SWAPNIL PATNI’S CLASSES CA FINAL AUDIT – AMENDMENT NOTES Prepared by;
CA HARSHAD JAJU INDEX Chapter No. 3 6 7 8 9 10 14 15 16 17 22
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Name Risk Assessment and Internal Control The Company Audit Liabilities of Auditor Audit Report Audit Committee and Corporate Governance Audit of Consolidated Financial Statements Audit of Non-Banking Financial Companies Audit under Fiscal Laws Cost Audit Special Audit Assignment Professional Ethics
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Chapter 3: Risk Assessment and Internal Control 3.1 Internal Control System – Nature and Scope Definition Definitio n of Internal Control System System - All the policies and procedures (internal controls) adopted by the management of an entity to assist in achieving management's objective of ensuring, as far as practicable, the orderly and efficient conduct of its business, including adherence to management policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.
The Following are the Nature and Scope of an Internal Control Audit: Nature Definition of Internal control : SA 315 defines the system of internal control as the process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, safeguarding of assets, and compliance with applicable laws and regulations. Scope - No Change 3.2 Inherent Limitations of Internal Control – No Change 3.3 Components of Internal Control In general, a system of internal control to be considered adequate should include the following five components: i. Control environment; ii. Entity’s Risk assessment Process; iii. Control activities; iv. Information system and communication; v. Monitoring of Controls
i.
Control Environment: The control environment encompasses the following elements: a. Communication and enforcement of integrity and ethical values – These are essential elements that influence the effectiveness of the design, administration and monitoring of controls. b. Commitment to competence – Matters such as management’s consideration of the competence levels for particular jobs and how those levels translate into requisite skills and knowledge. c. Participation by those charged with governance – Attributes of those charged with governance such as: Their independence from management. Their experience and stature. The extent of their involvement and the information they receive, and the scrutiny of activities.
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The appropriateness of their actions, including the degree to which difficult questions are raised and pursued with management, and their interaction with internal and external auditors. d. Management’s philosophy and operating style – Characteristics such as management’s: Approach to taking and managing business risks. Attitudes and actions toward financial reporting. Attitudes toward information processing and accounting functions and personnel. e. Organizational structure – The framework, within which an entity’s activities for achieving its objectives are planned, executed, controlled, and reviewed. f. Assignment of authority and responsibility - Matters such as how authority and responsibility for operating activities are assigned and how reporting relationships and authorization hierarchies are established. g. Human resource policies and practices – Policies and practices that relate to, for example, recruitment, orientation, training, evaluation, counseling, promotion, compensation, and remedial actions.
ii.
Entity’s risk assessment process: a. Entity’s risk assessment process includes How management identifies business risks relevant to the preparation of financial statements in accordance with the entity’s applicable financial reporting framework. Estimates their significance. Assess the likelihood of their occurrence, and decides upon actions to respond to and manage them and the results thereof.
b. Risks relevant to reliable financial reporting include External and internal events. Transactions or circumstances that may occur and adversely affect an entity’s ability to initiate. Record, process, and report financial data consistent with the assertions of management in the financial statements.
c. Risks can arise or change due to circumstances such as the following: i. Changes in operating environment . Changes in the regulatory or operating environment can result in changes in competitive pressures and significantly different risks. ii. New personnel. New personnel may have a different focus on or understanding of internal control. iii. New or revamped information systems. Significant and rapid changes in information systems can change the risk relating to internal control. iv. Rapid growth. Significant and rapid expansion of operations can strain controls and increase the risk of a breakdown in controls. v. New technology. Incorporating new technologies into production processes or information systems may change the risk associated with internal control.
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vi.
vii.
viii.
ix.
iii.
New business models, products, or activities. Entering into business areas or transactions with which an entity has little experience may introduce new risks associated with internal control. Corporate restructurings. Restructurings may be accompanied by staff reductions and changes in supervision and segregation of duties that may change the risk associated with internal control. Expanded foreign operations . The expansion or acquisition of foreign operations carries new and often unique risks that may affect internal control, for example, additional or changed risks from foreign currency transactions. New accounting pronouncements . Adoption of new accounting principles or changing accounting principles may affect risks in preparing financial statements.
