Taxmann's Handbook on Secretarial Audit

Foreword

T

he Companies Act, 2013 brought with it the requirement of Secretarial Audit for bigger companies. This was a watershed moment in the evolution of the profession of Company Secretaryship. When this was followed by the SEBI introducing this requirement in its Listing Regulations, it added further impetus to the function of Secretarial Audit. As the gravity of legal provisions and expectations of stakeholders from corporates on the governance front have been increasing, Secretarial Audit becomes both necessary and beneficial to the corporate world.

The Company Secretaryship profession is still considered to be young, but one cannot help but appreciate the fact that it has always been evolving. Over the years, the role has metamorphosed into a multi-dimensional one – being a Compliance Officer enabling adherence to the myriad and complex legal and regulatory frameworks; a Key Managerial Personnel (KMP) contributing to strategy formulation and implementation; and a Governance Professional guiding the boards.

This ‘Handbook on Secretarial Audit’ is a timely addition to the library of the Company Secretaries in general, and will act as a ready referencer particularly to those in practice. The authors of this book are mindful of the transformative effect a duly conducted Secretarial Audit can have on companies and their stakeholders. They have meticulously combined the key aspects of the Auditing Standards, the Guidance Notes and the Manual issued by the ICSI along with their own inputs on various aspects, which has come out from their experience and research. They have kept in mind the expectations of the stakeholders, the requirements of the lawmakers, the needs of the corporates, and the challenges at the ground level faced by the Secretarial Auditors.

The book takes the Company Secretaries step by step Into the process of Secretarial Audit and eases them into the process. The book also contains matters relating to the Secretarial Auditor’s responsibility in respect of frauds, which is an important discussion that must happen in the present scenario.

I compliment the authors for their efforts in bringing out a comprehensive Handbook on Secretarial Audit. I believe that the contents of the book will benefit and add value to Company Secretaries in employment and practice, other KMPs and Senior Management who deal with compliance and governance aspects in their day-to-day professional life, stakeholders perusing the secretarial audit reports and the boards of companies.

Happy reading!

Sarah Arokiaswamy Former Joint Secretary (Senior Grade) The Institute of Company Secretaries of India

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Preface ewda djksfr okpkye~ iaxqa ya?k;rs fxfje~ A ;RÑik rege~ oUns ijekuUnek/koe~ AA “I respectfully salute the Almighty, the embodiment of eternal bliss, by whose Divine Grace the mute can become eloquent and those beset with obstacles and challenges can cross over mountains,” ƚŚƵƐ ĞŶůŝŐŚƚĞŶƐ Ă ǀĞƌƐĞ ŝŶ ŚĈǀĈƌƚŚĂͲ ţƉŝŬĈ͘

I

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t indeed warrants divine intervention for any dream to become a solemn endeavour and then become reality. This ‘Handbook on Secretarial Audit’ is the result of a shared vision of the authors to bring about awareness on the importance of Secretarial Audit and the role it can play in elevating good governance practices in a company.

Good governance comes from a deeply internalised sense of accountability felt by the boards towards various stakeholders and a profound commitment to fairness and transparency. Good governance cannot merely be legislated into the minds of boards, rather this has to be imbibed. However, the law rightly lays down many compliance and disclosure norms, in order to provide for a basic framework for good governance. Compliance with these norms is expected to offer a reasonable degree of certainty to the stakeholders that a company is well governed. Hence, an assurance exercise on compliance and specified aspects of governance assumes paramount importance. This is especially so, in this time and age, when both the business environment and the legal landscape have become complex, and compliance is a nuanced subject matter and no longer a routine exercise.

Secretarial Audit introduced by the Companies Act, 2013, is an important milestone not only for Company Secretaries in practice but also for the boards and companies as well.

This is because a comprehensive test of the qualitative aspects of a company’s performance in terms of compliance and board processes is something that was hitherto not attempted in law.

Secretarial Audit engagements must be performed in accordance with the Auditing Standards laid down by the Institute of Company Secretaries of India (ICSI). It necessitates detailed and careful planning and execution of the plan, while being open to new inputs that arise along the process. The Secretarial Auditor must exercise independence, diligence and skilfulness. He should not only hone his skills to think rationally without bias, but must also nurture his creative prowess to visualize how weaknesses in compliance systems may lead to errors or be exploited to commit frauds. A Secretarial Auditor needs to exercise professional skepticism throughout the audit, although he need not approach with fullfledged suspicion that something is wrong unless circumstances warrant. He must have the grit and strength of character necessary to report the frauds that he may discover in the course of his audit. He must foster an indomitable spirit within him to take every challenge as an opportunity to learn something new and to grow as a person.

Through this endeavour, we have made an earnest attempt to bring out the importance and benefits of Secretarial Audit, the steps involved, the nuances involved, precautions to be taken in respect of some matters, points to be factored in, the Secretarial Auditor’s responsibility in respect of frauds, quality control aspects and the role of Secretarial Audit in corporate governance, corporate strategy and sustainability.

We always fall short of words to express our deep sense of gratitude to Mrs. Sarah Arokiaswamy, Former Joint Secretary (Senior Grade), ICSI for all the support and guidance she has given to us. No doubt, she has touched our lives in one way or the other. Her ‘Heartificial’ approach in mentoring has always been a great source of inspiration. Here too in her own way of giving a ‘Midas touch,’ she has graced the book with her Foreword. tĞ ĞdžƉƌĞƐƐ ŽƵƌ ƐŝŶĐĞƌĞ ŐƌĂƚŝƚƵĚĞ ƚŽ ƌ͘ W W ĂůĂŶ͕ ^ĞŶŝŽƌ ŽŶƐƵůƚĂŶƚ͕ DŝŶŝƐƚƌLJ ŽĨ WĂŶĐŚĂLJĂƚŝ ZĂũ͕ &ŽƌŵĞƌ ŝƌĞĐƚŽƌ͕ <ĞƌĂůĂ /ŶƐƚŝƚƵƚĞ ŽĨ >ŽĐĂů ĚŵŝŶŝƐƚƌĂƚŝŽŶ ĂŶĚ ƌĞĐŝƉŝĞŶƚ ŽĨ ƚŚĞ DĂŚĂƚŵĂ Gandhi International Award for Peace and Reconciliation, for enriching this book with his insightful Foreword and words of inspiration.

We are deeply grateful to CA Thomas Chazhikadan, Hon’ble Member of Parliament, Lok Sabha, for graciously penning his thoughts out of his rich professional experience, illuminating the essence of the book through his Foreword. tĞ ƉƌŽĨƵƐĞůLJ ƚŚĂŶŬ ƌ͘ DĂƚŚĞǁ <ƵnjŚĂůŶĂĚĂŶ͕ ,ŽŶ͛ďůĞ DĞŵďĞƌ ŽĨ <ĞƌĂůĂ >ĞŐŝƐůĂƚŝǀĞ Assembly and also a prominent Lawyer, for reposing confidence in our work and encouraging us through his inspirational Message appreciating the book.

