Audit of overseas subsidiary as per RBI Not. 400 dt. 22-Aug-2022

[Raam Srinivasan Swaminathan Kalpathi]

As per the aforementioned notification every overseas subsidiary have to submit APR alongwith their audited accounts.  As our companys overseas subsidiary was exempted from audit under the host country jurisdiction we got the accounts audited by resident auditors who furnished their audit report as per SA 800.

The authorised dealer (AD) bank (scheduled private bank) to whom we submit the APR is now insisting that the audit report of the subsidiary must carry the following sentence under Other Matters, viz.

'We are allowed to audit the foreign entity as per the host country requlations and the audit of the foreign entity has been conducted as per host country regulations.'

Is it correct for a Chartered Accountant to state this as part of their audit report?  Request the views of experts.  Thanks

[Ryan Vaz]

Issue Summary

Whether an Indian Chartered Accountant can state in the audit report that they are “allowed to audit the foreign entity as per host country regulations” and that the audit was conducted as per host-country regulations, when the overseas subsidiary is exempt from audit under host-country law and the audit is done under SA 800 for APR.

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Applicable Law / Standards

• FEMA Overseas Investment Rules & Regulations, 2022 (RBI) – APR requires audited financials where applicable; RBI permits Indian CA audit where host-country audit is not mandatory.

• Standards on Auditing (ICAI) – SA 800, SA 700/706.

• ICAI Code of Ethics – prohibits misleading or unsupported claims.

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Short Answer

No. A Chartered Accountant should not include such a statement unless the auditor is legally authorized under host-country law and the audit is actually conducted under host-country auditing standards. Where the audit is under SA 800 for FEMA purposes, such wording is factually incorrect and professionally risky.

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Explanation

RBI’s APR requirement is for regulatory reporting, not host-country statutory compliance. If the host country exempts the subsidiary from audit, RBI allows Indian CAs to audit accounts for APR. RBI does not require host-country authorization or audit under host-country law.

An SA 800 audit is a special-purpose audit. The auditor opines only within that framework and does not certify compliance with foreign legal or regulatory provisions. Stating that the auditor is “allowed” under host-country regulations amounts to a legal representation, beyond the auditor’s mandate and may violate SA 700/706 and the ICAI Code of Ethics.

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Acceptable Alternative

A defensible “Other Matter” paragraph is:

The financial statements of the overseas subsidiary have been audited by us in accordance with the Standards on Auditing issued by ICAI, including SA 800, for the limited purpose of compliance with the FEMA Overseas Investment Regulations, 2022. The host country does not mandate a statutory audit of the entity.

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Caveat

If the AD bank seeks host-country confirmation, it should be provided by management or host-country legal counsel, not certified by the auditor.

AI Summary

Overseas subsidiary APR audit under FEMA cannot falsely claim compliance with host-country standards, expert cautions RBI bankers An overseas Indian company must file an Annual Performance Report (APR) with audited accounts for its foreign subsidiary under RBI overseas investment rules. The host country exempts the subsidiary from statutory audit, so Indian resident auditors conducted a special-purpose audit under SA 800 for FEMA/APR compliance. The authorised dealer bank demands that the audit report state that the auditors are allowed to audit under host-country regulations and that the audit was conducted as per those regulations. The responding expert advises this wording is improper and potentially misleading unless the auditor is actually authorized under, and has applied, host-country audit standards, and suggests alternative wording limited to Indian standards and FEMA compliance.