Considering the applicability date of the amended audit rules, it implies that the auditor is not required to assess appropriateness of audit trail of previous years and the assessment will be only for prospective financial years. Audit reporting will be triggered for financial years commencing on or after April 1, 2022, however, the applicability of the Account Rules will commence on or after April 1, 2023.

Thus, there is likely to be a scenario for the financial year 2022-23 where in absence of compliance requirement for the companies, auditors would not be able to report under the Audit Rules.

The reporting requirements have been prescribed for audit of financial statements prepared under the Act. Accordingly, auditors of all class of companies including section 8 companies would be required to report on these matters. As per the Companies (Registration of Foreign Companies) Rules, 2014, the provisions of “Chapter X of the Act: Audit and Auditors” and Rules made there under apply, mutatis mutandis, to a foreign company as defined in the Act. Accordingly, the above reporting requirements would be applicable to the auditors of foreign companies as well.

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The requirements of audit trail are applicable to the extent a company maintains its records in the electronic form by using an accounting software. Thus, where the books of account are entirely maintained manually – the assessment and reporting responsibility under Rule 11(g) will not be applicable and accordingly, same would need to be reported as statement of fact by the auditor against this clause.

The auditor is required to comment on the above matters both in case of standalone financial statements and consolidated financial statements. However, while reporting on consolidated financial statements, the auditor may observe that certain components included in the consolidated financial statements are (a) either not companies under the Act, or (b) some components are incorporated outside India. The auditors of such components are not required to report on these matters since the provisions of the Act do not apply to them.

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It may be noted that section 129(4) of the Act which prescribes the requirements for consolidated financial statements including its audits has specifically stated that the provisions of the Act shall, mutatis mutandis, apply to the consolidated financial statements implying that necessary changes are required to be made to interpret the requirements in respect of consolidated financial statements and their audit.

Accordingly, in line with the approach adopted in case of reporting on the consolidated financial statements on the clauses of section 143(3) of the Act, the reporting on compliance with Rule 11(g) would also be on the basis of the reports of the statutory auditors of subsidiaries, associates and joint ventures that are companies defined under the Act.

The auditors of the parent company should apply professional judgment and comply with applicable Standards on Auditing, in particular, SA 600, “Using the Work of Another Auditor” while assessing the matters reported by the auditors of subsidiaries, associates and joint ventures that are Indian companies.

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