Process of Secretarial Audit Under Section 204 of the Companies Act 2013

Process of Secretarial Audit Under Section 204 of the Companies Act 2013

June 27, 2020
     

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Process of Secretarial Audit Under Section 204 of the Companies Act 2013

Secretarial Audit is a process to check compliance with the provisions of all applicable laws and rules/regulations/procedures; adherence to good governance practices with regard to the systems and processes of seeking and obtaining approvals of the Board and/or shareholders, as may be necessary, for the business and activities of the company, carrying out activities in a lawful manner and the maintenance of minutes and records relating to such approvals or decisions and implementation. The secretarial auditor is also expected to express an opinion, after satisfying himself, that there exist adequate systems and processes in the company commensurate with the size and operations of the company to monitor and ensure compliance with applicable laws, rules, regulations and guidelines. The secretarial auditor has to verify whether diverse requirements under applicable laws have been complied with.
Appointment of Secretarial Auditor
As per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014, read with Section 179 of the Companies Act, 2013, secretarial auditor is required to be appointed by means of resolution at a duly convened board meeting.

Communication to earlier Incumbent
Whenever a company secretary in practice is engaged as a secretarial auditor in place of an earlier incumbent, he shall communicate to the earlier incumbent about the proposed engagement in writing to be sent by registered/speed post or any other mode of delivery, as may be recognised by the Institute of Company Secretaries of India.
The Council of ICSI at its meeting held on 16th March, 2019 has made amendments in Guidelines wherein for Practice Company Secretaries, communication to previous incumbent would be mandatory before accepting the assignment, in terms of Clause (8) of Part i of the First Schedule to the Company Secretaries Act, 1980. The Council has approved the some services in respect of which it shall be mandatory to communicate to the previous incumbent (Company Secretary) before accepting the assignment in terms of terms of clause (8) of part I of the First Schedule to the Company Secretaries Act, 1980, which includes the Issuance of Secretarial Audit Report in terms of Section 204 of the Companies Act, 2013 and Issue of Secretarial Audit Report to material unlisted subsidiaries of Listed entities (whose equity shares are listed) under Regulation 24A of SEBI (LODR) Regulations, 2015.
Acceptance of Appointment
A formal letter for appointment should be issued by the company to the secretarial auditor along with the copy of the board resolution for appointment. The secretarial auditor should confirm acceptance of appointment in writing.
Preliminary Discussions/Surveys
It is important to have relevant information about the company. The secretarial auditor is expected to take general overview of the operations of the company and interact with the personnel involved to know about the nature of the business. He may opt for surveys for generating information about the company.
Preliminary Meeting
The preliminary meeting with the senior management and the administrative staff involved in the audit will give a fair idea of what is expected and the manner in which audit activities are to be undertaken. At this stage a time frame of the secretarial audit should be determined and finalized. The secretarial auditor shall discuss the scope and objectives of the audit, gather information on important Board processes, evaluate existing control systems and prepare the audit plan.
Finalization of Audit Plan and Briefing the Staff
It is important to work out an audit plan. The plan involves briefing the audit staff as to allotment of work, fieldwork responsibilities and other roles. The audit plan should comprehensively outline the fieldwork and usage of auditing tools. The review of controls helps the auditor determine the areas of highest risk and design tests to be performed in the fieldwork section. It is essential that the audit plan adheres to the timelines. Detailed checklist for each aspect of secretarial audit should be prepared and audit staff should be properly sensitized before commencement of audit.
Testing, Interviews and Analysis
The secretarial auditor may use a variety of tools and technology to gather information about the company’s operations. The secretarial auditor should determine whether the controls identified during the preliminary review are operating properly and in the manner described by the Company.
Fieldwork typically consists of interviewing with staff of the company whether formally or informally, reviewing procedure manuals, and processes, testing and analyzing compliance with applicable policies and procedures and laws, rules, regulations and assessing the adequacy of controls. This exercise may result in significant findings which the secretarial auditor may bear in mind while preparing the secretarial audit report.
Working Papers
Working papers are a vital tool of the audit process. They form the basis for expression of the audit opinion. They connect the management’s records and information to the auditor’s opinion. They are comprehensive and serve many purpose for the company as well as for the Auditor.
Audit Summary for Discussions
It is recommended that the findings during the course of audit are summarized and presented for initial discussions with the management for their views/ clarifications/replies.
Submission of Secretarial Audit Report
After considering the clarifications/replies of the management, the secretarial auditor shall prepare the secretarial audit report in form MR.3. The report is addressed to the members but is to be submitted to the Board. The report shall contain the opinion on the statutory compliances examined by the auditor and shall state whether in his opinion the Company is carrying out/not carrying out due compliances of the applicable provisions of the various laws. The report shall be provided with or without qualifications.
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