We express our heartfelt gratitude to Prof. Raveendranath K, Former Pro-Vice Chancellor, University of Calicut for extending his wishes to us and for his constant encouragement during the course of writing the book.

We sincerely thank Taxmann Publications Private Limited and the entire team for having supported us and making it a delightful venture particularly, Mr. Nilesh Bhanushali, Business Head and his team for the constant support all throughout the writing of this book.

The timely release of this book would have remained a distant dream without his support and consistent monitoring at various levels.

It is often the said that the best outcome will be out of tough situations and for us also it was not an exception. The respective family members of all of us were the real pillars who supported us to pursue our interest of writing the book. We take this opportunity to thank the family members, and well-wishers for believing in our dreams and for having stood by us during this significant journey. For all the three authors, this is a maiden attempt at writing a book and this would have been next to impossible without their support and encouragement.

In Ramayana, every contribution, be it from the grandest gesture to the subtlest aid, played a pivotal role in the construction of a mighty bridge. Similarly, throughout our journey, there are many who have extended their timely support and wise counsel. While naming each one remains a formidable task, we are deeply grateful for all their invaluable inputs.

We thank the readers for choosing this book. We hope it will take you on an interesting journey through the realm of Secretarial Audit just as it did for us!

We offer our salutations to all our Gurus and mentors who have guided us through our lives, and to the Almighty for blessing us with the strength and the joyful spirit to enjoy the journey. It is only with the divine grace that we could accomplish this dream. We humbly ƐƵďŵŝƚ ƚŚŝƐ Ŭ ĂƐ ŽƵƌ ŵŽĚĞƐƚ ŽĨĨĞƌŝŶŐ Ăƚ ƚŚĞ ŝǀŝŶĞ >ŽƚƵƐ ĨĞĞƚ ŽĨ >ŽƌĚ 'ƵƌƵǀĂLJŽŽƌĂƉƉĂŶ͕ akin to a delicate basil leaf offered with the deepest reverence.

Happy Reading!

With Warm Regards, CS Usha Ganapathy Subramanian CS A Sekar Dr. Ranjith Krishnan

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Řĺċϟϙ ÍŽôôIJîŘÍIJÍťēϟϙX

Residence: Aravindham, Thiroor, Mulakunnathukavu P.O., Thrissur District, Kerala, PIN-680581

Former Pro-Vice Chancellor University of Calicut Kerala

KĐƚŽďĞƌ ϮϬ͕ ϮϬϮϯ

&ĞůŝĐŝƚĂƚŝŽŶƐ Secretarial Audit holds a lot of signiĮcance in this age and Ɵme of complex business landscape, evolving legal frameworks and mounƟng stakeholder expectaƟons on good corporate governance. I appreciate the sincere eīorts put by CS Usha Ganapathy Subramanian, CS A Sekar and Dr. Ranjith Krishnan, for coming out with a book depicƟng various aspects of Secretarial Audit. I am conĮdent that this book will beneĮt all those who are concerned with compliance and governance funcƟons, especially Company Secretaries, senior management and the boards of corporates. I take this opportunity to convey my best wishes to the authors.

With Best Regards,

WƌŽĨ͘ ZĂǀĞĞŶĚƌĂŶĂƚŚ͘ <

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About the Authors CS Usha Ganapathy Subramanian Ms. Usha Ganapathy Subramanian is an Associate Member of the Institute of Company Secretaries of India (ACS) with an overall experience close to a decade. She is currently in whole time practice and worked previously with Sundaram Hydraulics Limited (A TVS group Company) as a Company Secretary, where she handled accounting domain as well. She also teaches corporate and securities laws for Company Secretaryship course. She has authored and co-authored articles, which have been published in professional journals. Her opinions of various aspects of securities markets are regularly featured in several National economic dailies. She has edited newsletters, case studies, fiction and non-fiction books. Besides an ACS, she is also a CFA from ƚŚĞ / & / hŶŝǀĞƌƐŝƚLJ ;/ŶĚŝĂͿ͕ ĂŶĚ ŚŽůĚƐ ŝƉůŽŵĂ ŝŶ DĂŶĂŐĞŵĞŶƚ ĐĐŽƵŶƚŝŶŐ from CIMA, London. She secured all-India rank in Foundation and Final levels of Company Secretary examinations and was recipient of Prize-II in B.Com from the University of Madras.

CS A Sekar CS A Sekar is in whole time practice as company secretary since 1996. He specializes in the field of Corporate Laws, Foreign Exchange Management (FEMA), SEBI and Securities Laws, Mergers and Acquisitions, Cost & Management AcĐŽƵŶƚŝŶŐ͕ ƵĞ ŝůŝŐĞŶĐĞ͕ dƌĂŶƐĨĞƌ WƌŝĐŝŶŐ͕ ƵƐŝŶĞƐƐ sĂůƵĂƚŝŽŶƐ and Corporate Sustainability. He also advises organizations in the SME sector on Strategic Management issues, Capital Financing & Structuring, IPO and Compliance Management. Currently, he is also advising listed entities on the implementation of systems and procedures for ESG and Sustainability reporting. CS A Sekar is a B. Com, FCMA, ACS, LL.B(Gen) and CMA (ANZ).

Dr. Ranjith Krishnan ƌ͘ZĂŶũŝƚŚ <ƌŝƐŚŶĂŶ ŝƐ ŝŶƚŽ ĨƵůůͲĨůĞĚŐĞĚ ĂĐĂĚĞŵŝĐƐ ĨŽƌ ƚŚĞ ůĂƐƚ 21 years. He has worked in senior positions in educational bodies viz. NISM and ICSI where he had handled diverse portfolios such as teaching, research, training, preparation of academic backgrounders etc. He is a member of Board of Studies and Advisory Boards in several educational institutions and has contributed in drafting of syllabus for the Undergraduate/Post Graduate ĐŽƵƌƐĞƐ͘ ,Ğ ŚŽůĚƐ Ă WŚ͘ ͘ ŝŶ DĂŶĂŐĞŵĞŶƚ ĂŶĚ ƉŽƐƚŐƌĂĚƵĂƚŝŽŶ ŝŶ ŵƵůƚŝƉůĞ disciplines including Law and Human Resource Management.

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Chapter-heads PAGE

Foreword - Sarah Arokiaswamy

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Foreword - Dr. P.P. Balan

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Foreword - Thomas Chazhikadan

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Preface

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Felicitations - Dr. Mathew Kuzhalnadan

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Felicitations - Prof. Raveendranath. K.

