Standards on Auditing ( SAs ) relating to Income Computation and Disclosure Standards ( ICDS ) - CA. Nidhi Jain 1
IMPACT OF ICDS Advance Tax Tax Audit Report Computation of Income Tax Return Deferred Tax Provision for Tax 2
REPORTING IN FORM 3CD 3
DISCLOSURE IN FORM 3CD 4
STRUCTURE OF STANDARDS Standards on Quality Control (SQC s) Assurance Services Audits and review of historical financial information Standards on Auditing (SAs) 200-999 Related Services Assurance engagements other than Audits and review of historical financial information Standards on Reviews Engagements (SREs) 2000-2699 Standards on Assurance Engagements (SAEs) 3000-3699 5 Standards on Related Services (SRSs) 4000-4699
STANDARDS ON AUDITING Standards on Auditing are formulated in context of an audit of financial statements by an independent auditor. SAs are to be adopted as necessary in the circumstances when applied to audit of historical financial information. SAs do not override laws and regulations that govern the audit of the financial statements. 6
WHY DISCUSSION OF SAs IMPORTANT APROPOS ICDS Materiality Mandate Attest Function Compliance with these standards are mandatory. Duty of members of ICAI to ensure that the SAs are followed in the audit of financial information. 7 If for any reason a member has not been able to perform an audit in accordance with the SAs, his report should draw attention to the material departures therefrom.
CONSEQUENCES OF NON- COMPLIANCE WITH SAs Standards on Auditing (SAs) represent the generally accepted procedures of audit. A member who does not perform an audit in accordance with these and fails to disclose the material departures there from, becomes liable for disciplinary proceedings of the Institute. Clause 9 Part I of the Second Schedule to the Chartered Accountants Act, 1949, specifies that a member in practice shall be guilty of professional misconduct if he fails to invite attention to any material departures from the generally accepted procedure of audit applicable to the circumstances. 8
CONSEQUENCES OF NON- COMPLIANCE WITH SAs Penalty under the Income Tax Act, 1961 - New section has been inserted vide Finance Act, 2017 (Section 271J) Without prejudice to the provisions of this Act, where the Assessing Officer or the Commissioner (Appeals), in the course of any proceedings under this Act, finds that an accountant or a merchant banker or a registered valuer has furnished incorrect information in any report or certificate furnished under any provision of this Act or the rules made thereunder, the Assessing Officer or the Commissioner (Appeals) may direct that such accountant or merchant banker or registered valuer, as the case may be, shall pay, by way of penalty, a sum of ten thousand rupees for each such report or certificate. Explanation. For the purposes of this section, (a) accountant means an accountant referred to in the Explanation below sub-section (2) of section 288; 9
DISCLOSURE - SECTION 145(2) OF INCOME TAX ACT Section 145(2) of Income Tax Act, 1961 is reproduced below: The Central Government may notify in the Official gazette from time to time *accounting standards to be followed by any class of assesses or in respect of any class of income. *now - income computation and disclosure standards. The word accounting standard was removed vide Finance Act, 2014, i.e.,w.e.f. 01.04.2015 (F.Y. 2014-15). The word income computation and disclosure standard was inserted through notification dated 31.03.2015. This was then deferred. Notification came on 29.09.2016 for applicability of ICDS from F.Y. 2016-17. 10
SAs RELATING TO ICDS Sl.No. 1. 2. 3. 4. Income Computation Engagement Quality control and Disclosure Standard and Engagement Standard applicable to Standard Specific ICDS applicable to ALL the ICDS ICDS- 1- Accounting Policies SA 570 ICDS- 2- Valuation of Inventories ICDS- 3- Construction Contracts ICDS- 4- Revenue recognition SA 240 11 SQC-1 SA 200 SA 210 SA 230 SA 240
SAs RELATING TO ICDS Sl.No. Income Computation Engagement Quality control and Disclosure Standard and Engagement Standard applicable to Standard Specific ICDS applicable to ALL the ICDS 5. 6. 7. ICDS- 5- Tangible Fixed Assets SA 250 ICDS- 6- Effects of changes in foreign exchange rates SA 300 ICDS- 7- Government Grants SA 501 SA 260 12 SA 500
SAs RELATING TO ICDS Sl.No. Income Computation Engagement Quality control and Standard Engagement and Disclosure applicable to Standard Standard Specific ICDS applicable to ALL the ICDS 8. ICDS- 8- Securities SA 560 9. ICDS-9 Borrowing Costs SA 570 SA 580 10. ICDS- 10- Provisions, Contingent Liabilities and Contingent Assets 13 SA 620
SQC 1: Quality Control for firms SQC 1: Quality Control for firms that perform audit and reviews of historical financial information, and other assurance and related services engagements. Firm should establish policies and procedures, so that firm and its personnel comply with relevant ethical requirements Ethical requirement- Fundamental principles of professional ethics which include Integrity Objectivity Professional competence and due care Confidentiality Professional behavior 14
