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Unformatted text preview: CARO 2016 LUNAWAT & CO. Chartered Accountants 17th June 2016, Rohini IFC REPORTING CA. PRAMOD JAIN FCA, FCS, FCMA, LL.B, MIMA, DISA Lunawat & Co. AGENDA  CARO 2016  Internal Financial Controls AUDIT REPORTS  Under Companies Act  CARO  NonNon- CARO  Others  Tax Audit Form 3 CA Form 3 CB  LLP  Society Lunawat & Co. Lunawat & Co. REPORT - COMPANIES  Inquiry u/s 143(1) – 6 points – only to be reported when comments required  Report to include:  Matters specified u/s 143(3) - 9 points  Matters specified in Rules - 3 points  Any order made u/s 143(3) for specified Companies in consultation with NFRA – CARO 2016 – 16 points Lunawat & Co. Lunawat & Co. CARO 2016 – APPLICABILITY  Applicable to all including Foreign Co. for a/cing a/cing period after 1.4.15 except: Banking Co. / Insurance Co. Section 8 Co. OPC Small Co. Not applicable on CFS Branch auditor also covered, if applicable to co. Lunawat & Co. CARO 2016 – APPLICABILITY  P. Co not being sub. or holding of Pub. Co. Co. whose: Paid up Capital & Reserves < 1 Cr as at B/s date; and Bonus, Pref. shares to be included Share Application money !! All reserves to be included including revaluation reserve Lunawat & Co. CARO 2016 – APPLICABILITY  P. Co not being sub. or holding of Pub. Co. Co. whose:  Outstanding Loans - Bank or FIs < 1 Cr during FY; FY; and All borrowings included – non fund based – to extent devolved, invoked guarantees & devolved LCs TL – interest accrued & due only to be considered CC – balance on any day as per books OD against FD included Outstanding due of Credit card also included Foreign banks covered - FIs include NBFC Lunawat & Co. CARO 2016 – APPLICABILITY  Pvt. Co not being sub. or holding of Pub. Co. Co. whose:  Total Revenue (including from discontinuing operations < 10 crores as per Financial Statements as per Sch III Other income included Lunawat & Co. CARO 2016 - CLAUSES  1(a) - Proper records - full particulars, quantitative details and situation of FA.  FAR in electronic form if 2 conditions satisfied: satisfied:  Controls & security measures in Co. are such that once finalised, FAR cannot be altered without proper authorization & audit trail.  FAR can be retrieved in a legible form. form.  In case above conditions not satisfied, satisfied, to obtain a duly authenticated printprint-out of FAR. In case auditor decides to rely on electronically FAR - to maintain adequate documentation evidencing evaluation of controls that seek to ensure completeness, completeness, accuracy & security of register. register Lunawat & Co. CARO 2016 - CLAUSES  1(b) – Physical verification – material discrepancy  1(c) 1(c) - Whether title deeds of immovable properties are held in the name of the company. If not, provide details thereof  TDR / Plt & Mach imbedded in land not imm. imm. Prop.  In case of conversion  In case of mortgage – banks  Online if available  Details – no. of cases, leasehold/freehold, gross/net block, remarks Lunawat & Co. CARO 2016 - CLAUSES  2(a)(b)(c) 2(a)(b)(c) merged into 2 - Whether physical verification of inventory has been conducted at reasonable intervals by the management & whether any material discrepancies were noticed and if so, how they have been dealt with in books of a/c  3 - Whether company has granted any loans, secured or unsecured to cos, firms, LLP or other parties covered in register maintained u/s 189. 189.[MBP[MBP-4] – 184(2)/188 Lunawat & Co. CARO 2016 - CLAUSES 3 – MBP 4 - If so,  (a) Whether terms & conditions of grant of such loans are not prejudicial to company’s interest; interest;  CY only, terms s. 186(7), ability to lend, borrower standing  (b) Whether the schedule of repayment of principal & interest is stipulated & whether repayments & interest are regular.  Opening + CY, squared up loans covered – no. of cases  (c) If overdue amount for more than 90 days, days, whether reasonable steps taken by Co. for recovery of the principal & interest  Opening + CY – no. of cases, principal amt overdue, intt overdue, steps taken Lunawat & Co. CARO 2016 - CLAUSES 4 – Internal control on purchase etc not required  4 - In respect of loans, investments and guarantees, whether provisions of Section 185 and 186 have been complied with. If not, provide details thereof.  185 Details – maximum amount and closing Bal.  186 – more than 2 layers, exceeding limits, rate of interest, other defaults 5 – Deposits – no change 7373-76 Lunawat & Co. CARO 2016 - CLAUSES 6 – Cost Records – no change  7 – Statutory Dues – Wealth tax (c) IEPF  Statutory due arises out of a statute, statute, rather than on an independent contractual or legal relationship  Advance tax, TDS, Custom duty… if intt – irregular.  Instalments granted by authority, penalty/intt penalty/intt covered  Irregularity vs. due more than 6 months  Mere show cause – not disputed, S. 154 – disputed  If no appeal filed – undisputed dues  Disclose disputed amounts even if provision made or amount deposited under protest Lunawat & Co. CARO 2016 - CLAUSES 8 – Accum. Accum. /cash losses– losses– not required  8 – Earlier 9 – Default to Bank, FIs, Govt. & debenture holders - (in case of banks, Govt. and FIs, lender wise details to be provided).  Default – non payment of dues, FIs include NBFCs  Period of default and amount lender wise  All defaults existing on B/S date – even earlier years  Debentures – lenderlender-wise detail not required  Govt. does not include – Foreign govt., Govt. Co, PSU, Boards, Corporations Lunawat & Co. CARO 2016 - CLAUSES  9 – New - Whether moneys raised by way of IPO / FPO (including debt instruments) & term loans were applied for purposes for which those are raised. If not, details together with delays / default & subsequent rectification.  