Presented by: Khushroo B. Panthaky Chartered Accountant ......of the Companies Act, 2013 (Revised...
Transcript of Presented by: Khushroo B. Panthaky Chartered Accountant ......of the Companies Act, 2013 (Revised...
Recent Regulatory Issues Impacting Audit Finalization for Year Ended 31 March 2016
Accounting, Auditing and Important Regulatory Updates
Presented by: Khushroo B. PanthakyChartered Accountant, Bombay
15 June 2016 – Indian Merchants Chambers
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Contents
• Companies Act, 2013• Fraud Reporting• Companies Act, 2013- Other updates• Schedule II• Reporting on Internal Financial Controls• Companies (Auditor’s Report) Order 2016 (CARO 2016)• CSR• SEBI Updates• ICAI Updates• Other Updates• Ind AS
Companies Act, 2013
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Companies Act 2013 – Independence
Key changes• Independence requirements under Companies Act 2013 are
stricter than existing independence rules under IESBA Code
• Under the 2013 Act, an auditor is not allowed to render, among other services, “management service” to the company, its holding or subsidiary company
• Term management services has not been defined either in 2013 Act or the Rules.
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Companies Act 2013 – Non Audit Services
Key changes
Restriction on services
• severe restrictions on providing non-audit services, directly or indirectly to the company, its holding or subsidiary company include:
‒accounting and book keeping services;
‒ internal audit;
‒design and implementation of any financial information system;
‒actuarial services;
‒ investment advisory services;
‒ investment banking services;
‒rendering of out sourced financial services; and
‒management services.
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Companies Act 2013 – Non Audit Services
Restriction on services
• transition period
‒Complete / terminate all services mentioned above on or before 31 March 2015.
‒Not to enter into any new agreement to render above mentioned services on or after 1 April 2014.
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Risk based approach
Understand theentity and its internal
control
Perform preliminaryanalytics
Link matters to financial statement risks and assertions
Perform tests of controls
Evaluate risk indicators
Perform inquiries
Perform walkthroughs
Identify controls thatrespond to the risks Yes
No
Perform appropriate substantive procedures
Assess inherent risk
Materialmisstatement is
reasonably possible?
Add
ition
al r
isks
iden
tifie
d du
ring
exec
utio
nIdentify mattersimpacting the
financial statements
Identify risks Evaluate risks Respond to risks
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Companies Act 2013 – Accounts-Financial Statements
Key changes
• 31 March to be the mandatory FY end (except for the purpose of aligning the FY with that of holding/subsidiary incorporated outside India, with prior approval of the NCLT)
• consolidation mandatory for all companies including unlisted and private companies having subsidiaries (including associates and joint ventures)
• the 2013 Act prescribes the format (similar to existing revised schedule VI of the Act) for preparation of Consolidated Financial Statement (CFS).
• requirement to show minority interest separately within equity on the balance sheet
• in the CFS, the company would need to give all disclosures relevant for CFS only
Consolidated Financial Statements (CFS)
With the Companies Act, 2013 coming into effect
AGENDA
• Applicability of the CFS standard
• Exemptions provided under the Companies Act, 2013
• Areas of Interpretation
• How professional firms assist in preparation of CFS
Applicability of the CFS Standard
Companies Act, 2013 establishes the requirement for CFS for Indian Companies
• Preparation of CFS is mandatory for all companies, including unlisted and private companies having subsidiaries (including associates and joint ventures)
• Consolidation is done in accordance with the provisions of Schedule III of the Act and the applicable accounting standards (21, 23 and 27)
• Companies preparing CFS under IFRS would now need to prepare the CFS under Indian GAAP and are required to conform to the accounting policies of the parent company
Applicability of the CFS Standard
• Companies that do not have any subsidiary but only has associates and / or joint ventures also need to prepare CFS
• Unlisted companies that have foreign subsidiary (ies) need to prepare CFS
Ministry of Corporate Affairs (MCA) has provided th e below exemptions:-
• Intermediate parent companies need not prepare CFS as long as they are wholly-owned and the immediate parent is in India
How professionals can support in preparation of CFS
• Review consolidation requirements for the group
• Accounting and tax advice on the alignment of group structure
• Review of the financial reporting framework, manage multi GAAP reporting and prepare for India GAAP reporting
• Review of consistency in accounting policies
• Review of the CFS reporting related internal controls within the group
• Training and knowledge transfer
Fraud Reporting
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MCA prescribes threshold for fraud reporting
• MCA notified 14 December 2015 as the date of commencement
of provisions of Companies (Amendment) Act, 2015 relating to
reporting of fraud
• MCA issued Companies (Audit and Auditors) Amendment
Rules, 2015
– all frauds to be reported to audit committee/board immediately
� no later than 2 days of auditor's knowledge of the fraud
– fraud involving / expected to involve individually INR 1 crore
or more to be reported to Central Government
– frauds not reported to Central Government: Board report to
disclose specified details
– amended provisions also applicable to cost auditor and
secretarial auditor
Effective date
Rules notified
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Guidance Note on Reporting on Fraud under section 143(12) of the Companies Act, 2013 (Revised 2016)
Erstwhile GN modified pursuant to amendment to
section 143(12) of the 2013 Act and Rule 13 of the
Companies (Audit and Auditors) Rules, 2014, which
requires the statutory auditor to report to the Central
Government only for frauds which involve/expected
to involve individually an amount => INR 1 crore
In case of fraud involving lesser than above amount, statutory auditor to report matter to the audit committee/Board of company instead of Central Government.
Guidance Note
Effective date
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Companies Act 2013 – Fraud Reporting
Directors' responsibility
directors has taken due care for preventing and detecting
fraud
ID's also to report concerns on suspected
fraud
listing agreement also
make board responsible for fraud related
matters
AC's responsibility
AC is responsible for reviewing findings of internal auditor's on
suspected fraud
reporting the fraud related matters to the
board
Auditorsresponsibility
auditor to report fraud to CG within 60 days
(first 45 days for board or AC to comment)
wide coverage & materiality greater than
INR 1 crore
applicable to secretarial and cost auditors
only specified frauds covered
Companies Act, 2013 - Other updates
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Omnibus approval by Audit Committee
• MCA notified 14 December 2015 as the date of commencement of provisions of Companies (Amendment) Act, 2015 relating to omnibus approval for related party transactions (RPTs)
• MCA issued Companies (Meeting of Board and its Powers) Second Amendment Rules, 2015 to permit omnibus approval for RPTs subject to prescribed conditions including:
‒ audit committee to consider certain factors while specifying criteria for omnibus approval
‒ criteria to be approved by board; consideration for approval include:
� repetitiveness of the transaction (in past or in future)
� justification for the need of omnibus approval
‒ omnibus approval to be valid only for a period of 1 financial year
‒ no omnibus approval for selling/disposing of the undertaking of company
Amended rules aligned with the SEBI (Listing Obliga tions and Disclosure Requirements)
Regulations, 2015
Effective date
Rules notified
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Companies (Amendment) Bill, 2016 introduced in Lok Sabha
Companies (Amendment) Bill, 2016 (the Bill)
• Finance Minister introduced the Bill on 16 March 2016 in Lok Sabha
• On 1 February 2016 MCA issued report of Companies Law Committee
(CLC) proposing several changes to the 2013 Act
• Recommendations would result in changes in 78 sections and more than
100 changes in the 2013 Act; proposed 50 amendments in rules
• Report aims at further improving ease of doing business and proposes to
– address transitional-cum-implementation challenges
– removal of inconsistencies between the 2013 Act and Accounting
Standards/SEBI requirements
– rectifying omissions and inconsistencies in the Act
• The Bill proposes amendments based on comments received fromstakeholders, ministries and recommendations of the CLC Report
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Companies (Amendment) Bill, 2016 introduced in Lok Sabha
Key Amendments Proposed
• Definition of subsidiary company and associate company to beamended
− term 'total share capital' to be replaced by 'total voting power' fordetermining holding subsidiary relationship
− significant influence means control of at least 20 percent of totalvoting power or control of or participation in taking businessdecisions under an agreement
• Removal of requirement for annual ratification of appointment orcontinuance of auditor
• Re-opening of financial statements restricted to eight years
• Removing restriction on layers of subsidiaries and investmentcompanies
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Companies (Amendment) Bill, 2016 introduced in Lok Sabha
Key Amendments Proposed
• Simplification of the private placement process by doing away withseparate offer letter
• Removing provisions relating to forward dealing and insider tradingfrom the existing company law
• Replacing central government approval with special resolutionapproval of shareholders in case managerial remuneration crosses theprescribed thresholds
• Introduction of test of material for pecuniary interest for testingindependence of independent directors
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Companies (Amendment) Bill, 2016 introduced in Lok Sabha
Key Amendments Proposed
• Companies may advance loan to any other person in whom director isinterested subject to prior approval by special resolution
• Align prescription for companies to have Audit Committee andNomination and Remuneration Committee with that of IndependentDirectors
• Exempting certain class of foreign companies from registering andcompliance regime under the Act
• Process of incorporation to be made easier for companies andunrestricted objects clauses to be permitted in the Memorandum ofAssociation
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Companies (Amendment) Bill, 2016 introduced in Lok Sabha
Key Amendments Proposed
• The requirement of deposit of INR one lac is proposed to bedone away with in cases of independent directors and directorsnominated by Nomination and Remuneration committee
• Disclosure in prospectus to be aligned with SEBI regulations(omitting prescription in 2013 Act and allowing theseprescriptions to be made by SEBI)
• Central Government to prescribe abridged form of annualreturn for One Person Company and small company
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Relaxation in audit limits under the 2013 Act - Eligibility
Earlier provision
• As per section 141 (3) (g) of the 2013 Act, “a person who is in full time
employment elsewhere or a person or a partner of a firm holding
appointment as its auditor, if such persons or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than
twenty companies” shall not be eligible for appointment as an auditor
of a company . 20 companies included all companies without any
exemption
MCA notification
• MCA has excluded one person companies, dormant companies, small
companies and private companies having a paid up share capital less than
₹100 crores from the audit limit of 20 companies as specified under section
141(3)(g) of the 2013 Act.
