financial reporting - east delhi study...

EAST DELHI CA STUDY CIRCLE OF NIRC OF

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

SUNDAY, SEPTEMBER 7, 2014

FINANCIAL REPORTING -IMPACT OF COMPANIES ACT 2013

GOPAL JI AGRAWAL B.COM LLB DISA IFRS (ICAI)

For any query, discussion or suggestion, please mail at

[email protected]

EAST DELHI CA STUDY CIRCLE OF NIRC OF

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

SUNDAY, SEPTEMBER 7, 2014

FINANCIAL REPORTING -IMPACT OF COMPANIES ACT 2013

GOPAL JI AGRAWAL B.COM LLB DISA IFRS (ICAI)


[email protected]

FINANCIAL REPORTING Vs. FINANCIAL STATEMENTS

BY- CA GOPAL JI AGRAWAL

What is the meaning of Financial Reporting (FR)?

What is the meaning of Financial Statements &

what statements are covered under it (FS)?

How the two differ from each other?

Whether Statutory Auditors are responsible for

FR or FS in case of corporate entities?

FINANCIAL REPORTING


Financial reporting means any reporting

about monetary matters or

Financial Reports are compiled about the

financial transactions or

Financial reports may also be called as a

structured representation of economic

phenomena in words and numbers

FINANCIAL REPORTING


Financial reporting includes the following:

(i) Financial Statements of an entity

(ii) Report by the management or those charged with the

governance on operations commonly called as MA &D or

MC or MR

(iii) Financial Summaries and highlights

(iv) Planned capital expenditure

(v) Financial ratios

(vi) Selected quarterly data

(vii) Any other financial information

CAR is the best example of Financial Reporting.

FINANCIAL STATEMENTS


Financial statements are

a structured

representation of the

financial position and

performance of a

reporting entity.[preface to ifrs]

COMPANIES ACT, 2013


RESPONSIBILTIES OF

STATUTORY AUDITORS

&

THE COMPANIES ACT,

2013??

REVIEWERS


WHO REVIEW

THE

STATUTORY

AUDITORS?

REVIEW BOARDS IN EXISTENCE


1. PEER REVIEW BOARD [PRB] 2. FINANCIAL REPORTING

REVIEW BOARD [FRRB] 3. QUALITY REVIEW BOARD[QRB] 4. QUALIFIED AUDIT REVIEW

COMMITTEE [QARC] 2012 ABOVE ALL THE 4 BOARDS

NATIONAL FINANCIAL REPORTING

AUTHORITY [2014]

FRRB OBSERVATIONS -216


1. AUDITORS’ REPORT (2) 2. CARO 2003 (15) 3. SCHEDULE VI (41) 4. ACCOUNTING

STANDARDS (158)

FRRB OBSERVATIONS -263


1. AUDITORS’ REPORT[15] 2. CARO 2003 [37] 3. ACCOUNTING

STANDARDS [211]

Independent Auditor’s report


No Addressee

Addressed to BOD

Reporting P&L for yr ending > 12 M

AS issued by ICAI

M.No. and firm Regn Number missing

Un-dated

Place of Signature not given

Branch Audit report not dealt with



Report date prior to FSs date

Membership number with prefix F

Examined the FSs

Report made subject to A/policies

Qualification not in thick/italic

Non-Compliance of several standards

still clean report

NOTES TO FSs


Corporate information & activity

Status as to SMC/Non SMC

Operating Cycle

Financial reporting framework

Use of Estimates

ONLY historical cost convention

Related Party relations/disclosures

P/period figures are not comparable

SCHEDULE VI [III]


Balance Sheet as on March 31, 2014

Statement of Profit & Loss Vs. Account

Currency is missed

Statement of Profit & Loss >12 M YR

Previous yr. figures in Notes missed

Face Items are given in Notes

NIL line items are reported

Classification missed

SCHEDULE VI [III]


Advance tax and provision for advance

tax stated separately

Audit fee payable stated as Provision

Auditors remuneration was not given

Par value of shares not disclosed in AC

and EPS

SAM is stated as Investment (L&A)

PY not given in FA

Repair to assets(building & machinery)

ACCOUNTING STANDARDS


Accounting Policies

1. Inventories

2. Cash Flow

3. Depreciation

4. Construction contracts

5. Revenue Recognition

6. Fixed Assets

7. Foreign exchange



8. Government grants

9. Investments

10. Amalgamation

11. Employee Benefits

12. Borrowing costs

13. Leases

14. EPS

15. CFS



16. Deferred Tax

17. Accounting for Associates

18. Discontinuing Operation

19. Intangible Assets

20. Accounting for JVs

21. Impairment of Assets

22. Contingent liabilities & Provisions

IMPORTANCE OF ACCOUNTS……


Books of accounts 114

Audit/auditing 131

Auditors 205

Turnover 11

CORPORATE LAW OR IPC????


76 imprisonment

31 punishment

44 penalties

68 25 lakh

189 fine

191 One lakh

AN OPEN SECRET PUZZLE


It is the only final delivery in the

audit process?

It is only mouthpiece of the

Auditors?

It is the only communication

between the auditors and the

stakeholders?

AN OPEN SECRET PUZZLE


It is hardly drafted and read by

qualified CA?

