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CS Professional guideline answers for Secretarial Audit, Compliance Management and Due Diligence

CS Professional guideline answers for Secretarial Audit, Compliance Management and Due Diligence

CS Professional Guideline Answers for Secretarial Audit, Compliance Management and Due Diligence: This excellent blog gives you complete knowledge, improve your skills in preparing and answering for Secretarial Audit, Compliance Management and Due Diligence in CS Professional.

This blog contains model answers for Secretarial Audit, Compliance Management and Due Diligence given by expert faculty of CS Professional.

We hope that these CS Professional guideline answers will assist the students in preparing for the Institute’s examinations


Attempt all parts of either Q.No. 1 or Q.No. 1A

Question 1

  • Prepare a checklist of documents required for KYC of Proprietorship &
  • The Chairman of ABC Limited, a listed company, seeks your opinion for framing a policy for preservation of documents to avoid stringent penal provisions for non-compliance of the provisions of the Companies Act, 2013 and the Rules made there under. Write a note to the Chairman stating classification of documents under specific period of preservation with specific reference to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations,
  • Who will pre-certify the followings e-forms ? Explain the compliance for certification of followings e-forms by Practicing
    • GNL-1
    • DPT-3
    • MGT-14
    • AOC 4
    • DIR 3 & DIR 3-KYC.
  • Your client wants to setup Food Processing Unit in the state of Uttarakhand. Describe the details about specific laws applicable to setup Food Processing (5 marks each)

Answer 1(a)

Checklist of documents required for KYC of Proprietorship & Partnership includes:

Sole Proprietorship Firm

  • PAN copy / PAN of the
  • Latest Colour Photograph of Proprietor and authorised signatory (if any).
  • Copy of Identity and Address proof of the Proprietor and authorised signatory (if any)



  • Copies of any 2 existence proofs of the firm confirming name and address of firm and name of proprietor;
  • FATCA (Foreign Account Tax Compliance) Declaration

Accounts of Partnership Firms

  • PAN copy / PAN of the
  • Registration certificate (Only in case of Registered Partnership firms)
  • Partnership deed
  • Copy of existence proof confirming name and address of firm
  • Beneficial Ownership Declaration (with name and address of all the partners)
  • FATCA (Foreign Account Tax Compliance) Declaration
  • Latest Colour Photograph of all authorized
  • Copy of Identity and Address proof of all authorised

Answer 1 (b)


The Chairman ABC Limited

Re: Classification of documents for period of preservation under SEBI (LODR) Regulations, 2015

Dear Sir,

The legal requirements of preservation of documents in accordance with the provisions of the Companies Act, 2013 and Regulation 9 of the SEBI (LODR) Regulations, 2015 are as under:

A.    Documents whose preservation shall be permanent in nature:

  1. Property records including purchase and sale deeds, licences, copyrights, patents & trademarks
  2. Corporate Records including Certificate of Incorporation, Common Seal, Minutes of Board, Committee and Shareholders’ Meetings, Register of Members and other Statutory Records
  3. Personal files of all live employees
  4. Any other record as may be decided by the Chief Executive Officer of the Company from time to

B.    Documents whose preservation period shall not be less than eight years after completion of the relevant transactions:

  1. Books of Account, Bank Statements and vouchers


  1. Filings with Stock Exchanges, Registrar of Companies and other statutory authorities.
  2. Payroll Records, Employee deduction authorisations, attendance records, employee medical records, leave records, Pension and retrial related Records,
  3. Corporate Social Responsibility Records
  4. Sponsorship Projects Records
  5. Correspondence and Internal Memoranda
  6. Any other record as may be decided by the Chief Executive Officer of the Company from time to

C.    Documents whose preservation shall be for a minimum period of three years after completion of the event:

  1. Tender Documents
  2. Lease Deeds and Contracts
  3. Legal files
  4. Insurance Records including policies and claims
  5. All e-mail correspondence, internal & external
  6. Documents under Secretarial Standards
    • Proof of sending Notice of the meetings of the Board / Committee and General meetings and its delivery
    • Proof of sending Agenda and Notes on Agenda and their delivery
    • Proof of sending and delivery of the draft of the Resolution
    • Proof of sending draft Minutes and its delivery
    • Proof of sending signed Minutes and its delivery
  7. Any other record as may be decided by the Chief Executive Officer of the Company from time to

Answer 1(c)

The Rule 8 sub rule-12 (a&b) of Companies (The Registration Offices & Fees), Rules 2014 provides that the following e-forms filed by companies, other than one person companies and small companies, under sub-rule (1) of rule 9, shall be pre-certified in the following manner, namely:-

  • GNL-l (Form for filing an application seeking approval from Registrar of Companies in e-form GNL-1 for different purposes under Companies Act, 2013) optional pre- certification by the Chartered Accountant or the Company Secretary or as the case may be the Cost Accountant, in whole-time


  • DPT – 3 (Return of deposits) certification by Auditors of the company as attachment and signed by the Authorised person of the company and shall be filed by company on or before the 30th day of June of every
  • MGT-14 pre-certification by the Chartered Accountant or the Company Secretary or as the case may be the Cost Accountant, in whole-time practice; shall be filed with Registrar within thirty days of the passing of resolution Pursuant to Section 94(1), 117(1) of the Companies Act,
  • AOC-4 (For filing financial statement and other documents with the Registrar) certification by the Chartered Accountant or the Company Secretary or as the case may be by the Cost Accountant, in whole time
  • E-form DIR-3 shall be signed and submitted electronically by the applicant using his or her own Digital signature certificate and shall be verified digitally by a company secretary in full time employment of the company or by the managing director or director or CEO or CFO of the company in which the applicant is intended to be appointed as director in an existing

E-form DIR-3 KYC : Every individual who holds a Director Identification Number (DIN) as on 31st March of a financial year as per these rules shall, submit e-form DIR-3-KYC for the said financial year to the Central Government on or before 30th, September of immediate next financial year. The DIN holder and a professional (CA/CS/CMA) certifying the form are the two signatories in form DIR-3 KYC.