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Other Updates - At glance
- MCA issued Companies (Share Capital and Debentures) Third
Amendment Rules, 2015 additionally permitting certain classes of
companies to issue secured debentures for a period upto 30 years
- companies permitted by a Ministry or Department of the Central
Government or by RBI or by the National Housing Bank or by any
other statutory authority to issue debentures for a period exceeding
10 years
Large number of companies can now issue secured deb entures for term exceeding 10 years
Schedule II
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Companies Act 2013 – Schedule II
• Useful life of an asset and residual value shall not be different from that indicated in Schedule II – Part C
• In case an entity choses a useful life or residual value different from Schedule II, it shall disclose the justification of the same
•The carrying amount of the asset on the date this Schedule becoming effective:
a) shall be depreciated over the remaining useful life of the asset as per this Schedule;
b) after retaining the residual value, shall be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.
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Guidance Note (GN) on Accounting for Depreciation in Companies
• The GN provides guidance on significant issues arising from practical
application of Schedule II like:
• Extra shift depreciation applicable where useful life estimated on single shift
basis at the beginning of the year
- Company, which estimated the useful life of an asset on single shift basis
at the beginning of the year, used the asset on double /triple shifts during
the year, the depreciation expense to be increased by 50% /100%
- multiple shift depreciation - estimation of residual value
- revaluation of assets - depreciation on low value items
- component approach - pro rata depreciation etc.
Component approach already permitted in paragraph 8.3 of the current AS 10. Under AS 10, there seems to be a choice in this matter; however, Schedule II requires mandatory application of component accounting
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Guidance Note (GN) on Accounting for Depreciation in Companies
– Component approach made mandatory under Schedule II –
effective from 1 April 2015
– Companies will need to identify and depreciate significant
components with different useful lives
– Unlike Schedule XIV, no requirement to provide depreciation at the
rate of 100% any for low value items in Schedule II
– a company may have a policy to fully depreciate the assets upto
certain threshold limits considering materiality aspect in the year of
acquisition
• GN applicable for accounting periods beginning on or after 1 April
2016; earlier application is encouraged
Reporting on Internal Financial Control
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• Reporting on internal financial controls (IFC) for financial years beginning on or after 1
April 2014 by directors
Internal financial controls defined as the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information
• The reporting on IFC would apply to audits of standalone and consolidated annual financial
statements . Auditor’s reporting on the adequacy of internal financial control system and its
operating effectiveness mandatory from financial years beginning on or after 1 April 2015
Listed companies Other companies
Reporting requirement for directors
• That ‘internal financial controls’ were adequate and effective
- Special comment on internal financial controls with reference to the financial statements
Reporting requirement for directors• Report on adequacy of internal financial
controls with reference to the financial statements only
Reporting on Internal Financial Control
ICAI issued guidance note on Audit of Internal Fina ncial Controls Over Financial
Reporting in September 2015
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Companies Act 2013 – Board Responsibilities
Section 134 Board of Directors
• State in Director's responsibility statement that directors had laid down "internal financial controls " to be followed by the Company and that such internal financial controls were adequate and operating effectively
• Applicable only in case of listed entity
Companies (Accounts) Rules, 2014
Board of Directors
• Include the details in respect of adequacy of "internal financial controls " with reference to the financial statements in Board's report
• Applicable to all companies
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Companies Act 2013 – Audit Committee and Independent Director's role
Section 177 Audit Committee
• Evaluation of internal financial controls and risk management systems;• Call for and discuss auditor's comments on internal control systems and their audit
observations and discuss those with management, if considered necessary.
Schedule IV Independent Directors
• Satisfy themselves on the integrity of financial information and that financialcontrols and the systems of risk management are robust and defensible
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Companies Act 2013 – Auditor's Responsibilities
Section 143 Auditor
• Report on whether the company has adequate internal financial controls system and operating effectiveness of such controls
• Applicable to all companies
CARO, 2015 Auditor
• Report if there are adequate internal control procedures for purchase of inventory and fixed assets and for sale of goods and services
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Companies Act 2013 – IFC Applicability
Requirements Listed companies Specific class of companies*
Other companies
Director's Responsibility Statement (Section 134)
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The Companies (Accounts)Rules, 2014 (Rule 8)
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Audit Committee (Section 177) aaaa aaaa
Independent Directors (Schedule IV)
aaaa aaaa
Auditor Report (Section 143) aaaa aaaa aaaa
* Specified class of companies:• public companies with a paid up capital of Rs.10 Crores or more;• public companies having turnover of Rs.100 Crores or more;• public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding
Rs.50 Crores or more.
The above thresholds as existing on the date of last audited Financial Statements shall be taken into account.
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Reporting on Internal Financial Control
Key highlights of the guidance note
36
Internal financial controls framework:Permits the Company to establish its own internal control over financial reporting criteria using the guidance in other auditing standards in addition to permitting the use of COSO framework, Turnbull Report, CoCo framework.
Materiality:Based on quantitative and qualitative risk factors
Approach:Top down approach - Identify risk of material misstatements due to error or fraud at financial statements level (including disclosures). Consider the auditor's understanding of the overall risks to internal financial controls over financial reporting while identifying the risk of material misstatement.
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Extent of testing:Provides number of samples to test the design and operating effectiveness of internal financial controls
Audit opinion:Auditor may choose to issue combined report (i.e., one report containing both an opinion on the financial statements and an opinion on internal financial controls over financial reporting) or separate reports on those.
