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Prime Minister of India Mr Narendra Modi  in an unscheduled live televised address to the nation at 20:15 Indian time (IST) on 8th October 2016 announced that circulation of all Rs.500 and Rs.1000 bank notes of Mahatma Gandhi series stands invalid and announced the issuance of new Rs.500 and Rs.2000 bank notes of new series. The banknote denominations of Rs 100/-, Rs 50/-, Rs 20/-, Rs 10/- and Rs 5/- of the Mahatma Gandhi series continued to remain as legal tender and were unaffected by the policy. The objective of demonetization is to prevent the funding of terrorism as well as to crack down on black money in the country.

Following are the various methods adopted for use of old currency notes and to violate the directives:

a) Gold Purchase: In Gujarat and Delhi, the sale of gold increased to 20% - 30% resulting in the increase in the price of gold to Rs.45000 from the ruling price of Rs.31,900 per 10 gms.

b) Multiple bank transactions: One of the generic method adopted was to make multiple transactions at different bank branches.

c) Railway booking: Booking of tickets in class 1AC or 2AC for the longest distance possible with the objective to cancel the tickets at a later date.

d) Payment of Municipal & Local Taxes: The use of the demonetized notes had been allowed by the government for the payment of municipal and local body taxes. This led to people using the banned Rs 500/- and Rs 1000/- notes to pay large amounts of outstanding taxes, and also advance taxes. As a result, revenue collections of the local authorities have jumped due to the demonetization.

e) Back dated FDs in co-operative banks and credit societies: In most of the co-operative banks and credit societies mostly in the rural areas where most of the bank activities are done manually, people have obtained back dated fixed deposits in the name of villagers by providing the villager some incentives to obtain their bank account details

f)  Unsecured loans: Loans were given to the people having minimal bank transactions or minimum amount of bank balance. Specifically those accounts which would not arouse any suspicion.

g) Payment of advance salary: Most of the companies which had earlier paid salaries through cash, have started to pay advance salary in the bank accounts of employees. Old currency notes were deposited in the bank accounts of employees with the threshold limit of Rs.2.5 lakhs.

Role of Auditors

It is important for the auditors to be part of the initiative to curb the black money and help to present a more transparent economy. More transparent economy would take the nation towards the path of growth. The auditors in this present scenario has to change the method of auditing and adopt more aggressive methodology which would help to unearth the above mentioned practices which are generally adopted by people to conceal their income or deposit their undisclosed money.

1. Analytical review: Evaluation of financial information through analysis of plausible relationships among both financial and non-financial data would give us the result in the form of any abnormality between the previous period and the present period. The auditor can arrive at the anticipated result of the entity based on the budgets, forecast or expectation. In case any large deposits are made during the period, the same can be detected by use of analytical procedure. Payment of long pending advances or advances could be given to the employees which may not be general practice or the policy of the company.

2. Review of bank accounts (including dormant account): As a general practice, it is observed that people have started depositing money in various bank accounts. Few of the accounts may have become dormant but money may have deposited after demonetization. The auditors have to check all the bank accounts and verify the pattern of transactions in those bank accounts. High variances or suspicious transactions may be reviewed.

3. Review of fixed assets details: A detailed scrutiny of the fixed assets would help the auditors to identify the abnormal procurement of fixed assets and the source of funding of the assets. The assets could be generally procurement of land, bullions, jewellery etc.

4. Review of transactions in E-Commerce: After the demonetization, since most of the transactions are done through E-Commerce, it is important for the auditors to understand how the transactions are made through E-commerce. Although E-commerce is not much different from any other traditional business other than its close integration with technology, all the e-commerce transactions have distinct characteristics of total involvement of end-user at every stage of the process.

5. Knowledge/training in auditing of financials in integrated systems environment

Considering the transactions which will be done through the electronic mode, the auditors should plan the audit accordingly. The audit team members should have knowledge or training in auditing the financial of a highly integrated accounting environment. Because of computerized scenarios, most professional auditors should hold this expertise.

Post Demonetization, many companies are using fraudulent methods to convert the undisclosed income / revenue. It is the duty of auditor to report such fraudulent matters. As per the Companies Act, 2013 if the auditor of a company in the course of performance of his duties as auditor, has reason to believe that an offence of fraud has been made by the officers or employees, he needs to report the same to the audit committee or the Board / or also report to the Central Government. Thus, the responsibility of auditor has increased many folds after the bold step taken by the Government and the audit community has to come forward by performing their duties diligently.


Published by

CA Amrita Chattopadhyay
(Audit & Assurance)
Category Audit   Report

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