Answer 1(d)

Illustrative list of the Laws applicable to the food processing sector is as under

  • Essential Commodities Act, 1955 (In Relation to Food)
  • Export Quality Control and Inspection Act, 1963
  • National Food Security Act, 2013
  • Food Safety & Standard Act, 2006
  • Food Safety and Standards Rules, 2011
  • Food Safety and Standards (Packaging and Labelling) Regulations, 2011
  • Food Safety and Standards (Licensing and Registration of Food Businesses) Regulations, 2011
  • Food Safety and Standards (Prohibition and Restrictions on Sales) Regulations, 2011
  • Food Safety and Standards (Food Products Standards and Food Additives) Regulations, 2011
  • Food Safety and Standards (Contaminants, Toxins and Residues) Regulations, 2011
  • The Meat Food Products Order, 1973
  • Meat and Meat Product Order, 1992 (MMPO)
  • The Fruit Products Order, 1955
  • Fruit Products (1st Amendment) Order, 2006


  • Vegetables Product Order, 1967 (VPO)
  • The Vegetable Oil Products (Control) Order, 1947
  • The Edible Oils Packaging (Regulation) Order, 1998
  • The Solvent Extracted Oil, De Oiled Meal, And Edible Flour (Control) Order, 1967
  • The Milk and Milk Products Order, 1992
  • Respective State Food Laws

Attempt all parts of either Q. No. 2 or Q. No. 2A

Question 2

  • Zen Limited had a paid up share capital of `35 crore in the previous year. The Company Secretary advises the Company that it is mandatory to appoint the auditor as per the requirements of Sec. 139 (2) of the Companies Act, 2013. The company is having public borrowings viz. from banks `25 crore, financial institutions ` 20 crore and public deposits of `7.5 crore. Examine the requirement of applicability of mandatory term/rotation in the appointment of auditor with reference to the changed scenario since June, 2017.
  • Describe the difference between C-KYC & E-KYC.
  • You have been engaged as a Practicing Company Secretary by XYZ Limited, an unlisted company having a turnover of `75 crore, for certification of annual return of the company for the year 2018-19. The annual return is signed by the Chief Executive Officer of the State the provisions of the Companies Act, 2013 and the Rules made there under as to signing and certification of annual return. Is it mandatory to file the annual return if the annual general meeting is not held in a particular year ?
  • Ramesh Kumar has received the certificate of membership as well as certificate of practice from the Institute of Company Secretaries of India on 31st March, 2019 and now he wants to become a Registered Give your professional advice on the matter and also explain the qualification & disqualification of Registered Valuer to Ramesh Kumar. (5 marks each)

OR (Alternate Question to Q. No. 2)

Question 2A

  • Describe Professional Misconduct in relation to members of the ICSI under First Schedule to the Company Secretaries Act, 1980 ?
  • You have been appointed as Company Secretary of XYZ , a listed company, having diversified business and multi-operational branch offices. On joining your office,you observed that under the prevailing scenario a comprehensive compliance management system is necessary. Prepare a checklist that should be considered by you about the desired system. What would be your responsibility as Company Secretary of the Company in due compliance of the desired system?


  • XYZ Ltd. is having paid up share capital of `00 crore as on 31st March, 2019. Whether the company is required to appoint a Company Secretary in the Company ? What would be your answer if the said XYZ is a Private Limited Company ? Explain the relevant provisions regarding the appointment of a Company Secretary in employment by the Company.
  • Your client wants to setup a unit in Pharmaceuticals sector in the state of Telangana. Describe in detail about the specific laws applicable for setting up of a unit in the Pharmaceuticals sector. (5 marks each)

Answer 2(a)

Provisions of section 139 (2) of the Companies Act 2013 and Rule 5 of the Companies (Audit and Auditors) Rules, 2014, as amended, deals with applicability of mandatory term / rotation in the appointment of auditor and the said provision is applicable to the following class of companies:

  • All unlisted public companies having paid up share capital of Rupees 10 crore or more;
  • All private limited companies having paid up share capital of Rupees 50 crore or more;
  • All companies having paid up share capital below the threshold limit mentioned in (a) and (b) above but having public borrowings from financial institutions, banks or public deposits of 50 crore or

Accordingly, Zen Pvt. Limited will get be covered as per provision (c) above and therefore, it is mandatorily required to rotate the Auditor as per the provisions of Section 139 (2) of the Companies Act, 2013.

Answer 2(b)

C- KYC stands for Central KYC which provide the uniform norms and inter-usability. The central KYC registry across all financial sectors has been set up as a depository for KYC records. This new process, without asking customers to provide multiple KYC undertakings will help banks, mutual funds, brokerage firms and depository participants offer services. After complying with the new CKYC norms, a unified customer identification code is generated, and which is used whenever KYC is required. This initiative has been started for the purpose of centralising and streamlining KYC process and also to avoid the duplication of KYC and less scope of forgery. The government has authorised the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) for performing the functions of Central KYC Records Registry (CKYCR), also the duty of receiving the details and safely storing them and retrieving the KYC records in the digital form of a ‘client’.

Earlier customers have to provide KYC documents separately to every financial institution but after the introduction of one-time centralisation process CKYC, customers will only have to complete the process once and it can be used for all different processes like opening savings bank accounts, buying life insurance or investing in mutual fund products.


E-KYC stands for electronic KYC. The service of e-KYC can only be used by those who have Aadhar numbers. Customers by their own consent needs to authorize their Unique Identification Authority of India (UIDAI), to reveal their identity or address information through biometric authentication to their respective bank branches or business correspondent (BC). After this the UIDAI sends the customer’s data comprising of customer name, age, gender, and photograph electronically to the bank. It is a valid process for KYC verification and under Prevention of Money Laundering (PML) Rules, information provided under e-KYC process will be considered as a ‘Valid Document’.

Answer 2(c)

As per Section 92 (1) of the Companies Act, 2013 read with Rule 11 of the Companies (Management and Administration) Rules, 2014, as amended, every company shall prepare its annual return in Form No. MGT-7 as they stood on the close of the financial year. The Annual Return is required to be signed by a director and the Company Secretary, or where there is no Company Secretary, by a Company Secretary in practice.

As provided in Rule 11 (2), the Annual Return, filed by a listed company or a company having paid up share capital of Rs.10 crore or more or turnover of Rs.50 crore or more, shall be certified by a Company Secretary in Practice and the certificate shall be in Form No. MGT-8.

In the given case, the annual return is signed by the Chief Executive Officer of the Company, which is not in accordance with the legal provisions mentioned above.

As provided in Section 92(4) of the Act, the Annual Return shall be filed within 60 days from the date on which the annual general meeting is held. Where no annual general meeting is held in any year, the annual return shall be filed within 60 days from the date on which the annual general meeting should have been held together with a statement specifying the reasons for not holding the annual general meeting.

Answer 2(d)

A Company Secretary in practice is recognized to be registered valuer for the asset class “Securities or Financial Assets” under Rule 3 of the Companies (Registered Valuer and Valuation) Rules, 2017. So Ramesh Kumar is recognized to be registered valuer for the asset class “Securities or Financial Assets” under the Companies (Registered Valuer and Valuation) Rules, 2017, as amended. However, he can become a registered valuer once he has at least three years of experience in the discipline.

Further, where valuation is required to be made in respect of any stocks, shares, debentures, securities, etc. of a company under the provisions of Companies Act, 2013, it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as prescribed under Section 247of the Companies Act, 2013 read with Rule 4 of Companies (Registered Valuers and Valuation) Rules, 2017.

To act as an Registered valuer in the Securities or Financial Assets the person should be the Member of the Institute of Chartered Accountants or the Institute of Cost Accountants of India or the Institute of Company Secretaries of India; or MBA / PGDBM specialization in finance or; post graduate degree in finance and should have at least three years of experience in the discipline. Further, the person needs to complete and


pass the Valuation Specific Education Course as per syllabus specified under rule 5 of the Companies (Registered Valuers and Valuation) Rules, 2017, as amended.