It was seldom read by regulators

or stakeholders?

It can ONLY save or sink an

auditor/audit firm?



147 (2) If an auditor of a company

contravenes any of the provisions of

section 139 (Appointment), section 143

(powers and duties and AS & SA),

section 144 (not to render certain

services) or section 145 (sign), the

auditor shall be punishable with fine

which shall not be less than twenty-five

thousand rupees but which may

extend to five lakh rupees:



Provided that if an auditor has

contravened such provisions knowingly

or wilfully with the intention to deceive

the company or its shareholders or

creditors or tax authorities, he shall be

punishable with imprisonment for a

term which may extend to one year and with fine which shall not be less than

ONE LAC rupees but which may extend

to 25 LAC rupees.



147(3) Where an auditor has been convicted

under sub-section (2), he shall be liable to—

(i) refund the remuneration received by him

to the company; and

(ii) pay for damages to the company, statutory

bodies or authorities or to any other person for

loss arising out of incorrect or misleading

statements of particulars made in his audit

report.

Indeterminate amount, people and time???



147(5) FIRM IS LIABLE

Where, audit being conducted by an audit

firm, it is proved that the partner (s) has acted

in a fraudulent manner or abetted or in any

fraud by, or in relation to or by the company

or its directors or officers, the liability whether

civil or criminal as provided in the Act or any

other law for such act shall be of the

concerned partner and of firm jointly and

severally.



140 (5) WINDING UP AUDIT FIRM The NCLT either suo motu or on an application made to it by

the Central Government or by any person concerned, if it is

satisfied that the auditor of a company has, whether directly

or indirectly, acted in a fraudulent manner or abetted or

colluded in any fraud by, or in relation to, the company or its

directors or officers, it may, by order, direct the company to

change its auditors.

Such an auditor shall not be eligible to be appointed as an

auditor of any company for a period of 5 years from the date of passing of the order and the auditor shall

also be liable for action under section 447.



143(12)FAILURE TO DISCLOSE FRAUD if in the course of the performance of his duties as

auditor, he has reason to believe that an offence

involving fraud is being or has been committed

against the company by officers or employees of

the company, auditor shall immediately report the

matter to the Central Government. In case of any

failure on his part to comply with this duty, he shall be

punishable with a fine which shall not be less than Rs.

1,00,000 but which may extend to Rs. 25,00,000.



245- CLASS ACTION SUIT- AUDITORS/FIRM

Minimum 100 or 10 % of the total members/deposit holders

Claim damages or compensation of demand any suitable

action

For any improper or misleading statement of particulars made in

the AUDIT REPORT or

any fraudulent, unlawful or wrongful act or conduct.



Punishment for false statement.

448. Save as otherwise provided in this Act, 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 there-under, any person

makes a statement,—

(a) which is false in any material particulars, knowing

it to be false; or

(b) which omits any material fact, knowing it to be

material,

he shall be liable under section 447 [Fraud).

COMPANIES ACT 1956


SECTION 233 OF THE COMPANIES ACT, 1956

[Penalty for non-compliance by auditor with sections

227 and 229]

If any auditor's report is made, or any document of the

company is signed or authenticated, otherwise than in

conformity with the requirements of sections 227 [Powers

and duties of auditors] and 229 [Signature of audit report, etc]

the auditor concerned, and the person, if any, other than the

auditor who signs the report or signs or authenticates the

document, shall, if the default is willful, be punishable

with fine which may extend to [ten thousand rupees].

Objectives of the ‘ Reports’


1. A reasonable assurance that FSs are free from material

misstatements whether due to fraud or error & adding

credibility to the FSs

2. Opinion as to compliance of applicable financial

reporting framework

3. Educates the user about the responsibility of the

management for the preparation of the FSs and

Auditors responsibility of expressing the opinion about

its true and fair view

4. Addition of the word “Independent” distinguishes

Auditors from management

5. Make it clear the difference between IAR, CA

certificate, Review report, compliance report,

compilation report, or agreed upon procedure report(s).

Materiality -revised


Information is material if its

omission or misstatement

(individually or collectively) could

influence the economic decisions of

the users taken on the basis of

financial information. Materiality

depends on the SIZE or NATURE

or a combination of both. (Entity

specific).

Misstatement


A difference between the amounts,

classification, presentation, or disclosure

of a reported financial statement item

and the amount, classification,

presentation, or disclosure that is

required for the item to be in

accordance with the applicable financial

reporting framework. Misstatements can arise from error or fraud.

REPORTING FRAMEWORK


General Purpose Reporting Framework It is Fair Presentation Framework or True &

Fair View reporting framework

Special Purpose Reporting Framework A financial reporting framework designed to

meet the financial information needs of

specific users. The financial reporting

framework may be a fair presentation

framework or a compliance framework. [SA

800.6.b)

AUDITORS’ REPORT

(Positive Assertions)


1. We conducted our audit in accordance with SA

issued by ICAI? [HOW MANY]

2. The financial statements are free from material

misstatements??

3. The balance sheet, the statement of profit and loss

and the cash flow statement comply with the

Accounting Standards referred to in sub-section

(3C) of Section 211 of the Companies Act, 1956 {to

the extent applicable}. [HOW MANY]

4. These financial statements represent

a true and fair view.

