Audit under Companies Act 2013 Companies Act; Reporting Standards. December 31, 2016 T V Balasubramanian Chennai

Transcription

1 Audit under Companies Act 2013 Companies Act; Reporting Standards December 31, 2016 T V Balasubramanian Chennai 1

2 Auditor appointment etc., First auditor to be appointed by the Board within 30 days or in an EGM within 90 days Thereafter, Act envisages that appointment is made for 5 year terms To be ratified in the AGM each year thereafter Removal of auditor requires Requires special resolution Requires prior approval of CG 2

3 Auditor appointment etc., Death creates a casual vacancy to be filled up by the Board which auditor will hold office until next AGM Resignation Would it be a casual vacancy? Non ratification Would it create a casual vacancy? 3

4 Auditor Disqualification Body corporate other than LLP Officer or employee of the Company Partner of a person who is in the employment, of the company. Holding any security or indebtedness or guarantee or provided any security in connection with the indebtedness of any third person (by firm, partner or his relative) to the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company Limits Security Rs.1 lakh in case of relatives; otherwise Nil; Indebtedness Rs. 5 lakhs Guarantee / Security Rs.1 lakh Directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company Relative is a director or is in employment of the company as a director or key managerial personnel; A person who is in full time employment elsewhere Holding audit of more than 20 companies per partner (other than OPC, dormant, small and private companies with PUC less than Rs.100 crores) Convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction; Any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialized services as provided in section

5 Rotation Applicability Type of Company Listed Companies Paid up Share Capital All Public Borrowing Unlisted Public Companies Rs.10 crore or more Or Rs.50 crore or more Private Limited Companies Rs.20 crore or more Or Rs.50 crore or more One Person Company / Small Company Not applicable Existing Companies which are covered are reaching transition time by 2017 Company may decide on audit partner rotation / team rotation / joint audit 5

6 Rotation Grey areas When 10 years has been served by more than one firm belonging to the same network in the past Partner who is in charge of the audit firm and also certifies the financial statements Rs. 10 crore / Rs.20 crore / Rs.50 crore limit as at previous year end, on the date of the Board meeting / AGM when? 6

7 Independent Auditors Report Italics / Bold for qualifications no longer exists Existing matters to report on continuing (Sec 227 of Companies Act 1956) Whether sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit; whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination; whether the report on the accounts of any branch office of the company by a person other than the company s auditor has been sent to him; whether the company s balance sheet and profit and loss account are in agreement with the books of account; whether, the financial statements comply with the accounting standards; whether any director is disqualified from being appointed as a director; 7

8 Independent Auditors Report Additional requirements brought in: the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company; any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith; whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls; such other matters as may be prescribed. Rule 11 prescribes: Whether company had disclosed impact, if any, of pending litigations on its financial position in financial statements Whether company had made provision as required under any law or accounting standards for material foreseeable losses if any on long term contracts including derivative contracts Whether there has been any delay in transferring amounts to IEPF by company 8

9 Observation & Comment Are construed to have the same meaning as referring to emphasis of matter paragraphs, situations leading to modification in the auditor s report. Only on financial transactions or matters that have been made by the auditor in the auditor s report which have an adverse effect on the functioning of the company are required to be reported under this clause Might have adverse effect on the functioning of the company neither the auditor s observations nor the comments made by him have any adverse effect on the functioning of a company Examples of emphasis of matter which may have an adverse effect on the functioning of the company include situations where: the going concern assumption is appropriate but there are several factors leading to a material uncertainty that may cast a significant doubt about the Company s ability to continue as a going concern; or a material uncertainty regarding the outcome of a litigation wherein an unfavourable decision could result in a significant outflow of resources for the company, etc. Examples of emphasis of matter which may not have an adverse effect on the functioning of the company include a situation where there is an emphasis of matter: on managerial remuneration which is subject to the approval of the Central Government; relating to accrual of a contractually receivable claim based on management estimate where the ultimate realisation could be different from the amount accrued; on frauds that have been dealt with in the financial statements of the company and would not have any continuing effect on the financial statements. 9

10 What is books of Accounts Section 2(13) Section 143(3)(b) requires the auditor to, inter alia, state whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books. We must understand this as we are expected to report about it!! Section 2(13) states (i) all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place; (ii) all sales and purchases of goods and services by the company; (iii) the assets and liabilities of the company; and (iv) the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section; 10

