1.00 Guidance Notes are primarily designed to provide guidance to
members on matters which may arise in the course of their professional work
and on which they may desire assistance in resolving issues which may pose
difficulty. Guidance Notes are recommendatory in nature. A member should
ordinarily follow recommendations in a guidance note relating to an auditing
matter except where he is satisfied that in the circumstances of the case,
it may not be necessary to do so. Similarly while discharging his attest
function, a member should examine whether the recommendations in a Guidance
note relating to an accounting matter have been followed or not. If the same
have not been followed, the members should consider, keeping in view the
circumstances of the case, a disclosure in his report necessary.
2.00 The ICAI has published the list of Guidance Notes on Accounting
Aspects and on Auditing Aspects. In addition to these there are Industry
Specific Guidance Notes. The following is the brief introduction to some of
the Guidance Notes issued by the ICAI. The members are requested to refer to
the text of the notes for complete guidance.
This Note details the accounting treatment on revaluation of assets and
creations of corresponding reserve. It allows the revaluation reserve to be
used only for the purpose of setting off the additional depreciation charged
due to revaluation. However, it recommends the entities not to charge the
additional expenditure to Revaluation Reserve but to the Profit and Loss
Account, as it is a prudent approach. For accounting treatment of
revaluation reserve in Amalgamations, please see AS 14 — Accounting for
Amalgamations.
2.03 Guarantee and Counter Guarantees Given by Companies
The Note discusses the various kinds of Guarantees/Counter Guarantees
given by the Companies and the nature of each for the purpose of disclosure
of the expected/contingent liability in the financial statements. The
Guidance Note stands withdrawn w.e.f. 1-4-2009
2.04 Guidance Note on Accrual Basis of Accounting
Consequent to the amendments made in the Companies Act in 1988 requiring
all companies to maintain accounts under accrual system, this Guidance Note
provides a comprehensive background on the subject. It discusses the concept
of accrual vs. cash methods and provides general guidance on recognition of
revenues, expenses, assets and liabilities under this method. The concept of
materiality in case of non-compliance and manner of reporting by the auditor
is also discussed therein.
2.05 Accounting for Depreciation in Companies
This Note discusses the various aspects of accounting for depreciation
including the methods of charging depreciation, change in the methods of
charging depreciation, relevant rates of depreciation, prorata
computation of depreciation, charge of depreciation in case of revaluation
of assets, and other matters arising on account of amendments to the
Companies Act, 1956.
2.06 Some Important Issues arising from the Amendments to Schedule XIV to
the Companies Act, 1956
Certain important amendments to Schedule XIV were made in December 1993
such as inclusion of continuous process plant as a category of asset for
depreciation rate and depreciation of low value items at 100%. This Guidance
Note discusses the impact of these changes and the issues arising there
from.
2.07 Availability of Revaluation Reserve for Issue of Bonus Shares
This Note emphasizes the Institute’s view that bonus shares cannot be
issued by capitalisation of revaluation reserves. It also prescribes the
manner of qualification to be given by the auditor in case the company has
issued bonus shares by capitalizing revaluation reserves.
2.08 Accounting for Leases
This Note is not applicable in respect of assets leased during accounting
periods commencing on or after
1-4-2001. In respect of such assets AS-19 — Leases, which is mandatory in
nature is applicable.
2.09 Accounting for Corporate Dividend Tax(CDT)
The Note recommends that the liability for CDT should be recognized in
the accounts of the year in which the dividend is recognized by a separate
disclosure ‘below the line’. The liability on account of CDT should be
disclosed separately under the head ‘Provisions’ in the Balance Sheet.
2.10 Accounting Treatment for Excise Duty
This Note discusses the nature of excise duty and recommends that excise
duty should be treated as a manufacturing expense and included in inventory
valuation. Where provision for such liability is not made in the accounts,
the auditor should qualify his report.