ACCOUNTING

STANDARDS

&

ENGAGEMENT

STANDARDS

Backbone of AUDITORS’ REPORT


COMPANIES ACT 2013


Accounting Standards [22] Section 2, 52(3), 55(2), 66(3), 129(1), 139(5), 143(3), 230(7), 232(2), Schedule II & III

Auditing Standards [8] Section 2, 132(1), 132(2), 143(2), 143(9), 143(10),

SAP [1982]

AAS [2002]

ES & SQC-1

[01/04/2008] BY- CA GOPAL JI AGRAWAL

Categories of Engagement Standards

[AAS / SAP]


Accounting Standards


Are the applicability criteria for Corporate and non

corporate entities are alike?

How many Accounting Standards Interpretations

are in existence?

Whether AS are applicable only on

corporate Entities?

Whether AS are applicable to charitable

institutions like trust, society or club etc?



Criteria for Small Medium sized company (SMC)

1. Equities or Debts are NOT listed or in

the process of listing

2. NOT a bank, financial institution or

insurance company

3. Turnover NOT exceeding 50 crore

4. Borrowings NOT exceeding 10 Crore

(any time during the year)

5. NOT a Holding or Subsidiary of Non

SMC



Reporting by Small Medium sized company (SMC)

“The Company is a Small and

Medium Sized Company (SMC) as

defined in the General Instructions in

respect of Accounting Standards

notified under the Companies Act,

1956. Accordingly, the Company has

complied with the Accounting

Standards as applicable to a Small

and Medium Sized Company.”



Criteria for Level – I Entity –Commercial, Industrial,

Business Reporting Entities

1. Equities or Debts are listed or in the

process of listing

2. Banks, Co-op banks, financial

institutions or insurance company

3. Turnover exceeding 50 crore

4. Borrowings exceeding 10 Crore

(any time during the year)

5. Holding or Subsidiary of Non SME



Criteria for Level – II Entity

1. Turnover exceeding 100(40) lacs but

not exceeding 50 crore

2. Borrowings exceeding 1Crore but

not exceeding 10 crore (any time

during the year)

3. Holding or Subsidiary of any above



Criteria for Level – III Entity

1. Turnover NOT exceeding 100 (40)

lacs

2. Borrowings NOT exceeding 1Crore



Reporting by Small Medium sized Entity (SME)

“The entity is a Level II or Level III SME as

per announcement by ICAI in respect of

applicability of the Accounting Standards

hence has not disclosed certain

information pursuant to the exemptions or

relaxations given to it and has complied

with the Accounting Standards insofar as

they are applicable to entities falling in

Level II or Level III (as the case may be).”



Whether we are reporting

this clause in TAX AUDITS?

What aspects are covered in Accounting Standards or

the pillars of Accounting Standards?



AS DESCRIPTION OF AS CORPO

-RATE Non –

Corporate

Level

APPLICABILITY AS PER TYPE OF ENTITY SMC Non

SMC III II I

1 Disclosure of Accounting Policies Y Y Y Y Y

2 Valuation of Inventories Y Y Y Y Y

3 Cash Flow Statement N Y N N Y

4 Contingencies and Events Occurring

After the Balance Sheet Date

Y Y Y Y Y

5 Net Profit Or Loss for the Period, Prior

Period Items and Changes in Accounting

Policies

Y Y Y Y Y

6 Depreciation Accounting Y Y Y Y Y

7 Construction Contracts Y Y Y Y Y




-RATE Non –

Corporate

Level


SMC III II II

9 Revenue Recognition Y Y Y Y Y

10 Accounting for Fixed Assets Y Y Y Y Y

11

3 The Effect of Changes in Foreign

Exchange Rates

Y Y Y Y Y

12 Accounting for Government Grant Y Y Y Y Y

13 Accounting for Investments Y Y Y Y Y

14 Accounting for Amalgamation Y Y Y Y Y

15 Employee Benefits Y* Y Y* Y* Y

Y* WITH SOME EXEMPTIONS & RELAXATIONS




-RATE Non –

Corporate

Level


SMC I11 II I

16 Borrowing Costs Y Y Y Y Y

17 Segment Reporting N Y Y Y Y

18 Related Party Disclosure Y Y N Y Y

19 Leases Y* Y Y* Y* Y

20 Earning Per Share Y* Y N N Y

21 Consolidated Financial Statements N Y N N N

22 Accounting for taxes on Income Y Y Y Y Y





-RATE Non –

Corporate

Level


SMC I11 II I

23 Accounting for investment in Associates

in Consolidated Financial Statements

N Y N N N

24 Discountinuing Operations Y Y N Y Y

25 Interim Financial Reporting N Y N N Y

26 Intangible Assets Y Y Y Y Y

27 Financial Reporting of Interest in Joint

Ventures

N Y N N N

28 Impairment of Assets Y* Y Y* Y* Y

29 Provisions, Contingent Liabilities and

Contingent Assets

Y* Y Y* Y* Y


TRUE & FAIR VIEW- FACTS


1. Overall presentation, structure and content of

the FSs in accordance with the FR Framework

2. FSs including notes represent the underlying

transactions, circumstances and events in a fair

manner

3. Adequate consistent application and disclosure

of significant accounting policies

4. Accounting estimates are reasonable

5. Information is relevant, reliable, comparable and

understandable (meets quality requirements)

6. Appropriate title and terminology to be used

7. Adequate disclosures though not required.

AUDITORS’ REPORT- OLD


Announcements of ICAI (December 2011)

Section 227(3)(g) of CA 1956, requires the auditors

to report “Whether the cess payable u/s 441A has

been paid and if not the details of cess not so paid”

“The auditor should report in his audit

report under the clause the Govt. has not

notified the rules u/s 441A, therefore we are

unable to comment on the same.”