11 Any qualification, reservation or adverse remark u/s 143(3)(h) 143(3)(h) Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith An auditor s report may contain matters leading to modifications in the auditor s report on financial statements. The matters that cause such modification may have a consequential effects or possible effects on the books of account maintained by the company and other matters connected therewith. Section 128 of the Act, inter alia, states that every company shall prepare and keep its books of account and other relevant books and papers and financial statements that give a true and fair view of the state of affairs of the company. Section 129(1) of the Act, inter alia, states that the financial statements shall comply with the accounting standards notified under section 133 of the Act 11

12 143(3)(h) cond. Matters to be reported needs to be evaluated based on the financial statements prepared under the Act Any material weakness in ICFR that is reported by the auditor under143(3)(i) may not have an impact on the maintenance of books of account if such material weakness did not result in a modification to the opinion on the financial statements of the company. However, if the material weakness in internal financial controls resulted in a modification to the audit opinion on the financial statements, then such modification may be covered for reporting under 143(3)(h) 12

13 143(3)(i) on ICoFR Reporting under section 143(3)(i) is part of the auditor s report though it may be reported in an annexure to the auditor s report If any observations or comments made by the auditor on the adequacy or operating effectiveness of ICoFR contain such matters, which, in his opinion, may have any adverse effect on the functioning of the company, should also be reported even if such observation did not result in a modification to the audit opinion on the financial statements of the company. Example in this regard may be where an auditor reports that the company did not have an appropriate internal control system for inventory with regard to receipts, issue for production and physical verification 13

14 Reporting fraud to Central Government - S 143 rw Rule 12/ 13 Applies to main auditor as well as branch auditor Earlier, only in respect of money laundering there is a requirement to report to CG (Implementation of S 51A of Unlawful activities (Prevention) Act 1969 ICAI circ. dated 22 Apr 2010) Now if an auditor has reason to believe that an offence involving fraud is being or has been committed in the company by officers or employees of the company he shall report it to CG Materiality limit Rs. 1 crore or above No duty of auditor regarded as contravened if such reporting done in good faith 14

15 S 447 definition of fraud fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss; wrongful gain means the gain by unlawful means of property to which the person gaining is not legally entitled; wrongful loss means the loss by unlawful means of property to which the person losing is legally entitled. 15

16 How to report fraud to CG - S 143 rw Rule 12/ 13 Time - Within 60 days In - Form ADI 4 How? Auditor to forward report to Board/AC of Co. seeking reply within 45 days Forward his report and reply with his comments to CG within 15 days of receipt of reply If no reply, auditor to forward his report to CG with a note containing details of report forwarded to Board or AC To - Secretary, MCA By registered post ack due or speed post followed by Branch auditor to have same duty related to the concerned branch audited (Rule 12) 16

17 Reporting fraud to CG - S 143 rw Rule 12/ 13 Are we opening a Pandora s box? Will aggrieved auditors report/ send reports to CG to take revenge on management and not accept replies of management? Board/ AC may call for the auditor after the report goes to them and persuade him aggressively What about past frauds? Officers will include directors also! 17

18 S. 144 Prohibited Services Applies to all companies Unlike IFAC does not have differentiation of public interest entities Extends to the company, holding or subsidiary Grey area Definition of management services Applicability to Associates, co-subsidiaries 18

19 S.146 Attending AGM Generally, auditor to attend AGM by himself or through a Chartered Accountant representative (who is qualified to sign as an auditor) Alternatively, exemption to be obtained from the company for not attending the AGM in person This applies to all companies 19

20 AUDIT REPORTING 20

21 Contents of today s coverage SA 700, Forming an Opinion and Reporting on Financial Statements (incl revision effective financial periods beginning on or after 1 st April 2017) SA 701, Communicating key matters to in the Independent Auditors Report (effective financial periods beginning on or after 1 st April 2017) SA 705, Modifications to the Opinion in Independent Auditor s Report (incl revision effective financial periods beginning on or after 1 st April 2017) and SA 706, Emphasis of Matter Paragraph and Other Matter Paragraph in the Independent Auditor s Report That deal with how to form an audit opinion, reach audit conclusions and issue different types of auditor s reports. Guidance Note on Reporting under Section 143 (3)(f) and (h) of the Companies Act, 2013 (issued in April 2015) 21