SQC 1: Quality Control for firms Firm should establish policies and procedures, so that firm and its personnel maintain independence. Firm should establish policies and procedures, for engagement team to complete the assembly of final engagement files on a timely basis after engagement reports have been finalized. ( Generally not more than 60 days) Firm should establish policies and procedures, to maintain confidentiality, safe custody, integrity, accessibility, and retrievability of engagement documentation. 15
SA 200: Overall Objectives of Independent Auditor SA 200: Overall Objectives of the independent auditor and the conduct of an audit in accordance with Standards on Auditing. Objective of the auditor is to obtain reasonable assurance (high level of assurance) about whether financial statements as a whole are free from material misstatement whether due to fraud or error. Failure to achieve the objective should be documented as per SA 230. Professional Skepticism - One of the requirement of satandard is Professional Skepticism, which includes being alert to For example 1.condition that may indicate possible fraud 2. Audit evidence that contradicts other audit evidence. 16
SA 210: Agreeing the terms of audit engagement The objective of the auditor is to accept or continue an audit engagement only when the basis upon which it is to be performed has been agreed through: Establishing whether the preconditions for an audit are present Confirm that there is a common understanding between the auditor and management and where appropriate those charged with governance of terms of the audit engagement. * preconditions for an audit- use by management of acceptable financial reporting framework. 17
SA 230: Audit Documentation Purpose of Audit Documentation It serves as a evidence of the auditors, basis for conclusion about the achievement of the overall objectives of the auditor and Evidence that the audit was planned and performed in accordance with the SAs and applicable legal and regulatory requirements. Audit documentation is record of audit procedures performed, audit evidence obtained and conclusion reached therefrom. It is also referred to as working papers. Audit working papers need to be maintained upto the retention period. 18
SA 230: Audit Documentation Assembly of the final audit file- SQC 1 requires the firms to establish policies and procedure for timely completion of the assembly of audit files. An appropriate time limit within which assembly of the final audit file is ordinarily not more than 60 days after the date of the auditors report. Owner ship of audit documentation- As per SQC 1 unless otherwise specified by law or regulation- audit documentation is property of the auditor. Clause 1 Part I of the Second Schedule to the Chartered Accountants Act, 1949 is as follows: A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he discloses information acquired in the course of his professional engagement to any person other than his client so engaging him without the consent of his client or otherwise than as required by any law for the time being in force. 19
SA 240: Auditors responsibilities relating to fraud SA 240: The Auditors responsibilities relating to fraud in an audit of financial statements Financial statements- a structured representation of historical financial information, including related notes, intended to communicate an entity s economic resources or obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework. The related notes ordinarily comprise a summary of significant accounting policies and explanatory information. The term financial statements ordinarily refers to a complete set of financial statements as determined by the requirements of the applicable financial reporting framework, but it can also refer to a single financial statement. 20
SA 240: Auditors responsibilities relating to fraud Primary responsibility of prevention and detection of fraud is of management or those charged with governance. While identifying and assessing the risk of material misstatement due to fraud, auditor shall based on presumption that there are risk of fraud in revenue recognition shall evaluate Which type of revenue, revenue transaction or assertions give rise to such risks. 21
SA 250: Consideration of laws and regulations SA 250 : Consideration of laws and regulations in an audit of financial statements The SA distinguishes the auditors responsibility in relation to compliance with two different categories of laws and regulation as follows: The provisions of laws and regulations generally recognized to have direct effect on the determination of material amounts and disclosures in the financial statements such as tax and labour laws Other laws and regulations that do not have a direct effect on the determination of the amounts and disclosures in the financial statements, but compliance with which may be fundamental to the operating aspects of the business, or to avoid material penalties; non compliance with such laws and regulations may therefore have a material effect on the financial statements. 22