AUDITORS’ REPORT- NEW


New Announcements of ICAI (January 3rd-4th 2014)

1. Regarding change in reporting u/s 227 (3)(bb) in

SA 700 illustrative report related to branch

auditors as per sec 228(3)( c)

2. Accounting Standard – 211 (3C) Vs. 133 (143)

3. Auditors Responsibility Paragraph-opinion with

regard to internal control for the PP of the FSs

4. Profit & Loss Account Vs. Statement of Profit

&loss

5. Reporting under CARO 2003 (non applicable

clauses)

AUDITORS’ REPORT-CHANGE 1


Section 227 (3) (bb) requires the auditor to report on

branch audit u/s 228(3( c) – Inadvertent error- SA 700

The report on the accounts of the branch

offices audited under section 228 by a person

other than the company’s auditor has been

forwarded to us as required by clause (c) of

sub-section (3) of section 228 and have been

dealt with in preparing our report in the

manner considered necessary by us.



Auditors Responsibility Paragraph –IC An audit involves performing procedures to obtain audit

evidence about the amounts and disclosures in the financial

statements. The procedures selected depend on the auditor’s

judgment, including the assessment of the risks of material

misstatement of the financial statements, whether due to fraud

or error. In making those risk assessments, the auditor

considers internal control relevant to the Company’s

preparation and fair presentation of the financial statements in

order to design audit procedures that are appropriate in the

circumstances but not for the purpose of

expressing an opinion on the effectiveness of

the Company’s internal control



PROFIT & LOSS A/C Vs. STATEMENT OF PROFIT & LOSS

Old Schedule VI used the term “Profit & Loss

Account”.

Revised Schedule VI (now III) used the term

Statement of Profit & Loss

Section 227 (still applicable) uses OLD term

Section 143 (3) (d) used the term Profit & Loss A/c??

What is to be done now?

AUDITORS’ REPORT- 4


Whether IAR to be issued u/s 143 of the

Companies Act, 2013 or Section 227 of

the Companies Act, 1956?

MCA circular no. 8 dated 04/08/2014

ICAI clarification dated 08/04/2014

All financial commencing on or after

01/04/2014 would be governed by new

such provisions.



Section 133 notified since 12/09/2013

(AS)- 211 (3C)

GC 16/2013 dated 18/09/2013 states that

the provisions of corresponding 98

sections 1956 (includes 211(3C) cease to

have effect. BUT

GC 15/2013 dated 13/09/2013 clarified

that AS notified shall remain continue.



The clause under Management responsibility &

Report on legal and other regulatory matters

MAY be changed:

Accounting Standards referred to in sub-section (3C)

of section 211 of the Companies Act, 1956 (“the

Act”) (which continue to be applicable in

respect of Section 133 of the Companies Act,

2013 in terms of General Circular 15/2013

dated 13th September 2013 of the Ministry of

Corporate Affairs)



Paragraph 80 of the Statement on CARO

2003 – addition

The auditor MAY

aggregate/ club the fact of

non applicability of different

clauses of CARO, 2003.


[10/02/2014]


Inclusion of financial statements (audited or

unaudited) in CFS

1.Component is unaudited but not

material

II. Component is audited but not

material

The principal auditor may or may not

disclose in report. If disclose, follow SA

706- OMP


[10/02/2014]


Inclusion of financial statements (audited or

unaudited) in CFS

III.Component is audited by others

and material [follow 706 OMP]

IV. Component is material but

unaudited

[Follow SA 705- Modification in

report]

STATUTORY AUDITORS

RESPONSIBILITY


Whether the Statutory Auditors of an Entity is responsible for the omissions or misstatements in the Financial Reporting of management i.e. MA &D or MC or MR which are stated separately in Annual Report?

Statutory Auditors’ Responsibility


SA 720 THE AUDITOR’S RESPONSIBILITY IN RELATION TO OTHER

INFORMATION IN DOCUMENTS CONTAINING AUDITED

FINANCIAL STATEMENTS deals with the auditor’s

responsibility in relation to other information in documents

containing audited FSs the auditor’s report thereon. In the

absence of any separate requirement in the particular

circumstances of the engagement, the auditor’s opinion

does not cover other information and the auditor has no

specific responsibility for determining whether or not

other information is properly stated. However, the auditor

reads the other information because the credibility of

the audited financial statements may be

undermined by material inconsistencies between

the audited financial statements and other

information. Ref: Para A1)

INDEPENDENT AUDITORS’

REPORT


HOW MANY STANDARDS,

RULES AND REGULATIONS

GOVERN INDEPENDENT

AUDITORS’ REPORT OR

REPORING BY

PRACTITIONERS IN INDIA?

