Statutory Audit Checklist for Foreign Subsidiaries in India: Related Party Disclosures, CARO 2020, and Dual GAAP Adjustments

Plan the statutory audit and group close separately

An Indian-incorporated subsidiary prepares statutory financial statements under the applicable Companies Act framework. Its overseas parent may also request a US GAAP, IFRS or other consolidation package. Determine whether Ind AS or the Companies (Accounting Standards) Rules apply locally; group reporting policy does not select the statutory framework. Keep the local trial balance and adjustment bridge separately identifiable, with reconciliation and approval evidence.

Related-party approvals and service evidence

Section 188 applies to specified contracts and arrangements. Where it applies, examine Board approval and prescribed member-approval thresholds. The ordinary-course and arm’s-length exception requires both conditions. Test audit committee approval separately under section 177 where applicable. Maintain the section 189 register in Form MBP-4 for arrangements it covers, subject to statutory exceptions. Apply Ind AS 24 or AS 18 for financial statement disclosures; the definitions and purposes differ. CARO paragraph 3(xiii) addresses applicable compliance with sections 177 and 188 and disclosure under the accounting standards.

For a management recharge, inspect the agreement, actual deliverables, recipient need, duplicative or shareholder activity, cost pool, allocation and pricing method. Compare contemporaneous records with legacy sections 92–92F and the applicable rules, or the corresponding 2025 Act framework. The accountant’s report is legacy Form 3CEB or current Form 48 as applicable; it does not automatically prove every amount is arm’s length. Consider deductibility, withholding, reverse charge and transfer pricing separately. The legacy section 92CE additional-tax option is conditional on a qualifying secondary adjustment and its own facts; it is not an automatic 18% charge on a management fee.

CARO and the separate audit trail report

For financial years starting on or after 1 April 2023, the Companies (Accounts) Rules require accounting software used for maintaining the books to record a transaction audit trail and dated edit log and ensure it cannot be disabled. Rule 11(g) of the Companies (Audit and Auditors) Rules, read with section 143(3)(j), is the separate auditor reporting requirement. Test feature operation throughout the year, coverage of interfaces and privileged database changes, tampering and preservation. An exception requires the applicable reporting and an assessment of its effect on the financial statement opinion; it does not automatically require an adverse opinion.

Build the group reconciliation from actual policy differences

Seven worked illustrations

1. Reconcile a five-year Bengaluru office lease

Assume a 25,000 sq. ft. office lease with ₹1.80 crore rent in year one, paid quarterly in arrears, escalating 5% at each anniversary. Assume a 10% nominal annual discount rate with quarterly compounding, or 2.5% per quarter, no incentives, initial costs, restoration or prepayments, and the same measurement inputs in both frameworks. Ind AS depreciates the ROU asset over five years on these facts; assume ASC 842 operating classification.

Using unrounded amounts, the US expense is ₹27,49,353 lower to the nearest rupee and the US ROU carrying amount is higher by the same amount. Reverse the two local expense components, record the single group lease cost, and reconcile the asset; a presentation reclassification alone does not bridge the carrying values. Different rates or payment assumptions can change both balances.

2. Evidence for a ₹5.40 crore management recharge

A Swedish parent bills €600,000 for management support; at an assumed ₹90 per euro, the charge is ₹5.40 crore. An invoice and a generic presentation alone may not substantiate delivery, allocation or pricing. Ask for service records, evidence of recipient use and cost-pool details. If an entire ₹5.40 crore deduction were disallowed and each rupee bore the 22% option plus 10% surcharge and 4% cess, incremental tax would be ₹1,35,90,720, before interest and any separately determined penalty. Neither full disallowance nor a CARO 3(ix) qualification follows automatically.

3. Parent RSUs and separate recharge

Assume a US parent grants awards to 80 employees, settles them in its own shares, and the subsidiary has no obligation to settle the awards with the employees. Under Ind AS 102, the subsidiary generally records employee services as equity settled over the relevant vesting period. A separate USD 400,000 recharge at ₹83 per dollar is ₹3.32 crore; evaluate the separate recharge obligation and accounting without automatically classifying the award itself as cash settled. Grant-date accounting, employee perquisite valuation and recharge measurement can differ.

A reported aggregate payroll withholding of ₹1.12 crore would be about 33.73% of ₹3.32 crore. That ratio does not establish correct TDS. Recompute from employee-level taxable salary, statutory valuation and tax event; legacy option rules generally use fair market value at exercise less any employee payment. Check how the actual RSU plan settles, and reconcile the remittance and Indian tax records separately.