Control Activities: Generally, control activities that may be relevant to an audit may be categorized as policies and procedures that pertain to the following: a. Performance reviews: These control activities include reviews and analyses of actual performance versus budgets, forecasts, and prior period performance; relating different sets of data – operating or financial – to one another, together with analyses of the relationships and investigative and corrective actions; comparing internal data with external sources of information; and review of functional or activity performance.
b. Information processing : The two broad groupings of information systems control activities are application controls, which apply to the processing of individual applications, and general IT-controls, which are policies and procedures that relate to many applications and support the effective functioning of application controls by helping to ensure the continued proper operation of information systems. c. Physical controls: Controls that encompass The physical security of assets, including adequate safeguards such as secured facilities over access to assets and records. The authorization for access to computer programs and data files. The periodic counting and comparison with amounts shown on control records.
d. Segregation of duties: Assigning different people the responsibilities of authorizing transactions, recording transactions, and maintaining custody of assets. iv.
Information system, including the related business processes, relevant to financial reporting, and communication: An information system consists of infrastructure (physical and hardware components), software, people, procedures, and data. Many information systems make extensive use of information technology (IT). The information system relevant to financial reporting objectives, which includes the financial reporting system, encompasses methods and records that: a. Identify and record all valid transactions.
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b. Describe on a timely basis the transactions in sufficient detail to permit proper classification of transactions for financial reporting. c. Measure the value of transactions in a manner that permits recording their proper monetary value in the financial statements. d. Determine the time period in which transactions occurred to permit recording of transactions in the proper accounting period. e. Present properly the transactions and related disclosures in the financial statements. v.
Monitoring of controls: An important management responsibility is to establish and maintain internal control on an ongoing basis. Management’s monitoring of controls includes considering whether they are operating as intended and that they are modified as appropriate for changes in conditions. Monitoring is done also to ensure that controls continue to operate effectively over time.
3.4 Review of Internal Controls Whether controls are capable of effectively preventing, or detecting and correcting, material misstatements. Whether controls are properly designed and implemented.
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Chapter 6: The Company Audit 6.1 Difference in requirements relating to auditor’s rotation under SQC 1 vis-à-vis Companies Act, 2013 The ICAI made a clarification dated 30.09.2016 on the difference in requirements relating to auditor’s rotation under Standard on Quality Control SQC 1 vis-à-vis Companies Act, 2013. In case of audits of listed entities, SQC 1 requires rotation of engagement partner after a pre-defined period normally not more than seven years. Now, since SQC 1 is applicable from April 1, 2009, the provisions regarding the rotation of engagement partner would be due from April 1, 2016 as per the SQC 1 during the transition phase. Further, the Companies Act, 2013 is also applicable from April 1, 2014 and the existing companies which are required to comply with provisions of this sub-section, shall comply with the requirements of this auditor’s rotation provisions within 3 years from the date of commencement of this Act. Therefore, the provisions regarding auditor’s rotation would be due from April 1, 2017 as per the Companies Act, 2013 during the transition phase Hence, there is a difference of 1 year in the compliance of auditor’s rotation provision between SQC 1 vis-à-vis the Companies Act, 2013 during the transition phase of implementation of the Companies Act, 2013. Thus, the Council of the ICAI decided to provide relaxation in the requirement of rotation of engagement partner given in SQC 1 for the transition phase (i.e. for the financial year 2016-17).
6.2 Curtailing right of the auditor regarding circulation of copy of representation in the case of appointment of Auditor other than retiring Auditor under section 140(4) of the Companies Act, 2013
If the Tribunal is satisfied on an application either of the company or of any other aggrieved person that the rights conferred by section 140(4) of the Companies Act, 2013 are being abused by the auditor, then, the copy of the representation may not be sent and the representation need not be read out at the meeting. 6.3 Duty to Report on Frauds – No Change 6.4 Re-opening of accounts on Court’s or Tribunal’s Orders Section 130 of the Companies Act, 2013 states that a company shall not re-open its books of account and not recast its financial statements, unless an application in this regard is made by the Central Government, the Income-tax authorities, the Securities and Exchange Board, any other statutory regulatory body or authority or any person concerned and an order is made by a court of competent jurisdiction or the Tribunal to the effect that— i. The relevant earlier accounts were prepared in a fraudulent manner; or ii. The affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements.
However, a notice shall be given by the Court or Tribunal in this regard and shall take into consideration the representations, if any.