22 Not included but care should be taken SA 710 (Revised) issued under the Clarity Project, Comparative Information Corresponding Figures and Comparative Financial Statements SA 720 under the Clarity Project, The Auditor s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements 22

23 Background Essentially, this is the culmination of Converging with IASB s international standards Bring specific placement of Unqualified Opinion Basis for qualified opinion Basis for adverse opinion Basis for disclaimer of opinion Matters of emphasis (not qualified) Other matters of importance (not qualified) New amendments regarding Key matters to be communicated in Audit Report 23

24 SA 700 Applicability from 1 st April 2011 Postponed by one year Applies only for audit report on general purpose financial statements General purpose framework could be Fair presentation framework Like under Companies Act Compliance framework Whether in compliance with specific regulatory requirements There could be a mixture of both required Like applicable for Banks and NBFCs regulated by RBI Specifically excluded for Tax Audits u/s 44AB For reports filed upto 31 st March 2014 While ICAI could take up with Tax Authorities for necessary change from their end ICAI GN states that the responsibilities could be included under observations 24

25 The process of reaching a conclusion Sufficient and appropriate evidence obtained SA 330 Materiality of uncorrected misstatements SA 450 Requirements of reporting framework materially complied with (A/cing Standards) Management judgment are not biased SA 260 and 540 Adequate disclosure of accounting policies Accounting policies are appropriate and consistent Accounting estimates are reasonable Information is relevant, reliable, comparable and understandable Adequate disclosure for users to understand Terminology used is appropriate Achieve true and fair presentation considering Overall structure and content Represent underlying transactions in a manner that s true and fair Meticulous collection of evidence Detailed documentati on of work done Analysing with professional skill, competence and reasoned judgement 25

26 Forming an Opinion Audit Process Has obtained sufficient appropriate evidence Unable to obtain sufficient appropriate evidence Reaches a conclusion that the financial statements are free from material mis-statement Reaches a conclusion that the financial statements are not free from material mis-statement Issue a Qualified or a disclaimer of opinion (SA 705) Clean opinion (SA 700) Modified opinion (SA 705) 26

27 Which modified opinion to use Nature of the matter giving rise to the modified opinion Auditor s judgement 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 Qualified opinion Adverse opinion Inability to obtain sufficient appropriate audit evidence Qualified opinion Disclaimer of opinion 27

28 Professional Judgment The distinguishing feature of the professional judgment expected of an auditor is that it is exercised by an auditor whose training, knowledge and experience have assisted in developing the necessary competencies to achieve reasonable judgments. Can be evaluated based on whether the judgment reached reflects a competent application of auditing and accounting principles and is appropriate in the light of, and consistent with, the facts and circumstances that were known to the auditor up to the date of the auditor s report. Professional judgment is necessary in particular regarding decisions about: Materiality and audit risk The nature, timing, and extent of audit procedures used Evaluating whether sufficient appropriate audit evidence has been obtained Evaluation of management s judgments in applying applicable financial reporting framework Drawing of conclusions based on the audit evidence obtained 28

29 Material mis-statement FS to comply with applicable financial reporting framework need to comply on four aspects Recognition Measurement Classification and presentation Disclosure As per SA 540 (Evaluation of misstatements identified during audit) Appropriateness of the selected Accounting Policies Application of selected Accounting Policies Appropriateness and adequacy of disclosures Three key concepts Evidence Materiality Mis-statement Other Key SA to consider SA 320, Materiality in Planning and Performing an Audit SA 450, Evaluation of Misstatements Identified during the Audit SA 500, Audit Evidence SA 501, Audit Evidence Specific Considerations for Selected Items SA 505, External Confirmations SA 570, Going Concern 29

30 What is Pervasive Pervasive effects on the financial statements are those that, in the auditor s judgment: (i) Are not confined to specific elements, accounts or items of the financial statements; (ii) If so confined, represent or could represent a substantial proportion of the financial statements; or (iii) In relation to disclosures, are fundamental to users understanding of the financial statements. 30