Further, a person is eligible to be a registered valuer if he/she-

  1. is a valuer member of a registered valuers organisation;
  2. is recommended by the registered valuers organisation of which he is a valuer member for registration as a valuer;
  3. has passed the valuation examination under rule 5 within three years preceding the date of making an application for registration under rule 6;
  4. possesses the qualifications and experience as specified in rule 4;
  5. is not a minor;
  6. has not been declared to be of unsound mind;
  7. is not an undischarged bankrupt, or has not applied to be adjudicated as a bankrupt;
  8. is a person resident in India;
  9. has not been convicted by any competent court for an offence punishable with imprisonment for a term exceeding six months or for an offence involving moral turpitude, and a period of five years has not elapsed from the date of expiry of the sentence:
  10. Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be registered;
  11. has not been levied a penalty under section 271J of Income-tax Act, 1961 and time limit for filing appeal before commissioner of income-tax (appeals) or income- tax appellate tribunal, as the case may be has expired, or such penalty has been confirmed by income-tax appellate tribunal, and five years have not elapsed after levy of such penalty; and
  12. is a fit and proper

Explanation : – For determining whether an individual is a fit and proper person under these rules, the authority may take account of any relevant consideration, including but not limited to the following criteria-

  1. Integrity, reputation and character;
  2. Absence of convictions and restraint orders; and
  • Competence and financial

Answer 2A(i)

Professional misconduct in relation to members of the Institute generally (First Schedule to the Company Secretaries Act, 1980)

PART I : Professional misconduct in relation to Company Secretaries in Practice.

A Company Secretary in Practice shall be deemed to be guilty of professional misconduct, if he-

  • Allows any person to practice in his name as a Company Secretary unless such


person is also a Company Secretary in practice and is in partnership with or employed by him;

  • pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his professional business, to any person other than member of the Institute or a partner or a retired partner or the legal representative of a deceased partner, or a member of any other professional body or with such other persons having such qualifications as may be prescribed for the purpose of rendering such professional services from time to time in or outside

Explanation. – In this item, “partner” includes a person residing outside India with whom a Company Secretary in practice has entered into partnership which is not in contravention of item (4) of this Part;

  • accepts or agrees to accept any part of the profits of the professional work of a person who is not a member of the Institute:

Provided that nothing herein contained shall be construed as prohibiting a member from entering into profit sharing or other similar arrangements, including receiving any share commission or brokerage in the fees, with a member of such professional body or other person having qualifications, as is referred to in item (2) of this part;

  • enters into partnership, in or outside India, with any person other than a Company Secretary in practice or such other person who is a member of any other professional body having such qualifications as may be prescribed, including a resident who but for his residence abroad would be entitled to be registered as a member under clause (e) of sub­ section (1) of section 4 or whose qualifications are recognized by the Central Government or the Council for the purpose of permitting such partnerships;
  • secures, either through the services of a person who is not an employee of such company secretary or who is not his partner or by means which are not open to a Company Secretary, any professional business:

Provided that nothing herein contained shall be construed as prohibiting any arrangement permitted in terms of items (2), (3) and (4) of this Part;

  • solicits clients or professional work, either directly or indirectly, by circular, advertisement, personal communication or interview or by any other means:

Provided that nothing herein contained shall be construed as preventing or prohibiting

  • any company secretary from applying or requesting for or inviting or securing professional work from another company secretary in practice; or
  • a member from responding to tenders or enquiries issued by various users of professional services or organizations from time to time and securing professional work as a consequence;
  • advertises his professional attainments or services, or uses any designation or expressions other than Company Secretary on professional documents, visiting cards, letterheads or sign boards, unless it be a degree of a University established


by law in India or recognized by the Central Government or a title indicating membership of the Institute of Company Secretaries of India or of any other institution that has been recognized by the Central Government or may be recognized by the Council:

Provided that a member in practice may advertise through a write up setting out the services provided by him or his firm and particulars of his firm subject to such guidelines as may be issued by the Council;

  • accepts a position as a Company Secretary in practice previously held by another Company Secretary in practice without first communicating with him in writing;
  • charges or offers to charge, accepts or offers to accept, in respect of any professional employment, fees which are based on a percentage of profits or which are contingent upon the findings, or result of such employment, except as permitted under any regulation made under this Act;
  • engages in any business or occupation other than the profession of Company Secretary unless permitted by the Council so to engage:

Provided that nothing contained herein shall disentitle a Company Secretary from being a director of a company except as provided in the Companies Act, 1956;

  • allows a person not being a member of the Institute in practice, or a member not being his partner to sign on his behalf or on behalf of his firm, anything which he is required to certify as a Company Secretary, or any other statements relating

PART II – Professional misconduct in relation to members of the Institute in service

A member of the Institute (other than a member in practice) shall be deemed to be guilty of professional misconduct, if he, being an employee of any company, firm or person-

  • pays or allows or agrees to pay, directly or indirectly, to any person any share in the emoluments of the employment undertaken by him;
  • accepts or agrees to accept any part of fees, profits or gains from a lawyer, a Company Secretary or broker engaged by such company, firm or person or agent or customer of such company, firm or person by way of commission or gratification.

PART III – Professional misconduct in relation to members of the Institute generally

A member of the Institute, whether in practice or not, shall be deemed to be guilt of professional misconduct, if he

  • not being a Fellow of the Institute, acts as a Fellow of the Institute;
  • does not supply the information called for, or does not comply with the requirements asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority;


  • while inviting professional work from another Company Secretary or while responding to tenders or enquiries or while advertising through a write up, or anything as provided for in items (6) and (7) of Part I of this Schedule, gives information knowing it to be

PART IV – Other misconduct in relation to members of the Institute generally

A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if-

  • he is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term not exceeding six months;
  • in the opinion of the Council, he brings disrepute to the profession or the institute as a result of his action whether or not related to his professional

Answer 2A(ii)

The compliance system and processes in a company are dependent mainly on the following factors:

  1. Nature of business(es).
  2. Geographical domain of its area of operation(s).
  3. Size of the company both in terms of operations as well as investments, technology, multiplicity of business activities and manpower
  4. Jurisdictions in which it
  5. Whether the company is a listed company or not.
  6. Regulatory authority (ies) in respect of its business
  7. Nature of the company , private, public, government company, etc.

A Company Secretary is the ‘Compliance Manager’ of the company. It is he who ensures that the company is in total compliance with all regulatory provisions. Corporate disclosures, which play a vital role in enhancing corporate valuation, is the forte of a Company Secretary. These disclosures can be classified into statutory disclosures, non­ statutory disclosures, specifies disclosures and continuous disclosures.

SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015 spells out elaborately on various aspects of disclosures which are to be made by the company such as contingent liabilities, related party transactions, proceeds from initial public offerings, remuneration of directors and various details giving the threats, risks and opportunities under management discussion and analysis in the corporate governance report which is published in the annual accounts duly certified by the professional like company secretaries. A company secretary has to ensure that these disclosures are made to shareholders and other stakeholders in true letter and spirit.