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About the Authors

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Contents

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Chapter 1

Introductory Chapter

1

Chapter 2

Secretarial Audit and Secretarial Auditor

19

Chapter 3

Stages of Secretarial Audit

43

Chapter 4

Understanding the Company’s Environment, Internal Controls and Preliminary Review of Documents

70

Chapter 5

Part I – Current File and Corporate Laws

95

Chapter 5A

Part II – Securities Laws, FEMA Regulations, Other Applicable Laws and Other Aspects I-13

135

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CHAPTER-HEADS PAGE

Chapter 6

Auditors’ Responsibility in Respect of Fraud

160

Chapter 7

Evaluation of Audit Evidence, Forming of Opinion and Preparation of Secretarial Audit Report

184

Chapter 8

Ensuring Quality Control in Secretarial Audit

209

Chapter 9

Role of Secretarial Audit in Corporate Governance, Strategy and Sustainability

227

Annexures Annexure 1 Annexure 2 Annexure 3 Annexure 4

Annexure 5 Annexure 6 Annexure 7

: Form No. MR-3 : Statement on Auditor’s Responsibility to be annexed with the Secretarial Audit Report and forms an integral part of the Report : Independence Criteria under section 141(3) of the Companies Act, 2013 : Threshold-based compliance under the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 : Sample tables for evolution of capital : Compilation of information for current file and useful charts : Excerpts from SA 240, CSAS-2 and CSAS-4 on Auditors’ Responsibility in Respect of Frauds

241 244 246 247

256 258 271

Contents PAGE

Foreword - Sarah Arokiaswamy

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Foreword - Dr. P.P. Balan

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Foreword - Thomas Chazhikadan

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Preface

I-8

Felicitations - Dr. Mathew Kuzhalnadan

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Felicitations - Prof. Raveendranath K.

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About the Authors

I-12

Chapter-heads

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1 INTRODUCTORY CHAPTER 1.1

The Need for Assurance on Compliance

1

1.2

Evolution of Provisions relating to Assurance on Compliance

3

1.3

Framework for Assurance on Compliance under the Companies Act, 2013

5

1.4

Definition of Secretarial Audit

6

1.5

Mandatory Requirement for Secretarial Audit

7

1.5.1

Mandate under the Companies Act, 2013

7

1.5.2

Mandate under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

9

1.6

The Case for Voluntary Adoption of Secretarial Audit

11

1.6.1

For MSMEs – OEM orders, SME IPO and Government Schemes

12

1.6.2

For Startups – Gearing up for Funding Rounds and IPOs/ Strategic Sale

13

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CONTENTS PAGE

1.7

1.6.3

For Acquisition or Investment Targets – Preparation for Due Diligence Processes

14

1.6.4

For Joint Ventures – Adherence to Compliance Standards and the terms of Joint Venture

15

Benefits of Secretarial Audit

15

1.7.1

Benefits to the Company

15

1.7.2

Benefits to the Regulators

16

1.7.3

Benefits to the other stakeholders

16

1.8

Who can perform Secretarial Audit?

17

1.9

Literature on Secretarial Audit

17

2 SECRETARIAL AUDIT AND SECRETARIAL AUDITOR 2.1

The Concept of Audit

19

2.2

An Overview of the Various Audits under the Companies Act, 2013

20

2.2.1

Audit of financial statements or Statutory Audit

20

2.2.2

Cost Audit

21

2.2.3

Internal Audit

22

2.2.4

Secretarial Audit

23

2.2.5

Whether Secretarial Audit is subsumed in other audits like Statutory Audit?

28

2.3

2.4

2.5.

2.6

Nature of Secretarial Audit

28

2.3.1

Salient features of Secretarial Audit

29

2.3.2

Does Secretarial Audit indicate absolute assurance?

29

Scope of Secretarial Audit

31

2.4.1

List of laws specifically mentioned

32

2.4.2

Other Applicable Laws

32

2.4.3

Governance Aspects

33

2.4.4

Other Aspects

34

The Contours of Responsibility of the Secretarial Auditor

34

2.5.1

Responsibility of the Secretarial Auditor

34

2.5.2

Responsibilities of those charged with Governance and the Management

36

Appointment, Qualification and Independence of a Secretarial Auditor

37

2.6.1

Appointment Procedure

37

2.6.2

Qualification Criteria

37

CONTENTS

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2.7

2.6.3

Independence Criteria

38

2.6.4

Certificate to the Board before Accepting the Engagement

40 40

Powers of a Secretarial Auditor

3 STAGES OF SECRETARIAL AUDIT 3.1

Factors involved in Planning and Performing an Audit

43

3.2

Stages of an Audit

44

3.3

ICSI Auditing Standards

45

3.3.1

Applicability of ICSI Auditing Standards CSAS-1 to CSAS-4

46

3.3.2

Framework under ICSI Auditing Standards

46 47

3.4

Matters relating to Professional Misconduct while Obtaining Professional Work

3.5

Acceptance of Secretarial Audit Engagement

49

3.5.1

Pre-engagement Meeting

49

3.5.2

Factors to be Considered Before Accepting an Audit Engagement

50

3.6

3.7

3.8

3.9

3.5.3

Eligibility Certificate

50

3.5.4

Appointment of Secretarial Auditor

51

3.5.5

Audit Engagement Letter

51

3.5.6

Communication to the Previous Incumbent

52

3.5.7

Commercial terms

53

3.5.8

Changes in the Engagement

54

Planning the Audit

54

3.6.1

Plan must enable gathering of sufficient appropriate audit evidence

55

3.6.2

Elements of Audit Planning

56

3.6.3

Contents of an Audit Plan

57

3.6.4

Professional skepticism

57

Audit Documentation

58

3.7.1

Necessary Qualities of Audit Documentation

58

3.7.2

Contents of Audit Documentation

59

3.7.3

Retention of Records

60

Understanding the Environment

60

3.8.1

General Information about the company – For Master File

60

3.8.2

Information in respect of the period under audit – For Current File

62

3.8.3

Sources of information

62

Assessing the Risks

63

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CONTENTS PAGE

3.10

Determining Materiality

63

3.10.1

Necessary to determine materiality

63

3.10.2

What is materiality?