31 Inability to obtain sufficient appropriate audit evidence Circumstances beyond the control of an entity For example, the entity s accounting records are destroyed by fire or are seized by an investigating agency; Circumstances related to the nature and timing of the auditor s work Examples: (a) for equity accounting of an associate, adequate financial information of the associate is not available; (b) the auditor is appointed after year-end and is therefore unable to observe physical verification of inventory; or (c) where the controls of the entity are not effective and the auditor concludes that performing substantive procedures alone is not sufficient; Limitation imposed by management For example, management prevents the auditor from observing inventory count or from requesting external confirmation of specific account balances, or imposes unrealistic time deadlines within which to issue an auditor s report. 31

32 How to act if limitation placed by Management? First seek to remove the restrictions Next Communicate to TCWG and explore ways to perform alternate procedures to obtain sufficient appropriate audit evidence If that also does not yield results, determine materiality and pervasiveness and accordingly Qualify the opinion Resign from the engagement however, if law does not permit that, provide a disclaimer of opinion 32

33 Key requirements in the report Consistency Form with specific paragraphs Title Address Introductory Paragraph Management s Responsibility Auditor s Responsibility Auditor s opinion Other responsibilities Signature Date of the audit report Place of issue of audit report 33

34 Key Change 1 Use of the word Independent in the context of promulgation of SQC 1 from 2009 No Change Report continues to be addressed to Members of a Company; Partners of a Firm and President of India for a Government Undertaking 34

35 Key Change 3 More detailed explanation of the Management s responsibility Key Change 2 Separate Introductory paragraph identifying the entity and the financials 35

36 Key Change 3 Management is responsible for the preparation of these financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Company in accordance with the Accounting Standards referred to. This responsibility includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error. 36

37 Key Change 4 Very detailed explanation of the Auditor s responsibility Key Change 5 Separate paragraph on true and fair opinion 37

38 Key Change 4 Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 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. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of the accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 38

39 Key Change 4 When a modified opinion is given, the auditor s responsibility para also changes: Qualified We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion. Adverse We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our adverse audit opinion. Disclaimer Our responsibility is to express an opinion on the financial statements based on conducting the audit in accordance with Standards on Auditing issued by the Institute of Chartered Accountants of India. Because of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. 39

40 Key Change 6 Separate report on other legal and regulatory requirements No change Closure of the report. Auditor responsible for events after Balance Sheet date only upto the date of the report 40

41 Key Change 7 When issuing modified reports, there is a need to specifically have a paragraph Basis for qualified opinion or Basis for adverse opinion or Basis for disclaimer of opinion. Also a separate paragraph for the opinion Qualified opinion or Adverse opinion or Disclaimer of opinion 41

42 SA 706 Emphasis of Matter A paragraph included in the auditor s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor s judgment, is of such importance that it is fundamental to users understanding of the financial statements. An Emphasis of Matter paragraph is not a substitute for either the auditor expressing a qualified opinion or an adverse opinion, or disclaiming an opinion, when required by the circumstances of a specific audit engagement. 42

43 Circumstances which require a Emphasis of Matter para An uncertainty relating to the future outcome of an exceptional litigation or regulatory action. Early application (where permitted) of a new Accounting Standard that has a pervasive effect on the financial statements in advance of its effective date. A major catastrophe that has had, or continues to have, a significant effect on the entity s financial position. 43

44 Some examples A current topical example could be the likely impact that migration from the existing Accounting Standards to the converged Ind AS will have on the financial position and performance of an entity in the coming accounting period where such migration has been notified by law or regulation. Another example could be the impact, if significant, of an unconventional interpretation of an Accounting Standard that an entity may have taken, even though the auditor is fully in agreement with it. 44

45 Other Matter Paragraph A paragraph included in the auditor s report that refers to matters other than those presented or disclosed in the financial statements that, in the auditor s judgment, is relevant to users understanding of the audit, the auditor s responsibilities or the auditor s report. 45

46 When Other matter para required? To explain serious restrictions placed on the audit Bring out the fact that another general purpose FS has also been signed off under a different reporting framework (for instance IGAAP and IFRS) When the intent is for specific use and not general purpose (but prepared in the same manner), to limit the report to intended users 46

47 Other matter para not to include Any matter that is required to be presented or disclosed in the financial statements Any information that the auditor is prohibited from providing by law, regulation or other Standards Information that is required to be provided by management 47