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Voluntary revision of financial statements or Board’s report: Section 131 of the Companies Act, 2013 states that if it appears to the directors of a company that— a. the financial statement of the company; or b. the report of the Board, do not comply with the provisions of section 129 (Financial statement) or section 134 (Financial statement, Board’s report, etc.) they may prepare revised financial statement or a revised report in respect of any of the three preceding financial years after obtaining approval of the Tribunal on an application made by the company in such form and manner as may be prescribed and a copy of the order passed by the Tribunal shall be filed with the Registrar.
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Chapter7: Liabilities of Auditor 7.1 Direction by Tribunal in case auditor acted in a fraudulent manner: i. Section 140(5) of the Companies Act, 2013, the Tribunal 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. ii. However, if the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within 15 days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place. iii. It may be noted that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447 of the said Act. iv. It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its director or officers.
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Chapter 8: Audit Report 8.1 Reporting under Companies (Auditor’s Report) Order, 2016 (CARO, 2016) – No Change 8.2 Manner of signing of Certificates by Chartered Accountants With a view to bring uniformity in the manner of signing of certificates, it is required that the members of the ICAI to include (in addition to any other requirements in this regard prescribed by the relevant law or regulation under which the certificate is being issued) the following details in their “Signatures” on the certificates issued by them: Name of the CA firm Firm Registration Number (FRN) Name of the member Designation (Partner/Proprietor) Membership Number
8.3 Duty to Report on Frauds – Section 143(12) – No change 8.4 Reporting under Section 143(3)(f) and (h) of the Companies Act, 2013 – No Change 8.5 Key Aspects discussed in Guidance Note on Audit of Internal Financial Controls over Financial Reporting (I) What is Internal Financial Control (IFC)? (Sec 134) As per Section 134 of the Companies Act 2013, the term Internal Financial Controls means the policies and procedures adopted by the company for ensuring: Orderly and efficient conduct of its business, including adherence to Company’s policies, Safeguarding of its assets, Prevention and detection of frauds and errors, Accuracy and completeness of the accounting records, and Timely preparation of reliable financial information.
(II) What is Internal Controls over financial Reporting (ICFR)? As per Guidance Note issued by ICAI it shall mean: “A Process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles”.
A Company’s internal financial control over financial reporting includes those policies and procedures: Reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company. Reasonable assurance that transactions are recorded as necessary to permit preparation of financial statement in accordance with generally accepted accounting principles, and Receipts and expenditures of the company are being made only in accordance with authorizations of management and director of the company. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have material effects of the financial statement.
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(III) Which provision of Companies Act requires such IFC and Reporting? i. Section 134: In the case of a listed company, the Directors’ Responsibility states that directors, have laid down IFC to be followed by the company and that such controls are adequate and operating effectively. ii. Section 143: The auditor’s report should also state whether the company has adequate IFC system in place and the operating effectiveness of such controls
iii. Section 177: Audit committee may call for comments of auditors about internal control systems before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company. iv. Schedule IV: The independent directors should satisfy themselves on the integrity of financial information and ensure that financial controls and systems of risk management are robust and defensible. v. Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014: The director’s report should contain details in respect of adequacy of internal financial controls with reference to the financial reporting. (IV) To whom does this apply? It will be applicable to - listed and unlisted companies, including small and one person companies. Furthermore, it states that auditors will have to report on ICFR in respect of both stand alone and consolidated financial statements. (V) When does this apply and for financial statements of which period? Auditors will have to report whether a company has an adequate ICFR system in place and whether the same was operating effectively as at the balance sheet date of 31 March 2016. (VI) What is extent of reporting? The auditor needs to obtain reasonable assurance to state whether an adequate internal financial controls system was maintained and whether such internal financial controls system operated effectively in the company in all material respects with respect to financial reporting only.
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Chapter 9: Audit Committee and Corporate Governance Clause 49
LODR Regulations
Listing agreement is a statutorily mandated contract between the listed entity and the stock exchange where it is listed, it does not have the authority of law behind it.