Reporting on Internal Financial Control
Key highlights of the guidance note
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Reporting on Internal Financial Control
Key Definitions
38
DeficiencyDeficiency in internal financial control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
Significant deficiency: A significant deficiency is a deficiency, or a combination of deficiencies, in internal financial control over financial reporting that is important enough to merit attention of those charged with governance since there is a reasonable possibility that a misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
Material weakness:A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
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Methodology for IFCOFR
39
Key strategic considerations Key operation considera tionPLAN EXECUTE REPORT
Materiality
Significant locations/accounts
Project plan and timelines
Entity-Level Controls
Relevant Processes
Process Risks
Control Design
Control Effectiveness
Control ImprovementsInternal ControlReport
Elements
StepsPreliminary assessment
Assess Current State and Identify
Relevant Processes
Document Design and
Evaluate Critical
Processes and Controls
Design Solutions for
Control Gaps
Implement Solutions for Control Gaps
Report
IT Controls
Project Management
Knowledge Sharing
CommunicationContinuous Improvement- moving
towards control rationalisation
IT Organisation and structure
IT Entity-Level Control Evaluations
IT Process Level Control Evaluations
External auditors engagement at each stage
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Approach on IFCOFR
40
Ste
ps ScopingCurrent State Analysis – “AS IS” processes
Conduct gap analysis
Design and validate ‘ To
be’ processes1 2 3 4
Key
Act
iviti
esD
eliv
erab
les
• Identify financial reporting elements, critical processes, supporting systems and locations
• Account level materiality and chart of accounts analysis
• Confirm the methodology for the engagement
• Prepare a detailed project plan
• Identify process owners
• Devise communication and reporting protocols
• Understand the ‘as-is’ process and sub-processes by interviewing key operating personnel
• Review entity level controls
• Conduct process / system walk-through including all the process steps where finance has an interface.
• Review ITGC Controls on the accounting systems being used
• Map risk factors and dependencies
• Identify ‘gaps’ and ‘what can go wrong’ in existing processes
• Identify control points with improvement opportunities
• Identify anti-fraud controls w.r.t. segregation of duties, safeguarding and authorization controls
• Suggest remedial action for gaps identified , in line with leading practices, and to ensure compliance
• Prepare ‘To-be’ process maps
• Update the risk control matrix and obtain buy-in from the process owners
• Develop and institutionalize a frame-work to make a continuous assessment on internal controls
• Detailed project plan • ‘As-is’ process documentation
• Gap Analysis Report • ‘To-be’ process maps • Risk control matrix • Control Dashboard for
the Leadership Team
Focus on significant risks and controls having an interface with finance function for each in-scope process
Companies (Auditor’s Report) Order 2016 (CARO 2016)
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Companies (Auditor’s Report) Order 2016 (CARO 2016)
• Supersedes CARO 2015 w.e.f. FY commencing on or after 1 April 2015• Exemption to private limited company, not being a subsidiary or holding
company of a public company satisfying all the following conditions:• paid up capital and reserves and surplus =< INR 1 crore• total borrowings =< INR 1 crore • total revenue =< INR 10 crores
• Private company which is a parent/subsidiary of a public company not exempted
Applicability
CARO 2016 not applicable to Consolidated financial statements – A welcome relief!
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Companies (Auditor’s Report) Order 2016 (CARO 2016)
• Banking company
• Insurance company
• Company licensed to operate under section 8 of the Act 2013
• Small Company as defined under the Act 2013
Exclusions
CARO 2016 is now compatible with The Companies Act ,2013!!!
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Companies (Auditor’s Report) Order 2016
• Reporting on internal control system- purchase of FA/inventory, sale of goods/services.
• Whether amount has been transferred to Investor Education and Protection Fund.
• Reporting on accumulated losses and cash losses.
• Reporting on procedures of physical verification for inventory
• Reporting on maintenance of records of Inventories
Matters Omitted in CARO 2016 as compared to CARO 2015
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Companies (Auditor’s Report) Order 2016
• Clause on reporting whether company has granted any loans, secured or unsecured to companies, firms or other parties • LLPs also included• additional reporting whether terms and conditions in
respect thereof are not prejudicial to the company’s interest and whether schedule of repayment/payment is stipulated
• reporting of amounts overdue for > 90 days instead of monetary limit
• Additional reporting on whether moneys raised by way of IPO/ further public offer (including debt instruments) have been applied for the purposes for which those are raised. If not, the details thereof
• Reporting on compliance with Section 185 and 186 of The Companies Act, 2013
New Clauses
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Companies (Auditor’s Report) Order 2016
• Reporting on managerial remuneration and compliance with Section 197 of The Act
• Reporting on non cash transaction with the directors or persons connected with him as per Section 192 of The Act
• Requirement for registration of The Company under Section 45 IA of the Reserve Bank of India Act
• Reporting on title deeds of the immovable properties in the name of the company
New Clauses
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CARO 2015 Vs. CARO 2016-Modifications
CARO 2015 CARO 2016 Change
Applicability
-a private limited company with apaid up capital and reserves not more than rupees fifty lakh -Loan outstanding not exceeding rupees twenty five lakh from any bank or financial institution
-Turnover not exceeding rupees five crore
at any point of time during thefinancial year.
Applicability
private limited company, notbeing a subsidiary or holdingcompany of a public company , having-a paid up capital and reserves andsurplus not more than rupees onecrore as on the balance sheet date -total borrowings not exceeding rupees one crore from anybank or financial institution at anypoint of time during the financialyear -total revenue as disclosed in Scheduled IIIto the Companies Act, 2013(including revenue fromdiscontinuing operations) not exceeding rupees ten crore during the financial year as per the financial statement
A Private company notbeing a subsidiary or holding company of a public companyexcluded now from theOrder 2016
-The term ‘reserve ’ hasbeen replaced with‘reserve and surplus’
-The term ‘turnover ’ hasbeen replaced with ‘revenue as disclosed in Scheduled III to theCompanies Act, 2013(including revenue fromDiscontinuing operations)’
-The term ‘loan outstanding’ has been replaced with ‘totalborrowings ’
-All the thresholds wereearlier seen at any pointof time during the financial year . Now, wrt to capital and reserves(and surplus) , it has been changed to as on the balance sheet dateand wrt turnover (revenue) , it has been changed to during the FY.
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CARO 2015 Vs. CARO 2016-Modifications
CARO 2015 CARO 2016 Change
Inventory
Matters to be included in theauditor's report. -
(a) whether physical verificationof inventory has been conducted atreasonable intervals by themanagement
Inventory
Matters to be included in theauditor's report. -
whether physical verification ofinventory has been conducted atreasonable intervals by the managementand whether any materialdiscrepancies were noticed and if so,whether they have been properlydealt with in the books of account
Reporting on materialdiscrepancies, reportedseparately earlier (pointc) clubbed with this point
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CARO 2015 Vs. CARO 2016-Modifications
CARO 2015 CARO 2016 Change
Borrowings
Matters to be included in theauditor's report. --if overdue amount is more thanrupees one lakh , whether reasonablesteps have been taken by the companyfor recovery of the principal and interest
Borrowings
Matters to be included in theauditor's report. --if the amount is overdue , state thetotal amount overdue for more thanninety days, and whether reasonablesteps have been taken by the companyfor recovery of the principal andinterest;;
Any overdue amount(exceeding 90 days ) is tobe stated as againstexceeding Rs. 1 lakhearlier (for any period )
Dues/Borrowings
Matters to be included in theauditor's report. –
whether the company hasdefaulted in repayment of dues to afinancial institution or bank ordebenture holders? If yes, the periodand amount of default to be reported
Dues/Borrowings
whether the company hasdefaulted in repayment of loans orborrowing to a financial institution,bank, Government or dues todebenture holders? If yes, the periodand the amount of default to be reported(in case of defaults to banks, financialinstitutions, and Government, lenderwise details to be provided).
The word ‘dues’ has beenreplaced with ‘loans orborrowing’The word ‘government’addedLender-wise details arenow asked to be provided
CSR
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Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016
• MCA has issued Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016 (‘Amendment Rules’) amending Rule 4(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014.
• The Amendment Rules, inter alia, provide the following: • Registered trust or a registered society through which CSR activities will be undertaken should be
established by the company either singly or along with any other company;
• Company established under section 8 of the 2013 Act or a registered trust or a registered society, established by the Central Government or State Government or any entity established under an Act of Parliament or a State legislature are now also included in list of entities through which CSR activities can be undertaken.
