regulations, 2009; and
  • The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998;

f. Other laws as may be applicable specifically to the company.

I. Secretarial Standards & Listing Regulations:

  • Secretarial Standards 1 & 2 issued by the Institute of Company Secretaries of India;
  • SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, if applicable.

II. Composition of Board of Directors/Minutes of Board & Committee Meetings & General Meetings:

  • The board of directors of the company is duly constituted with proper balance of executive directors, non-executive directors and independent directors.
  • The changes in the composition of the Board of Directors that took place during the period under review were carried out in compliance with the provisions of the Act.
  • Adequate notice is given to all directors to schedule the Board Meetings, agenda and detailed notes on agenda were sent at least seven days in advance and a system exists for seeking and obtaining further information and clarifications on the agenda items before the meeting and for meaningful participation at the meeting.

III. Adequate Systems and Processes in the Company: Secretarial Auditor also requires to report on whether Adequate systems and processes in the company commensurate with the size and operations of the company to monitor and ensure compliance with applicable laws, rules, regulations and guidelines.

IV. Details of specific events/actions having a major bearing on the company’s affairs: Secretarial Auditor also requires to report on details of specific events/ actions having a major bearing on the company’s affairs in pursuance of the laws applicable on the Company during the audit period the company.

Documents to be examined/verified while conducting Secretarial Audit (Inclusive & Not Exhaustive):

  • Memorandum of Association
  • Articles of Association
  • Certificate of Incorporation
  • Audited balance sheet(s).
  • Details of E-forms filed during the period.
  • Notice of calling Board Meetings.
  • Notice of calling Extraordinary General meeting, Annual General Meeting along with the explanatory statement.
  • Minutes of the Board meetings, Extraordinary General meeting, Annual General Meeting, Audit Committee Meetings, Nomination & Remuneration Committee Meetings, etc.

Further, the Secretarial Auditor shall review and periodically update (if required) the checklist based Compliance Monitoring System.

For PQR Co. Ltd.

Date:
Place:

Authorised Signatory

Secretarial Audit Compliance Management and Due Diligence ICSI Study Material