Standards Governing Reporting


How many Standards govern reporting?

1. SA-700 Forming an opinion and reporting on FSs

2. SA 705 Modifications to the opinion in IARs

3. SA-706 Emphasis of Matter paragraphs and other

matter paragraphs in Independent Auditors’ Report

4. SA-710 Comparative Information-Corresponding

figures and comparative FSs

5. SA -720 Auditors Responsibilities in relation to

other information in documents containing AFSs

6. SA 800- Special Considerations- Audit of FSs

prepared in accordance with special purpose

framework



How many Standards govern reporting-

continue>>>>

7. SA-805 Special Considerations- Audit of Single FS

and specific elements, accounts or items of a FS

8. SA-810 Engagement to report on Summary FSs

9. SRE -2400 Engagement to Review FSs

10. SRE-2410 Review of Interim Financial

Information performed by the Independent

Auditor of the entity

11. SAE 3400- The examination of prospective

financial information

12. SAE-3402 – Assurance Reports on controls at a

service organization



How many Standards govern reporting-

continue>>>>

13. SRS-4400- Engagement to perform agreed upon

procedures regarding Financial Information

14. SRS-4410- Engagement to compile Financial

Information

Statements/Guidance Notes governing

Reporting


1. Statement on Reporting u/s 227(1A) of the

Companies Act, 1956

2. Statement on CARO 2003 u/s 227(4A)

3. Guidance Note on Independence of Auditors

4. Guidance note on certificate issued under

Acceptance of deposit Rules 1975

5. Guidance note on Auditor report and

certificates for special purpose

6. GN on Reports in Prospectus

7. GN on certificate on Corporate Governance

8. GN on section 227(3)(e) (f) of Companies

Act 1956 9.GN on reports on Abridged FS



Title [IAR]

Addressee [Members]

REPORT ON FINANCIAL STATEMENTS

•Introductory paragraph

•Management’s responsibility paragraph

•Auditor’s responsibility paragraph

• Auditor’s opinion paragraph

• Other responsibilities paragraph

Matter Paragraph

Other Matter Paragraph REPORT ON OTHER LEGAL & REGULATORY REQUIREMENTS

Signature

Date of the auditor’s report (after approval)

Place of signature

FRN and Membership Number

PARENTS

Standards governing Reporting


1.SA-700 Forming an opinion and

reporting on FSs

2. SA 705 Modifications to the opinion

in IARs-qualified, adverse,

disclaimer 3. SA-706 Emphasis of

Matter paragraphs and

Other matter paragraphs

in Independent Auditors’ Report

SA-705- Modifications to the opinion in

Independent Auditors Report


Situation causes modifications in opinion?

A. There is a matter for which the auditor has

sufficient appropriate audit evidence to

determine that due to such matter the financial

statements are materially misstated, and

(b) There is a matter for which the auditor is

unable to obtain sufficient appropriate audit

evidence to determine whether due to it the

financial statements may be materially misstated.

SA-705- Modifications to the opinion

in Independent Auditors Report


Nature of

matter giving

rise to

modification

Auditor’s judgment about the

Materiality and Pervasiveness of the

Effects or Possible Effects on the

financial statements

Material but

Not Pervasive

Material and

Pervasive

FS are materially

misstated

Inability to obtain

sufficient appropriate

audit evidence

Qualified opinion

Qualified opinion

Adverse opinion

Disclaimer of opinion

SA-705- Modifications to the opinion

in Independent Auditors Report


When misstatement is pervasive?

(A)Where it pertains to an amount(s) in the

financial statements, it is not confined to specific

components, accounts or items of the financial

statements. If it is so confined, it represents or could

represent a substantial portion of the financial

statements; or

(B)Where it pertains to disclosures, such disclosures

or the matter(s) therein are/ could be fundamental to

the user’s understanding of the financial statements.

SA-706- Emphasis of Matter

Paragraphs and Other Matter

Paragraphs In IARs


Differentiate between MP & OMP?

Moreover there are following difference:

1. In MP, matters are appropriately presented

and disclosed in FSs but OMP are not

presented or disclosed in FSs.

2. MP is fundamental with reference to

understanding of FSs while OMP is relevant to

users’ understanding in respect of 3 matters

only(a)audit,(b)the auditor’s responsibilities

or (c ) the auditor’s report.”

CARO 2003 -APPLICABILITY


WHETHER &

WHEN CARO

2003 IS

APPLICABLE?

CARO 2003 -APPLICABILITY


EXEMPTION

Banking, Insurance and u/s 25 Company

Private Limited Company

Paid up capital and reserves 50L

Loan from bank/FI 25L

Turnover 500L

Limits at what time to be seen?

CARO 2003


Paragraph-wise comments

All the issues in a single clause

Name of the company & IAR reference

Determination of negative comment on

true & fair view of the FSs

FRRB OBSERVATIONS –CARO


Fixed assets verification

The management has explained to us that no material discrepancy were noticed during verification

The Auditor had not used his own

judgment to comment.



Substantial part of fixed assets disposal

On account of demerging of x unit under the scheme of arrangement, the concept of GC is not affected

The Auditor was required to make

specific comment on sale of FA.



Loans from parties u/s 301

The company has not taken intt free unsecured loans from companies u/s 301 of the Act.

