Pharmaceutical company stat audit

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CA Abhiram Bharat. (Querist)
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08 July 2011 dear experts,
im on audit of a pharma trading co.
it purchaes medicines from dealers & makes interstate & intrastate sales through consignment agents (CSA). now i want to know how to verify some important points.

i have already prepared some observation s& im gonna qualify this report.
suggestions neede.

kind regards
abhiram bharat
CA final apprared

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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08 July 2011 First of all go through the agreement between the company and the consignment agent.
Next verify whether the stock lying with the Consignment Agent is as shown by the company or not. Any deficiency is to be reported.
See the account of C&F agent whether the sale proceed has been account or not and the money has been deposited with the company in due date. Also see any interest provision for late payment. What about the breakage and expired medicine all these you have to check up.

If you can mail me the check list prepared by you at ssunderagarwal@gmail.com I can go through the same and suggest you accordingly.

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CA Abhiram Bharat.

CA Abhiram Bharat. (Querist)
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08 July 2011 thanx a ton sir.. but let me know one more thing
please if u acknowledge me .. i hav a doubt regarding this..

...the company has obtained DEPB licence which it shows as an asset, agreed,. but it sels the same to its sister concern at 95% of the total credit value+VAT @5% thereon..

now, plz tl me that the company shows this sales in the sales tax return since it charges VAT on sales thereof. but it can not be classifies as a saleable itm
i hav gone through various judgements & still there z a dillemma whether these are goods or not.. but since VAT has been charged on sales, we take as goods.
now tell me how can i classify as an P&L item..
also tell me something abt C&F agents in details, although i know.. but plz enlighten

kind regards-
abhiram

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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10 August 2024 When auditing a pharmaceutical trading company, especially one that engages in consignment sales and holds DEPB licenses, there are several important aspects to review and consider. Here’s a detailed approach to address the key points you mentioned:

### **1. DEPB License Accounting**

**DEPB License**: The Duty Entitlement Passbook Scheme (DEPB) allows exporters to claim a credit against customs duty on imported goods. When the company sells the DEPB license to its sister concern at 95% of its credit value plus VAT, the following considerations should be made:

#### **Classification and Reporting**

1. **Asset Classification**:
- **Current Asset**: If the DEPB license is intended to be used or sold within a year, it can be classified as a current asset.
- **Sale of DEPB**: The sale of DEPB licenses is often considered as a form of trade or revenue transaction, rather than saleable goods.

2. **P&L Classification**:
- **Revenue from Sale of DEPB**: Since the company charges VAT and shows the sale in the sales tax return, it should recognize the sale as revenue. This revenue should be classified under "Other Income" or a similar category in the Profit and Loss (P&L) statement. It is not classified as sales of goods but rather as income from the sale of a financial instrument or entitlement.

3. **Tax Implications**:
- Ensure VAT charged on the sale is accurately reported and remitted as per sales tax regulations.
- Verify if the DEPB license sale affects any customs or excise duty credits and compliance requirements.

#### **Documentation and Verification**

1. **Verify Documentation**:
- **DEPB License**: Confirm that the license is valid and properly recorded in the books.
- **Sale Documentation**: Check the sale agreements, invoices, and VAT records to ensure accuracy in reporting.

2. **Cross-Check with Sister Concern**:
- Verify that the transaction with the sister concern is at arm's length and reflects fair market value, even if it's sold at a discounted rate.

### **2. C&F Agents (Clearing and Forwarding Agents)**

**Role and Responsibilities**:
- **Clearing and Forwarding (C&F) Agents** are intermediaries who handle the clearing of goods from ports/customs and their subsequent transportation to the consignee or distribution points.
- **Services Provided**: They manage import/export documentation, handle logistics, pay duties and taxes, and ensure compliance with regulatory requirements.

#### **Accounting Treatment for C&F Agents**

1. **Fee Recognition**:
- **Service Fees**: Fees paid to C&F agents should be recognized as part of the operational expenses in the P&L statement. These are usually categorized under "Freight and Forwarding Expenses" or "Logistics Costs".

2. **Verification of Payments**:
- Ensure that payments to C&F agents are supported by proper documentation like invoices, contracts, and payment receipts.
- Cross-check that the fees charged align with contractual terms and are reasonable for the services provided.

3. **Regulatory Compliance**:
- Ensure that C&F agents are complying with local regulations and that their activities are documented and reported as required by law.

4. **Reconciliation**:
- Reconcile payments made to C&F agents with their service contracts to ensure accuracy and completeness.

### **Summary of Actions**

1. **DEPB License**:
- Classify the sale of DEPB licenses as "Other Income" in the P&L statement.
- Verify the documentation for the DEPB license and the sale transaction.
- Ensure correct VAT handling and tax reporting.

2. **C&F Agents**:
- Record payments to C&F agents as operational expenses.
- Ensure proper documentation and compliance with contractual terms.
- Verify the accuracy of expenses and reconcile with service contracts.

Addressing these areas thoroughly will help ensure that the financial statements accurately reflect the company's transactions and comply with accounting and regulatory standards.

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