SA 250: Consideration of laws and regulations The auditor in this regard has to remain alert to the extent that audit procedures applied for the purpose of forming an opinion on the financial statements may bring instances of identified or suspected non- compliance to the auditors attention. Auditor has to maintain professional skepticisim, given the extent of laws and regulations that effect the entity. Objectives of the auditor 1. To obtain sufficient appropriate audit evidence regarding compliance of those laws and regulations generally recognized to have a direct effect on the determination of material amount and disclosure in the financial statements. 2. Perform audit procedures to identify instances of non compliance with other laws and regulations that might have effect on the financial statements. 3. To respond appropriately to the non compliance or suspected non compliance. 23
SA 260: Communication with those charged with governance Objectives of the auditor: Communication to those charged with governance, the responsibility of the auditor and over view of planned scope and timing of the audit Obtain information relevant to the audit Provide timely observations that are significant Provide two way communication between auditor and those charged with governance. 24
SA 300: Planning an audit of financial statements Objective of the auditor To plan the audit so that it will be performed in an effective manner. The auditor shall establish overall audit strategy that sets the scope, timing and direction of the audit. At the time of establishing the overall audit strategy, auditor shall ascertain reporting objectives of the engagement to plan the timing of the audit and nature of communication required. 25
SA 500: Audit Evidence Audit evidence- Information used by the auditor in arriving at the conclusions on which the auditors opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. Objective of the auditor is to design and perform audit procedures in such a way as to enable the auditor to obtain sufficient appropriate audit evidence to enable to draw reasonable conclusion. Obtaining audit evidence from different sources or of different nature may indicate that individual item of audit evidence is not reliable. As per SA 230 when there is inconsistency in the audit evidence, auditor should record how inconsistency has been removed. 26
SA 501: Audit Evidence Specific Considerations for selected items Objectives of the auditor: Obtain sufficient appropriate audit evidence regarding existence and condition of inventory. Completeness of litigation and claims involving the entity. With regard to inventory auditor to obtain evidence regarding existence and condition of inventory. With regard to litigation and claims auditors shall perform audit procedures to identify litigation and claims which may give rise to risk of material misstatement. 27
SA 560: Subsequent Events Objectives of the auditor To obtain sufficient appropriate audit evidence about whether events occurring after the date of financial statement and date of auditors report that require adjustment or disclosure in financial statements are appropriately reflecting in financial statement. Respond appropriately to the facts that become known to the auditor after the date of auditors report. 28
SA 570: Going Concern Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. Auditors responsibility is to obtain sufficient appropriate audit evidence about the appropriateness of managements use of going concern assumption. This responsibility exists even if the financial reporting framework used in preparation of financial statements does not include an explicit requirement to make specific assessment of the entity s ability to continue as a going concern. 29
SA 580: Written Representation Written representation a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. Objectives of the auditor: To obtain written representation from management/ those charged with governance that they believe that they have fulfilled their responsibility for the preparation of the financial statement and for completeness of the information provided to the auditor. 30
SA 620: Using the Work of an Auditor s Expert Auditors Expert- An individual or company possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditors expert may be either an auditors internal expert or an auditors external expert. Objectives of the auditor: - To determine whether to use work of an auditors expert ; - If using the work of an auditors expert, to determine whether that work is adequate for the auditors purposes. 31
Thank You - CA. Nidhi Jain nidhijaincosting@gmail.com 32