With the objective of streamlining and consolidating the provisions of various listing agreements in operation for different segments of the capital markets, such as equity shares, preference shares, debt instruments, units of mutual funds, Indian depository receipts, securitised debt instruments and any other securities that the SEBI may specify. They are divided into two parts - Substantive provisions are incorporated in the main body - Procedural requirements are incorporated in the form of schedules. Issues of Corporate Governance – No Issues of Corporate Governance – No Change Change Applicability of Clause 49 To all companies whose equity shares are listed on a recognized stock exchange. Exemption: i) Companies having paid up equity share capital not exceeding Rs.10 crore and Net Worth not exceeding Rs.25 crore, as on the last day of the previous financial year; ii) Companies whose equity share capital is listed exclusively on the SME and SME-ITP Platforms.
Applicability of LODR Regulations [Regulation 3] Unless otherwise provided, these regulations shall apply to the listed entity who has listed any of the following designated securities on recognised stock exchange(s): (a) specified securities listed on main board or SME Exchange or institutional trading platform; (b) non-convertible debt securities, nonconvertible redeemable preference shares, perpetual debt instrument, perpetual noncumulative preference shares; (c) Indian depository receipts; (d) securitised debt instruments; (e) units issued by mutual funds; (f) any other securities as may be specified by the Board. Qualified and Independent Audit Committee [Regulation 18 (1)] Meeting of Audit Committee [Regulation 18 (2)] Powers of Audit Committee [Regulation 18 (2)] Role of Audit Committee [Part C (A) of Schedule II] Functions of Audit Committee – No change
Qualified and Independent Audit Committee [Clause 49 (III) (A)] Meeting of Audit Committee [Clause 49 (III) (B)] Powers of Audit Committee [Clause 49 (III) (C)] Role of Audit Committee [Clause 49 (III) (D)] Functions of Audit Committee – Sub Sections of Section 177 Review of Information by Audit Committee Review of Information by Audit Committee CA HARSHAD JAJU
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[Clause 49 (III) (E)] Verification regarding Composition of Board [Clause 49 (II) (A)] Remuneration of Directors [Clause 49 VIII (C)] All fees/compensation
[Part C (B) of Schedule II] Verification regarding Composition of Board [Regulation 17] Remuneration of Directors [Part C of Schedule V] Approval of Remuneration of Directors [Regulation 17 (6)] Other provisions as to Board and Obligations of Director and Senior Committees [Clause 49 II (D)] Management [Regulations 17(2) to 17(4), 25(5) to 25(6), 26(1) to 26 (2), 26(4) to 26(5)] Code of Conduct [Clause 49 II (E)] Provisions regarding Code of Conduct [Regulations 17(5), 26(3), 46(2) and Part D of Schedule V] Whistle Blower Policy [Clause 49 II (F)] Vigil Mechanism [Regulations 22 and 46 and Part C of Schedule V] Subsidiary Companies [Clause 49 (V)] Subsidiary of Listed Entity [Regulations 16(c), 24 and 46 and Part C of Schedule V] Proceeds from public issues, rights issues, Statement of Deviation(s) or Variation(s) [Regulation 32 and Part C of Schedule II] preferential issues etc [Clause 49 VIII (I)] Content of Management Discussion and Disclosures - Management Discussion and Analysis [Clause 49 VIII (D)] Analysis [Schedule V] Information to Shareholders [Clause 49 VIII Information to Shareholders [Regulation 36] (E)] CEO/CFO Certification [Clause 49 (IX)] Compliance Certificate [Part B of Schedule II] Basis of related party transactions [Clause 49 Related Party Disclosure [Regulations 27, 46 VIII (A)] and Schedule V] Disclosure of Accounting Treatment [Clause Disclosure of Accounting Treatment 49 VIII (B)] [Schedule V] Nomination and Remuneration Committee Nomination and Remuneration Committee [Clause 49(IV)] [Regulation 19 and Part D of Schedule II] Report on Corporate Governance [Clause 49 Report on Corporate Governance (X)] [Regulation 27 and Schedule II] Stakeholders Relationship Committee [Regulation 20 and Part D of Schedule II] i. It shall be constituted by listed entity. ii. Chairperson - Non-Executive Director. iii. Committee Members – Decided by Board of Directors. iv. The Committee shall consider and resolve the grievances of the security holders of the listed entity including complaints related to transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends.