Report had not dealt with the

firm and other parties and silent abt loan given to these parties.



Internal Control System

Commented on purchase of inventory and fixed assets and for the sale of goods.

Report had not dealt with the sale of services and whether there is continuing failure to correct the major weakness in system (2Q)



Internal Audit IA

The co.has dr. the yr. set up in house IA deptt. Co. is in the process of setting up a formal IA system.

Without setting up an IA system,

it could not set up any deptt. Statements are contradictory.



Statutory Dues

There were some delays in depositing undisputed income tax dues during the year.

Not stated whether there is any

outstanding dues for more than 6 months at the end of the year



Statutory Dues

There are no undisputed statutory dues outstanding at the end of the year for more than 6 months.

Silent about the regularity of deposit of undisputed dues and nothing about the disputed dues reporting.



Statutory Dues

There are no disputed statutory dues? In one of the notes, stated about

the certain dispute relating to ED pending hence contradiction in the report.

FRRB- AS 1-Disclosure of Accounting Policies


Revenue is recognised on the basis as stipulated

under AS-9 issued by ICAI?

Sales include ED but exclude sales tax.

{The policy regarding the timing of recognition of

revenue was not mentioned.}

No disclosure of valuation of land in inventory policy

was taken in inventory.

Operating cycle period not mentioned (Jury 2014)

No reference of FR Framework (Jury 2014)

FRRB- AS 1-Disclosure of Accounting Policies


Not disclosed the accounting policies in respect of: Borrowing costs Valuation of inventories Accounting for investments Impairment of assets Provisions, contingent liabilities and contingent assets

FRRB- AS 1


The capital employed in investment is more

than 50% of its net worth and dividend

constituted a significant portion of total

income.

Accounting policy in respect of dividend

income not disclosed.

FRRB- AS 2-Valuation of Inventories


Custom duty payable on raw material, stores and

spare are accounted for on clearing of the goods from

custom warehouse.

The liability arises as the goods enter the territory of

the country.

Raw materials, stores, spares and tools are valued at

cost?

Finished goods have been valued at lower of cost or

market value?

FRRB- AS 2


The company did not disclose the cost formula used?

ED is accounted for on the clearance of goods?

Stock of material sold by one unit to other is valued at

transfer price? i.e. unrealized profit accounted for.

Holding the real estate as part of inventory and

revaluing the land? No provision for it in AS-2

Inventory as taken, valued and certified by the

management? Means giving disclaimer for inventory.

FRRB- AS 2


MODVAT credit available as well as ED on FGs was

shown as a separate item under inventory? In case of

FGs, it is included, MODVAT is to be shown under

advance.

Land under inventory is VALUED at cost?

Machinery spares and maintenance is charged to P&L

(Jury 2014)

FRRB- AS 3-Cash Flow Statement


Foreign exchange variation was shown as

extraordinary item in cash flow under Operating

Activities while there was no such item in Profit &

Loss?

Financial Expenses/Interest paid was shown as cash

flow from operating activities?

Intt recd was shown as financing activities instead of

investing activities?

Fixed deposits with banks shown as financing instead

of investing activity?

FRRB- AS 3


Disclosed proceeds from general reserve as financing

activity while no cash can come from such head?

Cash flow from issue of share shown as investing

activity instead of financing activity?

Cash flow was categorized into four activities- fourth

one in the name of OTHERS?

Cash flow from long term borrowings and repayment

were shown at net figure instead of gross separately.

FRRB- AS 4 –Contingencies and events

occurring after the Balance-Sheet date


Rs. 678 lac for income tax had not been deposited

because of disputes but under contingencies, the

amount had been mentioned 105 lac for income tax.

No provision for claim liabilities has been made as It

has decided to charge the same on payment basis?

No provision was made in the accounts for doubtful

book debts in view of the adequate reserves?

A bank had agreed OTS of 1080 lac subject to

approval of the competent authority and later CA

turned rejected but intt provision was not made (HC)

FRRB- AS 4


Loans to certain companies amt to 48.19 crore whose

net worth has been substantially eroded but no

provision made as the company is involved in its

strategic and long term policies?

The company availed the sales tax exemption of 2628

lacs agnst the provisional certificate of 1500 lac and

expected to get full exemption but no provision is

estimated for any loss and said that it would be

adjusted when occur.

Discount, claims and rebates payable are accounted

for as and when settled?

FRRB- AS 4 –Contingencies and events

occurring after the Balance-Sheet date


Liability in respect of warranty cost is reckoned in the

year in which liability is settled?

No loans and advances has been considered doubtful

still a provision made?

Significant event after the BS date but before

finalization of BS is taken into account?

Provision for doubtful debts, if any, would be made at

appropriate time?

All the parties a/cs are subject to conf. & reconc.

FRRB- AS 5 Net profit or loss for the period, prior period

items & changes in accounting policies


The liability for leave en-cash was a/c for on pay-as-

you-go basis. The liability as year end has been

estimated by actuary and debited to revenue reserves

directly. (No Qualification is report)

The bank charged the excess dep. Due to revaluation

of assets directly to capital reserves instead of P/L.

Prior period expenses and income are included in

respective heads of expenses and income.

Prior period income shown as other income without

nature.