Default - amount involved , nature of default, delay in utilization  Co. to disclose end use of IPO/FPO in notes & auditor to verify – see SEBI (Listing Obl. & Dis. Req.) Reg.  Temporary investment (FDR) to be reported  Term Loans from Private Parties  If against property, FDR, etc – no specific purpose Lunawat & Co. CARO 2016 – CHANGES  10 - Whether any fraud by Co. or any fraud on Co. by its officers/ employees has been noticed or reported during the year; If yes, nature and amount involved be indicated  Only to report ‘noticed or reported’ frauds. 143(12) 143(12) frauds to CG/AC. Reported frauds u/s 143(12) to be reported not suspected frauds  Management fraud vs. Employee fraud  Fraudulent Financial Reporting vs. Misappropriation of assets Lunawat & Co. CARO 2016 - CLAUSES  11 – New - Whether managerial remuneration has been paid / provided in accordance with the requisite approvals mandated by the provisions of s. 197 r.w. schedule V? If not, state the amount involved & steps taken for securing refund of the same.  Only Public Cos  Exclusion – sitting fee, for professional services  Entitled persons, limits, procedure and approval  Reporting – payment to MD, WTD, MD, Manager, Excess amount paid/ provided, Due for recovery & steps taken Lunawat & Co. CARO 2016 - CLAUSES  12 – Nidhi Co..  13 – New - Whether all transactions with related parties are in compliance with S. 177 and 188 and details have been disclosed in FS etc as required by applicable AS.  To see s. 177 & 188 and AS 18  S. 188 applicable to all companies other than on arm’s length transactions entered into in ordinary course of business  May test on TP mechanism per IT Act Lunawat & Co. CARO 2016 - CLAUSES  13 – SA 550 Related Parties - transactions not in normal course of business (Eg (Eg): Eg): Complex equity transactions, such as corporate restructurings or acquisitions  Transactions with offshore entities in jurisdictions with weak corporate laws  Leasing of premises or rendering of management services by entity to another party if no consideration is exchanged  Sales transactions with unusually large discounts or returns  Transactions with circular arrangements, for example, sales with a commitment to repurchase  Transactions under contracts whose terms are changed before expiry. expiry  Lunawat & Co. CARO 2016 - CLAUSES  14 –New - Whether Co. has made preferential allotment / PP of shares or fully or partly convertible deb. during yr. yr. Whether S. 42 complied & amount raised used for purposes for which funds were raised.  If not, details of amount involved and nature of nonnon-compliance. Lunawat & Co. CARO 2016 - CLAUSES  15 – New - Whether the company has entered into any nonnon-cash transactions with directors or persons connected with him and if so, whether provisions of S. 192 complied with  Persons connected - 185(1) Expl. Expl. – check MBP 1  Loan, guarantee, etc – MBP 2; Contracts – MBP 4  FAR, BOD Meetings, EGM, AGM  Merger under court schemes – Not nonnon-cash  Acquisition of asset in one year, settlement of liability in another year – Not nonnon-cash Lunawat & Co. CARO 2016 - CLAUSES  16 – New - Whether Co is required to be registered u/s 4545-IA of RBI and if so whether the registration has been obtained  Understanding business, if principal business is Financing activity  5050-50 Test - Financial Assets > 50% of total assets and income from Financial assets > 50% of Gross Income  If required and registration not obtained reasons to be stated Lunawat & Co. CARO 2016 – FINER POINTS  Comply SAs– SAs– Documentation, Materiality  Assess the effect of failure to comply  It’s not a separate audit engagement  Have Check lists  Need to document basis of reaching at adverse opinion  Management Representation  Cross check with Board Report Lunawat & Co. Lunawat & Co. ICFR REPORTING  Take Engagement Letter  Perform procedures  Take Representation Letter  Issue Separate Report Unmodified Modified Qualified Adverse Disclaimer Lunawat & Co. ICFR REPORTING - QUALIFIED Due to adequacy • The Company did not have an appropriate internal control system for customer acceptance, (and therefore credit evaluation and establishing customer operating credit limits for sales, which could potentially effectiveness) result in the Company recognising revenue without establishing reasonable certainty of ultimate collection • ..except for the effects/possible effects of the material weakness/es weakness/es described above on the achievement of the objectives of the control criteria, the Company has maintained, in all material respects, adequate internal financial controls over financial reporting as on.. • …these material weakness/es weakness/es do not affect our opinion on the standalone financial statements of the Company Lunawat & Co. ICFR REPORTING - ADVERSE Due to adequacy • The Company did not have an appropriate internal control system for customer acceptance, (and therefore credit evaluation and …... operating • The Company did not have an appropriate effectiveness) internal control system for inventory with regard to receipts, issue for production and physical verification. Further, the internal control system for identification and allocation of overheads to inventory was also not adequate. These could potentially result in material misstatements in the Company’s trade payables, consumption, inventory and expense account balances. • …the Company has not maintained adequate internal financial controls over financial reporting • …these material weakness/es weakness/es do not affect our opinion on the financial statements of the Company Lunawat & Co. ICFR REPORTING - QUALIFIED Qualified - Due to • The Company’s internal financial controls