2.11 Accounting for Investments in the Financial Statements of Mutual
Funds
Since AS 13 ‘Accounting for Investments’ is not applicable to investments
by Mutual Funds, this Guidance Note has been issued to provide guidance on
the same. It prescribes that in case of investments by Mutual Funds (except
UTI), the carrying value should be determined by reference to its market
value on the date of the Balance Sheet and the Securities and Exchange Board
of India (Mutual Funds) Regulations, 1996. The Guidance Note stands
withdrawn w.e.f. 1-4-2009
2.12 Accounting for Dotcom Companies
This Note prescribes the treatment of certain transactions, which are
unique to Dotcom companies. They include cases such as the timing and amount
of revenue to be recognized from online sales/auctions and membership fees,
the valuation and accounting of advertising barter transactions, the
identification and financial recording of website development costs, rebates
and discounts offered and loyalty programmes for members. It also prescribes
certain disclosure requirements for Dotcom companies.
2.13 Accounting for Equity Index Option and Equity Stock Futures and
Options
This Note deals with accounting treatment of equity index option and
equity stock futures and options from the view point of the parties who
enter into such option contract as buyers or sellers. With the issuance of
Guidance note on accounting for equity index and equity stock futures and
options, this Guidance Note stands withdrawn.
2.14 Accounting for Oil and Gas Procuring Activities
This Note aims at providing guidance on accounting for costs incurred on
activities relating to acquisition of mineral interests in properties,
exploration, development and productions of oil and gas. The Guidance Note
suggests that there are two alternative methods for accountings for
acquisition, exploration and development costs viz.
-
Successful Efforts Method (SEM)
and
-
Full Cost Method (FCM). On
overall considerations SEM is recommended to be the preferred method. The
Guidance Note is under revision.
2.15 Accounting for Securitisation
Securitisation is the process by which financial assets are transformed
into securities. The Guidance Note deals with accounting for securitisation
transactions in the books of Originator, specially addressing the issues
such as when to securitise the secured assets, treatment of securitisation
of future receivables, measurement of consideration received in the form of
securities, etc. It also deals with accounting for securitisation
transactions in the books of Special Purpose Entities (SPE). The Guidance
Note stands withdrawn w.e.f. 1-4-2009
2.16 Accounting for Employee Share-based Payments
Some employers use share-based payments as a part of remuneration package
for their employees. This Guidance Note establishes financial accounting
principles for employee share-based payment plans, viz., ESOPs, ESPPs
and stock appreciation rights.
2.17 Accounting for State-level Value Added Tax
The State Level Value Added Tax comes into effect from 1st April, 2005 in
place of the sales tax structure prevalent in various States. This Note
provides guidance in respect of accounting various aspects of State-level
Value Added Tax (VAT) including accounting for credit/set off available for
input tax paid on purchases and accounting for VAT payable on sales.
2.18 Accounting by Schools
The Guidance Note recommends application of sound accounting principles
pertaining to recognition, measurement and disclosure of various items of
income and expenses, assets and liabilities in the financial statements of
schools keeping in view the peculiarities of the activities and formats of
financial statements keeping in view not-for-profit being the objective of
the school, with a view to harmonise the accounting practices being followed
2.19 Recognition of Revenue by Real Estate Developers
The term ‘real estate’ refers to land as well as building. The Guidance
Note recommends principles for recognition of revenue arising from real
estate sales by the enterprises engaged in such activities (commonly
referred to as real estate ‘developers’, ‘builders’ or ‘property
developers’).
2.20 Accounting for Fringe Benefits Tax
The Finance Act, 2005 has introduced Chapter XII-H in ‘Income Tax on
Fringe Benefits’ governing the Fringe Benefit Tax. The Note is being issued
to provide guidance on accounting for Fringe Benefit Tax (FBT), particularly
with regards to the recognition and presentation of FBT in the financial
statements.
3.01 Provision for Proposed Dividend
This Note requires an auditor to qualify his audit report in case the
management does not provide and disclose the provision for proposed
dividend.
3.02 Auditing of Accounts of Liquidators
This Note clarifies that the Audit of Liquidators required to be
conducted under section 551 of the Companies Act, 1956, would be similar to
the norms of a Company. It contains the recommendation of the Research
Committee on the contents of the Auditor’s Reports in such cases.
3.03 Independence of Auditors
This Note discusses the concept of auditor’s independence and the various
safeguards in Corporate Law as well as the Chartered Accountants Act, 1949.
It concludes with the observation that independence is basically a state of
mind and the safeguards in the Companies Act, 1956 and the Chartered
Accountants Act, 1949 are adequate.