64

3.10.3

Quantitative Materiality Threshold is not Sufficient for Compliance Aspects

65

3.11

Performing Various Audit Procedures

66

3.12

Evaluating Audit Evidence

67

3.13

Forming an Opinion

68

3.14

Drafting and Submitting the Secretarial Audit Report

68

3.15

Presence at AGM

69

4 UNDERSTANDING THE COMPANY’S ENVIRONMENT, INTERNAL CONTROLS AND PRELIMINARY REVIEW OF DOCUMENTS 4.1

4.2

Understanding the Entity and its Environment

70

4.1.1

Nature of Business

71

4.1.2

Basic Information from MCA’s Company Master Data

72

4.1.3

Promoters

73

4.1.4

Board Composition

73

4.1.5

Evolution of Capital and Shareholding Pattern

74

4.1.6

Corporate Restructuring in the Recent Past

76

4.1.7

Registrations, Licences, Approvals and Permissions from Authorities

76

4.1.8

Action Taken by Authorities, Orders passed and Ongoing Litigations and Prosecutions

77

4.1.9

Details of Auditors

77

Internal Controls and Compliance Systems

77

4.2.1

What are Internal Controls

77

4.2.2

Policies

79

4.2.3

Organisational Chart and Levels of Authority

80

4.2.4

Standard Operating Procedures

81

4.2.5

Compliance Systems – Internal Compliance Controls and Internal Governance Controls

82

4.2.6

Extent of Adoption of Technology

85

4.2.7

Internal Audit Reports

85

CONTENTS

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4.3

Relying on the Work of Other Professionals

86

4.3.1

Relying on the Work of Statutory and Tax Auditors

86

4.3.2

Scope of Statutory Audit in respect of Compliance and Governance Matters

87

4.4

Access to Books of Account and other Records

88

4.5

Preliminary examination of Filings for New Clients – Master Information

88

4.5.1

Charter Documents

89

4.5.2

MCA Filings

91

4.5.3

Stock Exchange Filings and Offer Documents filed with SEBI

92

4.6

Previous Years’ Financial Statements

92

5 PART I – CURRENT FILE AND CORPORATE LAWS 5.1

5.2

Compilation of Information for Current File

95

5.1.1

Latest Charter Documents

95

5.1.2

Meetings held during the financial year

96

5.1.3

E-Forms filed during the Financial Year

99

5.1.4

Registers under the Companies Act, 2013

99

5.1.5

Whether the Company has met any new Threshold-Based Compliance Criteria

101

5.1.6

Other Filings during the Financial Year

101

5.1.7

Media News Coverage and Websites of Enforcement Agencies

101

5.1.8

Specific Information from the Company

102

5.1.9

Matters to be observed from Internal Audit Reports

105

5.1.10

Previous Year Financial Statements and Provisional Financial Statements

105

Matters to be verified under Corporate Laws

106

5.2.1

Classification of Matters to be verified in case of Compliance

107

5.2.2

Periodic Compliance

107

5.2.3

Event-based Compliance

108

5.2.4

Matters relating to Nature of Business

108

5.2.5

Matters relating to Articles of Association

108

5.2.6

Amounts Received – Potential Classification as Deposits

109

5.2.7

Matters to be noticed in respect of some exempt amounts

110

5.2.8

Issue of Securities

110

5.2.9

Shareholding Pattern

116

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CONTENTS PAGE

5.2.10

Dividend

117

5.2.11

Directors

118

5.2.12

Meetings and Board Processes

120

5.2.13

Committees of the Board

122

5.2.14

Disclosure of Interest by Directors

122

5.2.15

Related Party Transactions

123

5.2.16

Loans and Guarantees Given and Investments made

127

5.2.17

Borrowings

128

5.2.18

Managerial Remuneration and Appointment of Key Managerial Personnel (KMP)

128

5.2.19

Corporate Social Responsibility (CSR)

130

5.2.20

General Meetings

131

5.2.21

Annual Report

133

5.2.22

Disclosures in Annual Return

133

5.2.23

Accounts and Audit

134

5A PART II – SECURITIES LAWS, FEMA REGULATIONS, OTHER APPLICABLE LAWS, AND OTHER ASPECTS 5A.1

5A.2

5A.3

Securities Market Regulations

135

5A.1.1

SEBI (Listing Obligations and Disclosures Requirements), Regulations, 2015 (Listing Regulations)

135

5A.1.2

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

138

5A.1.3

SEBI (Prohibition of Insider Trading) Regulations, 2015

139

5A.1.4

Other SEBI Regulations and the Listing Agreement

140

5A.1.5

Compliance with Listing Agreements in case of Listed Companies

141

FEMA, 1999 and the Rules and Regulations thereunder

142

5A.2.1

Foreign Direct Investment (FDI)

142

5A.2.2

External Commercial Borrowings (ECB)

144

5A.2.3

Overseas Investments (OI)

145

Other Specifically Applicable Laws

147

5A.3.1

Responsibility of Identifying and Segregating Applicable Laws

147

5A.3.2

Role of Secretarial Auditor

147

5A.3.3

Factors to be Considered for Identification and Segregation of Laws

149

CONTENTS

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Some specific aspects to keep in mind in respect of certain industries

151

5A.4

Adequacy and effectiveness of systems in place to ensure compliance with general laws

155

5A.5

Governance Aspects

156

5A.5.1

157

5A.3.4

5A.6

Specific Aspects of Governance Processes in Secretarial Audit

Other Aspects

157

5A.6.1

Adequacy and Effectiveness of Compliance Systems

157

5A.6.2

Specific events having a major bearing on the company’s affairs

158

6 AUDITORS’ RESPONSIBILITY IN RESPECT OF FRAUD 6.1

6.2

6.3

What is fraud?

160

6.1.1

Provisions relating to fraud under section 447 of the Companies Act, 2013

161

6.1.2

Definition under the Indian Penal Code, 1860

163

6.1.3

Definition under the Indian Contract Act, 1872

163

6.1.4

Provisions relating to fraud under the SEBI Act, 1992 and the regulations thereunder

164

6.1.5

Fraud under SA 240 – The Auditor’s Responsibilities Relating to Fraud issued by the ICAI

165

A Study of Responsibility in Relation to Frauds

165

6.2.1

Responsibility of those charged with governance

166

6.2.2

Section 143(12) – Duty to ‘Report’ Frauds

167

6.2.3

Responsibility of Auditor in Discovery of Frauds

168

6.2.4

Auditor’s Responsibility in Respect of Frauds in a Nutshell

175

6.2.5

Reporting of Fraud

175

Areas requiring in-depth focus in fraud detection

177

6.3.1

Related Party Transactions

177

6.3.2

Excessive Managerial Remuneration

177

6.3.3

Insider Trading

178

6.3.4

Mergers/Demergers/Acquisitions

178

6.3.5

Ponzi Schemes and Public Deposits

178

6.3.6

Tools for Risk Assessment in respect of Frauds

179

6.3.7

Understanding Frauds

181

6.3.8

Qualities Required to Detect and Report Frauds

182

I-22

CONTENTS PAGE

7 EVALUATION OF AUDIT EVIDENCE, FORMING OF OPINION AND PREPARATION OF SECRETARIAL AUDIT REPORT 7.1

Evaluating Audit Evidence

184

7.1.1

Evaluation of Audit Evidence v. Drawing Conclusions

184

7.1.2

Gathering and Evaluation of Evidence is a Simultaneous and Iterative Process

187

7.2

Forming an opinion

190

7.3

Process for Forming of Opinion

191

7.3.1

Consideration of Materiality

191

7.3.2

Principles involved in Forming of Opinion

193

7.3.3

Decided Cases, Clarifications and Opinions

198

7.3.4

Generally Accepted Auditing Practices

198

7.3.5

Third Party Report or Opinion

198

7.4

7.5

Management Representation Letter

199

7.4.1

Responsibility of the Secretarial Auditor in respect of matters in the Management Representation Letter