FRRB- AS 5 Net profit or loss for the period, prior period

items & changes in accounting policies


The company has shown ED provision as a deduction

from the value of Finished goods?

Extra depreciation is provided with application for the

same with the CG but without obtaining the

permission?

FRRB- AS 6 – Depreciation Accounting


Dep is provided on SLM as per schedule XIV and on

the amt added on revalution, dep is provided on

residual life of the assets?

In case of P&M, higher depreciation is charged based

upon useful life (without disclosure of rate & useful

life)

INR 25 crore was withdrawn from general reserve and

credited to P/L to neutralize the extra depreciation

due to change in policy?

Dep. on P& M not provided for shut down period?

FRRB- AS 7 – Construction contracts


In a service company, the inventory included Job in

progress only?

Not disclosed the aggregate costs incurred,

recognized profit (less losses) till reporting date &

The amount of advance received &

The amount of retentions

FRRB- AS 9 – Revenue Recognition


Sales (net of ED) shown on the face?

Sales including ED shown on the face and ED stated in

Mfg Expenses?

Dividend are accounted for as and when received?

It has deducted a consolidated figure of ED & CD from

sales?

Sales is stated net of returns, discount etc????

Timing of recognition not disclosed?

Captive consumption is treated as sale (Jury 2014)

FRRB- AS 10 – Accounting for fixed

assets


It added an amt of INR 167 lac in the total amount of

assets by way of revaluation instead of individual

assets?

It transferred an amt from revaluation reserve to

other income equivalent to addl dep. Instead of

showing the same separately in profit & loss?

FRRB- AS 11 – Effects of changes in

Foreign exchange rates


Imports and exports are recorded at the prefixed rates

Companies had not made the disclosure of exchange

differenced despite having voluminous transactions in

foreign currency?

Current assets and current liabilities are translated at

year end rate (permitted only monetary items)?

Excess or shortfall at the time of actual realization is

credited or debited to profit & loss A/c?

FRRB- AS 11 – Effects of changes in

Foreign exchange rates


Stock for which payments are pending are accounted

for at the applicable exchange rate at the year end?

Sales is inclusive of exchange fluctuation inter-alia?

FRRB- AS 12 – Accounting for

Government Grants


The company had clubbed “subsidy on fertilizers” with

the sales amount?

Grant received in the form of asset is shown in notes

but not recorded in fixed assets at nominal value?

Government grant that became refundable was

disclosed in the notes but not charged to profit and

loss as extra ordinary item?


Investments


The investments are stated at cost. (no bifurcation

between long term and current investment hence

incomplete policy)

Provision is made for any permanent diminution in the

value of investments (instead of then temporary)?

Investment in non cumulative redeemable pref shares

are valued at cost since having strategic interest in

the investee companies though having negative net

worth?


Investments


Stated one figure for interest and dividend earned and

no policy disclosure about the same?

Prov for diminution in the value of investment written

back after the line item Profit after tax i.e. below line?

The company had invested in various units and bonds

but failed to provide the A/policy as adopted?


retirement benefits


Gratuity and leave encashment are charged to p/l

based on assumption that benefits payable to

employee at year end (without actl. Valuation)

It did not disclose whether actuary valuation was done

at the end of the year or at earlier date?

Post retirement medical benefits were accounted on

the basis of actual eligible claims passed?

Retirement benefits are charged to p/l on the basis of

payment?


retirement benefits


Gratuity payment charged during the year was ten

times as to earlier year amt to 125 lac (12 lac)

without any reason and policy disclosure?

Amount of Rs. 441 lac is un-provided on the basis of

LIC valuation. It expects to meet the liability in coming

years by enhanced contribution to LIC?

Policy states that gratuity is provided on accrual basis

while there is no accrued liability in the BS?

FRRB- AS 16 – Borrowing Costs


Borrowings costs are recognized in the FSs except in

respect of specific borrowing raised for acquisition of

capital assets? (general borrowings might also be

used for qualifying assets)?

Valuation of finished goods include dep. & interest?

Amount of interest capitalized during the year is not

disclosed in several cases?

FRRB- AS 17 – Segment Reporting


In the policy, it states having more than one segment

while in notes to accounts, it states one segment only?

It stated segment reporting on the basis of stand

alone FSs instead of CFSs?

Company was having sales from Oil Division, Rice

Division and other sales while it fail to disclose SR?

It allocated the interest into two segments while intt is

not allocated unless it is a company having primary

business of finance or intt is being capitalized in

stock?

FRRB- AS 18 – Related Party

Disclosures


It disclosed trans. With the relative of KMP without

stating the names of such relatives?

It disclosed the trans with other related parties

(relationship not stated)

Trans with related parties like rent, commission etc

disclosed but the nature of transaction whether paid

or recd not disclosed?

Report mentioned names of two parties together as

associates and JV?

FRRB- AS 18 – Related Party

Disclosures


Report did not disclose the name of KMP under As-18

information while there was MD having such

relationship?

The corporate governance report stated the

remuneration to MD while it was not reported under

AS_18 disclosures?

FRRB- AS 19 – Leases


It had taken new assets on HP but did not give

relevant disclosure?

Rs. 858 lac assets were given on lease but disclosure

not given for the same?

