[Opinion] Auditors in the Hot Seat | A Case Study on Non-compliances & Disclosure Neglect in Audit Report

Prof R Balakrishnan – [2023] 154 taxmann.com 32 (Article)

1. A small brief about this case

The Government of India vide notification no. GSR 307(E) dated 30th March 2017 brought out amendments in the Companies (Audit and Auditors) Rules 2014, in Rule 11, after clause (c) stating that the following compliance to be reported by the auditors. The auditors need to bring out in their audit report, whether the company had provided requisite disclosure in its financial statements as to holdings as well as dealings in specified bank notes during the period 8th November 2016 to 30th December 2016 and if so, whether these are in accordance with the books of accounts maintained by the company.

In this particular case, the company had prepared the financial statements showing that there were no transactions of specified bank notes during the period it was applicable and the amount was shown as zero. However, as per the bank statements, there had been a couple of transactions during this period recorded by the bank. The auditors had not pointed out the non-compliance by the company in their audit report as required and hence the auditors had been penalized for the contravention committed by them for the financial year in question for contravention of the provisions of section 143(3) of the Companies Act 2013 read with Rule 11 (d) of the Companies (Audit and Auditors) Rules 2014 and the auditors were held liable for penalty under section 450 of the Companies Act 2013.

Let us go through this case in order to understand the intricacies involved and the rationale behind the issue of show cause notice leading to a penalty upon the statutory auditors.

2. Audit report and Auditors’ responsibility

The statutory auditor is required to carry out the audit of the financial statements along withstatement of changes in equity and statement of cash flows for the year that ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information and to provide an opinion that to the best of their information and according to the explanations given to them, the aforesaid financial statements give the information required by the Companies Act, 2013 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the company as at the yearend date and total comprehensive income (comprising of profit and other comprehensive income), changes in equity and its cash flows for the year then ended. The auditors are also required to state the basis for their opinion in the audit report

In short, any non-disclosure, or non-compliance committed by the company is required to be commended upon in the audit report which is affecting the true and fair view of the financial statement by way of qualifications, comments, and observations and even drawing the attention of the members by way of emphasis of matter.

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