200

7.4.2

Matters in respect of which Management Representation Letter is Required

200

Unmodified/Modified Opinion

201

7.5.1

Unmodified Opinion

201

7.5.2

Modified Opinion

202

7.5.3

Presentation of modified opinion or disclaimer of opinion

203

7.6

Limitation on the Scope of Audit

204

7.7

Auditor’s Responsibility

205

7.8

Format of Report

206

7.8.1

207

Signature Block

8 ENSURING QUALITY CONTROL IN SECRETARIAL AUDIT 8.1

Quality Control

209

8.2

The ICSI Manual on Quality Control Processes

210

8.3

Components Necessary for Establishing Quality in a Firm’s Functioning

210

8.3.1

210

Objectives of Ensuring Quality and Establishing Quality Control

CONTENTS

I-23 PAGE

8.4

8.5

8.6

8.3.2

Steps in achieving quality objectives

211

8.3.3

Setting up of Quality Control System

212

8.3.4

Consistent adherence to the established system

214

8.3.5

Monitoring adherence to the Quality Control System

214

8.3.6

Maintenance of the Quality Control System

215

Internal Quality Control Aspects

215

8.4.1

Leadership Responsibilities

216

8.4.2

Ethical Requirements

217

8.4.3

Human Resources

220

8.4.4

Performance Evaluation

220

8.4.5

Monitoring

220

Quality in Client Interaction

221

8.5.1

Acceptance and Continuation of Client Relationships and Specific Engagements

221

8.5.2

Integrity level of client and the Firm’s Ethical Stance

223

8.5.3

Allocating Responsibilities for Engagement Team and Partners

223

Quality Considerations Specific to Secretarial Audit

224

9 ROLE OF SECRETARIAL AUDIT IN CORPORATE GOVERNANCE, STRATEGY AND SUSTAINABILITY 9.1

9.2

Secretarial Audit and Corporate Governance

227

9.1.1

228

Board Composition

9.1.2

Board Processes

229

9.1.3

Holding Promoters Accountable

229

9.1.4

Shareholders’ Democracy

230

9.1.5

Shareholder Activism

230

9.1.6

Investor Grievance Redressal

231

9.1.7

Upholding Terms of SHA (Shareholders’ Agreement)

231

9.1.8

Compliance Management Systems and Internal Control Processes

232

9.1.9

Managerial Remuneration

232

9.1.10

Disclosure of Interest and Related Party Transactions

232

Secretarial Audit and Strategy

233

9.2.1

Group Structures for Diversification and Vertical Integration

233

9.2.2

Raising Funds for Expansion

234

9.2.3

Managing Alliances, Joint Ventures

234

I-24

CONTENTS PAGE

9.3

9.2.4

Better Control Mechanisms towards Efficiency

234

9.2.5

Brand Equity and Goodwill

234

Secretarial Audit and Sustainability

235

9.3.1

Sustainable Growth of the Company

235

9.3.2

Sustainable Development of the Stakeholders

236

9.3.3

Sustainable Development of the Nation

237

ANNEXURES Annexure 1:

Form No. MR-3

241

Annexure 2:

Statement on Auditor’s Responsibility to be annexed with the Secretarial Audit Report and forms an integral part of the Report

244

Annexure 3:

Independence Criteria under section 141(3) of the Companies Act, 2013

246

Annexure 4:

Threshold-based compliance under the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

247

Annexure 5:

Sample tables for evolution of capital

256

Annexure 6:

Compilation of information for current file and useful charts

258

Annexure 7:

Excerpts from SA 240, CSAS-2 and CSAS-4 on Auditors’ Responsibility in Respect of Frauds

271

C H A P T E R

3

Stages of Secretarial Audit 3.1 FACTORS INVOLVED IN PLANNING AND PERFORMING AN AUDIT

Adhering to applicable laws like CA 2013, Listing Regulations

Adhering to CSAS, Guidance Notes, the Manual, Guidelines on Peer Review, UDIN, Quality Control, etc.from ICSI

In a way that enables obtaining reasonable assurance

Planning and Performing Secretarial Audit

Qualitative aspects like integrity, independence, competence, confidentiality

Factors specific to auditee's business

It is the duty of the Secretarial Auditor to plan and perform the audit in a way that enables obtaining reasonable assurance regarding compliance and maintenance of records. He does this by gathering sufficient appropriate evidence by performing various audit procedures. He evaluates the evidence, and makes his report to the members of the company.

The Secretarial Auditor must follow the due procedures right from the moment he is approached for the engagement, throughout the performance of audit and until he submits the report to the auditee. Even thereafter, the duty of the Secretarial Auditor extends to attending the Annual General Meeting.

43

44

STAGES OF SECRETARIAL AUDIT

The Secretarial Auditor must adhere to the requirements relating to Secretarial Audit under the Companies Act, 2013 read with the Rules and the Listing Regulations and SEBI’s circulars, as may be applicable. Apart from this, the Secretarial Auditor must follow the Auditing Standards CSAS 1-4, Guidance Notes on the Auditing Standards, the Guidance Note on Secretarial Audit, the Manual on Secretarial Audit, Guidelines on Peer Review, Quality Review, UDIN and other guidance issued by the ICSI while planning and performing the audit. The Secretarial Auditor must also keep in mind the matters of misconduct as detailed under the First and Second Schedules to the Company Secretaries Act, 1980. When the conduct of an auditor amounts to a misconduct under the said Schedules, disciplinary proceedings may be launched against him.

Further, there are qualitative aspects that must be kept in mind. He is expected to conduct the engagement in a professional manner with integrity, independence and competence. He should maintain confidentiality. Maintaining confidentiality is important for any client; it becomes more important in respect of listed companies because if unpublished price-sensitive information is leaked, it may lead to insider trading and violation of the code of conduct that fiduciaries must have in place as per the SEBI (Prohibition of Insider Trading) Regulations, 2015.

The Secretarial Auditor must keep in mind the nature of business, the business cycle, the history of the company and its promoters, nature and volume of the transactions or records of the auditee, applicable laws, systems in place for compliance and other factors specific to the auditee company.

3.2 STAGES OF AN AUDIT The various stages of an audit can be summarised as under:

Accepting an audit engagement

Determining materiality

Forming an audit opinion

Planning the audit

Performing audit procedures

Drafting the Secretarial Audit Report

Understanding the entity and its environment

Audit documentation

Submitting the Report to the Auditee

Assessing risks of material misstatement or non-compliance

Evaluating the evidence

Presence at AGM

STAGES OF SECRETARIAL AUDIT

45

1. Accepting an audit engagement includes matters to be considered and procedures to be performed before accepting the engagement and soon thereafter. This includes matters like assessing the integrity level of the client, competence of the auditor, communication with the previous incumbent, and so on.