The advisory services of the company secretaries impact to all components and activities of the compliance framework, as the business receives one point specialized support and advice to help manage its compliance risks more effectively. The company secretary plays a proactive advisory role as he advises management, local boards and committees, the compliance executor, and the employees.


The company secretary provide advice on compliance risk, responsibilities, obligations, concerns and other compliance issues that are suitable for the business’ practices and operational constraints of the company.

The company secretary is the professional who guides the board and the company in all matters, renders advice in terms of compliance and ensures that the board procedures are duly followed, best global practices are brought in and the organisation is taken forward towards good corporate citizenship.

The function of Company Secretary includes

  1. to report to the Board about compliance with the provisions of this Act, the rules made thereunder and other laws applicable to the company;
  2. to ensure that the company complies with the applicable secretarial standards;
  3. to provide to the directors of the company, collectively and individually, such guidance as they may require, with regard to their duties, responsibilities and powers;
  4. to facilitate the convening of meetings and attend Board, committee and general meetings and maintain the minutes of these meetings;
  5. to obtain approvals from the Board, general meeting, the government and such other authorities as required under the provisions of the Act;
  6. to represent before various regulators, and other authorities under the Act in connection with discharge of various duties under the Act;
  7. to assist the Board in the conduct of the affairs of the company;
  8. to assist and advise the Board in ensuring good corporate governance and in complying with the corporate governance requirements and best practices;
  9. to discharge such other duties as have been specified under the Act or rules; and
  10. such other duties as may be assigned by the Board from time to

Answer 2A(iii)

According to Section 203 of the Companies Act, 2013 & Rule 8 of the Companies (Appointment and Remuneration) Rules, 2014, Every listed company and every other public company having paid up share capital of rupees ten crores or more is required to appoint a whole time Company Secretary, Managing Director and CFO.

Further rules 8A of the Companies (Appointment and Remuneration) Rules, 2014 provides that a company other than a company covered under rule 8 which has a paid up share capital of five crore rupees or more shall have a whole-time company secretary .

Hence, XYZ Ltd as a Public Company is required to appoint Whole Time Company Secretary.

Further on 31st March, 2019 if XYZ is a Private Limited Company then it has to appoint Whole time Company Secretary if paid up capital of the Company is Rs.5 Crore


or above as per Rule 8A of the Companies (Appointment and Remuneration) Rules, 2014.

Answer 2A(iv)

Illustrative list of the Laws applicable to the Pharmaceuticals sector is as under

  • The Drugs and Cosmetics Act, 1940 & Amendment 2008
  • The Drugs and Cosmetics Rules, 1945
  • The Pharmacy Act, 1948
  • The Drugs and Magic Remedies (Objectionable Advertisement) Act, 1954
  • Drugs (Magie Remedies) Objectionable Advertisement Rules, 1955
  • The Narcotic Drugs and Psychotropic Substances Act, 1985
  • Special Permits and Licences Rules, 1952
  • The Medicinal and Toilet Preparations (Excise Duties) Act, 1956
  • The Drugs (Prices Control) Order 1995 (under the Essential Commodities Act)
  • Essential Commodities Act,1955
  • The Clinical Establishments (Registration and Regulation) ACT, 2010
  • The Clinical Establishments (Registration and Regulation) Rules, 2010
  • Biological Diversity Act, 2002
  • Biological Diversity Rules, 2004
  • Drug Policy, 2002
  • Plant Quarantine Order
  • National Pharmaceutical Policy, 2012
  • Drugs (Prices Control) Order, 2013
  • Rules for the Manufacture/ Use/ Import/ Export and Storage of Hazardous micro- organisms / genetically engineered organisms or


Question 3

  • Describe differences between Social audit and Takeover
  • Explain the due diligence for issue of securities by a
  • Is there a need to obtain a Management representation letter from the Auditee Company ? (5 marks each)

Answer 3(a)

A social audit is a way of measuring/ understanding/ reporting and ultimately improving an organization’s social and ethical performance. A social audit helps to narrow gaps between vision/goal and reality/ between efficiency and effectiveness. It is a technique to understand/measure/ verify/ report on and to improve the social performance of the organization.

Social auditing creates an impact upon governance. It values the voice of stakeholders/


including marginalized/poor groups whose voices are rarely heard. Social auditing is taken up for the purpose of enhancing local governance/ particularly for strengthening accountability and transparency in local bodies.

Social audit is a process of reviewing official records and determining whether the reported expenditures reflect the actual money spent on the ground. A social audit is a formal review of a company’s endeavours in social responsibility.

The key difference between development and social audit is that a social audit focuses on the neglected issue of social impacts/ while a development audit has a broader focus including environment and economic issues/ such as the efficiency of a project or programme.

A social audit is an official evaluation of an organization’s involvement in social responsibility projects or endeavours. For example, a local family store makes a clothing donation to an NGO that has a homeless shelter for women and children. The store makes a similar donation three times a year. This is something that a social audit might uncover. Factors examined by a social audit include records of charitable contributions, volunteer events and efficient utilization of energy, transparency, work environment and employees wages.

Takeover audit : To provide the desired results to an investor and to ensure that the acquisition is executed in the most effective manner, the concept of the takeover audit has been evolved; the takeover audit provides a cost benefit analysis to suggest a strategic plan for the long term investment strategy. The audit provides for the Acquisition Audit as well as the inter-se Transfer performed by the acquirer.

Takeover Audit for merger/acquisition/ takeover could be done as three parts: pre-acquisition, post-acquisition and sell-side. Internal auditors or professionals with this domain expertise can contribute significant value by ensuring that a vibrant due diligence process is in place and operating as intended. A rigorous audit vide due diligence process help companies take advantage of legitimate new business opportunities while at the same time help minimize the risks. A strong audit cum due diligence process is critical to ensure that the acquirer is fully aware of all aspects of the proposed transaction and provides access to vital intelligence that is used to negotiate the final price and integrate the new subsidiary more effectively.

Answer 3(b)

A public company may issue securities to public through prospectus Public offer by complying with the provisions of Part I of chapter III Prospectus and Allotment of Securities; or through private placement by complying with the provisions of Part II of chapter III – Prospectus and Allotment of Securities; or through a rights issue or a bonus issue in accordance with the provisions of the Companies Act, 2013 (‘the Act’) and in case of a listed company or a company which intends to get its securities listed also with the provisions of the Securities and Exchange Board of India Act,1992 and the rules and regulations made thereunder, the key regulation governing the issue of securities and preparation of financial information are

  • SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2018
  • SEBI (Listing Obligation and Disclosure Requirement) Regulations,


SEBI ICDR Regulations provide the guidelines relating to conditions for various kind of issue including public and right issue, the ICDR regulations provide detailed provisions:

  1. relating to public issue such as conditions an Initial Public offer (IPO) and Further Public Offer (FPO) conditions
  2. relating to pricing in public Conditions governing promoters contribution, restriction on transferability of promoters contributions, minimum offer to public, reservations, manner of disclosures in offer documents etc.

SEBI (LODR) Regulations, 2015 lay down the broad principles for periodic disclosure to be given by the listed entities operating in different segments of capital markets.