Other income includes the revenue arising from lease

rent also but did not disclose the policy of revenue

recognition for the same?

FRRB- AS 20– EPS


? A bank and certain companies had not disclosed the

BEPS and DEPS on the face of the profit & loss

? Not disclosed the EPS before and after extra-ordinary

items

?Not disclosed the policy and weighted average

number of shares used as denominator

? Non disclosure of reconciliation of BESP & DEPS

denominations

? Disclosed EPS (whether B or D)

FRRB- AS 20– EPS


? Disclosed the same B & D despite having convertible

share warrants?

? Fail to disclose the nominal value of share with EPS

?Calculated EPS on the basis of opening number of

shares despite shares issued during the year

?EPS without deducting the preference shares divident

payable

FRRB- AS 21– CFSs


? On the face of the CFSs, the company has disclosed

separate line items for share of the assets, liabilities,

Income and expenses but fail to disclose the previous

year figures?

?Non disclosure of notes, other statements and

explanatory material on consolidation of CFSs as per

para 6

FRRB- AS 22– Accounting for taxes of

income


?Non disclosure of the nature of evidence supporting

virtual certainty in case of unabsorbed losses and dep

and just taken that the management was confident to

realize it

?Non disclosure of the break up of deferred tax assets

and liabilities in several cases

?DTA not recognized on the basis of prudence while

DTL was recognized in the FSs (not set off against

present DTA)

No evidence stated for convincing evidence (2014)

FRRB- AS 22– Accounting for taxes of

income


?Disclosure of DTL/DTA under wrong line item

As a part of loan funds

As a part of shareholders fund

After the head reserves and surplus

Under the schedule provisions

After the head Fixed assets

?Recognized DTA but not disclosed the policy

anywhere

?Transferred the DTL from the profit after tax

?Not set off the Provision of IT with Prepaid taxes

FRRB- AS 26– Intangible Assets


? Current revenue exp incurred on R&D is charged to

P/L unless deferred? (Not bifurcated into R and D

? R & D costs are charged to P/L except fixed assets

acquired

?Intangible assets are amortized over useful life of the

assets (non disclosure of rate and life)

?Deferred expenses on a/c of debenture issue exp.

And premium on restructuring of loan funds treated

as intangible assets as per AS-26 (dealt with AS-16)

?Preliminary and pre-operative continuing?

FRRB- AS 27– Interest in JVs


?It had disinvested a part of its share in JV and lost

effective join control hence not consolidated (required

consolidation till the date of disposal

?It was having JV but fail to disclose anything

?It mentioned the names of 2 companies as JV and

Associates but fail to disclose information per AS-27

?In AS-18, the JVs names were given but did not

considered them in CFSs.

FRRB- AS 28– Impairment of Assets


? In a listed company, it had neither disclosed the

accounting policy in respect of impairment of assets

nor it mentioned whether company had conducted any

impairment test

FRRB- AS 29– Provisions, contingent

liabilities and contingent assets


? Contingent liabilities also included the information

relating to provisions etc. (should be separately

stated)

?Custom duty on import is assessed provisionally and

included under contingent liabilities

No provision for warranty, taken on cash basis (2014)

No provision for loyalty programs (2014)

FRRB OBSERVATIONS –SCHEDULE

VI -OLD


The Co. has issued bonus shares but failed to disclose the source from which bonus shares were issued.

The Co. has taken short term loan of

1500 lac but failed to disclose the break-up into banks and others.


VI -OLD


The Co. had net off the interest received and paid in the schedule?

It had given one figure for expenses

on employee instead of salaries, cont. to PF etc and staff welfare.

Insurance figure was clubbed with other expenses.


VI -OLD


The Co. has shown repairs to assets instead of repair to building and repair to machinery.

Unclaimed fixed deposits had been

included in unsecured loans instead of current liabilities.


VI -OLD


The Co. had shown one figures of sundry creditors and acceptance instead of showing separately.

In respect of note of deferred taxes-

prev yr figure not stated. In FA, prev yr figures not stated.


VI -OLD


The Co. had shown forfeited shares account in the reserves and surplus instead of share capital.

The company has included capital WIP in schedule of FA instead of showing on the face of BS.

The amt. originally paid up on forfeited shares was not given.


VI -OLD


The break up of auditors remuneration was not disclosed.

One figure for current assets, loan & advances as well as current liabilities & provision was given instead of break up on the face.

Calls in arrears was deducted from premium instead of share capital.


VI -OLD


It had disclosed the audit fee payable under the head provision instead of CL.

Advance income tax paid was shown under other current assets instead of loans and advances.

The amt of audit fee stated in notes was different.


VI -OLD


The figures of freehold and leasehold properties were clubbed.

The SAM paid was shown under

investment instead of L&A. The loss of stock due to accident had

been reported at the net figure and gross figures was not at all.

An humble appeal I will acknowledge your critical comments

and suggestions for making our

Coming Deliberations

more effective and copious

Gopal Ji Agrawal B.COM LLB DISA IFRS (ICAI)


[email protected]

An humble appeal I will acknowledge your critical comments

and suggestions for making our

Coming Deliberations

more effective and copious

Gopal Ji Agrawal B.COM LLB DISA IFRS (ICAI)


[email protected]

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