Queries deserving attention for consideration for Auditors


Merited attention is invited to Para D 8 of Ind. AS 101 - on First Adoption of Indian Accounting Standards. 

Clause (b) of Para D 8 of the above said Standard is quoted for your ready reference, 

"A first-time adopter may have established a deemed cost in accordance with previous GAAP for some or all of its assets and liabilities by measuring them at their fair value at one particular date because of an event such as a privatization or initial public offering.

(a) If the measurement date is at or before the date of transition to Ind. ASs, the entity may use such event-driven fair value measurements as deemed cost for Ind. ASs at the date of that measurement.

(b) “If the measurement date is after the date of transition to Ind. ASs, but during the period covered by the first Ind. AS financial statements, the event-driven fair value measurements may be used as deemed cost when the event occurs. An entity shall recognise the resulting adjustments directly in retained earnings (or if appropriate, another category of equity) at the measurement date. At the date of transition to Ind. ASs, the entity shall either establish the deemed cost by applying the criteria in paragraphs D5–D7 or measure assets and liabilities in accordance with the other requirements in this Ind. AS.”

But, according to Proviso (i) to section 2(43) of Companies Act” 2013 " any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise”,  is not a free reserve for distribution as dividend. .

A cursory study of the above highlights the different approach between section 133 of the Act that prescribes Accounting Standards & section 2(43) on declaration of dividend. Which will overrule the other is a legal point since both are two different sections of the Companies Act? 

In view of the above, ICAI should come forward with necessary clarification suggesting the category of equity where it can be parked and how long?

Chapter X on Audit and Auditors:

The Companies Amendments Act 2017 covers a wider range of provisions The Companies Act 2013. These amendments are mainly to mend so as to end the confusions that crept in respective provisions of the primary Act.

Now, it is the time to focus on amendments that are required to have a fair play on 'Rotation of Auditors' under section 139(2) of the Act to be read with Rule 5 under Chapter X on ' Audit and auditors'. Nobody questions rotation of auditors but the manner in which it is done is questionable and highly shocking. Rotation per se is cosmic activity. Blood rotates to eschew clot. But, the way in which rotation is prescribed and launched appears to be highly hasty, rash and rushed with attended consequences that are highly vivid to see by one and all.

A lion's share of audits have moved to Top four (?) , no to Big four leaving the Indian audit firms in   the lurch loitering without direction. ICAI are to take care of the entire auditing community and not a segment. If a part of the body 'bloats', it is only 'swelling' that is bad health and not symptom of good health. This is to be nipped in the bud before taking alarming proportion. What's the way out? The only remedy is to go for a joint audit with one constituent to be mandatorily an Indian audit firm in respect of listed companies or companies belonging to such class or classes as prescribed under rules related to the section. If it is not attended to by ICAI through the good office of MCA, sooner than later, it is apprehended there will be only uncertain future for the Indian audit firms. Let ICAI arise, awake, stop not till the gloomy picture is erased lock, stock and barrel. Cartel appears to be on the horizon that should not be allowed.

The next amendment that is required is not to the Companies Act but to the Annexure 1 on illustrative Annual Firm Personnel Independence Confirmation (vide SQCI). The first declaration is 'During the period, I or my immediate family members did not have any investments in an entity to which I rendered assurance services etc. Read this with Section 141(3)(1)) to be read with the rule concerned 10 on disqualifications of auditor. To quote, (1) For the purpose of proviso to sub-clause (i) of clause (d) of sub-section (3) of section 141, a relative of an auditor may hold securities in the company of face value not exceeding rupees one lakh: Provided that the condition under this sub-rule shall, wherever relevant, be also applicable in the case of a company not having share capital or other securities: Provided further that in the event of acquiring any security or interest by a relative, above the threshold prescribed, the corrective action to maintain the limits as specified above shall be taken by the auditor within sixty days of such acquisition or interest It is high time the ICAI has make necessary amends in line and tune with The Companies Act

SQC1 vis- a- vis Companies Act 2013:

Queries deserving attention for consideration for Auditors

The following deserves ICAI attention for necessary update in SQC1, if considered fit and proper. 

The ICAI has issued Standard on Quality Control (SQC1) on April 2008 with Implementation Guide to facilitate discharge of professional responsibilities that inter alia covers convergence with international standards.

Since 2008, a major change that has taken place is the enactment of the Companies Act 2013 that has enlarged the responsibilities of Auditing community.

For instance, Section 144 on “Auditor not to render certain services” is a new “Avatar” & has no equivalent provision in 1956 companies Act. Section 144 of the Indian Penal Code is normally promulgated to avoid unlawful assembly of people with attempt to cause public disturbance. It is not on normal situations.  But, for number sack of the Section 144 of the Companies Act 2013 on ‘Auditor not to render certain services’ what about its reach? It is phenomenal in the sense that it is day to day attempt to obliterate any situations that is apprehended to cause malefic effect on Independence of Auditors by expressly indicating the services not to be rendered by the auditor/s. Perhaps, the section is primarily inserted to ward off situations that may cause threat to independence and that the root for that malady is nipped in the bud. 

Sec. 141 on “Eligibility, qualifications and disqualifications of auditors” has enlarged the provisions on this core as compared to corresponding section 226 on “Qualifications and disqualifications of auditors” of the earlier Act. In the light of sea changes in the various provisions of the Companies Act 2013 the responsibilities & the obligations following therefrom have increased by leaps & bounds.

Para 27 of the SQC1 on rotation appear a little out-dated as compared to the Companies Act,2013 section 139(2) to be read with rule thereunder. For brevity, the same has not been quoted.

Again, the Implementation Guide on Ethical requirements Para 2.5 suggests a criteria for senior

Personnel also-- recommends 5 years or more on Audit or on attestation engagement.

Further, the Companies Act, 2013 has introduced various sections according to which auditors have been exposed to the criminal proceedings.

Though the Chartered Accountants Act 1949 as updated, Code of Ethics, the Council’s General Guidance, FAQ&A throw light on the subject, these are primarily issued before the New Act. Therefore, it goes without saying that it is high time ICAI would rise to the call to address these problems to update the SQC1 with practical Frequently Asked Question & Answer model in a columnar table format so as to navigate to achieve the target and the desired results.

Audit Engagement Letter SA 210 on Agreeing the Terms of Audit Engagements:

Auditors based on above said Standard prepare Audit Engagement letter in the format (form and content) highlighted in Pare A 22 and A 23 of the said Standard and based on suggested / relevant  Illustrated Audit Engagement   Letter.

Of late, certain clients based on their legal advice ask for the Audit Engagement letter on a stamped paper. The Institute would like to consider the issue in the context of the law of the land.

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P.R. Sethuraman 
on 17 November 2018
Published in Audit
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