A private company may issue securities by way of rights issue or bonus issue in accordance with the provisions of the Act; or through private placement by complying with the provisions of Part II of Chapter III Prospectus and Allotment of Securities & Chapter IV –Share Capital & Debentures of Companies Act, 2013.

The scope and comprehensiveness of the Issue of Securities due diligence is important not only from a legal standpoint to avoid liability but also from a reputational perspective as the reputation of the company and its promoters and other participants may be significantly vanished, if on a later date it appears that the company and other participants are failed to uncover and disclose to prospective investors critical issues relating to the issuer or the Securities.

While the specific requirements in connection with issue of securities are different under the Companies Act, 2013 and SEBI Laws & Regulations made thereunder, any non-compliance in these regulations are generally impose liability if the offering memorandum or prospectus contains a materially incorrect or misleading statement or omits a material fact. However in certain conditions the complete issue of securities stand cancelled. The violation of any applicable liability provisions may result in liability for offering participants, in particular the issuer and the underwriters. These liability provisions emphasize the need for careful preparation of all materials to be used in issue of securities offerings, in particular the offering memorandum or prospectus.

Answer 3(c)

A management representation letter is a form letter written by a company’s external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis.

The auditor may obtain a management representation letter from the auditee company. The letter may be signed by Managing Director/Company Secretary/Senior Management who would normally have authority to issue the same. The Auditor can use this letter of representation as part of his audit evidence.

However, it is advised to exercise all possible care, reasonable skill & due diligence. Adequate enquiries should be made in respect of matters which are capable of direct verification. Mere getting certification from management may defeat the purpose of the audit.

Question 4

  • What do you mean by an unqualified/unmodified opinion by an auditor ?


  • What do you understand by a CSR Audit ? Explain its
  • What is Forensic Audit Report ? Highlight its major
  • What is materiality concept in auditing ?
  • What are the benefits which a practice unit will obtain in undergoing a peer review ? (3 marks each)

Answer 4(a)

An unqualified opinion is also known as a clean opinion. The auditor reports an unqualified opinion if the affairs of the company are presumed to be free from material misstatements. In addition, an unqualified opinion is given over the internal controls of an entity if management has claimed responsibility for its establishment and maintenance and the auditor has performed fieldwork to test its effectiveness.

An unqualified opinion contains no reservations concerning the company. This is also known as a “clean” opinion meaning that the affairs of the company are presented fairly.

The Auditor should express an unmodified opinion when based on Audit Evidence, the Auditor concludes that:

  1. there is due compliance with the applicable law in terms of timelines and process;
  2. the records as relevant for the audit verified by him as a whole are free from misstatement and maintained in accordance with applicable laws; and
  3. the auditor should express an unmodified opinion when the auditor concludes that the information on the affairs of the company in all material respects, are in accordance with the applicable reporting

Answer 4(b)

Corporate Social Responsibility (CSR) audit help in measuring the actual social performance against the social objectives set by the Company. It also provides that at what level the decision making, mission statement, guiding principles, and business conduct are aligned with social responsibilities. The audit helps meeting the expectations of stakeholder groups relating to social and environmental responsibilities of the company.

The CSR audit cover the CSR activities relating to human rights, fundamental human rights, freedom of association and collective bargaining, non-discrimination, forced labor, child labor, health and safety, career development and training, environmental issues and issues relating to community development and social wellbeing. However, the Schedule VII of the Companies Act, 2013 provides the list of activities which could be taken by the company as their CSR activities and cover the following:

  • Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking
  • Promoting education, including special education and employment enhancing


vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.

  • Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
  • Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set­up by the Central Government for rejuvenation of river
  • Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional art and handicrafts;
  • Measures for the benefit of armed forces veterans, war widows and their dependents;
  • Training to promote rural sports, nationally recognized sports, Paralympic sports and Olympic sports
  • Contribution to the prime minister’s national relief fund or any other fund set up by the central for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women;
  • Contributions or funds provided to technology incubators located within academic institutions which are approved by the central
  • Rural development
  • Slum area
  • disaster management, including relief, rehabilitation and reconstruction “

Explanation.– For the purposes of this item, the term ‘slum area’ shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.

Answer 4(c)

Forensic Audit is a dynamic and strategic tool in combating corruption, financial crimes and frauds through investigations and resolving allegations of fraud and embezzlement. It may be conducted to determine negligence. Forensic is the application of science to crime concerns. Forensic science is science which is applied to legal matters especially criminal matters.

“Forensic” means suitable for use in the court of law. The examination a company’s financial records to derive evidence which can be used in a court of law is a Forensic Audit. It includes the use of accounting, auditing and investigative skills to assist in the legal matters.

Forensic audits are highly specialized, and the work requires detailed knowledge of fraud investigation techniques and the legal framework. Forensic accountants are trained to look beyond the numbers and have necessary skills and experience to accept the


work. Highly specialized and the work requires detailed knowledge of fraud investigation, techniques and the legal framework (civil, criminal laws and human psychology) and to identify substance over form when dealing with an issue.

A forensic auditor is required to have specialist training so that he can understand the legal framework and also has the knowledge of forensic audit techniques. He should also have the expertise in the use of IT tools and techniques that facilitate data recovery and analysis.

A forensic audit, also known as forensic accounting, refers to the application of accounting methods for detection and gathering evidence of frauds, embezzlement, or any other such white-collar crime. It is the application of accounting skills to legal questions.

Forensic audit is done in two-phases.

  1. Investigation Services – At first the auditor begins with an investigation; looking into the accounts and statement) and identifying defects in It then moves on to find ways to deal with such defects) which is a reactionary function.
  2. Litigation Services – It is entirely possible the frauds detected be resolved within the company However) there are times when they need to be resolved through legal channels. During such situations) forensic auditors give litigation support to the advocates. Their advice and consultation about the legalities of commercial disputes are very essential. Moreover) they also provide research assistance by giving relevant documents and facts to support a legal claim) and also help decide the extent of damage that is required. They are also called up by the Court as an expert witness for further investigation.

Illustrative table of contents of a Forensic Audit Report include the following points:

  1. Executive Summary
  2. Origin of the audit
  3. Audit Objective
  4. Proposed Audit Outputs
  5. Audit Implementation approach
  6. Risk Analysis
  7. Internal Environment Risk: Customers) product and Competitors;
  8. Financial Management; Human Resource Management; Information Technology; Business processes
  9. External Environment Risk: Economy and market situation; political and legal scenario; Technology in the sector
  10. Audit Process
  11. Preliminary understanding of scope and incident coverage
  12. Collect evidence


  1. Conduct Interviews
  2. Analyse findings
  3. Validate inferences and conclusions
  4. Evidence of risk events
  5. Conflicts of interest; Bribery; Extortion; Theft; Fraudulent transactions; inventory frauds; misuse of assets; financial statement frauds
  6. Audit recommendations
  7. Logical framework approach
  8. Preconditions and risks
  9. Governance on recommendation implementation
  10. Stakeholders
  11. Budget considerations

Answer 4(d)

Material means important and essential. The disclosure of important matters helps the users in taking business decisions. There should be neither suppression of vital facts nor miss-statements.