48 Emphasis vs. Other Matter Emphasis of Matter Relates to financial statements including the notes etc., Relates to appropriately presented / disclosed matter Placed immediately after Opinion Para Other Matter Relates to audit, responsibilities and report Relates to what is not presented / disclosed Placed after emphasis of Matter para If related to other legal requirements, placed after that section 48

49 Illustrations in the Implementation Guide Unqualified Report Modified Opinion Report Report with emphasis of matter / other matter Standalone financials Consolidated financials Audit under other laws Qualified report Adverse opinion report Qualified report where effect is not determinable Disclaimer of report Matter of Emphasis para uncertainty on a major legal issue Other matter paragraph where subsidiaries not audited by the same auditor 49

50 Revision to 700 and

51 Revised SA 700 and SA 701 Internationally applicable for all reporting from financial period ending on or after 15 th Dec So, if you have global reporting for Dec 2016, this is applicable. In India it is applicable from (as we have used audits of financial statements for periods beginning on or after April 1, 2017) Need for revision? It was felt that the binary (Pass / Fail) auditor s report may not provide adequate transparency about the audit and the auditor s insights about the company based on its work. To provide more entity specific and relevant information in the auditor s report 51

52 Key enhancements Mandatory for audits of financial statements of listed entities, voluntary application for entities other than listed entities: New section to communicate key audit matters (KAM). KAM are those matters that, in the auditor s judgment, were of most significance in the audit of the current-period financial statements. Disclosure of the name of the engagement partner, with a harm s way exemption. (We already do this) For all audits: Opinion section required to be presented first, followed by the Basis for Opinion section, unless law or regulation prescribe otherwise. Enhanced auditor reporting on going concern (GC), including: Description of the respective responsibilities of management and the auditor for GC; A separate section when a material uncertainty exists, and is adequately disclosed, under the heading Material Uncertainty Related to Going Concern ; and New requirement to challenge adequacy of disclosures for "close calls in view of the applicable financial reporting framework when events or conditions are identified that may cast significant doubt on an entity s ability to continue as a GC. Affirmative statement about the auditor s independence and fulfillment of relevant ethical responsibilities, with disclosure of the jurisdiction of origin of those requirements Enhanced description of the responsibilities of the auditor and key features of an audit, together with the provision that certain components of this description may be presented in an appendix to the auditor s report or, where law, regulation or national auditing standards expressly permit, by reference in the auditor s report to a website of an appropriate authority. 52

53 Form of audit report 53

54 Practical Example - 1 Central Government or a court of law, say, at the request of the entity, permits it to follow a specific accounting treatment in respect of a particular transaction. For example, an entity may be permitted to account for a certain type of income or expenditure on cash basis or on a deferral basis that may not be permitted by the Accounting Standards. Whether such departure from the framework requires auditor to qualify his opinion? 54

55 Practical Example - 1 Answer NO The departure is not a non compliance, but compliance with a modified framework If the effect of doing this is material, the auditor should describe the resultant deviation from the framework in sufficient detail in an emphasis of matter paragraph 55

56 Practical Example - 2 What if the law under which the report is to be provided prescribes a format? As far as possible, to bring in the elements of this SA 700 without affecting the ultimate legal requirement Else, not to include the statement We conducted the audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India. Where required to issue a suitable opinion under SA 705 / SA 706 as may be appropriate 56

57 Practical Example - 3 Where audit is done under two standards say SA and ISA If the two standards do not have any conflict that would require the auditor to form a different opinion under each of them to state in report We conducted the audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India and the International Standards on Auditing. If conflict exists, auditor to issue separate reports under each standard one could be a clean opinion whilst the other is modified etc., 57

58 Practical Example - 4 Entity voluntarily provides or is required by law / regulations to provide additional information outside the scope of the applicable financial reporting framework. For instance, RBI may require banks to present many other financial information In such cases, what should the audit approach be? 58

59 Practical Example - 4 As a first option discuss with client on possibility of providing such information separately from the financial statements Presented separately in a way to clearly show that such information is unaudited Even in such cases, under SA 720 to ensure at least that such information is not inconsistent with the audited financial statements If these are not possible and it is part of the financial statements (including the notes) then these have to be also included in the scope of the audit opinion 59

