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TRANS HINDON CPE STUDY CIRCLE OF CIRC OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

TRANS HINDON CPE STUDY CIRCLE OF CIRC OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA SATURDAY, APRIL 26 TH 2014 WAYS TO MITIGATE PRECARIOUS LIABILITIES OF AUDITORS [ COMPANIES ACT, 2013] GOPAL JI AGRAWAL B.COM LLB DISA IFRS (ICAI)

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TRANS HINDON CPE STUDY CIRCLE OF CIRC OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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  1. TRANS HINDON CPE STUDY CIRCLE OF CIRC OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA SATURDAY, APRIL 26TH 2014 WAYS TO MITIGATE PRECARIOUS LIABILITIES OF AUDITORS [COMPANIES ACT, 2013] GOPAL JI AGRAWAL B.COM LLB DISA IFRS (ICAI) For any query, discussion or suggestion, please mail at gjafca@gmail.com +91 9811264160

  2. COMPANIES ACT, 2013 RESPONSIBILTIES OF STATUTORY AUDITORS & THE COMPANIES ACT, 2013?? BY- CA GOPAL JI AGRAWAL

  3. REVIEWERS WHO REVIEW THE STATUTORY AUDITORS? BY- CA GOPAL JI AGRAWAL

  4. REVIEW BOARDS IN EXISTENCE • PEER REVIEW BOARD [PRB] • FINANCIAL REPORTING REVIEW BOARD [FRRB] • QUALITY REVIEW BOARD[QRB] • QUALIFIED AUDIT REVIEW COMMITTEE [QARC] 2012 • ABOVE ALL THE 3 BOARDS • NATIONAL FINANCIAL REPORTING AUTHORITY [2014] BY- CA GOPAL JI AGRAWAL

  5. FRRB OBSERVATIONS -216 • AUDITORS’ REPORT (2) • CARO 2003 (15) • SCHEDULE VI (41) • ACCOUNTING STANDARDS (158) BY- CA GOPAL JI AGRAWAL

  6. AN OPEN SECRET PUZZLE It is the only final delivery in the audit process? It is only mouthpiece of the Auditors? It is the only communication between the auditors and the stakeholders? BY- CA GOPAL JI AGRAWAL

  7. AN OPEN SECRET PUZZLE It is hardly drafted and read by qualified CA? It is seldom read by regulators or stakeholders? It can ONLY save or sink an auditor/audit firm? BY- CA GOPAL JI AGRAWAL

  8. MATTERS FOR DISCUSSION BY- CA GOPAL JI AGRAWAL

  9. MATTERS FOR DISCUSSION BY- CA GOPAL JI AGRAWAL

  10. IMPORTANCE OF ACCOUNTS…… Books of accounts 114 Audit/auditing 131 Auditors 205 Turnover 11 BY- CA GOPAL JI AGRAWAL

  11. CORPORATE LAW OR IPC???? 76 imprisonment 31 punishment 44 penalties 68 25 lakh 189 fine 191 One lakh BY- CA GOPAL JI AGRAWAL

  12. CORPORATE LAW OR IPC???? 147 (2) If an auditor of a company contravenes any of the provisions of section 139 (Appointment), section 143 (powers and duties and AS & SA), section 144 (not to render certain services) or section 145 (sign), the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees: BY- CA GOPAL JI AGRAWAL

  13. CORPORATE LAW OR IPC???? Provided that if an auditor has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than ONE LAC rupees but which may extend to 25 LAC rupees. BY- CA GOPAL JI AGRAWAL

  14. CORPORATE LAW OR IPC???? 147(3) Where an auditor has been convicted under sub-section (2), he shall be liable to— (i)  refund the remuneration received by him to the company; and (ii)  pay for damages to the company, statutory bodies or authorities or to any other person for loss arising out of incorrect or misleading statements of particulars made in his audit report. Indeterminate amount, people and time??? BY- CA GOPAL JI AGRAWAL

  15. CORPORATE LAW OR IPC???? 147(5) FIRM IS LIABLE Where, audit being conducted by an audit firm, it is proved that the partner (s) has acted in a fraudulent manner or abetted or in any fraud by, or in relation to or by the company or its directors or officers, the liability whether civil or criminal as provided in the Act or any other law for such act shall be of the concerned partner and of firm jointly and severally. BY- CA GOPAL JI AGRAWAL

