A section 135 CSR compliance audit works through four linked tests: whether the company meets the net worth, turnover or net profit threshold that triggers applicability, whether the CSR committee is properly constituted and the CSR policy approved by the board, whether the spending obligation of two percent of average net profit for the preceding three years was correctly computed and actually spent or carried forward correctly, and whether any unspent amount was transferred within the prescribed timelines; each test has its own evidence, and a company that spends the right amount can still fail on committee constitution or on misclassifying an ongoing project, and the exact thresholds and computation mechanics should be confirmed against the current section 135 rules.
Applicability
Section 135 applies to a company meeting a prescribed net worth, turnover, or net profit threshold in the immediately preceding financial year. Test the company's own applicability assessment by recomputing each of the three criteria independently; a company that crossed a threshold mid-year through an acquisition or a one-off gain is often the one that misses applicability in the first year it becomes relevant.
CSR committee and policy
- Confirm the CSR committee is constituted with the prescribed minimum number of directors, including at least one independent director where the company is required to have one.
- Check the CSR policy is approved by the board and disclosed as required, including on the company's website where mandated.
- Confirm the committee formulates and recommends the annual action plan, and that the board approves it, rather than CSR spending being approved without a documented plan.
Spending obligation computation
- 01Recompute average net profit for the preceding three financial yearsNet profit is computed as per section 198, which adjusts statement profit for specified items; do not use the profit figure from the statement of profit and loss directly without these adjustments.
- 02Apply the two percent obligation to the recomputed averageCompare the company's stated obligation figure to the independently recomputed amount; a company new to CSR applicability in its fourth year of existence computes the average over the years it has actually existed.
- 03Trace actual spend against eligible CSR activitiesConfirm spend falls within the activities listed in Schedule VII, is not spent on activities benefiting only the company's own employees or in the ordinary course of business, and is net of any amount set off from a prior year's excess spend if claimed.
- 04Check administrative overhead and impact assessment cost limitsAdministrative overheads are capped at a prescribed percentage of total CSR expenditure for the year, and impact assessment costs for companies required to conduct one are separately capped; test both against the prescribed limits.
Unspent amount transfer
Unspent amounts on non-ongoing projects transfer to a specified Schedule VII fund within six months of the financial year end; unspent amounts on ongoing projects transfer to a separate unspent CSR bank account within thirty days of the financial year end and must be utilised within three years of transfer. This is the same mechanic tested under the corresponding CARO reporting clause, and the evidence built here should be the same working paper used there rather than a duplicate exercise.
A company that routes CSR spend entirely through an implementing agency or a group foundation needs the agency's own utilisation certificate, not just the transfer of funds to the agency, to support that the amount was actually spent for CSR purposes in the year claimed.
Regulatory requirement
The exact applicability thresholds, the section 198 adjustments to net profit, the administrative overhead and impact assessment caps, and the unspent amount transfer timelines are set out in section 135, the CSR rules and Schedule VII as currently in force. Confirm all of these against current source material before concluding on compliance.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- CARO & Companies ActSecretarial compliance checklist for a statutory auditorBoard meeting frequency, statutory registers and ROC filing timeliness, read as evidence of compliance culture rather than a secretarial checklist in its own right.
- CARO & Companies ActBooks of account compliance under the Companies ActWhat proper books of account require under the Companies Act, the audit-trail-software requirement, and how to test whether it is actually switched on.
- CARO & Companies ActCARO 2020 reporting checklist for statutory auditorsThe topic areas CARO reporting covers, what evidence each one needs, and how the clauses fit together across the audit file.
- Payroll & employee costDirector remuneration audit under the Companies ActManagerial remuneration limits and approvals, financial statement disclosure, and testing payments against board and shareholder resolutions.
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