60 Practical Example - 5 Emphasis of Matter We draw attention to Note X(i) and X(ii) to the financial statements which describe the execution application filed in the H ble Bombay High Court by aggrieved selling shareholders of the acquired entity against the deduction made by the Company from deferred purchase consideration in respect of payments it had to make to the Income Tax authorities in respect of demands against the acquired company for periods prior to acquisition, and the execution proceedings initiated by the Company against the selling shareholders for recovery of amounts due to it pursuant to the selling shareholders obligation to indemnify the Company against tax demands raised on the acquired entity for years prior to the effective date of acquisition. Our opinion is not qualified in respect of this matter. 60

61 Practical Example - 6 Emphasis of Matter We draw attention to Note XX to in Schedule XX of the financial statements which provides details with regard to the identification and adjustment during the year of the amount of impairment of fixed assets amounting to Rs. xx cr (net of tax) and certain expenses amounting to Rs. xx cr against Business Reconstruction Reserve. This reserve was created under the Scheme of Arrangement u/s391 to 394 of the Companies Act 1956 approved by the Honourable High Court of Mumbai vide its Order dated XXth June, 20XX by transferring the balance standing to the credit of its Securities Premium Account for adjusting certain expenses as defined in the Scheme. Our opinion is not qualified in respect of this matter. 61

62 Practical Example - 7 Emphasis of Matter 1. We draw attention to Note XX in Schedule XX of the financial statements relating to exercise of option by the Company to recognise gains and losses arising on fluctuation of foreign exchange rates on long term monetary items, to assets or to a reserve as detailed in the Note, consequent to the amendment to Accounting Standard 11, The Effects of Changes in Foreign Exchange Rates, resulting in the profits for the year being higher by Rs xxx million and its consequential impact on the reserves and surplus and carrying cost of assets as detailed therein. 2. We further draw attention to Note YY in Schedule XX of the financial statements relating to change in method of recognizing the impact of foreign currency fluctuations on effective hedging instruments in accordance with principles of hedge accounting set out in Accounting Standard 30, Financial Instruments Recognition and Measurement, having no impact on the profits for the year. Our opinion is not qualified in respect of these matters. 62

63 Practical Example - 8 Emphasis of Matter We draw attention to Note XX of Schedule XX to the financial statements stating that the Company has paid Rs xx cr under protest against claims of Rs xx cr for expenses which the Company has disputed in matters that are in various stages of litigation. Pending resolution of these disputes by the relevant courts, these expenses have been accounted for in the financial statements based on the management s expectation of the amounts due. Our opinion is not qualified in respect of this matter. 63

64 Practical Example - 9 Emphasis of Matter We invite attention to Note No. X of Schedule XX Notes to the Financial Statements, regarding impairment of fixed assets wherein, due to the highly technical nature of the plant and machinery, we have relied on the estimates and assumptions made by the Company s internal technical department which we prima facie found to be reasonable in arriving at the recoverable value of the fixed assets at the Bhandup cash generating unit of the Company. Our opinion is not qualified in respect of this matter. 64

65 Practical Example - 10 Emphasis of Matter We draw attention to Note No. X of schedule XX to the financial statements regarding approval of the Central Government in respect of certain transactions for the rendering of services to the parties covered under Section 297 of the Companies Act, 1956 for the period up to December 31, 20XX, which the Company has applied for and is pending approval from the authorities. Our opinion is not qualified in respect of this matter. 65

66 Practical Example - 11 Emphasis of Matter In view of their technical nature, we have placed reliance on technical/ commercial evaluation by the management in respect of categorization of wells as exploratory, development and producing, allocation of cost incurred on them, depletion of producing properties on the basis of the proved developed hydrocarbon reserves, liability for abandonment costs, liabilities under NELP for under-performance against agreed Minimum Work Programme and allocation of depreciation on process platforms to transportation and facilities. Our opinion is not qualified in respect of this matter. 66

67 Practical Example - 12 Emphasis of Matter Refer note no X of Notes to the Financial Statements in Schedule XX regarding the Scheme of Demerged Undertaking. The Company took over the demerged undertaking of PQR Ltd. under the Composite Scheme of Arrangement sanctioned by the Hon ble High Court of Gujarat by Order dated 1st March, 20XX. The appointed date for this purpose was 1st December, 20XX and the effective date is 7th March, 20XX. Three parties have filed an appeal against this Order before the Division Bench of the Hon ble High Court of Gujarat and their appeal, which has been admitted, is pending. The Company has given effect to the above Scheme subject to the Hon ble High Court s decision in the said appeal. Our opinion is not qualified in respect of this matter. 67

