Accounting based on govt directions

A State Govt company is doing the accounting of Grant rec'd from State Govt on the basis of specific state govt circular and is disclosing the fact in the notes to account. However, the method quoted in circular in contrary to the Accounting standard on Govt Grants. Should the Govt company follow the state govt directions or the AS/ IndAS for accounting rhe same. what should Statutory auditor do/comment in this case.