2. Planning the audit includes planning the scope, timeline and extent of the audit procedures.

3. Understanding the entity and its environment involves understanding the entity’s business, events during the review period, internal controls and systems in place for compliance.

4. Assessing risks of material misstatement or non-compliance flows from the understanding of the entity and its environment.

5. Determining materiality for the purpose of performing test-checks and sampling based on the assessment of risks.

6. Performing audit procedures includes test of controls and substantive procedures.

7. Maintenance of audit documentation including working papers, preservation of evidence obtained and related matters.

8. Evaluating the evidence involves analysing the sufficiency and appropriateness of the evidence to support reasonable assurance on compliance. The evidence must constitute reasonable basis for the auditor to form his opinion.

9. Forming an audit opinion based on the evidence with respect to the extent of compliance with laws.

10. Drafting the Secretarial Audit Report based on the audit opinion formed. This may be a modified report (having adverse remarks, qualification or other remarks) or this may be an unmodified report (clean report).

11. Submitting the Report to the Auditee involves finalising the report, generating UDIN, signing the report and appropriately addressing it to the auditee.

12. Presence at AGM is required for the Secretarial Auditor unless exempt by the company.

3.3 ICSI AUDITING STANDARDS The ICSI has issued Auditing Standards to equip Practising Company Secretaries with the tools, techniques and knowledge on best practices for rendering auditing services to their clients. Auditing Standards also ensure uniformity and standardisation of auditing procedures and practices. Company Secretaries in Practice have been bestowed and entrusted with the opportunity of performing various types of audits, right from the Secretarial Audit under the provisions of section 204 of the Companies Act, 2013 and under regulation 24A of the Listing Regulations, audit of depository participants, internal audit of stock brokers, internal audit of investment advisors,

46

STAGES OF SECRETARIAL AUDIT

internal audit of portfolio managers, internal audit of credit rating agencies and so on. As laws become more complex and as the business environment evolves, more audit opportunities and responsibilities will be offered to the Company Secretaries in practice.

The ICSI constituted the Auditing Standards Board in 2016. The Auditing Standards framed by the Auditing Standards Board were issued in 2019. These were made applicable on a recommendatory basis from 1st July, 2019. In view of the Covid-19 pandemic, the mandatory applicability of the ICSI Auditing Standards was postponed to 1st April, 2021. The ICSI has also issued Guidance Notes to the ICSI Auditing Standards to provide clarity and practical guidance on the Standards.

3.3.1 Applicability of ICSI Auditing Standards CSAS-1 to CSAS-4

Practising Company Secretaries are required to follow all the ICSI Auditing Standards mandatorily in respect of all audit engagements under any statute on or after 1st April, 2021.

This is applicable for all audit engagements whether in pursuance of the Companies Act, 2013 or under the securities market regulations or any other law.

In respect of audits conducted on a voluntary basis at the request of the auditee, compliance is not mandatory but is recommended.

In respect of audits undertaken pursuant to an order of Court, Tribunal or a Regulatory Authority, CSAS-1 should be followed to the extent possible.

zCSASͲ1: Aud diting Standaard

on Audit Engagement E

xCSASͲ2: Auditing SStandard on A Audit Processs and Docum mentation

xCSASͲ33: Auditing Standard on o Forming off Op pinion

xCSASͲ4: Auditing n Secretarial Standard on Aud dit

CSAS-1 to CSAS-3 pertain to all audits in general, including Secretarial Audit. CSAS-4 is dedicated to Secretarial Audit.

3.3.2 Framework under ICSI Auditing Standards

CSAS-1: Auditing Standard on Audit Engagement: This Standard deals with the principles and procedures for acceptance and continuance of an audit engagement.

It deals with pre-engagement meeting, communication with the previous auditor, limit on audit engagements, conflict of interest, appointment of the auditor, audit engagement letter, maintaining confidentiality and change in terms of engagement.

STAGES OF SECRETARIAL AUDIT

47

CSAS-2: Auditing Standard on Audit Process and Documentation: This Standard deals with planning and performing the audit process and maintenance of documentation. What constitutes sufficient and appropriate record to form the basis of the auditor’s opinion is also defined here. It provides for matters relating to audit planning, enumerates the steps in the overall audit process, developing an audit plan, risk assessment, preparation of checklists, collection of evidence, analysis of evidence, audit documentation, and matters on record keeping and retention.

CSAS-3: Auditing Standard on Forming of Opinion: This Standard deals with the manner of evaluating the conclusions drawn from the audit evidence for the purpose of forming an opinion and drawing the audit report. The aim is to provide uniformity in the manner of forming the audit opinion.

CSAS-4: Auditing Standard on Secretarial Audit: This Standard lays down matters relating to Secretarial Audit and evaluation of compliance with laws.

This Chapter discusses the concepts and practical aspects relating to the process of audit with due consideration to ICSI Auditing Standards, the Guidance Notes, matters of misconduct under the Company Secretaries Act, 1980, and other guidance available.

3.4 MATTERS RELATING TO PROFESSIONAL MISCONDUCT WHILE OBTAINING PROFESSIONAL WORK The way a person conducts himself is what makes or breaks a professional. Professionals must conduct themselves in a manner that shows strength of character, determination, discipline, integrity and reliability. The conduct of a member of a profession, which is unbecoming of a professional, though may be legal, needs to be viewed seriously.

This is because the society and the businesses rely on the work of professionals and any misconduct on the part of the professional affects the stakeholders and may also bring discredit to the profession. Hence, there needs to be a disciplinary mechanism to deal with matters of misconduct.

The First and Second Schedules to the Company Secretaries Act, 1980 deal with matters of misconduct in respect of Company Secretaries. Simplistically speaking, the First Schedule contains matters of serious misconduct, and the Second Schedule provides for matters of misconduct of much graver nature. Disciplinary proceedings in respect of the former are held before the Board of Discipline, whereas in respect of the latter, proceedings are held before the Disciplinary Committee. The consequences range from reprimand, fine up to Rs. 1 Lakh, suspension of membership for a period up to three months in case of misconduct falling under the First Schedule, while in case of the Second Schedule, the consequences are reprimand, higher fine limits up to Rs. 5 Lakhs, permanent cancellation of membership or suspension of membership for any length of time. An appeal lies with the Appellate Authority constituted under the Chartered Accountants Act, 1949.

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STAGES OF SECRETARIAL AUDIT

The aforesaid First Schedule is divided into four parts:

Part I – Professional misconduct relating to Company Secretaries in Practice

Part II – Professional misconduct relating to Members in employment

Part III – Professional misconduct relating to all Members generally

Part IV – Other misconduct relating to all Members generally

The Second Schedule is divided into three parts:

Part I – Professional misconduct relating to Company Secretaries in Practice

Part II – Professional misconduct relating to all Members generally

Part III – Other misconduct relating to all Members generally

Company Secretaries in Practice must keep in mind clauses (5) and (6) of Part I of the First Schedule when it comes to obtaining any engagement.