  • The concept of the materiality draws the whole process of the audit, the user of the audit report does not require the absolute accuracy to make informed decision, accordingly a matter is considered material if its omission or misstatement would reasonably influence the decision of an intended user of the audit
  • The concept of materiality should be considered by the auditor while determining the nature, timing and extent of audit procedures and evaluating the effect of the misstatements.
  • The concept of materiality is used both at the planning stage of the audit, when deciding what and how much work need to be done and in evaluating the result of the audit, which is generally known as planning materiality and reporting materiality.
  • The Auditor has to report the errors which he judges to be material, the audit work can be planned in the knowledge that it need to detect errors that are material.

In accessing materiality, the prime consideration is the total value of the error, However, the values is not the sole consideration, the nature of the error or the context in which the transaction occurs are sometimes more important and the auditor must always consider these factors, as well as the value, when deciding whether an error is material.

Materiality consists of both quantitative and qualitative factors. Materiality is often considered in terms of monetary value but the inherent nature or characteristics of an item or group of items may also render a matter material. Materiality is a matter of professional judgment and depends on the auditor’s interpretation of the users’ needs. A


matter can be judged material if knowledge of it is likely to influence the decisions of the intended users.

Materiality should be considered by auditor while determining the nature, timing and extent of audit procedures and while the evaluating the effect of misstatement.

During the planning process, information is gathered about the entity in order to assess risk and establish materiality levels for designing audit procedures. Issues that may be considered material even if the monetary value is not significant would include the following:

  • Material by value
  • Material by nature
  • Material by context

Answer 4(e)

There are significant benefits which a Practice Unit (PU) will obtain in undergoing a Peer Review. These may be summarised below:

  1. A successful peer review will provide comfort to the PU that he has adhered to various statutory, documentary and other regulatory
  2. If deficiencies are noticed and corrective measures suggested, the PU will have an opportunity to correct the deficiencies and thereby enhance his professional competence.
  3. If a Peer Review Certificate is issued in favour of the PU it enhances his credibility in the eyes of the general
  4. Since a Chinese wall exists between the Peer Review Process and the Disciplinary Proceedings, the PU will benefit from peer review without any apprehension of any disciplinary proceedings being initiated against him for any deficiencies noticed on his
  5. Clients of the PU will benefit from knowing that their PU is periodically reviewed by the

Question 5

  • You are engaged as a retainer in a company for looking after all secretarial With the advent of introduction of Goods and Services Tax (GST), though the company initially managed to handle this work, subsequently, it finds it very difficult in view of the attrition in the concerned staff managing it and also with reference to the latest amendments and notifications issued frequently. The Company then decided to discuss with you to undertake the work as GST professional. What are the duties and responsibilities that has to be performed as a GST Professional ? Briefly explain.
  • What do you mean by Environment Audit ? Prepare a process chart for conducting Environment
  • Draft the ‘confidentiality undertaking’ and ‘arbitration’ clauses of a non-disclosure (5 marks each)


Answer 5(a)

Company Secretary as GST Professional

Company Secretaries can play an important role in being an advisor and facilitator for due compliances under GST and be an asset to the general business community and corporate world. With their expertise in interpreting laws and skills to tackle and manage regulatory compliances under GST, Company Secretaries render value added services to the trade and industry while acting as extended arms of regulatory mechanism. A person having passed CS final examination is eligible for enrolment as GST Practitioner. Company Secretaries can provide guidance and advisory services to business entities to interpret GST laws and assist in effectively discharging various compliances under GST while undertaking activities like tax planning, maintenance of GST records, drafting legal documents like replying to show cause notices, impact analysis, etc.

Though, the Company Secretaries cannot perform Audit in matters related to GST. But he can provide the following services:

  • Advisory services or strategic advisor : A Company Secretary can comprehensively interpret the law of GST and provide complete guidance and advisory to the business Company Secretaries are more suited for their services because of their knowledge of laws and good communication skills.
  • Tax Planning : Company Secretaries are competent to understand the impact of laws and its various alternatives and can be helpful in proper tax planning under
  • Procedural Compliances : Procedural Compliance includes registration, filing of returns, payments of taxes, assessment etc. Since, a Company Secretary is already playing the role of a Compliance Officer under various other laws, he can assist in the same under GST law
  • Book/Record Keeping : Like any other tax laws, introduction of GST would also require proper record keeping and maintaining systematic records of credit of input/input service and its proper utilisation
  • Representation : A Company Secretary can provide the service of representation with confidence because of practical exposure due to appearing before various competent
  • Appellate work : Because of their legal bent of mind, a Company Secretary can provide better services in the field of appellate

Answer 5(b)

Environmental audit is a general term that can reflect various types of evaluations intended to identify environmental compliance and management system implementation gaps, along with related corrective actions and it has a wide variety of meanings. Environmental Audit refers to verification and assessment of environmental measures in an organisation.

There are generally two different types of environmental audits: compliance audits and management systems audits. These audits are intended to review the site’s/


company’s legal compliance status in an operational context. Compliance audits generally begin with determining the applicable compliance requirements against which the operations will be assessed. This tends to include Central Law, State Laws, permits and local laws. In some cases, it may also include requirements within legal action.

Need for Environment Audit

  • Business can assess the environmental impact of their
  • To ensure that the corporate decisions are not spoiling company’s market for its products, destroying the source of essential supply, damaging or polluting the very
  • It highlights areas of inefficiencies in process g. Where the amount of resources used are out of proportion to the amount of saleable items/ services produced.
  • It highlights excessive
  • It provides opportunity for business to decrease its wastes output and reduce the cost of waste treatment or waste

Process of Environment Audit

  1. Understanding the industrial activity and Pre-audit or planning stage

Collection of background information about the entity, definition of objectives and scope of audit, formation of audit team and development of audit plan and protocols.

  1. On-site or Field Audit

Communicate the objectives of the audit to key faculties and schedule necessary meetings and interviews, identify areas of concern, site / facility inspection, evidence / records / document review, staff interviews, initial review of findings.

  1. Assessing the impact and post-audit

Final evaluation of findings, submit preliminary report with type and magnitude of impact on the environment, get approval of management, introduce the findings to the auditees, submit final environment audit report along with short/ long term acceptability.

  1. Follow up or review

Verify the action taken on audit findings and recommendations.

Answer 5(c)

Confidentiality Undertaking Clause

The Receiving Party agrees :

  • to keep confidential and not disclose to any third party, copy, reproduce, adapt, divulge, publish or circulate any part of or the whole of any Confidential Information without the prior written consent of the Disclosing Party; and
  • to restrict access to the Confidential Information disclosed to it under this


Agreement to those of its employees and officers who need to know the same strictly for the purpose; and

  • not to use Confidential Information disclosed to it under this Agreement for any purpose other than the purpose; and
  • not to combine any part of or the whole of the Confidential Information with any other information; and
  • not to disclose the whole or any part of the Confidential Information to any third party without (a) the prior written consent of the Disclosing Party and (b) prior to disclosure to such third party procuring that the third party is bound by obligations which are no less onerous than those contained in this Agreement; and
  • to procure that each employee and officer to whom Confidential Information is disclosed under this Agreement is prior to such disclosure informed of the terms of this Agreement and agrees to be bound by them; and
  • to procure that the Confidential Information in its possession is stored securely and that physical access to it is

Arbitration Clause

  1. This agreement shall be construed in accordance with and governed by the laws of
  2. Any dispute arising in connection with or out of the performance or the interpretation of this agreement, which the parties cannot settle, shall be finally settled by The place of arbitration shall be at…………………………………………………………………. The

arbitration shall be governed by the provisions of the Arbitration and Conciliation Act, 1996 and the rules made thereunder.

