Introduction
Welcome back! In our last lesson, we established a clear distinction between financial, compliance, and performance audits as conducted by the C&AG. We saw that compliance audit, in particular, assesses whether activities and transactions adhere to laws, rules, and principles of financial propriety.
Today, we will focus on a critical and examinable component of compliance auditing in the public sector. This lesson addresses the learning outcome: Describe the auditor's responsibility to report on compliance with directives issued by the government.
This isn't just a theoretical concept; it's a mandatory legal requirement under the Companies Act, 2013, that significantly shapes the audit of a Public Sector Undertaking (PSU). For your CA Final exams, understanding this responsibility is crucial because it goes beyond the general requirements of other audits and involves specific reporting obligations to the C&AG. This lesson will break down the "what," "why," and "how" of these directives, giving you the conceptual clarity and technical language needed to excel.
1. The Legal Foundation: Section 143(5) of the Companies Act, 2013
The entire framework for these special government directives rests on a specific clause in the Companies Act. The Comptroller and Auditor General of India (C&AG) is granted a unique power over the audit of government companies.
Let's watch a short video that explains this power.
PSU Audit English Revision | CA Final Audit | CA Shubham Keswani (AIR 8)
This clip from CA Shubham Keswani clearly explains the C&AG's power under Section 143(5) to issue directions to the auditor. He uses a helpful analogy to make the concept stick.
Watch the video from 00:18:50 to 00:20:15. Focus on the three key things the auditor must include in their report to the C&AG regarding these directions.
As the video highlighted, Section 143(5) empowers the C&AG to direct the statutory auditor on the manner in which the accounts of a government company are to be audited.
This is a significant power. It means the C&AG can ask the auditor to look into specific areas of concern. Consequently, the auditor has a direct reporting responsibility back to the C&AG. The auditor's report submitted to the C&AG must include:
- The directions issued by the C&AG.
- The action taken by the auditor to comply with those directions.
- The impact of those actions on the company's accounts and financial statements.
To solidify this, let's look at the formal guidance from ICAI.
ICAI's Technical Guide on Revised C&AG Directions
The ICAI has published a Technical Guide on this exact topic. Reading the introductory paragraphs will help you understand the mandatory nature of these directions and how they fit into the overall audit.
Please read the section titled 'Background to this Technical Guide'. Pay close attention to paragraphs 1 and 3, which explain the legal basis under Section 143(5) and clarify that the reporting is 'supplemental to' and an 'integral part of' the main auditor's report.
The key takeaway is that these are not mere suggestions; they are mandatory directions. The auditor’s response forms part of the official audit report, making it a matter of high importance and scrutiny.
2. The Revised C&AG Directions: Focusing on Clause V
The C&AG periodically issues and revises these directions. The current set covers five key thematic areas.
While all five areas are important, our focus today is on the specific directive related to compliance with laws and regulations. This is Clause V of the C&AG's revised directions.
Let's read the exact wording of this crucial clause from the source document.
ICAI's Technical Guide: Appendix with Revised Directions
Here is the Appendix from the ICAI's Technical Guide, which reproduces the exact text of the revised directions. Reading Clause V will show you precisely what the C&AG expects the auditor to report on.
In the Appendix, find and read Clause V. Note the specific government bodies and regulators mentioned.
As you've just read, Clause V requires the auditor to report on the company's compliance with the rules and regulations of several key bodies, including:
- Securities and Exchange Board of India (SEBI)
- Department of Investment and Public Asset Management (DIPAM)
- Ministry of Corporate Affairs (MCA)
- Department of Public Enterprises (DPE)
- Reserve Bank of India (RBI)
- Telecom Regulatory Authority of India (TRAI)
- Indian Computer Emergency Response Team (CERT-IN)
- Ministry of Electronics and Information Technology (MeitY)
- National Payments Corporation of India (NPCI)
The directive is clear: the auditor must examine compliance and highlight any cases of deviation.
3. The Auditor's Response: From Procedure to Report
So, how does an auditor fulfill this responsibility? The process involves specific audit procedures and carefully worded reporting.