68 Practical Example - 13 Emphasis of Matter We draw attention to Note X in Annexure II to the abridged financial statements and also Note XX in Schedule M to the complete set of financial statements regarding deductions made/ amounts withheld by some customers aggregating to Rs. 605,083 thousand (Previous year Rs. 461,224 thousand) on various accounts which are being carried as sundry debtors. The Company is also carrying accrued income of Rs. 95,455 thousand (Previous year Rs. 95,455 thousand) relating to these customers. The ultimate outcome of the above matters cannot presently be determined although the Company is of the view that such amounts are recoverable and hence no provision is required thereagainst. Our opinion is not qualified in respect of this matter. 68

69 Practical Example - 14 Emphasis of Matter We draw attention to Note XX of Schedule XXB to the financial statements regarding non-disclosure of the impact of fair value method of accounting on net results and Earnings Per Share as required by the Guidance Note on accounting for employee sharebased payments issued by the Institute of Chartered Accountants of India. Our opinion is not qualified in respect of this matter. 69

70 Practical Example - 15 Emphasis of Matter We draw attention to: (a) Note 5 on the Statement, which explains the circumstances under which no obligation under a Share Purchase agreement has yet arisen in terms of Accounting Standard 29, in relation to the sale of investments of equity shares in XYZ Limited made during the previous year ended 31st March, 20X0; and (b) Note 4 on the Statement regarding provision made for diminution, other than temporary, in value of investments, which is considered to be adequate for the reasons stated in the said Note. Our opinion is not qualified in respect of these matters 70

71 Practical Example - 16 Emphasis of Matter We draw attention to Note 6 to the Consolidated Financial Statements regarding investments in certain subsidiaries aggregating Rs. XXX lacs which are yet to break even. At reporting date, the Company s share of cumulative losses in these subsidiaries is Rs.XXX lacs against which provision for diminution of Rs. XXX lacs is considered as adequate by the management, based on business plans. Our opinion is not qualified in respect of this matter. 71

72 Practical Example - 17 Emphasis of Matter (a) We draw attention to Note No. XX of Schedule YY regarding debit to Goodwill of the loss arising on transfer of the Export Business Undertaking to ABC Private Limited and adjusting such Goodwill against the balance in the Securities Premium Account in terms of the Scheme of Arrangement as approved by the High Court of Bombay. Had such loss not been adjusted against Securities Premium Account as permitted under the Order of the High Court but debited to the Profit and Loss Account as per the generally accepted accounting principles, the net loss before tax of Rs. XXX would have resulted into a net loss before tax of Rs. XXX and the loss carried to Balance Sheet would have been Rs XXX in stead of Rs XXX. (b) We also draw attention to Note No. CC of Schedule YY regarding investments in a wholly owned subsidiary whose net worth is eroded and the consequent possibility of impairment of the equity investment of Rs XXX made and non-recovery or partial recovery loan of Rs XXX given to it by the Company. For reasons explained in the said Note, including the subsidiary s future business plans and growth prospects, such impairment if any is considered to be temporary in nature and no provision is considered necessary in the accounts of the Company. Our opinion is not qualified in respect of these matters 72

73 Practical Example - 18 Emphasis of Matter We invite attention to Note no. X of Schedule XX-X of the financial statements regarding the cancellation of investment in XXX equity shares of ABC Limited aggregating Rs XXX and the issuance of XXX transferable warrants to the Company, both pursuant to a court approved composite scheme of Reduction cum Arrangement between ABC Limited and its shareholders (including the Company). As stated in the Note, the Company has obtained independent legal counsel s opinion that no tax liability arises on the reduction cum arrangement. On that basis, no tax liability is recognised in respect thereof. Our opinion is not qualified in respect of this matter. 73

74 References Standards of Auditing SA Forming and Opinion and Reporting on Financial Statements SA Modifications to the Opinion in Independent Auditor s Report SA Emphasis of Matter Paragraph and Other Matter Paragraph in the Independent Auditor s Report ICAI s Implementation Guide on Reporting Standards 74