India: Requirement To Conduct A Limited Review Of The Audit Of All Entities Whose Accounts Are Consolidated With That Of A Listed Entity And Consequent Necessary Procedures

Introduction

The Kotak Committee Report on Corporate Governance had recommended certain changes to the regulatory regime for group audit. Consequently, the Securities and Exchange Board of India (SEBI) had amended regulation 33 of the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 (LODR) by including the following sub-regulation: "The statutory auditor of a listed entity shall undertake a limited review of the audit of all the entities/companies whose accounts are to be consolidated with the listed entity as per AS 21 in accordance with guidelines issued by the Board on this matter". The amendment was notified by SEBI through a notification dated May 9, 2018 and has been made effective from April 1, 2019 (the SEBI Notification). The purpose of the SEBI Notification was to ensure that there is uniformity while conducting an audit/ review of all consolidated entities in a group with that of the listed company – and consequently, that the statutory auditor of the listed entity conduct an independent and a minimum review of the audited financial statements/ results of those entities whose financial statements/ results are consolidated with that of the listed entity's.

Subsequent to the SEBI Notification, SEBI has issued a circular dated March 29, 2019 (SEBI Circular), through which SEBI has codified the guidelines and procedures to be followed by listed entities, entities that are consolidated with such listed entities and their respective statutory auditors to give effect to the amendment referred to above. This newsletter details such amendments and explains the rationale behind such introduction.

The SEBI Circular in detail

Objective

A listed company is required to publish financial information periodically, in order to allow shareholders, stakeholders and the public at large to view its business and financial performance and take consequent and necessary decisions based on such review. Financial information is required to be published quarterly, year to end of each quarter and annually. SEBI prescribes formats for the presentation of such financial information by listed entities and formats for limited review reports and audit reports to be issued along with such financial information. In order to align such formats with the amendment introduced by the SEBI Notification, as mentioned above, and in order to prescribe procedures to be undertaken in order to conduct such limited review, SEBI has issued the SEBI Circular. It is clarified that the new formats introduced by the SEBI Circular replaces the earlier formats for limited review reports and audit reports issued in relation to the presentation of financial information by listed companies.

The procedure to be followed while conducting a limited review consolidated financial statements/ results of listed companies:

In order to ensure that there is uniformity while conducting an audit/ review of all consolidated entities in a group with that of the listed company – and for that purpose, the statutory auditor of the listed entity conduct an independent and a minimum review of the audited financial statements/ results of those entities whose financial statements/ results are consolidated with that of the listed entity's – SEBI has laid down certain procedures to be conducted by the statutory auditor of the listed company. A few important procedures to be conducted are as follows:

  • Obtain an understanding of the consolidation process followed by the listed entity, including instructions issued by the management of the listed entity to its consolidated entities,
  • Discuss with the auditors and management of the consolidated entities the business activities that are significant to the group or is likely to be significant,
  • Design and perform audit/ review procedures on the consolidated financial statements/ results arising from special considerations relating to the consolidation process,
  • When considered necessary, require the subsidiary's auditor to answer a detailed questionnaire,
  • The auditor of the listed company may decide that supplemental tests of the records or the financial statements of the subsidiary is necessary, which it may conduct itself or through the auditor of the subsidiary.

Further, the auditor of the listed company shall communicate to the auditors of the consolidated entities instructions, in order to aid the review process and maintain consistency in group audit – some of the material instructions are as follows:

  • Identify a threshold above which misstatements in the financial statement of the subsidiary cannot be regarded as immaterial,
  • Identify significant misstatements in the consolidated financials due to fraud or error caused by the work of a consolidated entity's auditor,
  • A description of the accounting policies, to ensure consistent application of accounting policies across the group,
  • Description of identified deficiencies in internal controls in the consolidated entities,
  • Indicators of possible management bias in making accounting estimates at the subsidiary level.

The above list is not exhaustive and may include other matters, as decided by the statutory auditor of the listed company. However, if the statutory auditor of the listed company does not include any of the matters mentioned above in the procedure adopted by it while conducting a review, he should record reasons in writing.

It is pertinent to note that the procedure prescribed by the SEBI Circular does not alter the requirements of limited review or audit of the standalone/consolidated financial statements/results of the listed company and/or the standalone financial statements/results of the consolidated entities. The requirement for review/audit of the financial statements / results as required by the LODR continues to exist.

Revised formats of limited review reports and audit reports issued in relation to the presentation of financial statements – as per the SEBI Circular

The SEBI Notification and the SEBI Circular has necessitated amendments to the formats of auditor's reports on financial statements/results. Such formats are divided into two categories, (i) for listed entities other than banks and insurance companies and (ii) for banks. Insurance companies are required to follow the formats prescribed by the Insurance Regulatory and Development Authority.

The following formats for auditor's reports on financial statements/results have been included in the SEBI Circular- amended to the extent of the changes instituted by the substantive terms of the SEBI Notification and SEBI Circular:

  • Format for the limited review report on quarterly and year to date results;
  • Format of an unmodified opinion is expressed on the quarterly and year to date financial results;
  • Format of an independent auditor's review report on review of consolidated unaudited quarterly and year to date financial results;
  • Format of an unmodified opinion is expressed on consolidated audited quarterly and year to date financial results; and
  • Format of an unmodified opinion is expressed on consolidated audited annual financial results.

The procedure prescribed by the SEBI Circular is applicable for listed entities in case the financials of the parent company or listed entity are prepared in accordance with Indian Accounting Standards or Accounting Standards.

Comments

The SEBI Circular merely lays down the procedure to be adopted by the statutory auditor of the listed company while ensuring a review of the audited and reviewed financials of the consolidated entities. The procedures assist in ensuring that the standards of audit and limited review adopted by different auditors for different entities in the same group are alike – as a result of which, the consolidated financial statements/ results present a true and fair picture of the financial conditions and results of operations of the group as a whole.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions