CA_Final_Audit_Amendment_May_2020_by_ca_sarthak_jain.pdf - UNIT 7 AUDIT COMMITTEE CORPORATE GOVERNANCE(Listing Obligation Disclosure Requirement 58 GET

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Unformatted text preview: UNIT 7 AUDIT COMMITTEE & CORPORATE GOVERNANCE (Listing Obligation & Disclosure Requirement) 58 GET THE BEST OF CA FINAL AUDIT - By CA SARTHAK JAIN AUDIT COMMITTEE & CORPORATE GOVERNANCE UNIT 7 INDEX 1. The Legal Framework 2. Audit Committee 3. Board of Directors 4. Code Of Conduct 5. Related Party Transactions 6. Vigil Mechanism 7. Subsidiary of Listed Entity 8. Statement of Deviation(s) or Variation(s) 9. Disclosures - Management Discussion and Analysis 10. Information to Shareholders 11. Stakeholders Relationship Committee 12. Transfer or Transmission or Transposition of Securities 13. Compliance Certificate 14. Disclosures 15. Risk Management Committee 16. Nomination and Remuneration Committee 17. Report on Corporate Governance 18. Auditors’ Certificate CA FINAL - Advanced Auditing and Professional Ethics - By CA Sarthak Jain 59 1. THE LEGAL FRAMEWORK WHY LODR? LODR & CLAUSE 49 APPLICABILITY OF LODR REGULATIONS [REGULATION 3] Listing agreement is a statutorily mandated contract between the listed entity and the stock exchange where it is listed, it does not have the authority of law behind it. Hence, on September 2, 2015, SEBI issued the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 ( LODR Regulations ), with the objective of streamlining and consolidating the provisions of various listing agreements in operation for different segments of the capital markets, such as equity shares, preference shares, debt instruments, units of mutual funds, Indian depository receipts, securitised debt instruments and any other securities that the SEBI may specify. The LODR Regulations also capture the corporate governance principles found in Clause 49 of SEBI’s Model Listing Agreement. It may be noted that the LODR Regulations deal with only post-listing requirements and exclude all pre-listing requirements. Unless otherwise provided, these regulations shall Apply to the listed entity who has listed any of the following designated securities on recognised stock exchange(s): specified securities (equity and convertibles)listed on main board or SME Exchange or institutional trading platform (ITP) non-convertible debt securities, non-convertible redeemable preference shares, perpetual debt instrument, perpetual non-cumulative preference shares; Indian depository receipts (IDR); securitised debt instruments; security receipts; units issued by mutual funds; other securities be specified by the Board 2. AUDIT COMMITTEE AUDIT COMMITTEE (UNDER LODR REGULATION 18 & COMPANIES ACT SECTION 177) PARTICULARS Applicable LODR Provisions of Audit Committee and Corporate Governance given in Chapter IV of LoDR are applicable to all listed companies that have listed equity shares or convertibles on recognized stock exchange except provisions given in in Reg. 17 to 27 are not applicable to: (a) Companies listed on SME exchange (b) Companies with: a. Paid Up Equity Share Capital of <= 10 Crores; and b. Net Worth <= 25 Crores Minimum number of 3 director members Minimum nonNA executive directors rd Minimum 2/3 + and in case of a listed independent entity having outstanding SR 60 GET THE BEST OF CA FINAL AUDIT - By CA SARTHAK JAIN SECTION 177 Applies to:All listed public companies (Section 177); and Other public companies with: (a) Paid Up Capital > = 10 Crores, or (b) Loans, Borrowings, Debentures, Deposits outstanding > 50 Crores, or (c) Turnover > = 100 Crores as per last audited FS (Section 177 and Rule 4 of Cos (Appointment &Qualification of Director) Rules, 2014) Once covered in limit covered for 3 consecutive years Excluding Unlisted public company being JV, Wholly owned subsidiary &Dormant co. 3 NA Majority Directors Financial Literacy Financial Management or Accounting Expertise Chairperson POWERS OF AUDIT COMMITTEE [REGULATION 18 (2)(c)] ROLE OF AUDIT COMMITTEE [PART C (A) OF SCHEDULE II] equity shares, (shares with superior voting rights) the audit committee shall only comprise of independent directors (Amendment) All Atleast 1 m eh Majority including chairperson NA To be independent director To be financially literate and be present at AGM Secretary Company Secretary to be the NA secretary of the AC Finance Director / Head of Invitees NA Finance, Head of Internal Audit, Statutory Auditor, etc MAY BE invited Meeting of Audit Atleast 4 times in a year with No special provision, governed by Committee max gap of 120 days provisions for committees in CA13 rd Quorum 2 or 1/3 , whichever is higher, No special provision, governed by with minimum 2 ID provisions for committees in CA13 The Audit Committee shall have powers, which should include the following: To investigate any activity within its terms of reference. To seek information from any employee. To obtain outside legal or other professional advice. To secure attendance of outsiders with relevant expertise, if it considers necessary. It may be noted that the powers mentioned above are only illustrative and not exhaustive. The Board may delegate/vest further powers to the committee. The role of the Audit Committee shall include the following: Oversight of the listed entity’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible; Recommendation for appointment, remuneration and terms of appointment of auditors of the listed entity; However, in case of Government Company, it is limited to the recommendation for remuneration. (Amendment) Approval of payment to statutory auditors for any other services rendered by the statutory auditors; Role w.r.t. FS and Audit Report (Important) Reviewing, with the management, the annual financial statements and auditor's report thereon before submission to the Board for approval, with particular reference to: Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of clause (c) of sub-section 3 of section 134 of the Companies Act,2013; Changes, if any, in accounting policies and practices and reasons for the same; Major accounting entries involving estimates based on the exercise of judgment by management; Significant adjustments made in the financial statements arising out of audit findings; (e) Compliance with listing and other legal requirements relating to financial statements; CA FINAL - Advanced Auditing and Professional Ethics - By CA Sarthak Jain 61 REVIEW OF INFORMATION BY AUDIT COMMITTEE Schedule II Part C(B): Mandatory Review 62 Disclosure of any related party transactions; Modified opinion (s) in the draft audit report; Reviewing, with the management, the quarterly financial statements before submission to the Board for approval; Reviewing, with the management, the statement of uses/application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilized for purposes other than those stated in the offer document/prospectus/ notice and the report submitted by the monitoring agency monitoring the utilisation of proceeds of a public or rights issue, and making appropriate recommendations to the Board to take up steps in this matter; Reviewing and monitoring the auditor’s independence and performance, and effectiveness of audit process; Approval or any subsequent modification of transactions of the listed entity with related parties; Scrutiny of inter-corporate loans and investments; Valuation of undertakings or assets of the listed entity, wherever it is necessary; Evaluation of internal financial controls and risk management systems; Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit; Discussion with internal auditors of any significant findings and follow up there on; Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the Board; Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern; To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non-payment of declared dividends) and creditors; To review the functioning of the Whistle Blower mechanism; Approval of appointment of Chief Financial Officer after assessing the qualifications, experience and background, etc. of the candidate; Carrying out any other function as is mentioned in the terms of reference of the Audit Committee. Reviewing the utilization of loans and/ or advances from/investment by the holding company in the subsidiary exceeding rupees 100 crore or 10% of the asset size of the subsidiary, whichever is lower including existing loans / advances / investments existing as on the date of coming into force of this provision If the company has set up an Audit Committee as per section 177 of the Companies Act, 2013, the company must ensure that the said Audit Committee has such additional functions / features as are contained in the LODR Regulations. The Audit Committee shall mandatorily review the following information as per Part C (B) of Schedule II: GET THE BEST OF CA FINAL AUDIT - By CA SARTHAK JAIN Management discussion and analysis of financial condition and results of operations; Statement of significant related party transactions (as defined by the Audit Committee), submittd by management; Management letters / letters of internal control weaknesses issued by the statutory auditors; Internal audit reports relating to internal control weaknesses; and The appointment, removal and terms of remuneration of the Chief Internal Auditor shall be subject to review by the Audit Committee. Statement of deviations: (a) quarterly statement of deviations including report of monitoring agency if applicable and (b) annual statement of funds utilized for purposes other than