Clause (5) provides that a Company Secretary in Practice shall be deemed to be guilty of professional misconduct, if he— “secures, either through the services of a person who is not an employee of such Company Secretary or who is not his partner or by means which are not open to a Company Secretary, any professional business. Provided that nothing herein contained shall be construed as prohibiting any arrangement permitted in terms of items (2), (3) and (4) of this part.”

Clause (6) provides that a Company Secretary in Practice shall be deemed to be guilty of professional misconduct, if he — “solicits clients or professional work, either directly or indirectly, by circular, advertisement, personal communication or interview or by any other means: Provided that nothing herein contained shall be construed as preventing or prohibiting- (i) any Company Secretary from applying or requesting for or inviting or securing professional work from another Company Secretary in practice; or (ii) a member from responding to tenders or enquires issued by various users of professional services or organisations from time to time and securing professional work as a consequence.”

The objective behind the aforesaid clauses is that the professional service should not be commoditised. A professional remains a professional only so long as his work speaks for itself. Hence, ideally speaking, a professional in practice must get assignments and not seek assignments except in the manner permitted otherwise. A Company Secretary in practice is allowed to apply for work from another Company Secretary in practice or by responding to tenders and enquiries. The ICSI has issued the ICSI (Guidelines for Advertisement by Company Secretaries), 2020, which is applicable to the Members of the Institute, whether in practice or otherwise, rendering any advisory, consultancy or representation services. Advertisement in the limited manner as permitted by the Guidelines are permitted and do not amount to misconduct. A Practising Company Secretary (PCS) must always keep in mind the above aspects when obtaining professional engagements.

STAGES OF SECRETARIAL AUDIT

49

3.5 ACCEPTANCE OF SECRETARIAL AUDIT ENGAGEMENT Once a Company Secretary in Practice is offered an audit engagement, he or she must weigh several factors before acceptance the engagement. There are various matters of professional behaviour and good conduct, procedures and documentation that must be followed in the course of accepting an engagement. Matters relating to independence and limit on number of audits have been dealt with in the previous chapter. The other matters are detailed in the forthcoming paragraphs under the following heads:

Pre-engagement Meeting

Factors to be Considered Before Accepting

Eligibility Certificate

Appointment of Auditor

Audit Engagement Letter

Communication to the Previous Incumbent

Acceptance of the Engagement

Changes in the Engagement

3.5.1 Pre-engagement Meeting Before accepting the Secretarial Audit engagement, the auditor is required to have a pre-engagement meeting with the company. Matters such as terms of engagement including the timelines proposed, previous years’ reports, the general nature of business of the company, the organisational and decision-making structure, an understanding of the industrial environment it works in, internal controls in respect of compliance, may be discussed, among other matters. The Secretarial Auditor must disclose his conflict of interest, if any, at this stage itself. If there is substantial conflict of interest as detailed in the previous chapter, he must not accept the engagement. The PCS shall maintain utmost confidentiality in respect of the information gathered during the meeting.

When it comes to confidentiality, the PCS must remember that Clause (1) of the Second Schedule to the Company Secretaries Act, 1980 provides that a Company Secretary in Practice shall be deemed to be guilty of professional misconduct, if he — “discloses information acquired in the course of his professional engagement to any person other than the client so engaging him, without the consent of such client, or otherwise than as required by any law for the time being in force.” Although the clause talks about information acquired “in the course of his professional engagement,” it is expected that the PCS keep in mind the spirit behind the clause and maintain confidentiality

50

STAGES OF SECRETARIAL AUDIT

in respect of information obtained even before he accepts the engagement. This must be ensured irrespective of whether he accepts the engagement.

3.5.2 Factors to be Considered Before Accepting an Audit Engagement Firstly, we will look at the factors to be considered while accepting an audit engagement. In this regard, the ICSI issued a Guidance Manual on Quality of Audit & Attestation Services formulated by the Quality Review Board in April 2015. As per the Manual, the firm’s quality control systems shall contain policies in respect of client relationships. A firm is required to have policies and procedures in respect of acceptance of a client relationship. Policies need to be framed in order to ensure that the following are factored in while considering acceptance of an engagement:

The PCS or the firm has the required competence, time and resources necessary to carry out the engagement.

Relevant ethical requirements like independence are satisfied.

Very specifically, it mentions that the firm must consider the integrity level of the client and ensure that it is at an acceptable level. The factors to be considered in this regard include: the reputation of the promoters, directors and key managerial personnel, business practices and policies, attitude towards compliance, limitations imposed on the audit, if any, and the reasons for not reappointing the earlier auditor.

It asks the firms to ensure whether the reporting framework is acceptable and whether the management of the client acknowledges and accepts its responsibility as far as the subject matter is concerned. In respect of Secretarial Audit, this would be acknowledging that the responsibility of compliance lies with the management.

If there is a limitation on the scope of the engagement in such a manner that it may not permit the auditor to obtain reasonable level of assurance, or in a manner that indicates the PCS has to issue a disclaimer of opinion, he shall not accept the engagement of audit. For example, if the auditee says that the auditor shall not have access to secretarial records or crucial elements of financial information, it is better that the PCS not accept the engagement.

3.5.3 Eligibility Certificate The Guidance Note to CSAS-1, para 1.1.2 provides that the PCS shall submit a Certificate confirming the following:

The number of audits is within the limits prescribed by the ICSI.

There is no substantial conflict of interest with the auditee.

STAGES OF SECRETARIAL AUDIT

51

There is no restriction to render the service under the ICSI Guidelines.

He or she is not debarred from undertaking such audit under any law or under the orders of the disciplinary mechanism of the ICSI.

The Guidance Note also provides a specimen eligibility certificate as Annexure A to the said Guidance Note.

3.5.4 Appointment of Secretarial Auditor The procedures regarding the appointment of the Secretarial Auditor like passing of Board Resolution at a meeting of the Board, and filing of Form MGT-14 within 30 days in case of public companies is already covered in the previous chapter.

3.5.5 Audit Engagement Letter The PCS must seek from the auditee an Engagement Letter detailing the following as per the requirement under para 1.1.3 and para 1.2 of the CSAS-1:

The objective and scope of the audit;

The responsibilities of the Auditor and the Auditee. In cases where the responsibility is determined by law, the Engagement Letter shall refer to the provisions of the relevant law along with a statement that the Management acknowledges and understands its responsibilities for preparation and maintenance of records and for devising proper systems to ensure compliance with the provisions of applicable laws, act, rules, regulations and standards for the time being in force.