4. A year of edit-log testing

For FY 2024–25, the review period has 365 calendar days. A successful voucher edit test is evidence of operation at that time only. Check configuration changes, backup retention, privileged access, direct database modifications and all relevant accounting applications across the year. Report observed Rule 11(g) exceptions as applicable and assess separately whether they affect the financial statement opinion.

5. Quarterly returns for a ₹15 crore cash-credit limit

Assume the sanctioned limit is secured by current assets, whether or not there is also a parent guarantee. It exceeds the ₹5 crore clause 3(ii)(b) threshold. Reconcile the amounts and supporting evidence for all filed quarters.

CARO does not set a 10% difference trigger. Reconcile and report differences under the Order and applicable auditing guidance.

6. A 60% downstream investment for ₹12 crore

Assume an Indian subsidiary of a Singapore group subscribes ₹12 crore for 60% of another Indian company. A simple pro-rata implied equity value is ₹20 crore; that arithmetic is not a FEMA valuation. Check the investing company’s actual ownership and control and whether the investment is indirect foreign investment under the NDI Rules. Verify the target’s sector, cap and route, applicable pricing, permitted funding and approval evidence.

Check the separate DPIIT notification clock of 30 days from the relevant investment even if allotment has not taken place, and the RBI Form DI clock generally of 30 days from allotment for a qualifying subscription. Use the rules in force for the transaction; a later transfer or reclassification can have a different reporting trigger. Reconcile the annual statutory-auditor compliance certification where required.

7. A ₹75 crore company’s tax audit reconciliation

For a legacy year, ₹75 crore turnover exceeds even the ₹10 crore business threshold available where both low-cash conditions are met. Reconcile Form 3CA and the applicable version of Form 3CD to the statutory accounts. For the current Act use the prescribed Form 26 where applicable. Recheck the relevant year and legal obligations.

• Clause 21(d): test prescribed disallowance rules, including the ₹10,000 per-person per-day aggregation for covered cash payments, the separate ₹35,000 goods-carriage limit and Rule 6DD exceptions.
• Clause 22: use the notified form version to reconcile micro and small enterprise payments and interest, including section 43B(h) and MSMED Act disclosures where applicable. Section 15 applies the appointed day without a written agreement and caps an agreed period at 45 days from acceptance or deemed acceptance.
• Clause 34: reconcile TDS and TCS statements, ledgers and payments. Where applicable check legacy Forms 26Q and 27Q, and evaluate any disallowance under the separate provisions; a matched ledger is not itself proof of deductibility.

Closing evidence checklist

• Confirm the statutory reporting framework, governing approvals, audit scope and component instructions.
• Reconcile related-party registers, notes, evidence of services, tax returns and transfer pricing reports.
• Test fixed assets, inventory, bank returns, statutory dues, foreign funding and borrowing reports.
• Document internal controls and audit trail exceptions.
• Reconcile and sign off the Indian-to-group accounting adjustments and preserve the evidence behind each entry.

Frequently asked questions

1. Can the Indian auditor rely entirely on the group auditor?

No. Use the work of another auditor only as allowed by the applicable standards and obtain sufficient appropriate evidence for the local opinion.

2. Does a failed audit trail test automatically change the main opinion?

No. Address Rule 11(g) reporting and separately assess the effect on the main audit opinion.

3. Does a recharge make parent awards cash settled?

Not by itself. Analyze who settles with the employee under Ind AS 102 and account for any separate recharge obligation.

4. What supports an overseas management fee?

Evidence of agreed and delivered services, recipient use, costs, allocation and a defensible pricing method. The tax report is only one item.

5. Can an AGM be held by video?

Check the MCA circular framework in force for that meeting, the procedural safeguards and any required filings. Permission to use video does not itself extend the statutory AGM deadline.

6. What should the group reporting file contain?

Keep the statutory trial balance, adjustment schedule, policy and valuation support, reconciled group balances and documented approvals.

Sources

• Companies Act, 2013, including sections 128, 143, 177, 188 and 189
• Gazette: Companies (Auditor’s Report) Order, 2020
• ICAI implementation guide on audit trail reporting under Rule 11(g)
• MCA Ind AS 116, Leases
• FASB ASU 2016-02, Topic 842
• MCA Ind AS 102, group arrangements and recharge
• MCA Ind AS 115, contract costs and revenue
• MCA Ind AS 12, income taxes
• MCA AS 22, accounting for taxes on income
• RBI mode of payment and NDI reporting regulations
• RBI reporting for external commercial borrowings
• MSMED Act, sections 15, 16 and 22
• CBDT Notification 23/2025 amending Form 3CD
• Income Tax Department: current Form 26 tax audit FAQs
• Income-tax Rules, 2026 including tax audit and transfer-pricing forms