Auditor should ascertain i. From the minute book of Directors : Whether a Board committee, namely a Shareholders/ Investors Grievance Committee has been set up. ii. From the minute book of Shareholders/Investors Grievance Committee meetings whether such committee is prima facie functioning. iii. Verify from the records of the Shareholders/ Investors Grievance Committee as well as from the certificate obtained by the listed entity from SEBI and stock exchange(s) -
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As regards the investors’ grievances pending up to the date of certificate of compliance of conditions of corporate governance. 9.18 Transfer or Transmission or Transposition of Securities [Regulation 40] i. The Board of Directors of a listed entity shall delegate the power of transfer of securities to a committee or to the compliance officer or to the registrar to an issue and/or share transfer agents. ii. However, the board of directors and/or the delegated authority shall attend to the formalities pertaining to transfer of securities at least once in a fortnight. It may be noted that the delegated authority shall report on transfer of securities to the board of directors in each meeting. iii. The auditor should ascertain from the minutes book of the Board meetings whether the listed entity has delegated the power of share transfer to an officer or a committee or to the registrar and share transfer agents. The auditor should also verify from the records maintained to ascertain whether the delegated authority has attended to share transfer formalities at least once in a fortnight. The auditor may verify whether any transfer request are pending for more than a fortnight and are not attended to in terms of this Regulation. Risk Management Committee [Regulation 21] i. Constituted by Board of Directors. ii. Members: The majority shall consist of members of the Board of Directors. iii. Chairperson: Member of the Board of Directors and senior executives of the listed entity. iv. The Board of Directors shall define the role and responsibility of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to the committee and such other functions as it may deem fit. v. The provisions of this regulation shall be applicable to top 100 listed entities, determined on the basis of market capitalisation, as at the end of the immediate previous financial year.
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Chapter 10: Audit of Consolidated Financial Statements The requirement related to preparation of consolidated financial statements shall not apply to a company if it meets the following conditions: i. It is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its other members, including those not otherwise entitled to vote, having been intimated in writing and for which the proof of delivery of such intimation is available with the company, do not object to the company not presenting consolidated financial statements; ii. It is a company whose securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India; and iii. Its ultimate or any intermediate holding company files consolidated financial statements with the Registrar which is in compliance with the applicable Accounting Standards.
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Chapter 14: Audit of Non-Banking Financial Companies Compliance with Companies (Auditor’s Report) Order, 2016 [CARO, 2016] 1. As per Clause (xvi) of Paragraph 3 of CARO, 2016, the auditor is required to report that “Whether the company is required to be registered under section 45 -IA of the Reserve Bank of India Act, 1934 and if so, whether the registration has been obtained.” Relevant Provisions: a) Requirement of Registration: The registration is required where the financing activity is a principal business of the company. b) The Reserve Bank of India restricts companies from carrying on the business of a nonbanking financial institution without obtaining the certificate of registration. c) What is A Non-Banking Financial Company (NBFC): It is a Company engaged in the business of loans and advances, acquisition of shares/ stocks/ bonds/ debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hirepurchase, insurance business, chit business But it does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a nonbanking financial company (Residuary non-banking company).
Financial Activity as Principal Business? - When a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. This test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.
d) NBFCs are doing functions similar to banks, however there exist difference between banks & NBFCs. NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below: Cannot accept demand deposits; Do not form part of the payment and settlement system and cannot issue cheques drawn on itself; Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