3.04 Preparation of financial statements on letter heads and stationery
of Auditor
It is recommended that the practice of preparing the financial Statements
on the stationery of the Auditors should be avoided, since such a practice
is liable to be misinterpreted.
3.05 Auditor’s Report on revised accounts of companies before circulation
to shareholders
In some cases, the accounts, duly approved by Board and reported by the
Auditors may be revised before their circulation to the members. In such
cases, the auditor shall be required to ensure that all copies of the
earlier accounts and reports are returned and adequate disclosure of the
fact of revision is made in the Notes to the revised accounts. The auditor’s
report on the revised accounts shall be in substitution of the earlier
report. In the opinion of the Council, these general principles are as well
applicable to the audit of the accounts of Government Companies as defined
in section 617 of the Act.
3.06 The Duty Cast on Auditors under Section 45MA of the Reserve Bank of
India Act, 1934
The role of the auditor, his responsibility and his reporting
requirements under the above-mentioned provisions of the statute are covered
in this Guidance Note.
3.07 Audit Report and Certificates for Special Purposes
Special Purpose Audit Report are usually required to be given by
auditors. This Guidance Note discusses the scope and responsibility of the
auditor, and contents and manner of reporting in such cases.
3.08 Section 293A of the Companies Act, 1956 and the Auditor
The limit imposed on companies for contribution to any political party or
purpose w.e.f. 24-5-1985 are discussed in this Note. The Note also advises
the auditor to qualify his report in case the contributions made are beyond
the limit specified in the section.
3.09 Audit of Fixed Assets
Fixed Assets usually constitute a significant portion of the assets of a
company. The audit of fixed assets is, thus, of considerable importance.
This Guidance Note discusses the auditor’s role in evaluation of internal
controls, review of records and verification procedures, and the valuation
and disclosure of fixed assets in the Balance Sheet.
3.10 Revision/Rectification of Financial Statements
This note clarifies that in keeping with the view of the Department of
Company Affairs, accounts once adopted at the Annual General Meeting cannot
be reopened or rectified under any circumstances. However, in case the Board
of Directors reopen/rectify the accounts, the auditor will be required to
qualify his report in the manner prescribed therein.
3.11 Audit of accounts of non-corporate entities (bank borrowers)
This Note discusses the various facets of audit of large non-corporate
Bank borrowers with emphasis on the aspects of reporting, the format for
presentation of Financial Statements as well as Fund/Cash Flow Statements.
3.12 Audit of abridged financial statements
This Note discusses the norms laid down for listed companies sending
abridged financial statements to its shareholders under section 219 of the
Companies Act, 1956. The note provide, guidance to members on issues
relating to audit of such abridged financial statements apart from
prescribing form content and other requirements of such statements.
3.13 Certification of documents for registration of charges
This Note deals with the statutory provisions, the Forms required to be
submitted, the verification procedure of the forms and the certification
requirement by chartered accountants, for charges required to be registered
with the Registrar of Companies.
3.14 Audit of inventories
Considering the importance of inventory in the financial statements, this
Note provides guidance to the auditor in audit of inventories. It highlights
the significance of internal control evaluation, verification of records,
presence at physical verification, confirmations from third parties and the
examination of valuation and disclosure of inventories in the financial
statements.
3.15 Audit of investments
The role of the auditor and steps to be taken in establishing the
existence, valuation and disclosure of investments by an entity are laid
down in this Guidance Note.
3.16 Audit of debtors, loan and advances
This Note is intended to help auditor in the audit of current assets such
as Debtors, Loans and Advances. It discusses the various control features to
be considered, the suitability of direct confirmation procedure and
disclosure in the financial statements.
3.17 Audit of miscellaneous expenditure shown in the balance sheet
The auditor’s role in identifying, verifying and evaluation of the items
appearing under the item ‘Miscellaneous expenditure’ in the Balance Sheet is
laid out in this Guidance Note. This Note shall stand withdrawn in respect
of audit of financial statements of enterprises for which AS 26 —
‘Intangible Assets’ has become mandatory and in respect of the entity that
has chosen to apply AS 26 to account for Intangible Assets.