Attempt all parts of either Q. No. 6 or Q. No. 6A

Question 6

  • As a Company Secretary, prepare an information chart, to be contained in, for preparing a scheme of
  • Define Internal Describe core principles of Internal Audit.
  • What is Audit Trail and why there is a need of creation of Audit Trails ?

(5 marks each)

OR (Alternate Question to Q. No. 6)

Question 6A

  • Analyse the differences between the following :
    • Fraud and Non-compliance
    • Ethics and
  • What are the penal provisions under the Companies Act, 2013 for giving incorrect Secretarial Audit Report or making false statements


  • What are the criteria for suspension of the trading in the shares of the listed entities?                                                                                             (5 marks each)

Answer 6(a)

The scheme of amalgamation to be prepared by the company should contain inter- alia the following information:

  1. Definitions of transferor and transferee as well as the definition of the undertaking of the transferor
  2. Authorised, issued and subscribed capital of transferor and transferee
  3. Basis of scheme should be explained briefly on the recommendation of valuation report, covering transfer of assets/liabilities, specified date, reduction or consolidation of capital, application to financial institutions as lead institution for permission,
  4. Change of name, object and accounting
  5. Protection of
  6. Dividend position and
  7. Management structure, indicating the number of directors of the transferee company and the transferor
  8. Applications under Sections 230 and 232 of the Companies Act, 2013 to obtain approval from the
  9. Expenses of
  10. Conditions of the scheme to become effective and operative and the effective date of

The basis of the scheme should be framed on the reports of valuers for both the merger partner companies. The underlying idea is to ensure that the scheme is just and equitable to the shareholders and employees of each of the amalgamating companies and to the public at large. It should be ensured that common yardstick is adopted for valuation of shares of each of the amalgamating company for fixing rate of exchange of shares on merger.

A.    Information Required by the Professional Generally includes

  1. Cross holding of the Directors of the Transferee and Transferor
  2. Relationship between the directors of the transferee and transferor companies under the Companies Act,
  3. Names of the officers of both the transferee and transferor companies who are to be authorised to sign the Application, Affidavit and Petition. (The companies concerned can authorise anyone person to act on behalf of them, who may be from either of the companies).
  4. Names of the English and regional language newspapers in which notices are to be published.


  1. Names in preferential order as to the chairmen of the meetings of the transferee and transferor (The chairman in this case need not be a director on the board of directors of the company concerned or even a member of the company).
  2. List of creditors and their List of individual cases to be given, as well as categorisation in various slabs.

B.    Information/Documents that may be required by the Regional Director, Ministry of Corporate Affairs, in connection with Amalgamation.

  1. Balance sheets for last five years of the transferee
  2. Balance sheets for last five years of the transferor
  3. Two copies of the valuation report of the
  4. List of top shareholders of the transferee
  5. List of top shareholders of the transferor
  6. List of directors of the transferor company and their other
  7. List of directors of the transferee company and their other
  8. Number and percentage of NRI and foreign holding in the transferee and transferor
  9. Rights/Bonus/Debentures Issues made by the transferee and the transferor companies in the last five

C.    The Following Information is required to be furnished to the Auditors Appointed by the Official Liquidator.

  1. From the transferor company
  2. Certified true copy of the scheme of amalgamation along with the
  3. Certified true copy of the Memorandum and Articles of Association of the
  4. List of shareholders of the company with their Any changes during the last five years to be indicated.
  5. Accounts of the company made upto the appointed day of
  6. Address of the registered office of the
  7. Present authorised and paid-up share capital of the
  8. Changes in the Board of directors during the last five years along with list of present Board of
  9. List of associated concern in which directors are
  10. List of various appeals pending under Income tax, GST, Custom Duty, FEMA,


  1. Details of loans and advances given to the associated concern/companies under the same management during the last five
  2. Details of revaluation of
  3. Details of any allegations and/or complaints against the
  4. Details of amount paid to the managing director, directors or any relative of the directors during the last five
  5. Comparative statement of profit and loss account and balance sheet for the last five
  6. Details of bad debts written off during the last five
  7. List of all charges registered with the Registrar of Companies and the amount secured against the
  8. Copy of the latest annual return filed with the Registrar of Companies along with
  9. Details of all the subsidiary companies as under:
    • Authorised and paid-up share capital of the
    • List of present shareholders along with details of changes in the shareholding patterns during the last five

The following information of the transferee company is required by the auditor:

  1. Names of the existing directors of the
  2. List of common shareholders of the companies involved in the amalgamation with individual
  3. Authorised and paid up capital of the
  4. Copy of latest audited balance
  5. The auditors may also require the following records of the transferor company for examination:
  6. Books of account and relevant records for the last five
  7. Minutes book of Board and General

Answer 6(b)

As defined by the Institute of Internal Auditors (IIA), Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.

Independence is established by the organizational and reporting structure. Objectivity is achieved by an appropriate mind-set. The internal audit activity evaluates risk exposures


relating to the organization’s governance, operations and information systems, in relation to:

  1. Effectiveness and efficiency of
  2. Reliability and integrity of financial and operational
  3. Safeguarding of
  4. Compliance with laws, regulations, and

Based on the results of the risk assessment, the internal auditors evaluate the adequacy and effectiveness of how risks are identified and managed in the above areas. They also assess other aspects such as ethics and values within the organization, performance management, communication of risk and control information within the organization in order to facilitate a good governance process. An effective internal audit activity is a valuable resource for management and the board and the audit committee due to its understanding of the organization and its culture, operations, and risk profile. The objectivity, skills, and knowledge of competent internal auditors can significantly add value to an organization’s internal control, risk management, and governance processes. Similarly an effective internal audit activity can provide assurance to other stakeholders such as regulators, employees, providers of finance, and shareholders.