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Audit Procedures a) Examine that the transactions of the company with relation to the activities covered under the RBI Act and directions related to the Non-Banking Financial Companies. b) The financial statements should be examined to ascertain whether company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. c) Whether the company has net owned funds as required for the registration as NBFC. d) Whether the company has obtained the registration as NBFC, if not, the reasons should be sought from the management and documented. e) The auditor should report incorporating the following:i. Whether the registration is required under section 45-IA of the RBI Act, 1934. ii. If so, whether it has obtained the registration. iii. If the registration not obtained, reasons thereof. 2. As per Clause (xii) of Paragraph 3 of CARO, 2016, the auditor is required to report that whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio of 1:20 to meet out the liability and whether the Nidhi Company is maintaining ten per cent unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability. Relevant Provisions Audit Procedures and Reporting a) As per Rule 5(1) every Nidhi shall, within a period of 1 year from the commencement of these rules, ensure that it has— i. Not less than 200 members; ii. Net owned funds of 10 lakh rupees or more; iii. Unencumbered term deposits of not less than 10% of the outstanding deposits as specified in Rule 14; and iv. Ratio of net owned funds to deposits of not more than 1:20. b) The auditor should note that as such a Nidhi Company can accept deposits not exceeding 20 times of its net owned funds as per last audited balance sheet. c) As per Rule 14, every Nidhi is to invest and continue to keep invested, in encumbered term deposits with a Scheduled commercial bank (other than a cooperative bank or a regional rural bank), or post office deposits in its own name an amount which shall not be less than 10% of the deposits outstanding at the close of business on the last working day of the second preceding month, which needs to be examined. d) As per Rule 3(d) Net Owned Funds are defined as the aggregate of paid up equity share capital and free reserves as reduced by accumulated losses and intangible assets appearing in the last audited balance sheet. Provided that, the amount representing the proceeds of issue of preference shares, shall not be included for calculating Net Owned Funds. e) A Nidhi company can accept fixed deposits, recurring deposits accounts and savings deposits from its members in accordance with the directions notified by CA HARSHAD JAJU
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the Central Government. The aggregate of such deposits is referred to as “deposit liability”. f) The auditor should ask the management to provide the computation of the deposit liability and net owned funds on the basis of the requirements contained herein above. g) The auditor may report, incorporating the following as at the balance sheet date:i. In case of shortfall in the ratio of net owned funds to the deposits, report the amount of shortfall and state the actual ratio of net owned funds to the deposits. ii. In case of shortfall with regard to the minimum amount of 10% as unencumbered term deposits, as specified in Nidhi Rules 2014, report the amount thereof.
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Chapter 15: Audit under Fiscal Laws 1. Income Computation and Disclosure Standards (ICDS): Section 145 of the Income Tax Act, 1961 deals with the method of accounting. Section 145(1), income chargeable under the heads “Profits and gains of business or profession” or “Income from other sources” - computed in accordance with either the cash or mercantile system of accounting. Section 145(2) empowers the Central Government to notify in the Official Gazette from time to time, income computation and disclosure standards. Accordingly, the Central Government has, notified 10 income computation and disclosure standards (ICDSs) to be followed by all assesses (other than an individual or a HUF who is not required to get his accounts of one previous year audited in accordance with the provisions of section 44(AB)) , following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profit and gains of business or profession” or “ Income from other sources” from the A.Y. 2017-18.
The Central Government has prescribed 10 Income Computation and Disclosure Standards (ICDSs) as under: A. ICDS I relating to Accounting Policies. B. ICDS II relating to Valuation of Inventories. C. ICDS III relating to Construction Contracts. D. ICDS IV relating to Revenue Recognition. E. ICDS V relating to Tangible Fixed Assets. F. ICDS VI relating to the Effects of Changes in Foreign Exchange Rates. G. ICDS VII relating to Government Grants. H. ICDS VIII relating to Securities. I. ICDS IX relating to Borrowing Costs. J. ICDS X relating to Provisions, Contingent Liabilities and Contingent Assets. 2. Form No. 3CD Clause 13 (d) whether any adjustment is required to be made to the profits or loss for complying with the provisions of income computation and disclosure standards notified under section 145(2). Clause 13 (e) If answer to (d) above is in the affirmative, give details of such adjustments: Increase Decrease Net effect in profit in profit (Rs) (Rs) (Rs) ICDS I Accounting Polices ICDS II Valuation of Inventories ICDS III Construction Contracts ICDS IV Revenue Recognition ICDS V Tangible Fixed Assets CA HARSHAD JAJU
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ICDS VI
Changes in Foreign Exchange Rates ICDS VII Government Grants ICDS Securities VIII ICDS IX Borrowing Costs ICDS X Provisions, Contingent Liabilities and Contingent Assets Total Clause 13 (f) Disclosure as per ICDS: i ICDS I relating to Accounting Policies. ii ICDS II relating to Valuation of Inventories. iii ICDS III relating to Construction Contracts. iv ICDS IV relating to Revenue Recognition. v ICDS V relating to Tangible Fixed Assets. vi ICDS VI relating to the Effects of Changes in Foreign Exchange Rates. vii ICDS VII relating to Government Grants. viii ICDS VIII relating to Securities. ix ICDS IX relating to Borrowing Costs. x ICDS X relating to Provisions, Contingent Liabilities and Contingent Assets.