• If the Board of Directors of a Company decide to undertake its CSR activities through a company established under section 8 of the 2013 Act or a registered trust or a registered society, other than those specified in Rule 4(2), such company or trust or society should have an established track record of three years in undertaking similar programs or projects; and the company has specified the projects or programs to be undertaken, the modalities of utilisation of funds of such projects and programs and the monitoring and reporting mechanism .
• These amendment rules are effective from 23 May 2016.
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FAQs on Corporate Social Responsibility under section 135 of the 2013 Act
MCA, through FAQs issued following clarifications on 12 January 2016:
• Holding or subsidiary of a company (which fulfils criteria under section 135(1)) to comply with
section 135(1) only if it also fulfills such criteria
• Section 8 companies not exempted from CSR provisions
• Foreign company's balance sheet filed under section 381(1)(b) to contain annexure regarding report
on CSR
• Contribution in kind cannot be monetized as CSR expenditure
• Excess amount spent on CSR cannot be carried forward to subsequent years
• ‘any financial year ’ referred to under sub-section (1) of section 135 of the Act read with Rule 3(2) of
Companies CSR Rule, 2014, implies ‘any of the three preceding financial years’
• Amount spent towards CSR not to be claimed by the company as business expenditure
• Computation of net profit for section 135 to be as per section 198 i.e. ‘Profit before tax ’
Objective of government behind CSR provisions is not to monitor, but to enable corporates to conduct themselves in socially responsible manner. Monitoring/implementation continues to be the responsibility of BOD/CSR
committee/auditors
A company which does not meet the criteria in the relevant financial year however, meets criteria in any of the preceding 3 FYs, would need to constitute a CSR Committee and comply with provisions of sections 135 (2) to (5)
read with CSR Rules
SEBI Updates
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• SEBI has issued circular on ‘Disclosure of the impact of audit qualifications by the listed entities’ under regulation 33 and regulation 52 of SEBI (Listing and Other Disclosure Requirements) Regulations, 2015.
This circular, inter alia, provides following: • For audit reports with unmodified opinion, the listed entity should furnish a declaration to that
effect to the stock exchange(s) while submitting the annual audited financial results;
• For audit reports with modified opinion, a statement showing impact of audit qualifications should be filed with the stock exchanges in a format as specified in Annexure I to the circular.
• The format requires mentioning the following: - figures for key financial items such as turnover, total expenditure, net profit, total assets, total
liabilities etc. before and after adjusting for the audit qualifications; - details of audit qualification/type/frequency etc.
SEBI (Listing and Disclosure Requirements) Regulati ons, 2015
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• The management of the listed entity shall have the option to explain its views on the audit qualifications;
• Where the impact of the audit qualification is not quantified by the auditor , the management shall make an estimate . In case the management is unable to make an estimate, it shall provide reasons for the same. In both the scenarios, the auditor shall review and give the comments.
• This circular shall be applicable for all the annual audited standalone/ consolidated financial results, as applicable, submitted by the listed entities for the period ending on or after 31 March 2016.
SEBI (Listing and Disclosure Requirements) Regulati ons, 2015
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FAQs on SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
SEBI through additional FAQs issued following clarifications on 29 January 2016:
• As per regulation 23(8) all existing material related party contracts/ arrangements entered into prior to
the date of notification of these regulations, which may continue beyond such date should be placed
for approval in the first General Meeting subsequent to notification of these regulations:
– the listed entity need not take fresh approval in case the entity has already fulfilled the
requirement of the regulations
• Companies having subsidiaries to prepare two sets of Form A and/or Form B, one for standalone
results and another for consolidated results based on the respective audit report
• Mandatory reporting of Business Responsibility Report in Annual Report for 500 listed entities
applicable from 1 April 2016 i.e. FY 2016-17
• Regulation 35 for a listed entity to submit to the stock exchange(s) an Annual Information
Memorandum will become applicable as and when it is specified by SEBI
• All unlisted subsidiaries (whether material or not) should periodically bring to the notice of the BOD
the listed entity, a statement of all significant transactions/arrangements entered into by the unlisted
subsidiary
• A director of a listed entity can be member in maximum ten committees and chairperson of more than
five committees of listed entities and unlisted public limited compani es put together
© 2016 Walker Chandiok & Co LLP All rights reserved 57
SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2016
• SEBI has issued SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations,
2016. These amendment regulations have amended the following regulations:
• Regulation 33 - Financial results
• The key changes, inter alia, include that instead of submission of Form A (for audit report with
unmodified opinion), the listed entity shall submit a declaration to that effect to stock exchange
while publishing the annual audited financial results. Further, instead of submission of Form B (for
audit report with modified opinion), listed entities will be required to submit ‘Statement on impact
of audit qualifications’.
• Regulation 34 - Annual report
• ‘Statement on impact of audit qualifications’ as stipulated in Regulation 33(3)(d) also needs to be
submitted with annual report.
• Regulation 52 - Financial results
• The key changes, inter alia, include that instead of submission of Form A (for audit report with
unmodified opinion), the listed entity shall submit a declaration to that effect to stock exchange
while publishing the annual audited financial results. Further, instead of submission of Form B (for
audit report with modified opinion), listed
• entities will be required to submit ‘Statement on impact of audit qualifications’.
© 2016 Walker Chandiok & Co LLP All rights reserved 58
SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2016
• Regulation 53 - Annual report
• ‘Statement on impact of audit qualifications’ as stipulated in Regulation 52(3)(a) also needs to be
submitted with annual report.
• Regulation 95
• Reference of ‘Form B accompanying annual audit report’ replaced by ‘Statement on impact of audit
qualifications accompanying Annual Audit Report’.
• Schedule IV - Disclosures in financial results
• The key changes, inter alia, include that management of the listed entity has the option to explain its
views on the audit qualifications and the same shall be included in the ‘Statement on impact of audit
qualifications’. Further, for audit qualifications where the impact is not quantifiable, the management
should make an estimate and the auditor will review the same and report accordingly. Where the
management is unable to make an estimate, it should provide the reasons and the auditor will review
the same and report accordingly. This will be included in the ‘Statement on impact of audit
qualifications’.
• Schedule VIII - Manner of reviewing Form B accompanying annual audited results has been deleted.
• These amendment regulations shall come into force on 01 April 2016.
© 2016 Walker Chandiok & Co LLP All rights reserved 59
SEBI (Issue of Capital and Disclosures Requirements) (Second Amendment) Regulations, 2016
• Dissenting shareholders to be given an exit opportunity by promoters and shareholders having control
over the company as per SEBI regulations (Section 13(8) and 27(2) of the 2013 Act)
– dissenting shareholders mean shareholders who voted against the resolution for change
in objects or variation in terms of a contract, ref erred to in the prospectus of the issuer
• Accordingly, SEBI amended SEBI ICDR 2009 to introduce new chapter VI-A on ‘Conditions and
Manner of Providing exit opportunity to Dissenting Shareholders’ providing for:
- Conditions for exit offer - Eligibility of shareholders for availing the exit offer
- Determination of Exit offer price - Manner of providing exit to dissenting shareholders
etc.
• Promoters/shareholders in control to make exit offer if:
- the public issue has opened after 1 April 2014 and
- offer is dissented by at least 10% of the shareholders and
- the amount to be utilized for the objects for which the prospectus was issued is less than 75% of
the amount raised
• Amended regulation not applicable in case of no identifiable promoters/shareholders in control of listed
issuer
Amended regulations effective from 17 February 2016
• Consequential amendments made to SEBI (Substantial Acquisition of Shares and Takeovers)
(Amendment) Regulations, 2016
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SEBI (Issue of Capital and Disclosures Requirements) (Third Amendment) Regulations, 2016
• These amendment regulations, inter alia, provide following:
Definition of wilful defaulter has been included in regulations;
No person who is a wilful defaulter will make a public announcement of an open offer for acquiring shares or enter into any transaction that would attract obligation to make a public announcement of an open offer for acquiring shares.