3.18 Audit of cash and bank balances
The auditors should employ appropriate procedures and obtain sufficient
appropriate evidence regarding the existence, right and completeness of Cash
and Bank Balances. This Note recommends the auditor to carry out physical
verification of cash at the year end and also seek necessary confirmations
from banks for balances held by it.
3.19 Audit of liabilities
This Note prescribe the measures to be taken by the auditor in regard to
internal control evaluation, verification and examination of Loans,
Creditors, Other Liabilities, Provisions and Contingent Liabilities.
3.20 Audit of revenue
This Note prescribes that the auditor should obtain reasonable audit
evidence regarding the management’s assertion of the occurrence,
completeness, measurement and disclosure of revenue.
3.21 Certification of corporate governance
This Note provides guidance to auditors on the certification of the
compliance of conditions of the Corporate Governance as stipulated in Clause
49 of the Listing Agreement between the Stock Exchange and the auditee. It
clarifies the responsibility of the auditor in this regard and provides
guidance on the enquiries and verification procedure to be followed before
issue of such a certificate. The Note has been revised in February, 2006.
3.22 Sections 227(3)(e) and (f) of the Companies Act, 1956
The amendments to the reporting requirements of auditors by the Companies
(Amendment) Act, 2000 are discussed in this Guidance Note. It clarifies the
auditor’s responsibility in reporting all adverse comments/observation in
bold/italics and also prescribes the verification procedures for
ascertaining whether any of the directors are disqualified from appointment
under Section 274(1)(g) of the Companies Act, 1956.
3.23 Revision of the audit report
This note aims to provide guidance to the members regarding revision of
the audit report after the same has been issued, in the case the auditor
considers necessary to do so. It lays down the procedure to be followed by
the auditor who, subsequent to the Audit Report, becomes aware that the
facts may have existed at that date which might have affected his report.
3.24 Special consideration in the audit of small entities
The Council of the Institute recognizes that audit of small entities
gives rise to a number of special considerations. The emphasis of the Note
is to describe the characteristics that are commonly found in small entities
and indicate how they might affect the application of Auditing and Assurance
Standards (AASs). Thus, this includes (a) discussion of the characteristics
of small entities and (b) guidance on the application of AASs to the audit
of small entities.
3.25 Computer Assisted Audit Techniques (CAATS)
The application of auditing procedures may require the auditor to
consider techniques known as Computer Assisted Audit Techniques (CAATs) that
use the computer as an audit tool for enhancing the effectiveness and
efficiency of audit procedures. CAATs are computer programmes and data that
the auditor uses as part of the audit procedures to process data of audit
significance contained in an entity’s information system. This Guidance Note
provides guidance in the use of CAATs.
3.26 Audit of Capital and Reserves
In carrying out the audit of capital and reserves, the auditor is
particularly concerned with obtaining sufficient, appropriate audit evidence
to corroborate the management’s assertions regarding existence, occurrence,
obligations, completeness, measurement, valuation, presentation and
disclosure. The Guidance Note gives guidance in this regard.
3.27 Audit of Consolidated Financial Statements
Accounting Standard 21 ‘Consolidated Financial Statements’ lays down
principles and procedures for preparation and presentation of consolidated
financial statements (CFS). CFS are presented for a group of entities under
the control of a parent. However the law or regulation governing the entity
may require the CFS to be audited by the statutory auditor of the entity.
The guidance note provides the guidance on the specific issues and audit
procedures to be applied in an audit of CFS.
3.28 Audit of Expenses
The guidance note gives the guidance in auditing the expenses of the
entity.
3.29 Payment of dividend
The guidance note discusses the legal provisions for payment of dividend
and the procedure and precautions to be taken while auditing payment of
dividend. It also discusses about the disclosures to be made in respect of
dividend.
3.30 Reports in Company Prospectuses
It provides guidance on compliance with the provisions of The Companies
Act,1956 and Securities and Exchange Board of India (Disclosure and Investor
Protection) Guidelines, 2000 relating to the reports required to be issued
by Chartered Accountant in Prospectus/statement in lieu of prospectus issued
by the companies for the offerings made in India.
3.31 Tax Audit under Section 44AB of the Income-tax Act, 1961
This Note gives in details the requirements of the revised Tax Audit
Forms and the Auditor’s responsibility in the discharge of his functions
under this section.