  16. CORPORATE LAW OR IPC???? 140 (5) WINDING UP AUDIT FIRM The NCLT either suomotu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors. Such an auditor shall not be eligible to be appointed as an auditor of any company for a period of 5 years from the date of passing of the order and the auditor shall also be liable for action under section 447. BY- CA GOPAL JI AGRAWAL

  17. CORPORATE LAW OR IPC???? 143(12)FAILURE TO DISCLOSE FRAUD if in the course of the performance of his duties as auditor, he has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, auditor shall immediately report the matter to the Central Government. In case of any failure on his part to comply with this duty, he shall be punishable with a fine which shall not be less than Rs. 1,00,000 but which may extend to Rs. 25,00,000. BY- CA GOPAL JI AGRAWAL

  18. CORPORATE LAW OR IPC???? 245- CLASS ACTION SUIT Any 100 or more members/deposit holders of the company or 10% of the total number of members/deposit holders of the company can file a class action suit to claim damages or compensation or demand any other suitable action against the auditor in the manner prescribed under Section 245 of the Act. Action under this section can be initiated against the auditor including audit firm of the company for any improper or misleading statement of particulars made in the audit reportor for any fraudulent, unlawful or wrongful act or conduct. BY- CA GOPAL JI AGRAWAL

  19. COMPANIES ACT 1956 SECTION 233 OF THE COMPANIES ACT, 1956 [Penalty for non-compliance by auditor with sections 227 and 229] If any auditor's report is made, or any document of the company is signed or authenticated, otherwise than in conformity with the requirements of sections 227 [Powers and duties of auditors] and 229 [Signature of audit report, etc] the auditor concerned, and the person, if any, other than the auditor who signs the report or signs or authenticates the document, shall, if the default is willful, be punishable with fine which may extend to [ten thousand rupees]. BY- CA GOPAL JI AGRAWAL

  20. AUDITORS’ REPORT THREE POSITIVE ASSERTIONS IN THE REPORT: We conducted our audit in accordance with SA issued by ICAI???? The balance sheet, the statement of profit and loss and the cash flow statement comply with the Accounting Standards referred to in sub-section (3C) of Section 211 of the Companies Act, 1956 {to the extent applicable} These financial statements represent a true and fair view? BY- CA GOPAL JI AGRAWAL

  21. TRUE & FAIR VIEW- FACTS • Overall presentation, structure and content of the FSs in accordance with the FR Framework • FSs including notes represent the underlying transactions, circumstances and events in a fair manner • Adequate consistent application and disclosure of significant accounting policies • Accounting estimates are reasonable • Information is relevant, reliable, comparable and understandable (meets quality requirements) • Appropriate title and terminology to be used • Adequate disclosures though not required. BY- CA GOPAL JI AGRAWAL

  22. Technical, Ethical and Professional Standards – meaning and coverage WHAT OR HOW MANY STANDARDS GOVERN FRs OR FSs? WHAT OR HOW MANY ACTS, RULES AND REGULATION GOVERN FSs/FRs? WHAT ADDITIONAL ACTS, RULES & REGULATIONS APPLICABLE FOR LISTED ENTITIES? BY- CA GOPAL JI AGRAWAL

  23. Technical, Ethical and Professional Standards – meaning and coverage 1.Preface to the Statements of Accounting Standards 2.Framework for the preparation and presentation of financial statements 3. Preface to the Standards on quality control, auditing, review, other assurance and related services 4.Framework for Assurance Engagements 5.Standards on Quality Control (SQC-1) Cont……. BY- CA GOPAL JI AGRAWAL

  24. Technical, Ethical and Professional Standards – meaning and coverage Cont….. 6.Accounting Standards 7.Engagement Standards 8. Statements issued by ICAI 9.Guidance notes issued by ICAI on accounting, auditing and other matters including industry specific GN 10. Notification, directions, announcements, council decisions and instruction of ICAI BY- CA GOPAL JI AGRAWAL

  25. Statutes, Rules and Regulations 1. The Chartered Accountant Act, 1949 (as amended in 2006) 2. Code of Ethics for Chartered Accountants (as amended) 3.The Companies Act, 1956 and New Schedule VI) 4.The Banking Regulation Act, 1949- Schedule III 5.Securities Contract Regulation Act, 1957 6.IRDA (Preparation of FSs & Auditors Report of the Insurance Companies) Regulations 2002 {AS-17 to all insurers)1. 7. Provision as per MA & AA of the company Cont…….. BY- CA GOPAL JI AGRAWAL