• These amendment regulations shall come into force on 25 May 2016.
© 2016 Walker Chandiok & Co LLP All rights reserved 61
SEBI issued clarification to align financial information disclosure in offer document per SEBI (ICDR) Regulations, 2009 with MCA's roadmap on Ind AS
.
*to be disclosed by making suitable restatement adjustments to the accounting heads from their values as
on the dates of transition following accounting policies consistent with that used at date of transition
Clarification on applicability of Ind AS to disclosures in offer documents under SEBI (ICDR) Regulations, 2009
Filing of offer doc
Latest FY
2nd
latest FY3rd FY 2nd
earliest FY
Earliest FY
Upto 31 Mar'17
IGAAP IGAAP IGAAP IGAAP IGAAP
B/w 1 Apr'17-31 Mar'18
Ind AS Ind AS Ind AS* IGAAP IGAAP
B/w 1 Apr'18-31 Mar'19
Ind AS Ind AS Ind AS IGAAP IGAAP
B/w 1 Apr'19-31 Mar'20
Ind AS Ind AS Ind AS Ind AS IGAAP
On or after 1 Apr'20
Ind AS Ind AS Ind AS Ind AS Ind AS
For
com
pani
es w
here
Ind
AS
app
lies
from
FY
201
6-17
(pha
se I)
Circular provides clarity to companies that are in the process/contemplating a listing on the Indian markets
• Applicable to all companies required to disclose financial information in accordance with Ind AS per MCA’s roadmap & whose offer document is filed with SEBI on/after 01 April 2016
• Disclosure of Interim period to be in line with the accounting policies followed for latest FY
• All five FY may be voluntarily presented using Ind AS
• Issuer company to explain the difference between Ind AS and the previously applicable AS, and impact thereof
• For phase II companies (FY 2017-18), timelines to be applicable with a time lag of 1 year
• Consistent accounting policies to be followed for each FY
Key Takeaways-• Up to 31 Mar'17, latest FS can be as per Indian GAAP, from 1 Apr'17, they should be
as per Ind AS• Companies to determine the feasibility of preparing the five-year Ind AS financial
statements vis-a-vis the information gaps that the hybrid approach may create
© 2016 Walker Chandiok & Co LLP All rights reserved 62
SEBI provided following relaxations-
- the CFR for the quarters ending December 2015 & March 2016 and year ending March
2016 may continue to be filed under IFRS
- the relaxation granted does not affect the requirements of the 2013 Act
CFS for year ending March 2016 to be prepared as per IGAAP
• Option to submit CFR• Option to use IFRS for CFR
Earlier requirement (Listing Agreement)Earlier requirement (Listing Agreement)
• Option to submit CFR continues• CFR to be prepared as per Indian GAAP• IFRS results may be submitted additionally (optional)
New Requirement (Listing Regulations)New Requirement (Listing Regulations)
Interim relaxation for submission of consolidated financial results (CFR) under IFRS
© 2016 Walker Chandiok & Co LLP All rights reserved 63
• SEBI issued circular providing requirements to be fulfilled by a listed entity and stock
exchange in respect of schemes of arrangement
– Requirement to submit auditor's certificate for compliance with IGAAP continued
� mere disclosure of deviations in accounting treatment in the scheme with the
aforesaid AS shall not be deemed as compliance
– Requirement of valuation report from an independent CA continued
� Additionally, valuation reports to be considered by audit committee
• SEBI also provided eligibility conditions for companies seeking relaxation under rule 19(7)
of the Securities Contracts (Regulation) Rules, 1957
SEBI prescribes requirements for schemes of arrangement
Applicable from 1 December 2015; schemes submitted prior to 1 December 2015
continue to be governed by earlier circulars
© 2016 Walker Chandiok & Co LLP All rights reserved 64
SEBI through FAQs issued following clarifications on 20 November 2015:
• Restriction on grant of ESOPs to independent directors under these Regulations and
2013 Act applies only to fresh grants of ESOPs
• grant made prior to commencement of these provisions to remain valid subject to
fulfillment of terms and conditions of relevant ESOP scheme
Un-appropriated inventory of shares not backed by grants but acquired through secondary
acquisition by the trust to be sold on the recognized stock exchange within a period of 5 years
from the date of notification of regulations; SEBI clarifies:
• appropriation towards ESPS/ESOP/SAR/General Employe e Benefits Scheme/
Retirement Benefit Schemes by 27 October 2015 to be considered as compliance with
above provisions
• company may appropriate towards individual employees or sell in the market during
next 4 years so that no un-appropriated inventory remains thereafter
Clarifications on SEBI (Share Based Employee Benefits) Regulations, 2014
© 2016 Walker Chandiok & Co LLP All rights reserved 65
SEBI amends formats for financial results
• SEBI (Listing Obligations And Disclosure Requirements) Regulations, 2015 are effective
from 1 December 2015 (Listing regulations)
• SEBI revised formats for listed entities for publishing financial results on 30 November
2015
– Revised formats largely similar to those prescribed under clause 41 of the erstwhile
listing agreement
• Companies adopting Ind AS while publishing financial results
– to include disclosures as per Ind AS 34, Interim Financial Reporting to be included
– to comply with Ind AS 101, First time adoption of Indian Accounting Standards
– Comparatives for quarterly/annual results to be Ind AS compliant
Companies may need to get their Ind AS financial Statements for the year ended 31
March 2016 audited
• Investor complaints to be disclosed to stock exchange separately from the financial
results
• Details of public shareholding and promoter/promoter group shareholding no longer
For interim reporting, Ind AS will be applicable fr om quarter ending 30 June 2016 onwards
© 2016 Walker Chandiok & Co LLP All rights reserved 66
SEBI amends formats for financial results
• Formats also to be used by companies adopting Ind AS; key issues include:
– Manufacturing, trading and service companies proposing to follow functional
classification of expenditure in annual profit and loss account to furnish quarterly
financial results in alternative formats
� Functional classification not permitted by Ind AS 1, Presentation of Financial
Statements
– statement of financial results includes 'exceptional items' not defined in Ind AS
– separate disclosure of financial and non-financial assets and liabilities not provided in
the Statement of Assets and Liabilities
– minority interest included under ‘Equity and Liabilities’ as a separate heading;
Schedule III to the 2013 Act requires that minority interests be presented within equity
separately from the equity of the owners of the parent
© 2016 Walker Chandiok & Co LLP All rights reserved 67
Penal provisions on non- compliance with Listing Regulations
• Stock exchanges to monitor compliance by listed entities with the provisions of the Listing
Regulations
• Stock exchanges required to adopt:
‒ standard operating procedure for suspensions and revocation of suspension trading
of specified securities
‒ uniform structure for imposition of fine
• Depositories, on receipt of intimation from concerned exchange, to freeze or unfreeze the
entire promoter/promoter group shareholding
• Stock exchanges to disclose on their website action taken against listed entities including
details of amount of fine, period of suspension etc.
