Recent Amendments to Accounts and Audit under Companies Act, 2013

Recent Amendments to Accounts and Audit under Companies Act, 2013

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  • Recent Amendments to Accounts and Audit under Companies Act, 2013

Background: 

Recently, the Ministry of Corporate Affairs came out with certain amendments which impact the maintenance of accounts, reporting and preparation of financial statements. These were released by way of Companies (Audit and Auditors) Amendment Rules, 2021; Companies (Accounts) Amendment Rules 2021 and Amendment to Schedule III of Companies Act, 2013 which provides for the format of the Balance Sheet and Statement of Profit and Loss.

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We have captured a snapshot of the amendment

It is quite common to see Companies maintaining their Books of Accounts using desktop based or cloudbased software. Books of Accounts have been broadly defined by the Companies Act, 2013 as to include the following: 

  •  all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;
  • all sales and purchases of goods and services by the company;
  • the assets and liabilities of the company; and
  • the items of cost. 

The Central Government vide Gazette notification dated 24th March 2021 has introduced Companies (Accounts) Amendment Rules, 2021 in addition to Companies (Accounts) Rules, 2014, which now mandates the usage of only such accounting software that has the following feature: a) recording an audit trail of every transaction b) including an edit log with date and c) without a feature to disable such audit trail at any point Advith Comments: This is a significant change that has been brought out. The requirement of having an audit trail in the accounting system was already an audit requirement and was being tested by auditors to ascertain the effectiveness of the controls. Now, with this amendment it is also a statutory requirement. 

There are 2 possibilities: Some companies might have deployed some Enterprise Resource Planning (ERP) where almost all the processes are integrated; and the other possibility is that companies might have deployed multiple tools for accounting, payroll management, process flow etc. In either situation, it is highly recommended that Companies evaluate whether their ERP or any of the tools that they are using, complies with the requirements as specified above. It is also very important to note that this amendment is applicable from 1st April, 2021.

New reporting requirement in Audit report 

Section 143 of The Companies Act has stated the matters to be disclosed as a part of the Audit Report. Through Companies (Audit & Auditors) Amendment Rules, 2021, following new requirements have been added, which are to be reported in the audit report w.e.f. 1st April, 2021: 

  •  Whether representation has been received from the management that no funds have been advanced or loaned or invested by the company, in any other person or entities in any manner whatsoever, with the intention of further lending or investment, other than those disclosed in the notes to accounts;
  • Whether representation has been received from the management no funds have been received by the company, from any other person or entities in any manner whatsoever, with the intention of further lending or investment, other than those disclosed in the notes to accounts;
  • The Audit Procedure has given a reasonable assurance that there is no material misstatement with respect to the above disclosures.
  • Whether dividend declared/ paid is in line with the requirements of Section 123 of Companies Act, 2013.
  • Whether the Company has been maintaining the Books of Accounts in a software that has an audit trail and edit log without any tampering with the feature throughout the year;
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Amendments to Schedule III of Companies Act, 2013

Schedule III provides for the format of presentation of financials statements. Certain additional disclosures have been notified w.e.f. 1st April, 2021, which are captured below:

  • 01
    Ageing Analysis

    Ageing Analysis to be provided for the following Items: 

    1. Trade Receivables
    2. Trade Payables
    3. Capital Work in Progress
    4. Intangibles under Development
  • 02
    Relating to Immovable Assets

    1. Title deeds not held in the name of the company are to be disclosed
    2. If any revaluation of Property Plant & Equipment was done, whether the same was carried out by a Registered Valuer
    3. Details of Benami Property held by the Company
  • 03
    Corporate Governance Related

    1. Promoter’s shareholding structure/ changes.
    2. Loans given to Directors, KMP and other relative of director as a total Percentage of Total Loans Given.
    3. Registration of Charges with the Registrar of Companies along with reasons for delay, if any.
    4. Transactions with Companies struck off by the Registrar.
    5. Compliance with maximum number of layers of subsidiaries allowed as per Companies Act, 2013.
  • 04
    Miscellaneous Disclosures

    1. End use of funds from Banks & Financial Institutions if not used for intended purpose
    2. Quarterly Statement submitted to bank of Current Assets bought via Bank Mortgage & if any deviation from books with reasons for the same.
    3. Declaration if the entity is a Willful defaulter.
    4. Detailed Ratio Analysis.
    5. In case the company is under the scheme of arrangement, weather all the terms of the arrangement are complied
  • 05
    Disclosures in Statement of Profit & Loss

    1. Undisclosed Income offered to Income tax, if any, to be disclosed in the books.
    2. CSR activities carried out to be disclosed in detail.
    3. Details of any Crypto Currency held by the Company.

 

Advith Comments: 

Amendments proposed to the reporting requirements in Audit report and Schedule III are significantly far reaching. Some of them also seem a little out of place and illogical. For instance, a company is being asked to declare by themselves, if they hold properties as Benami for someone. If there were to be a company, which was doing that, would they disclose it! Further, the amount of information that is added to be mentioned in the financial statements require significant effort by Companies and their finance team to arrive at such amount of information. The mandate to mention ratios in the financial statements are bound to create problems as the definition of some of the ratios are not universal and subject to multiple interpretations. There also appears to be confusion if these are applicable for financial statements and audit reports drawn up from 1st April, 2021 or for financial year starting anytime after 1st April, 2021. It maybe better if regulator release suitable clarification on the same.