  26. Statutes, Rules and Regulations Cont….. 8.NBFC Auditors Report (RBI) directions 2008 9.Micro, Small and Medium Enterprises Development Act, 2006 10. LLP Act & LLP Rules 2009 (Form 8) 11.Other Specific Statutes, rules, regulations, notifications, circulars, instructions, guidelines pronouncements under any other governing laws like municipal board etc. BY- CA GOPAL JI AGRAWAL

  27. Statutes, Rules and Regulations (LISTED) Listing agreement (Clause 31, 31A, 41 & 49) SEBI Act 1992, rules, regulations. Master circulars. Circulars, notifications etc. SEBI(substantial acquisition of shares and takeover) regulations 2011 SEBI (prohibition of Insider Trading) regulations 1992 SEBI (Issue of capital and disclosure requirements) Regulations 2009 SEBI (ESOS & ESPS) Guidelines 1999 SEBI (Issue and listing of debt securities) Regulations 2008 The Depositories Act 1996, regulations and bye laws The Securities Contract regulation act, 1996, rules BY- CA GOPAL JI AGRAWAL

  28. AUDITORS’ REPORT- NEW • New Announcements of ICAI (January 3rd-4th 2014) • Regarding change in reporting u/s 227 (3)(bb) in SA 700 illustrative report related to branch auditors as per sec 228(3)( c) • Accounting Standard – 211 (3C) Vs. 133 (143) • Auditors Responsibility Paragraph-opinion with regard to internal control for the PP of the FSs • Profit & Loss Account Vs. Statement of Profit &loss (schedule VI vs. 227) • Reporting under CARO 2003 (non applicable clauses) BY- CA GOPAL JI AGRAWAL

  29. AUDITORS’ REPORT- NEW New Announcements of ICAI (February 10, 2014) Manner of Disclosure in the Auditor’s Report of the Fact of Inclusion of Unaudited Financial Statements/ Information of Component/s in the Financial Statements Audited by the Principal Auditor(s) BY- CA GOPAL JI AGRAWAL

  30. STATUTORY AUDITORS RESPONSIBILITY Whether the Statutory Auditors of an Entity is responsible for the omissions or misstatements in the Financial Reporting of management i.e. MA &D or MC or MR which are stated separately in Annual Report? BY- CA GOPAL JI AGRAWAL

  31. Statutory Auditors’ Responsibility SA 720 THE AUDITOR’S RESPONSIBILITY IN RELATION TO OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMENTS deals with the auditor’s responsibility in relation to other information in documents containing audited FSs the auditor’s report thereon. In the absence of any separate requirement in the particular circumstances of the engagement, the auditor’s opinion does not cover other information and the auditor has no specific responsibility for determining whether or not other information is properly stated. However, the auditor reads the other information because the credibility of the audited financial statements may be undermined by material inconsistencies between the audited financial statements and other information. Ref: Para A1) BY- CA GOPAL JI AGRAWAL

  32. Statutory Auditors’ Responsibility Information that contradicts information contained in the audited financial statements. A material inconsistency may raise doubt about the audit conclusions drawn from audit evidence previously obtained and, possibly, about the basis for the auditor’s opinion on the financial statements. Recourse to the Auditors: Insist the management to change their report or Modify the auditors report BY- CA GOPAL JI AGRAWAL

  33. Statutory Auditors’ Responsibility The material misstatements may be in respect of other information not related to FSs but still affect the credibility of these documents. The Auditors should insist the management to revise or rectify such inconsistency or misstatement or revise the auditors’ report. OR The Auditors may put the observation in “other matter paragraph” as per SA 706 without modifying the report. BY- CA GOPAL JI AGRAWAL

  34. Materiality -revised Information is material if its omission or misstatement (individually or collectively) could influence the economic decisions of the users taken on the basis of financial information. Materiality depends on the size or nature or a combination of both. (Entity specific). BY- CA GOPAL JI AGRAWAL

  35. Misstatement A difference between the amounts, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud. BY- CA GOPAL JI AGRAWAL