ICAI Updates
Standard on Auditing (SA) 700 (Revised)
Forming an Opinion and Reporting on Financial Statements
Introduction
• Earlier known as SA 700 (AAS 28), “ The Auditor’s Report on Financial Statements”
• Deals with auditor’s responsibility to form an opinion on the financial statements (FS)
• Deals with form and content of the auditor’s report issued on General Purpose FS
• Promotes consistency in the auditor’s report which enables global acceptance of the auditor’s report
• Consistency also helps promote user’s understanding and identify unusual circumstances when they occur
• Effective for audits of FS for periods beginning on or after April 1, 2012
Auditor’s report – Auditor’s Responsibility section
• The auditor’s report shall include a section with the heading “Auditor’sResponsibility”
• It shall state that the responsibility of the auditor is to express anopinion on the FS based on the audit
• It shall state that the audit was conducted in accordance with Standardson Auditing issued by the ICAI . It shall also explain that thoseStandards require that the auditor comply with ethical requirements andthat the auditor plan and perform the audit to obtain reasonableassurance about whether the FS are free from material misstatement
Auditor’s report – Auditor’s Responsibility section
• It shall describe an audit by stating that:
a) An audit involves performing procedures to obtain audit evidenceabout the amounts and disclosures in the FS;
b) The procedures selected depend on the auditor’s judgment ,including the assessment of the risks of material misstatement of theFS, whether due to fraud or error
c) In making those risk assessments, the auditor considers internalcontrol relevant to the entity’s preparation of the FS in order todesign audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on theeffectiveness of the entity’s internal control
Auditor’s report – Auditor’s Responsibility section
d. In circumstances when the auditor also has a responsibility toexpress an opinion on the effectiveness of internal control inconjunction with the audit of the FS, the auditor shall omit thephrase that the auditor’s consideration of internal control is not forthe purpose of expressing an opinion on the effectiveness of internalcontrol; and
e. An audit also includes evaluating the appropriateness of theaccounting policies used and the reasonableness of accountingestimates made by management, as well as the overallpresentation of the FS
Auditor’s opinion
• The auditor’s report shall include a section with the heading “Opinion”
• When expressing an unmodified opinion on FS prepared in accordancewith a fair presentation framework, the auditor’s opinion shall, unlessotherwise required by law or regulation, use one of the following phrases,which are regarded as being equivalent:
a) The FS present fairly , in all material respects, in accordance with[the applicable financial reporting framework]; or
b) The FS give a true and fair view of ------- in accordance with [theapplicable financial reporting framework]
• When expressing an unmodified opinion on FS prepared in accordancewith a compliance framework , the auditor’s opinion shall be that the FSare prepared, in all material respects, in accordance with [the applicablefinancial reporting framework]
Other Reporting Responsibilities – Separate from the Audit Report
• If the auditor addresses other reporting responsibilitiesin the auditor’s report in addition to the responsibilityunder the SAs, these shall be in a separate section inthe auditor’s report and sub-titled “ Report on OtherLegal and Regulatory Requirements,” or otherwise asappropriate to the content of the section
• The “Report on Other Legal and RegulatoryRequirements” shall follow the “Report on the FinancialStatements.”
• The separate section helps clearly distinguish themfrom the auditor’s responsibility under the SAs
Other Requirements on Auditor’s report
• The auditor’s report shall be signed in the personal name withmembership number and the name of the audit firm with registrationnumber
• The auditor’s report shall be dated no earlier than the date on which theauditor has obtained sufficient appropriate audit evidence on which tobase the auditor’s opinion on the FS, including evidence that:
a) All the statements that comprise the FS, including the related notes,have been prepared ; and
b) Those with the recognised authority have asserted that they havetaken responsibility for those FS.
• The auditor’s report shall name specific location, which is ordinarily thecity where the audit report is signed
Standard on Auditing (SA) 705
Modifications to the Opinion in the Independent Auditor’s Report
Introduction
• This SA deals with the auditor’s responsibility to issue an appropriatereport in circumstances when, in forming an opinion in accordance with SA700 (Revised), a modification to the auditor’s opinion is necessary
• This SA establishes three types of modified opinions , namely, aqualified opinion, an adverse opinion, and a disclaimer of opinion. Thedecision on type of modified opinion depends upon:
a) The nature of the matter giving rise to the modification, i.e., whether theFS are materially misstated or, in the case of an inability to obtainsufficient appropriate audit evidence, may be materially misstated;
b) The auditor’s judgment about the pervasiveness of the effects orpossible effects of the matter on the FS
• This SA is effective for audits of FS beginning on or after April 1, 2012
Definitions
• Pervasive – A term used to describe the effects on the FS ofmisstatements or the possible effects on the FS of misstatem ents , ifany, that are undetected due to an inability to obtain sufficientappropriate audit evidence . Pervasive effects on the FS are those that,in the auditor’s judgment:
a) Are not confined to specific elements, accounts or items of the FS;
b) If so confined, represent or could represent a substantial proportionof the FS; or
c) In relation to disclosures , are fundamental to users’ understandingof the FS
• Modified opinion – A qualified opinion, an adverse opinion or adisclaimer of opinion
Types of Modified Opinions
Qualified OpinionThe auditor shall express a qualified opinion when:
a) The auditor, having obtained sufficient appropriate audit evidence,concludes that misstatements, individually or in the aggregate, arematerial, but not pervasive, to the FS; or
b) The auditor even though unable to obtain sufficient appropriate auditevidence concludes that the possible effects on the FS of undetectedmisstatements, if any, could be material but not pervasive
Adverse OpinionThe auditor shall express an adverse opinion when the auditor, havingobtained sufficient appropriate audit evidence, concludes thatmisstatements, individually or in the aggregate, are both , material andpervasive to the Financial Statements
Types of Modified Opinions
Disclaimer of Opinion
• The auditor shall disclaim an opinion when the auditor is unable to obtainsufficient appropriate audit evidence on which to base the opinion, andthe auditor concludes that the possible effects on the FS of undetectedmisstatements, if any, could be both material and pervasive
• The auditor shall disclaim an opinion when, in extremely rarecircumstances involving multiple uncertainties , the auditor concludesthat, notwithstanding having obtained sufficient appropriate audit evidenceregarding each of the individual uncertainties, it is not possible to form anopinion on the FS due to the potential interaction of the uncertaintiesand their possible cumulative effect on the FS
Opinion paragraph in Modified Audit Report
• When the auditor modifies the audit opinion, he shall use the heading“Qualified Opinion”, “Adverse Opinion”, or “Disclaimer of Opinion”, asappropriate, for the opinion paragraph
• When the auditor expresses a qualified opinion due to a materialmisstatement in the FS, the auditor shall state in the opinion paragraph that,except for the effects of the matter(s) described in the Basis for QualifiedOpinion paragraph:
a) The FS present fairly , in all material respects in accordance with theapplicable financial reporting framework when reporting in accordancewith a fair presentation framework; or
b) The FS have been prepared, in all material respects , in accordancewith the applicable financial reporting framework when reporting inaccordance with a compliance framework
Communication with Those Charged With Governance (TCWG)
• When the auditor expects to modify the opinion in the auditor’s report, theauditor shall communicate with TCWG the circumstances that led to theexpected modification and the proposed wording of the modification
• The auditor should give notice to TCWG of the intended modification(s)and the reasons (or circumstances) for the modification(s)
• The auditor should seek the concurrence of TCWG regarding the facts ofthe matter(s) giving rise to the expected modification(s), or to confirmmatters of disagreement with management as such; and
• TCWG to have an opportunity, where appropriate, to provide the auditorwith further information and explanations in respect of the matter(s)giving rise to the expected modification(s)
Summary on Modified Opinions – a snapshot
Nature of the Mattergiving rise to theModification
Auditor’s Judgment about the
Pervasiveness of the Effects; or Possible Effects on the FS
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
Standard on Auditing (SA) 706
Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
Scope and effective date
• To be applied when the auditor considers it necessary to draw users’attention:
a) to matters presented or disclosed in the FS that are fundamentalto users’ understanding of the FS (defined as 'Emphasis ofMatter Paragraph' ); or;
b) to matters other than those presented or disclosed in the FS thatare relevant to users’ understanding of the audit, the auditor’ sresponsibilities or the auditor’s report (defined as 'OtherMatter Paragraph' )
• Effective for audits of FS for periods beginning on or after April 1, 2012
Requirements – Emphasis of Matter Paragraph
• Obtain sufficient appropriate audit evidence that the matter is notmaterially misstated in the FS
• The auditor shall:
(a) Include it immediately after the Opinion paragraph in the report;
(b) Use the heading “Emphasis of Matter”, or other appropriate heading;
(c) Include in the paragraph a clear reference to the matter beingemphasised and to where relevant disclosures that fully describe thematter can be found in the FS; and
(d) Indicate that the auditor’s opinion is not modified in respect of thematter emphasised.