Written representations provided and/or to be provided by the Management to the Auditor, including particulars of the Predecessor or Previous Auditor;

The timelines within which the audit report shall be submitted by the Auditor, along with milestones, if any;

The commercial terms regarding audit fees and reimbursement of out-of-pocket expenses in connection with the audit; and

Limitations imposed, if any, on the audit by the auditee.

Once the engagement letter is received and the terms are acceptable to the auditor having regard to the timelines, commercial terms, scope of audit, and limitations imposed, if any, the auditor shall indicate his acceptance to the engagement either by way of indicating it on a copy of the engagement letter or by way of a separate communication.

The Auditors’ responsibilities include:

Performing the audit as per the terms of the engagement.

52

STAGES OF SECRETARIAL AUDIT

Deputing team members who have the competence to perform the audit under the supervision of the PCS.

Ensuring professional behaviour by everyone in the audit team.

Ensuring maintenance of confidentiality by the entire team.

Ensuring there is no trading in securities while in possession of unpublished price sensitive information.

Auditee’s responsibilities shall include:

Providing access to the necessary documents and records.

Deputing personnel to provide such documents, information and explanation required by the auditor.

Providing management representations on the matters required by the Auditor providing substantial evidence in respect of those matters and acknowledging responsibility on the matters stated in the representations.

To provide details of the previous incumbent, if any.

3.5.6 Communication to the Previous Incumbent A professional must always have respect towards his fellow professionals. This is necessary to uphold the dignity of the profession and also to ensure there is healthy competition and cooperation among the members of the profession. Towards this, clause (8) of Part I of the First Schedule to the Company Secretaries Act, 1980 provides that a Company Secretary in Practice shall be deemed to be guilty of professional misconduct, if he — “accepts the position of a Company Secretary in Practice previously held by another Company Secretary in Practice without first communicating with him in writing.” Communication with previous incumbent is required in case of certain engagements, of which Secretarial Audit is one.

The Guidance Note on Audit Engagement provides clarity on the words, “Predecessor or Previous Auditor” in clause (6) under the Definitions. It defines ‘Predecessor or Previous Auditor’ as, “an Auditor who has conducted the most recent audit assignment of the Auditee and submitted report thereon prior to the incumbent Auditor or was engaged but did not complete the audit assignment due to his resignation, termination or otherwise.” The Guidance Note also clarifies, “An Auditor who has completed the assignment and has not been reappointed or an Auditor who had been appointed but has not completed the assignment due to resignation, termination or otherwise, shall be deemed to be a “Predecessor or Previous Auditor” for the same assignment.” From this we can gather that Predecessor or Previous Auditor means: 1. The Auditor who has submitted report in respect of the most recent audit assignment but has not been reappointed, or

STAGES OF SECRETARIAL AUDIT

53

2. The Auditor who was engaged but did not complete the audit assignment due to any reason.

The PCS who is approached with a Secretarial Audit engagement must keep in mind that prior intimation is compulsory even before he accepts the engagement. There should be positive evidence of the communication having reached the previous incumbent, that is, there should be proof of delivery. Electronic media like e-mail may also be used for communication provided that the PCS is able to establish that the communication has been received by the previous incumbent. No-objection or consent of the previous incumbent is not needed. In terms of the Guidance Note on Audit Engagement, communication sent through registered post acknowledgement due or by courier or by hand delivery with a written acknowledgement or through an e-mail is acceptable. Applying the guidance contained in para 4.9.5 of Guidance Note on Code of Conduct for Company Secretaries on the aforesaid clause (8) of Part I of the First Schedule to the Company Secretaries Act, 1980, in respect of exclusive attestation assignments offered to Company Secretaries in Practice, the PCS must take steps to learn whether a different PCS was appointed for the same period earlier and it is desirable to seek consent from such person.

Further, a reasonable time should be given to the previous incumbent to respond to the communication. As per the Guidance Note on Audit Engagement, the reasonable period would be 7 days from the date of communication. The Guidance Note also provides the format for such communication.

This requirement should also be looked at as an opportunity for the PCS to get the acquaintance of another professional or to maintain a good professional camaraderie.

In fact, the PCS may ask the previous incumbent regarding any significant issues arising out of his experience with the client that he may be able to provide. Such information may be useful while performing the audit. It is necessary to maintain confidentiality of the information.

3.5.7 Commercial terms There is no minimum fee required to be charged by the PCS in respect of engagements.

However, he or she should ensure that a fair fee is charged. The factors to be kept in mind while deciding the fee include: the size of the company, type of company – whether private or public or listed, nature of business, internal controls in place, man-hours estimated, and other relevant factors. In terms of clause (2) of Part I of the First Schedule to the Company Secretaries Act, 1980, the PCS is not permitted to pay a commission to obtain an audit.

Handbook on Secretarial Audit AUTHOR :

PUBLISHER : DATE OF PUBLICATION : EDITION : ISBN NO : NO. OF PAGES : BINDING TYPE :

USHA GANAPATHY SUBRAMANIAN, A SEKAR, RANJITH KRISHNAN TAXMANN OCTOBER 2023 2023 EDITION 9789357784122 300 PAPERBACK

Rs. 745

Description This book serves as an extensive, yet concise, handbook on Secretarial Audit, addressing a wide array of topics, including: u

The Significance and Advantages of Secretarial Audit

u

Detailed Procedures and Subtleties of the Audit Process

u

Guidelines and Safeguards for Certain Issues

u

Critical Considerations and Factors to be Included

u

The Obligations of the Secretarial Auditor in Identifying and Addressing Fraud

u

Aspects of Quality Assurance in Secretarial Audit

u

Exploring the Impact of Secretarial Audit on: 

Corporate Leadership and Governance



Strategic Planning and Execution in Business



Advancing Sustainability and Responsible Practices

The book will be helpful for Company Secretaries (both in employment and practice), other key managerial personnel (KMPs) and senior management who deal with compliance and governance aspects in their day-to-day professional life. It will also be helpful for stakeholders perusing secretarial audit reports and boards of companies.

The Present Publication is the latest 2023 edition and has been amended upto October 2023. This book is authored by CS Usha Ganapathy Subramanian, CS A Sekar, and Dr Ranjith Krishnan with the following noteworthy features: u

u

[Integration of Essential Components], which includes: 

Crucial elements from Auditing Standards



Insights from Guidance Notes



Contents from the Manual issued by the ICSI

[Author’s Contributions] The authors have added their insights and knowledge from extensive experience. They have also input the findings from a thorough research

u

[360° Coverage], which includes: 

Stakeholder Expectations – The book is customised to meet what stakeholders in Secretarial Audit anticipate

 

Legislative Requirements – It also addresses and complies with the demands of lawmakers Corporate Needs – The content is crafted to cater to the necessities of corporates w.r.t. to Secretarial Audit



Ground-Level Challenges – The book tackles the challenges faced by Secretarial Auditors in practical scenarios

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