Step 1: Understanding the Scope (Beyond SA 250)
Your first thought might be SA 250, Consideration of Laws and Regulations in an Audit of Financial Statements. While SA 250 provides the general framework, Clause V imposes a stricter responsibility.
- SA 250 primarily focuses on non-compliance that could have a material effect on the financial statements.
- Clause V requires factual reporting on compliance with the specified regimes, regardless of whether non-compliance has a material financial impact. It's about accountability and adherence to the regulatory framework itself.
This distinction is a common point of confusion and a valuable insight for your exams.
Revised CAG Directions under Section 143(5) - AUBSP
This article provides a concise explanation of how Clause V's requirements differ from the standard approach under SA 250. It also suggests practical ways for the auditor to gather evidence.
Read the section 'Clause V – Compliance with Specified Laws and Regulations'. Then, jump to the FAQs at the bottom and read the answers to 'Does Clause V go beyond the requirements of SA 250?' and 'How should auditors obtain comfort on regulatory compliance?'.
Step 2: Performing Audit Procedures
To report on compliance, the auditor needs to gather sufficient appropriate evidence. Relying solely on management inquiry is not enough. The approach is multi-faceted:
- Leverage Management's Responsibility: Under Section 134(5)(f), directors are responsible for ensuring compliance with applicable laws. The auditor should start by obtaining management's own assessment.
- Obtain a Compliance Statement: The auditor should request a formal "Legal and Regulatory Compliance Statement" from management, detailing each applicable law, the method of compliance, and its status.
- Involve the Company Secretary: Under Section 205, the Company Secretary is responsible for reporting on compliance to the Board. The auditor should review these reports.
- Perform Test Checks: The auditor performs their own verification by reviewing documents like regulatory filings, correspondence with regulators, minutes of meetings, and internal audit reports.
- Obtain Written Representations: As a final step, the auditor obtains a written representation from management confirming the completeness of the laws identified and the company's compliance status.
Step 3: Drafting the Report
After performing the procedures, the final step is to report the findings. The wording must be precise. The ICAI's Technical Guide provides illustrative formats, which are the gold standard for your exam answers.
ICAI's Technical Guide on Revised C&AG Directions
Let's return to the ICAI's Technical Guide to see the exact reporting language you should use. This directly addresses your goal of translating concepts into exam-ready answers.
Navigate to 'Clause V – Compliance with Specified Laws and Regulations'. Read paragraphs 117 to 122, which outline the audit approach and lead to the 'Illustrative Reporting' section. Study the two main reporting examples provided.
The report will typically state one of two conclusions:
- Full Compliance: A statement confirming that, based on the audit procedures, the company is complying with the specified regulations.
- Compliance with Exceptions: A statement confirming compliance, except for specific deviations which are then listed and detailed.
This structured reporting ensures that the C&AG and other stakeholders receive a clear and unambiguous statement on the company's regulatory discipline.
Conclusion
Today, we have dissected the auditor's specific responsibility to report on compliance with government directives in a PSU audit. We've traced this duty from its legal source in Section 143(5) of the Companies Act, 2013, to the practical steps of audit procedure and reporting under Clause V of the C&AG's revised directions.
Key Takeaways:
- Source of Power: Section 143(5) grants the C&AG the authority to issue mandatory directions to the statutory auditor of a government company.
- Auditor's Duty: The auditor must report back to the C&AG on the directions received, actions taken, and the financial impact.
- Specific Directive (Clause V): This requires the auditor to factually report on the company's compliance with regulations from key bodies like SEBI, RBI, MCA, etc., and to highlight any deviations.
- Beyond SA 250: This responsibility is more stringent than the general duties under SA 250, as it requires reporting on compliance status itself, not just on non-compliance leading to material misstatement.
- Reporting: The final report must be clearly worded, either confirming full compliance or detailing specific areas of non-compliance, following the formats suggested by the ICAI.
Mastering this topic gives you a significant advantage, as it demonstrates a deep understanding of the unique accountability framework governing public sector entities. This concludes our module on the audit of Public Sector Undertakings. You have now built a comprehensive understanding of the C&AG's role, the different types of audits performed, and the special responsibilities placed upon auditors in this critical sector.