Requirements – Emphasis of Matter Paragraph (EOM)
• Emphasis Of Matter (EOM) may be necessary in the followingcircumstances:
(a) An uncertainty relating to the future outcome of an exceptionallitigation or regulatory action;
(b) Early application (where permitted) of a new accountingstandard that has a pervasive effect on the FS;
(c) A major catastrophe that has had, or continues to have, asignificant effect on the entity’s financial position
Other relevant aspects
• Communicate with TCWG regarding the expected inclusion and theproposed wording of the paragraph
• EOM does not affect the auditor's opinion and is not a substitute for :
a) The auditor expressing a qualified opinion or an adverse opinion, ordisclaiming an opinion, when required or
b) Disclosures in the FS that the applicable financial reportingframework requires management to make
• In the rare circumstance where the auditor is unable to resign from anengagement due to a limitation on the scope of the audit imposed bymanagement being pervasive, the auditor may include an 'Other Matterparagraph' to explain why it is not possible for the auditor to resign fromthe engagement
POWERS AND DUTIES OF AUDITOR U/S 143 OF COMPANIES ACT, 2013
• Section 143(1): Make enquiries during audit
• Section 143(2): Prepare report to members of company on the accounts and financial statements.
• Section 143(3): Matters to be reported in audit report.(a) Obtain information & explanation to the best of his knowledge,(b) Maintenance of proper books of accounts,(c) Report of accounts of branch office of a company,(d) Balance sheet and P& L dealt are in agreement with books of accounts,(e) Compliance of Accounting Standards,(f ) Observations or comments having adverse effect on functioning of company,(g) Disqualification of any director,(h) Any qualification, reservation or adverse remark on maintenance of accounts.
RELEVANT EXTRACT“The auditor’s report shall also state-(h) Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith.”
‘Books of Accounts’ include:• Sums of money receipts and expenditure,• Sales and purchases of goods and services,• Assets and liabilities,• Items of cost u/s 148 in the case of a company which belongs to any class
of companies specified.
REPORTING U/S 143(3)(H) OF COMPANIES ACT,2013
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ICAI's new/revised Standards on Auditing (SA)
New SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
Revised SA 700, Forming an Opinion and Reporting on Financial Statements
Revised SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
Revised SA 705, Modifications to the Opinion in the Independent Auditor’s Report
Revised SA 570, Going Concern
New/Revised SAs are effective for audits of financials statements for the periods beginning on or after
1 April 2017
© 2016 Walker Chandiok & Co LLP All rights reserved 93
ICAI's new/revised Standards on Auditing (SA)
• Key audit matters (KAM)- those matters which have been communicated with those charged with governance, which auditor understands to be of most significance
• Applicable in case of audit report of listed entities and where auditor otherwise decides or where required by law and regulations
• To be categorised under a separate sub heading in the auditor’s report
• KAM include areas involving significant judgements, significant difficulties encountered during the audit, critical accounting estimates
• KAMs are not a substitute for expressing a modified opinion
New SA 701- Salient features
© 2016 Walker Chandiok & Co LLP All rights reserved 94
ICAI's new/revised Standards on Auditing (SA)
• Revised order of elements in audit report:• the first section of the auditor’s report to include the auditor’s opinion• 'basis of opinion' to be placed after the opinion section
• Audit report to include a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements:• the statement shall refer to the Code of Ethics issued by ICAI
• Management Responsibility section, to include a statement regarding:• its responsibility for assessing the Company’s ability to continue as a
going concern (GC)• whether the use of the GC basis of accounting is appropriate
• Detailed Auditor's responsibility section. Responsibilities include:• to conclude on the appropriateness of management’s use of the GC
basis • statement that auditor communicates with TCWG regarding, inter-alia,
the planned scope and timing of the audit and significant audit findings etc.
• Location of auditor's responsibility- Body of Report/ as Appendix/ on Website
Revised SA 700- Key changes
© 2016 Walker Chandiok & Co LLP All rights reserved 95
ICAI's new/revised Standards on Auditing (SA)
• Gives relationship between Emphasis of Matter paragraphs (EOM) and KAM in the Auditor’s Report• when proposed SA 701 applies, the use of EOM is not a
substitute for a description of individual KAMs.• EOM/OM cannot be used when the matter has been
determined to be a KAM • Reiterates examples of circumstances from other SAs where
EOM may be given• Explains EOM is not a substitute for reporting in accordance
with Proposed SA 570 (Revised) when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a GC
• Guidance on placement of EOM/OM where KAM is there• Gives list of SAs containing requirements for EOM/OM
Revised SA 706- Key changes
© 2016 Walker Chandiok & Co LLP All rights reserved 96
ICAI's new/revised Standards on Auditing (SA)
• KAM section not to be included when the auditor disclaims an opinion on the financial statements (FS), unless required by law
Revised SA 705 – Key change
• In situations when a material uncertainty related to going concern exist and for which adequate disclosure have been made in financial statements• include separate titled, “Material Uncertainty Relating to Going Concern"
as against an EOM used earlier• Material uncertainty related to going concern is, by its nature, a KAM
• dealt with in accordance with Proposed SA 570• Where events or conditions are identified that may cast significant doubt on
the entity’s ability to continue as a going concern but, based on the audit evidence obtained, the auditor concludes that no material uncertainty exists• the auditor to evaluate whether, as per the applicable financial reporting
framework, the FS provide adequate disclosures about these events or conditions.
Revised SA 570- Key changes
Other updates
© 2016 Walker Chandiok & Co LLP All rights reserved 98
• Payment of Bonus (Amendment) Act, 2015 (effective retrospectively
from 1 April 2014)
– Salary or wage ceiling for calculation of bonus increased from INR
3,500 to INR 7,000 per month or minimum wage fixed by appropriate
Government, whichever is higher
– Salary limit for eligibility for payment of bonus increased from INR
10,000 to INR 21,000 per month
Other updates- Payment of Bonus (Amendment) Act, 2015
A welcome step for workers- number of employees enti tled for bonus payments will be
increased
© 2016 Walker Chandiok & Co LLP All rights reserved 99
Other updates-Employees' Provident Fund Organisation (EPFO)
Withdrawal of grace period by Employees' Provident Fund
Organisation (EPFO)
• Employers required to pay provident fund contributions and
administrative charges within 15 days of close of every month and had
a grace period of 5 days to remit contribution
− EPFO removed the grace period for depositing dues under
Employees' Provident Funds and Miscellaneous Provisions Act,
1952 and schemes framed thereunder
(effective from February 2016 – contributions for month of January
2016 to be deposited within above timelines)
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Amendments relating to disclosure requirements in Schedule III of Companies Act, 2013
- The MCA has issued a notification to expand the disclosures relating to
trade payables . The companies are now required to disclose trade
payables to micro enterprises and small enterprises separately from other
trade payables on the face of the Balance Sheet.
- Further, Company is required to disclose certain additional details
including principal amount and interest due thereon remaining unpaid at the
end of each accounting year, amount of interest paid by the buyer and
amount of interest due and payable for the period of delay in making
payment relating to trade payables to micro enterprises and small
enterprises.
- The notification is effective from 4 September 2015
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Other updates - Income Computation and Disclosure Standards
• The Ministry of Finance has issued the Income Computation and Disclosure Standards (ICDS) for computation of taxable income by all assesses following the mercantile system of accounting in relation to their income under the heads ‘Profit and gains of business or profession’ and ‘Income from Other Sources’.
• The ICDS have been notified under Section 145(2) of the Income-tax Act, 1961.These standards are applicable for the assessment year 2016- 2017 (previous year 2015-2016) i.e. applicable immediately with effect from 1 April 2015. ICDS also provides transitional provisions to facilitate first time adoption and consideration of the resultant impact.
© Grant Thornton India LLP. All rights reserved.
