Your audit report may be missing one of these 6 Rule 11 lines — including the 11(g) audit trail

The "Report on Other Legal and Regulatory Requirements" is the part of a company audit report most often copied from last year's file. That works until the rules change — and Rule 11 has changed more than once. A report built on a template from before 2021 is missing three clauses; one built before 2023 handles the audit trail wrongly. This guide goes through each current clause, what it asks, the wording issues to watch, and how to document your answer.

Where Rule 11 sits in the report

Section 143(3) lists the matters the auditor's report on a company must state — proper books of account, agreement with the books, compliance with the Accounting Standards, directors' disqualification, internal financial controls, and "such other matters as may be prescribed" (clause (j)). Rule 11 of the Companies (Audit and Auditors) Rules, 2014 prescribes those other matters. For a public company, section 197(16) adds a statement on whether the remuneration paid to its directors is in accordance with section 197. CARO 2020, where it applies, is a separate annexure under section 143(11).

The current clauses at a glance

Clauses (a), (b) and (c): the old ones, still easy to get wrong

• (a) Pending litigations. The answer should match the statements. If there is a contingent liability note for a tax demand or a civil suit, the report says the impact has been disclosed and refers to the note. If there are no pending litigations, say so — do not say "disclosed" when nothing is disclosed.
• (b) Material foreseeable losses. Most small companies have no long-term contracts or derivatives; the report then says there were none for which there were material foreseeable losses. Where there are long-term contracts — a construction or EPC business, for example — check the provision before you write that one was made.
• (c) IEPF. Most private companies have no amounts to transfer. The report should say that, rather than "there has been no delay", which implies there were transfers.

Clause (e): funds routed through intermediaries

Rule 11(e) has three parts. The report states whether:

1. management has represented that, to the best of its knowledge and belief, other than as disclosed in the notes, no funds have been advanced, loaned or invested by the company to or in any other person or entity (intermediaries) with the understanding that the intermediary will lend or invest in other persons or entities identified by or on behalf of the company (ultimate beneficiaries), or provide a guarantee or security on their behalf;
2. management has represented the same in reverse — that no funds have been received by the company from any person or entity (funding parties) with such an understanding; and
3. based on audit procedures that you considered reasonable and appropriate in the circumstances, nothing has come to your notice that causes you to believe that those representations contain any material misstatement.

Two practical points. The representations in (i) and (ii) must exist in writing. ICAI's Implementation Guide on Rule 11(e) and (f) recommends a separate, specific representation letter from those charged with governance, taken on record by the Board; keep the signed letter and a copy of the Board resolution on file, alongside your SA 580 representation letter. And part (iii) is your conclusion, so it needs procedures behind it: review of loans given and taken, large receipts and payments around the same dates, and related party transactions. ICAI's Implementation Guide on Rule 11(e) and (f) sets out suggested procedures.

Clause (f): dividends and section 123

If the company declared or paid a dividend during the year — final dividend for the previous year, or interim dividend for this one — the report states whether it complies with section 123: paid out of profits of the year or undistributed profits of earlier years (after depreciation), interim dividend within the limits, and the amount deposited in a separate account with a scheduled bank within five days of declaration. If no dividend was declared or paid, the report says so.

Clause (g): the audit trail

For financial years commencing on or after 1 April 2023, the proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 requires every company that uses accounting software to use software with a feature of recording an audit trail of each and every transaction — an edit log of each change, with the date — that cannot be disabled. Rule 11(g) asks the auditor to report whether:

• the company used accounting software with an audit trail (edit log) facility;
• the feature operated throughout the year for all transactions recorded in the software;
• the audit trail feature has not been tampered with; and
• the audit trail has been preserved by the company as per the statutory requirements for record retention — section 128(5) requires books of account to be kept for at least the eight preceding financial years.

Points that come up in small-company audits:

• Was the edit log on from 1 April? TallyPrime has had an edit log from Release 2.1. In standard TallyPrime it is optional and can be switched on or off; the separate TallyPrime Edit Log edition keeps it on with no option to disable it. Logging starts only when the feature is enabled, and earlier transactions have no log — so a company that upgraded or switched it on in July has not had an audit trail operating throughout the year. Ask which edition and release was used and when the edit log was enabled, and check it.
• More than one system. Payroll, billing or inventory software is also accounting software for this purpose if books of account are maintained in it, or if it posts entries directly and automatically into the main accounting software (ICAI Implementation Guide, FAQ 25). Cover each such system.
• Preservation. ICAI's Implementation Guide on Rule 11(g) (Revised 2024 Edition) says the preservation sentence is not reported in the first year of applicability; it becomes relevant from the second year, FY 2024-25. Read with section 128(5), the audit trail must be kept for at least eight years from 1 April 2023.
• Consequential reporting. Where the Rule 11(g) comment is modified, ICAI's Implementation Guide says this must also be considered in the statement under section 143(3)(b) on proper books of account and under section 143(3)(h) on qualifications relating to the maintenance of accounts. Where internal financial controls reporting under section 143(3)(i) applies, consider that too.

Getting the wording right

• Start each year from the current illustrative format — ICAI's Implementation Guide on Reporting Standards (Revised SA 700, SA 705 and SA 706) and the Rule 11 Implementation Guides — not from last year's report.
• Write the answer the facts support: "no pending litigations", "no long-term contracts", "no dividend declared or paid" are all valid answers, but they must be true.
• Where a clause is answered with an exception, the exception must be specific — which software, which period, which transactions.
• Keep a short working paper for each clause with the evidence: the contingent liability list, the contract review, the IEPF check, the representation letter, the dividend working, and the audit trail testing.

Frequently asked questions

Sources

• Companies (Audit and Auditors) Rules, 2014 — Rule 11, as amended by G.S.R. 206(E), 24 March 2021 and G.S.R. 248(E), 1 April 2021
• Companies (Accounts) Rules, 2014 — Rule 3(1), proviso (audit trail)
• Companies Act, 2013 — sections 123, 128(5), 143(3), 197(16)
• ICAI — Implementation Guide on Reporting under Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 (Revised 2024 Edition)
• ICAI — Implementation Guide on Reporting under Rule 11(e) and 11(f) of the Companies (Audit and Auditors) Rules, 2014
• Tally Solutions — Edit Log in TallyPrime: FAQ
• ICAI — SA 580 Written Representations