those stated in the offer document/ prospectus/ notice. AUDIT PROCEDURES FOR AUDIT COMMITTEE RELATED CHECKS INTRODUCTION The auditor should ascertain from the minutes book of the Audit Committee and other sources like agenda papers, etc. whether the Audit Committee has reviewed the above- mentioned information. Where certain deficiencies or adverse findings are noted by the Audit Committee, the auditor will be required to see that these have been suitably dealt with by the management in the report on corporate governance. ROLE OF Similarly, Section 177 of the Companies Act, 2013 provides the auditors AUDITOR IN of a company and the key managerial personnel the right to be heard in AUDIT the meetings of the Audit Committee when it considers the auditor’s COMMITTEE report but they shall not have the right to vote. AND The auditor must ensure that he communicates frequently and openly CERTIFICATION with the Audit Committee on key accounting or auditing issues that, in OF COMPLIANCE the auditor’s judgment, give rise to a greater risk of material OF CONDITIONS misstatement of the financial statements. OF The auditor has to keep in mind that his role is not to drive corporate CORPORATE governance directly. GOVERNANCE Amendment: Statutory auditor of listed entity shall undertake limited review of all entities/ companies whose accounts are consolidated with the listed entity as per Ind AS in accordance with guidelines issued by SEBI AUDITOR’S The auditor’s responsibility in certifying compliance with the RESPONSIBILITY requirements of corporate governance relates to the verification and certification of factual implementation of requirements of corporate governance as stipulated in the LODR Regulations. Such verification and certification is neither an audit nor an expression of opinion on the financial statements of the company. GENERAL As in the case of other professional assignments, in certifying the PRINCIPLES OF compliance with the requirements of corporate governance, the 3 CA FINAL - Advanced Auditing and Professional Ethics - By CA Sarthak Jain 63 AUDIT MANAGEMENT REPRESENTATIONS auditor should comply with the Code of Ethics . The auditor should conduct verification as stipulated in the LODR Regulations, in accordance with the Guidance Note on Certification of Corporate Governance issued by ICAI. The auditor should consider obtaining management representations in accordance with SA 580, Written Representations . 3. BOARD OF DIRECTORS Board of Directors - (under Regulations and Companies Act) Particulars Board size M Composition of BOD E E Composition ID Chairperson 64 LODR The board of directors of the top 1000 listed entities (with effect from April 1, 2019); and the top 2000 listed entities (with effect from April 1, 2020) shall comprise of not less than 6 directors. Explanation: The top 1000 and 2000 entities shall be determined on the basis of market capitalisation as at the end of the immediate previous financial year Companies Act, 2013 The board of directors to comprise of: Minimum 3 Maximum 15 directors If more than 15 directors to be appointed obtain permission by passing special resolution (Section 149) >= 50% of BOD to be of NED No specific provision Atleast 1 Woman director. for NED. (Top 500 listed entities by 1-4-2019 and Top At least 1 woman 1000 by 1-4-2020 to have atleast 1 Independent director required Woman Director) No listed entity shall appoint a person or continue the directorship of any person as a non-executive director who has attained the age of seventy five years unless a special resolution is passed to that effect, in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person. (Amendment) rd If Chairperson NED; then atleast 1/3rd At least 1/3 ID be ID If Chairperson NED but is a promoter or related to promoters to hold positions at Board or one level below Then atleast ½ to be ID Else also atleast half be ID Where the listed company has outstanding SR equity shares, atleast half of the board of directors shall comprise of independent directors. (Amendment) With effect from April 1, 2020, Refer Section 203 for The top 500 listed entities shall ensure that KMP the Chairperson of the board of such listed GET THE BEST OF CA FINAL AUDIT - By CA SARTHAK JAIN Board Meeting Quorum for Board meeting g Maximum number of directorships including any alternate directorships 10 entity shall (a) be a non-executive director; and (b) not be related to the Managing Director or the Chief Executive Officer as per the defini i n f he e m ela i e defined nde the Companies Act, 2013: Provided that this sub-regulation shall not be applicable to the listed entities which do not have any identifiable promoters as per the shareholding pattern filed with stock exchanges. Explanation - The top 500 entities shall