Other updates- Key changes to Engagement letter
• Explicit reference to reference to the management’s and auditor’s responsibility in the event of identification of any fraud, in accordance with the provisions of Section 143(12) of the Companies Act, 2013 (“the Act”)
• Requirement to include reporting on internal financial controls in the scope of engagement
• Cash flow statement is a part of financial statements
Ind AS
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Ind AS implementation journey so far
MCA notified IND AS implementation
roadmap for companies other than Banks/
Insurance/NBFC on 16 Feb'15
RBI recommended a roadmap for
banks/NBFCs and issued report of working group
on implementation of Ind AS by Banks in Sept-
Oct'15
IRDA in Nov'15 announced insurance sector to
converge with IFRS post the issue of revised IFRS 4, Insurance Contracts, by
the IASB and issued discussion paper on
convergence to Ind AS in Dec'15
MCA issued press release on 18 Jan'16 providing
roadmap for implementation of Ind As
by Banks/ Insurance/NBFC
RBI and IRDA issued roadmap for
implementation of Ind AS for banks and insurers in
Feb/Mar'16
MCA notified Ind AS amendment rules
including roadmap for NBFC and confirming the roadmap for bank
and insurance companies on 30 Mar'16
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Companies (Indian Accounting Standards) (Amendment) Rules, 2016
• MCA issued aforesaid amendment rules to amend Companies (Indian Accounting Standards)
Rules, 2015 (Published in the Official Gazette on 30 March 2016)
– Banking/insurance companies to apply Ind AS per roadmap notified by RBI/IRDA
– Roadmap for implementation of Ind AS by Non-Banking Financial Companies
– Omission of Ind AS 115, ‘Revenue from Contracts with Customers’, and insertion of Ind AS
11, ‘Construction contracts’ and Ind AS 18, ‘Revenue’
– Consequential amendments to other Ind AS
The omission of Ind-AS 115 is on expected lines due to implementation issues arising on account of IASB deferring the new revenue recognition standard by a further one year compared to the initial planned go-live date
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Implementation of Ind AS by NBFCs
Category Phase I (FY 2018-19) (Comparatives for period ending 31 March 2018)
Phase II (FY 2019-2020) (Comparatives for period ending 31 March 2019)
Listed NBFC
NBFC with net worth =>INR500 crore NBFCs whose equity/ debt securities are listed /in process of listing in India/outside India and having net worth < INR500 crore
Unlisted NBFCs
NBFC with net worth =>INR500 crore NBFCs that are unlisted companies and having a net worth=> INR250 crore but < INR500 crore
GroupCompanies
Applies to holding, subsidiary, joint venture or associate companies of the above companies (other than those already covered under MCA's road map of February 2015 )• If parent NBFC prepares CFS under AS Rules 2006- its subsidiaries, associates
and JV covered under Ind AS Rules 2015 to additionally provide financials as per accounting policy of parent for consolidation until NBFC falls within the purview of the road map above
• If parent company covered by Ind AS rules 2015 has a NBFC subsidiary, associate or JV- such NBFC subsidiary, associate or JV to additionally provide financials as per accounting policy of parent for consolidation until NBFC falls within purview of road map above
OthersNBFCs with a net worth < INR250 crore and not covered in Phase I or II wouldcontinue to comply with the existing accounting standards
• Ind AS would be applicable to both consolidated and individual financial statements• Early adoption seems to be not permitted for NBFCs as per the roadmap
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Implementation of Ind AS by Insurers and Banks
• IRDA and RBI issued a roadmap for insurers and banks to follow the Ind AS notified under the
Companies (Indian Accounting Standards) Rules, 2015 (as amended)
• To be in preparedness to submit pro-forma Ind AS financial statements to the IRDA/RBI
• To disclose in the Annual Report, the strategy and progress made for Ind AS
implementation
• Above roadmap applicable to holding, subsidiary, joint venture or associate companies of
banks, notwithstanding the roadmap for companies
Applicable for accounting periods beginning from 1 April 2018 onwards, early adoption NOT
permitted
For Insurers For Banks
From quarter ended 31 Dec'16 onwards
From half-year ended 30 Sept'16 onwards
For Insurers For Banks
From FY 2015-16 until implementation From FY 2016-17 until implementation
- Comparatives for the period ending 31 Mar'18
- Applicable to both Standalone FS and CFS
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Implementation roadmap for Ind AS by Companies
Mandatory adoption Phase I (FY 2016 – 17) Phase II (FY 2016 – 17)
Listed companiesAll companies with equity/debt listed or in the process of being listed in/outside India with net worth >= INR 500 crore
Companies with equity/debt listed or in the process of being listed in/outside India (excluding those listed or in the process of being listed on SME exchange)
Unlisted companiesAll companies with net worth >= INR 500 crore
Companies having net worth >= INR250 crore
Group companiesApplicable to holding, subsidiaries, joint ventures, or associates of companies covered above
Any other company can voluntarily adopt Ind AS
• Applicable to CFS as well
• Net worth to be calculated based on the stand-
alone financial statements as on 31 March 2014
or first audited financial statements for
accounting period ending after that date
• Net worth – as per definition of Companies Act,
2013 (2013 Act)
• Once applied (even if voluntarily), Ind AS will
have to be followed irrevocably
• Provision of law (including regulations and
rules) to prevail where Ind AS not in conformity
with law
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Companies (Accounting Standards) Amendment Rules, 2016
• MCA issued aforesaid amendment rules to amend AS Rules 2006 (Published in the Official
Gazette on 30 March 2016)
– The Accounting Standard (AS) 2, AS 4, AS 10, AS 13, AS 14, AS 21 and AS 29 as specified
in these Rules to substitute the corresponding AS with the same number as specified in AS
Rules 2006
– AS 6 has been omitted
– As Overview of key changes in AS
AS 2, 'Valuation of inventories'- Aligned with revised AS 10 for spare parts accounting
AS 4, 'Contingencies and Events after the balance sheet date'- Dividend declared after balance sheet to be non-adjusting item
AS 10, 'Property, Plant and Equipment'--Component accounting mandatory (in line with 2013 Act), -Clarity on spare parts accounting
AS 13, 'Accounting for Investments'- Investment property to be accounted for in accordance with cost model as prescribed in AS 10
AS 14, 'Accounting for amalgamations'- Reference to 1956 Act replaced with 2013 Act
AS 21, 'Consolidated Financial Statements'- A company without a subsidiary but having associate / JV to prepare CFS
AS 29, 'Provisions, Contingent Liabilities and Contingent Assets'-Decommissioning liability provision would be on discounted basis
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Other updates on Ind AS
Clarifications issued by Ind AS Transition Facilita tion Group (ITFG)
• ITFG has issued ITFG Clarification Bulletin 1
• Bulletin 1 primarily provides clarifications on issues relating to
– Applicability of Companies (Indian Accounting Standards) Rules, 2015 (Rules)
• Any company that meets threshold of net-worth (as specified in the rules) in a particular
financial year (FY) should apply Ind AS from immediately next FY
• A holding, subsidiary, JV or associate company of a 'company' to which the Rules apply (e.g.
phase I companies)- to apply Rules for accounting periods commencing from the period as
applicable to the 'company'
– Accounting for exchange differences arising from translation of long-term foreign currency
monetary items recognised in financial statements for period ending immediately before the
beginning of first Ind AS reporting period
– Functional currency assessment as at the date of transition
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Other updates on Ind AS
• MCA notified amendments Schedule III to the 2013 Act for companies whose financial statements are
drawn up in compliance of Companies (Indian Accounting Stand ards) Rules, 2015 . The existing
Schedule III has been divided into two parts:
• (a) Division I - applicable to a company whose financial statements are required to comply with the Companies (Accounting Standards) Rules, 2006; and
• (b) Division II - applicable to a company whose financial statements are drawn up in compliance with Ind AS.
• Applicable to standalone and consolidated financial statements
• The salient features of Division II include provides following formats-
– Balance Sheet (presenting assets and liabilities in the order of liquidity not permitted)
– Statement of profit and loss , presented in two sections-
• Profit/loss for the period
• Other comprehensive Income
- Statement of changes in equity
- Statement of cash flows (to be prepared as per Ind AS)
• The disclosure requirements specified in schedule III are in addition to and not in substitution of the
disclosure requirements specified in the Ind AS
Thank You