  36. FINANCIAL REPORTING Vs. FINANCIAL STATEMENTS What is the meaning of Financial Reporting (FR)? What is the meaning of Financial Statements & what statements are covered under it (FS)? How the two differ from each other? Whether Statutory Auditors are responsible for FR or FS in case of corporate entities? BY- CA GOPAL JI AGRAWAL

  37. FINANCIAL REPORTING Financial reporting means any reporting about monetary matters or Financial Reports are compiled about the financial transactions or Financial reports may also be called as a structured representation of economic phenomena in words and numbers BY- CA GOPAL JI AGRAWAL

  38. FINANCIAL REPORTING • Financial reporting includes the following: • (i) Financial Statements of an entity • Report by the management or those charged with the governance on operations commonly called as MA &D or MC or MR • Financial Summaries and highlights • Planned capital expenditure • Financial ratios • Selected quarterly data • Any other financial information • CAR is the best example of Financial Reporting. BY- CA GOPAL JI AGRAWAL

  39. FINANCIAL STATEMENTS Financial statements are a structured representation of the financial position and performance of a reporting entity.[preface to ifrs] BY- CA GOPAL JI AGRAWAL

  40. FINANCIAL STATEMENTS 1.Balance Sheet [Statement of financial position] 2.Statement of profit & loss [Statement of total comprehensive income] 3. A statement of change in Equity-not permitted in India separately as per published IND-AS 4. Statement of other comprehensive income -not permitted in India separately as per IND-AS 5.Cash Flow Statement [Statement of cash flow] 6.Notes comprising significant accounting policies and other descriptive and narrative information 7.Other additional information as required by any statute, custom and usages. BY- CA GOPAL JI AGRAWAL

  41. BASICS OF FINANCIAL STATEMENTS Whether the Balance Sheet or Profit & Loss or Cash Flow or Notes or Supplementary information can be called financial reporting individually ? BY- CA GOPAL JI AGRAWAL

  42. BASICS OF FINANCIAL STATEMENTS Categorize the FINANCIAL STATEMENTS from the point of view of applicable Statutes, rules, regulation and technical, ethical and professional standards? OR Differentiate between GPFSs and SPFSs? BY- CA GOPAL JI AGRAWAL

  43. GPFSs V. SPFSs Category I- General Purpose Financial Statements (GPFSs) The term ‘GPFSs includes balance sheet, statement of profit and loss, a cash flow statement (wherever applicable) and statements and explanatory notes which form part thereof, issued for the use of various stakeholders, government and their agencies and the public. (Preface 3.4) BY- CA GOPAL JI AGRAWAL

  44. GPFSs V. SPFSs Category I- General Purpose Financial Statements (GPFSs) General Purpose financial statements (referred to as ‘financial statements’) are those intended to meet the needs of the users who are not in a position to require an entity to prepare reports tailored to their particular information needs [IAS1.7] BY- CA GOPAL JI AGRAWAL

  45. GPFSs V. SPFSs Category II- Special Purpose Financial Statements (SPFSs) Financial statements prepared in accordance with a special purpose framework. (SA 800.6.a) BY- CA GOPAL JI AGRAWAL

  46. REPORTING FRAMEWORK General Purpose Reporting Framework It is Fair Presentation Framework or True & Fair View reporting framework Special Purpose Reporting Framework A financial reporting framework designed to meet the financial information needs of specific users. The financial reporting framework may be a fair presentation framework or a compliance framework. [SA 800.6.b) BY- CA GOPAL JI AGRAWAL

  47. FAIR PRESENTATION FR. Meaning of Fair Presentation Framework or True and fair presentation Fair presentation framework refers to a financial reporting framework that require compliance with the requirements of FINANCIALREPORTING FRAMEWORK and satisfies the following TWO conditions BY- CA GOPAL JI AGRAWAL

  48. FAIR PRESENTATION FR. Condition (1): It acknowledges implicitly or explicitly that to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; BY- CA GOPAL JI AGRAWAL

  49. FAIR PRESENTATION FR. Condition (2): It acknowledges explicitly that it may be necessary for management to depart from requirements of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances. BY- CA GOPAL JI AGRAWAL

  50. Basic Elements of FS What are the Elements in Financial Statements? BY- CA GOPAL JI AGRAWAL

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