As per the IIA, core principles of Internal Audit hovers around the performance of effective internal auditing and all of them must be present and working well. How an internal auditor, as well as an internal audit function, demonstrate achievement of the core principles may be quite different from organisation-to­organisation. But, failure to achieve any of the core principles implies that an internal audit activity is not as effective as it could be in achieving internal audit’s mission. Core principles of internal audit are:

  1. Demonstrates
  2. Demonstrates competence and due professional
  3. Independent and objective
  4. Aligns with the strategies, objectives, and risks of the
  5. Is appropriately positioned and adequately
  6. Demonstrates quality and continuous
  7. Communicates
  8. Provides risk-based
  9. Insightful, proactive, and future-focused.
  10. Promotes organisational

Answer 6(c)

Audit Trail is a repository of administrative and operational documentation relating to audit process. It is established and maintained to aid in audit planning and to centralize available documentation and information not included in the individual audit files. Information included in the permanent files should only be information that cannot be feasibly included


in the working papers due to volume or format or because the information will be applicable on an on going basis to the current audit or future audits. Permanent files should be filed with all audit and follow-up working papers supporting the audit. The contents of permanent files are dependent on the needs of the audit. An index should be developed and placed in the front of the permanent file indicating the documents contained, date included in file and auditor’s initials.

The auditor should prepare and maintain working papers, the form and content of which should be designed to meet the circumstances of a particular engagement. The information contained in working papers constitutes the principal record of the work that the auditor has done and the conclusions that he has reached concerning significant matters. Working papers serve mainly to –

  1. Provide the principal support for the auditor’s report, including his representation regarding observance of the standards of field work, which is implicit in the reference in his report to generally, accepted auditing
  2. Aid the auditor in the conduct and supervision of the

Working papers are records kept by the auditor of the procedures applied, the tests performed, the information obtained, and the pertinent conclusions reached in the engagement. Examples of working papers are audit programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents, and schedules or commentaries prepared or obtained by the auditor. Working papers also may be in the form of data stored on tapes, films, or other media.

The quantity, type, and content of working papers vary with the circumstances, but they should be sufficient to show that the records agree or reconcile with the statements or other information reported on and that the applicable standards of field work have been observed.

Working papers ordinarily should include documentation showing that-

  • The work has been adequately planned and supervised, indicating observance of the first standard of field
  • A sufficient understanding of internal control has been obtained to plan the audit and to determine the nature, timing, and extent of tests to be
  • The audit evidence obtained, the auditing procedures applied, and the testing performed have provided sufficient competent evidential matter to afford a reasonable basis for an opinion, indicating observance of the third standard of field

Working papers are the property of the auditor. The auditor’s rights of ownership, however, are subject to ethical limitations relating to the confidential relationship with clients.

The auditor’s working papers may sometimes serve as a useful reference source for his client, but the working papers should not be regarded as a part of, or a substitute for, the client’s accounting or other records.


The auditor should adopt reasonable procedures for safe custody of his working papers and should retain them for a period sufficient to meet the needs of his practice and to satisfy any pertinent legal requirements of records retention.

Audit working papers provide evidence of audit coverage and documentation of audit trails, they should be properly filed and stored. In addition, there should be a standardized format for working papers, adequate cross-referencing to identify the audit working papers created as well as a system for filing and retrieving working papers.

Answer 6A(i)

  • Fraud V/S Non Compliance

Fraud : As defined in Explanation to Section 447 of the Companies Act, 2013, the “fraud” in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

In general the fraud can be defined as act or course of deception, an intentional concealment, omission, or perversion of truth, to

  • gain unlawful or unfair advantage,
  • induce another to part with some valuable item or surrender a legal right, or
  • inflict injury in some

Willful fraud is a criminal offense which calls for severe penalties, and its prosecution and punishment. However, incompetence or negligence in managing a business or even a reckless waste of firm’s assets (for example by speculating on the stock market) does not normally constitute a fraud.

Non Compliance : The term non-compliance refers to failure to comply with the laws, rules regulations etc. It is commonly used in regard to a failure to meet the compliance requirements or failure to doing compliance be it the failure in following procedures, filing of information, eligibility conditions, reporting etc.

The relationship between the Fraud and the non-compliance can be constructed as the non- compliance in the company may lead to a fraud however it may also be noted that the fraud can also be made in the compliant company.

  • Key Differences between Ethics and Values

The fundamental differences between ethics and value are described in the given below points:

  • Ethics refers to the guidelines for conduct, that address question about Value is defined as the principles and ideals, which helps them in making the judgement of what is more important.
  • Ethics is a system of moral In contrast to values, which is the stimuli of our thinking.


  • Values strongly influence the emotional state of mind. Therefore, it acts as a motivator. On the other hand, ethics compels to follow a particular course of action.
  • Ethics are consistent, whereas values are different for different persons e. what is important for one person may not be important for another person.
  • Values tell us what we want to do or achieve in our life, whereas ethics helps us in deciding what is morally correct or incorrect in the given
  • Ethics determines to what extent our options are right or As opposed to values, which defines our priorities for life.

To summaries ethics are consistently applied over the period and remains same for all the human beings. Values have an individualistic approach, i.e. it varies from person to person but remains stable relatively unchanging, but they can be changed over time due to a significant emotional event.

Answer 6A(ii)

Section 448 of Companies Act 2013 deals with penalty for false statements. The section provides that if in any return, report certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this Act or the rules made thereunder, any person makes a statement-

  • which is false in any material particulars, knowing it to be false; or
  • which omits any material fact, knowing it to be material, he shall be liable under section

Penalty for incorrect Secretarial Audit Report

Section 447 deals with punishment for fraud which provides that any person who is found to be guilty of fraud, involving an amount of at least ten lakh rupees or one percent of the turnover of the company, whichever is lower shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. In case, the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

In case where the fraud involves an amount less than ten lakh rupees or one per cent. of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to Fifty lakh rupees or with both.

In view of this, a company secretary in practice will be attracting the penal provisions of section 448, for any false statement in any material particular or omission of any material fact in the Secretarial Audit Report. However, a person will be penalised under section 448 in case he makes a statement, which is false in any material particular, knowing it to be false, or which omits any material fact knowing it to be material.

It is pertinent to note that section 448 applies to “any person”. In view of this, a


company secretary in practice, who is an independent professional, will be attracting the penalty, as prescribed in section 448 in case his observations in the secretarial audit report turns out to be false or he omits any material fact, knowing it to be false or material.

Answer 6A(iii)

If a listed entity is non-compliant with the provisions of the Listing Regulations as per the criteria specified below, the concerned recognized stock exchange(s) shall suspend trading in the shares of such listed entity by following procedure prescribed in the SEBI Circular No. SEBI/HO/CFD/ CMD/CIR/P/2018/77 dated May 3, 2018.

Criteria for suspension of the trading in the shares of the listed entities are as under:

  1. Failure to comply with regulation 17(1) with respect to board composition including appointment of woman director for two consecutive quarters;
  2. Failure to comply with regulation 18(1) with respect to constitution of audit committee for two consecutive quarters;
  3. Failure to comply with regulation 27(2) with respect to submission of corporate governance compliance report for two consecutive quarters;
  4. Failure to comply with regulation 31 with respect to submission of shareholding pattern for two consecutive quarters;
  5. Failure to comply with regulation 33 with respect to submission of financial results for two consecutive quarters;
  6. Failure to comply with regulation 34 with respect to submission of annual report for two consecutive financial years;
  7. Failure to submit information on the reconciliation of shares and capital audit report for two consecutive quarters;

Receipt of the notice of suspension of trading of that entity by any other recognized stock exchange on any or all of the above grounds.


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