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Chapter 16: Cost Audit 1. Maintenance of Cost Records: Applicable to the Classes of Companies whose overall Turnover is 35Cr or more during the immediately preceding financial year. 2. Cost Audit Rules not to apply in certain cases The requirement for cost audit under these rules shall not be applicable to a company which is covered under rule 3, and, i. Whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue; or ii. Which is operating from a special economic zone. iii. Which is engaged in generation of electricity for captive consumption through Captive Generating Plant.
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Chapter 17: Special Audit Assignments Audit Report of Mutual Funds: 1. Every mutual fund shall have the annual statement of accounts audited by an auditor who is not in any way associated with the auditor of the asset management company. 2. An auditor shall be appointed by the trustees. 3. The auditor shall forward his report to the trustees and such report shall form part of the Annual Report of the mutual fund. 4. The auditor’s report shall comprise the following:— a. a certificate to the effect that,— i. He has obtained all information and explanations which, to the best of his knowledge and belief, were necessary for the purpose of the audit; ii. The balance sheet and the revenue account give a fair and true view of the scheme, state of affairs and surplus or deficit in the Fund for the accounting period to which the Balance Sheet or, as the case may be, the Revenue Account relates; iii. The statement of account has been prepared in accordance with accounting policies and standards as specified in the Ninth Schedule.
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Chapter 22: Professional Ethics Clause 6 – Part 1 – 1st Schedule Solicits clients either directly or indirectly by
Circular
Advertisement
Personal communication
Interview or
By any other means.
Exception: Provided that nothing herein contained shall be construed as preventing or prohibiting –
Any Chartered Accountant from applying for or inviting or securing professional work from another chartered accountant in practice; or A member from responding to tenders or enquiries issued by various users of professional services or organizations from time to time and securing professional work as a consequence.
Amendment i. A member of the Institute in practice shall not respond to any tender issued by an organization or user of professional services, in areas of services which are exclusively reserved for chartered accountants , such as audit and attestation services. ii. Exception: a. Where minimum fee of the assignment is prescribed in the tender document itself or b. Where the areas are open to other professionals along with the Chartered Accountants.
Clause (10) Part 1 – 1st Schedule - Charges or offers to charge, accepts or offers to
accept in respect of any professional employment fees which are based on a percentage of profits or which are contingent upon the findings, or results of such employment Exemption: However, fees should not be regarded as being, contingent if fixed by a court or other public authority. Regulation 192 – Exemption from clause (10) a. A receiver or a liquidator can receive fees based on a percentage of the realization or disbursement of the assets. b. Auditor of a co-operative society can receive fees based on a percentage of the paid up capital or the working capital or the gross or net income or profit. CA HARSHAD JAJU
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c. A valuer for direct taxes and duties can charge the fees based on a percentage of the value of property valued. Amendment d. In the case of certain management consultancy services (Section 224 – Members Deemed to be in Practice) as may be decided by the resolution of the Council from time to time, the fees may be based on percentage basis which may be contingent upon the findings, or results of such work; e. In the case of certain fund raising services, the fees may be based on a percentage of the fund raised; f. In the case of debt recovery services, the fees may be based on a percentage of the debt recovered; g. In the case of services related to cost optimization, the fees may be based on a percentage of the benefit derived; and h. Any other service or audit as may be decided by the Council.
Clause (11) Part 1 – 1 st Schedule - Engages in any business or occupation other than
the profession of chartered accountant unless permitted by the Council so to engage.
Amendment General Resolution -Permission granted generally: Members of the Institute in practice be generally permitted to act as recovery consultant in the banking sector, for which no specific permission from the Council would be necessary.
Clause 6 – Part 1 – 1st Schedule Guidelines for Website Nature of assignments handled (to be displayable only on specific “pull” request). Names of clients and fee charged cannot be given. Amendment i. Disclosure of names of clients and/or fees charged, on the website is permissible only where it is required by a regulator, whether or not constituted under a statute, in India or outside India, provided that such disclosure is only to the extent of requirement of the regulator. ii. Where such disclosure of names of clients and/or fees charged is made on the website, the member/ firm shall ensure that it is mentioned on the website [in italics], below such disclosure itself, that “This disclosure is in terms o f the requirement of [name of the regulator] having jurisdiction in [name of the country/area where such regulator has jurisdiction] vide [Rule/ Directive etc. under which the disclosure is required by the Regulator].
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