over customer acceptance, acceptance, credit evaluation and operating establishing customer credit limits for sales, effectiveness Unmodified – On Adequacy were not operating effectively which could potentially result in the Company recognising revenue without establishing reasonable certainty of ultimate collection • ..except for the effects/possible effects of the material weakness/es weakness/es described above on the achievement of the objectives of the control criteria, the Company’s internal financial controls over financial reporting were operating effectively as on.. • …these material weakness/es weakness/es do not affect our opinion on the standalone financial statements of the Company Lunawat & Co. ICFR REPORTING - ADVERSE Due to operating • The Company’s internal financial controls over customer acceptance, acceptance, credit evaluation and effectiveness Unmodified – On Adequacy establishing customer credit limits for sales, were not operating effectively which could potentially result in the Company …. • The Company’s internal control system for inventory with regard to receipts, issue for production and physical verification were not operating effectively. effectively. Further, the internal control system for identification and allocation of overheads to inventory was also not operating effectively. These could potentially result …. • …Company’s internal financial controls over financial reporting were not operating effectively • …these material weakness/es weakness/es do not affect our opinion on the financial statements of Company Lunawat & Co. ICFR REPORTING - ADVERSE Due to - Essential • The Company did not have an appropriate internal financial control system over financial components of reporting since the internal controls adopted by internal controls the Company did not adequately consider risk not adequately assessment, which is one of the essential considered components of internal control, with regard to in the internal the potential for fraud when performing risk financial controls assessment established by the • …the Company has not maintained adequate company and effective internal financial controls over financial reporting as on.. • …these material weaknesses do not affect our opinion on the financial statements of the Company Lunawat & Co. ICFR REPORTING - ADVERSE • The Company did not have appropriate internal Resulting in controls for reconciliation of physically inventory modified opinion with the inventory records, which has resulted in of standalone misstatement of inventory values in the books of financial account.… statements • because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained adequate and effective internal financial controls over financial reporting as of.. • …these material weakness/es weakness/es has affected our opinion on the standalone financial statements of the Company and we have issued a qualified (/ adverse / disclaimer of) opinion on the standalone financial statements. Lunawat & Co. ICFR REPORTING - DISCLAIMER • the Company has not established its internal Due to financial control over financial reporting on Framework for criteria based on or considering the essential internal financial components of internal control stated in the control over Guidance Note on Audit of IFCoFR issued by the financial reporting ICAI. Because of this reason, we are unable to not obtain sufficient appropriate audit evidence to established but provide a basis for our opinion whether the does not impact Company had adequate internal financial the audit opinion controls over financial reporting and whether on financial such internal financial controls were operating statements effectively as at… • …the disclaimer does not affect our opinion on the financial statements of the Company Lunawat & Co. ICFR REPORTING - DISCLAIMER Due to - Auditor • The system of internal financial controls over financial reporting with regard to one of the unable to obtain significant branches of the Company at _____ sufficient were not made available to us to enable us to appropriate audit determine if the Company has established evidence on adequate internal financial control over financial internal financial reporting at the aforesaid branch and whether controls over such internal financial controls were operating financial reporting effectively as at… but does not • …the disclaimer does not affect our opinion on impact audit the financial statements of the Company opinion on the financial statements Lunawat & Co. ICFR REPORTING - DISCLAIMER Due to - Auditor • The system of internal financial controls over financial reporting with regard to the Company unable to obtain were not made available to us to enable us to sufficient determine if the Company has established appropriate audit adequate internal financial control over financial evidence on reporting and whether such internal financial internal financial controls were operating effectively as at… controls over • … the disclaimer has affected our opinion on the financial reporting financial statements of the standalone Company and impacting and we have issued a qualified (/ adverse / audit disclaimer of) opinion on the financial opinion on the statements. financial statements Lunawat & Co. DOCUMENTATION Have checklists, tell articles to cross verify  Seniors to cross verify  Take necessary certificates / representation from management  External Confirmations  Ensure Compliance of ASs  Ensure all applicable regulatory compliances including Companies Act, 2013  Comply with SAs  Work not documented is work not done.  Lunawat & Co. CA. Pramod Jain [email protected] +91 9811073867 © 2016 CA. Pramod Jain, Lunawat & Co ...
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