be determined on the basis of market capitalisation, as at the end of the immediate e i financial ea . the LODR Every company shall hold the first meeting of the Board of Directors within thirty days of the date Regulations stipulates that of its incorporation and thereafter hold a minimum number of four meetings of its Board of Board meetings Directors every year in such a manner that not shall be held at more than one hundred and twenty days shall least four times intervene between two consecutive meetings of a year and that the Board. the maximum time gap Provided that the Central Government may, by between any notification, direct that the provisions of this subtwo meetings section shall not apply in relation to any class or should not description of companies or shall apply subject to exceed one such exceptions, modifications or conditions as hundred and may be specified in the notification. twenty days. rd The quorum for every meeting of the board 1/3 or 2, whichever is of directors of the top 1000 listed entities higher with effect from April 1, 2019; and the board of directors of the top 2000 listed entities with effect from April 1, 2020 shall be one-third of its total strength or three directors, whichever is higher, including at least one independent director; A person shall not be a director in more Section 165 than 8 listed entities with effect from April Maximum 20 1, 2019 and in not more than 7 listed directorships entities with effect from April 1, 2020: Subject to condition that person shall not serve as an independent director in more than 7 listed entities. But, any person who is serving as a whole time director/managing director in any listed entity shall serve as an independent director in not more than 3 listed entities. For the purpose of this sub-regulation, the count for the number of listed entities on which a person is a director / independent CA FINAL - Advanced Auditing and Professional Ethics - By CA Sarthak Jain 65 evaluation of independent directorsAmendment Recommenddation of the board to the shareholdersAmendment IV Exemption B director shall be only those whose equity shares are listed on a stock e change. The evaluation of independent directors shall be done by the entire board of directors which shall include (a) performance of the directors; and (b) fulfillment of the independence criteria as specified in these regulations and their independence from the management: Provided that in the above evaluation, the directors who are subject to evaluation shall not participate. The statement to be annexed to the notice as referred to in sub-section (1) of section 102 of the Companies Act, 2013 for each item of special business to be transacted at a general meeting shall also set forth clearly the recommendation of the board to the shareholders on each of the specific items. With reference to the above Para, it has been notified that, in case of Section 8 company, section 173 (1) shall apply only to the extent that the Board of Directors, of such Companies shall hold at least one meeting within every six calendar months. CAI 7E7m It may be noted that, in case of specified IFSC public and private company, it shall hold the first meeting of gang the Board of Directors within sixty days of its incorporation and thereafter hold at least one meeting of the Board of Directors in each half of a calendar year. Section 173(1) (Amendment) Apart from receiving remuneration, should not have had/ should not have any material pecuniary relationship with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year. Also, such independent director, either by himself or with any of his relatives should not be a material supplier, service provider or customer or a lessor or lessee of the listed entity, and should not also be a substantial shareholder of the listed entity. Who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or member of the promoter group of the listed entity; who is not a nonindependent director of another company on the board of which any non-independent director of the listed entity is an independent director. In determining ‘not a substantial shareholder’, he (together with his relatives) should not own 2% or more of total voting power of the listed entity. Disclosure Disclosure requirements regarding directors’ remuneration are stated below: (i) All pecuniary relationship or transactions of the non-executive directors vis-à-vis the listed entity shall be disclosed in the Annual Report. (ii) Criteria of making payments to non-executive directors. Alternatively, this may be disseminated on the listed entity‘s 0 AN INDEPENDENT NON-EXECUTIVE DIRECTOR REMUNERATION OF DIRECTORS [PART C OF SCHEDULE V] 66 GET THE BEST OF CA FINAL AUDI...
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