Accounting Treatment For Excise Duty The following is the text of the revised Guidance Note on Accounting Treatment

For Excise Duty issued by the Institute of Chartered Accountants of India INTRODUCTION 1. The Institute of Chartered Accountants of India, had issued a Guidance Note on Accounting Treatment for Excise Duties m 1979. In order to bring uniformit in the accounting treatment of excise dut and in!entor !a"uation, the Guidance Note #as re!ised in 19$$. %ee&ing in !ie# further de!e"o&ments, !i'., issuance of the re!ised Accounting (tandard )A(* +, ,-a"uation of In!entories, )#hich has come into effecting res&ect of accounting &eriods commencing on or after 1...1999 and is mandator in nature*, it has been decided to re!ise this Guidance Note again. This re!ised Guidance Notes being issued in su&ersession of the ear"ier Guidance Note issued in 19$$ and is effecti!e in res&ect of accounting &eriods beginning on or after A&ri" 1, 1999. +. This Guidance Note recommends accounting treatment for Excise Dut in res&ect of excisab"e goods &roduced or manufactured b an enter&rise. A se&arate Guidance Note on Accounting Treatment for /0D-AT sets out &rinci&"es for accounting for /0D-AT )no# renamed as 1CEN-AT2. 3. At the outset, this Guidance Note brief" dea"s #ith norma"" acce&ted accounting &rinci&"es for in!entor !a"uation as &rescribed in re!ised Accounting (tandard )A(* + 4-a"uation of In!entories5 issued b the Institute of Chartered Accountants of India, and nature of excise dut 6or detai"s, reference shou"d be made to re!ised Accounting (tandard )A(* + and Centra" Excise Act, 7u"es, Notifications and Circu"ars. Normally Accepted Accounting Principles For Inventory aluation .. Norma"" acce&ted accounting &rinci&"es #ith regard to the !a"uation of in!entories )i.e. materia"s or su&&"ies to be consumed in the &roduction &rocess or in the rendering of ser!ices, #or89in&rocess and finished goods*, as &rescribed in re!ised Accounting (tandard )A(* +,,-a"uation of In!entories,, are re&roduced be"o#: ,;. In!entories shou"d be !a"ued at the "o#er of cost and net rea"isab"e !a"ue,. ,<. The cost of in!entories shou"d com&rise a"" costs of &urchase, costs of con!ersion and other costs incurred in bringing the in!entories to their &resent "ocation and condition., 47. The costs of &urchase consist of the &urchase &rice inc"uding duties and taxes )other than those subse=uent" reco!erab"e b the enter&rise from the taxing authorities*, freight in#ards and other ex&enditure direct" attributab"e to the ac=uisition. Trade discounts, rebates, dut dra#bac8s and other simi"ar items are deducted in determining the costs of &urchase., ,$. The costs of con!ersion of in!entories inc"ude costs direct" re"ated to the units of &roduction, such as direct "abour. The a"so inc"ude a s stematic a""ocation of fixed and !ariab"e &roduction o!erheads that are incurred m con!erting materia"s into finished goods. 6ixed &roduction o!erheads ate those indirect costs of &roduction that remain re"ati!e" constant regard"ess of the !o"ume of &roduction, such as de&redation and maintenance of factor bui"dings and the cost of factor management and administration. -ariab"e &roduction o!erheads are those indirect costs of &roduction that !ar direct" , or near" direct" , #ith the !o"ume of &roduction, such as indirect materia"s and indirect "abour., ,9. The a""ocation of fixed &roduction o!erheads for the &ur&ose of their inc"usion in the costs of con!ersion is based on the norma" ca&acit of the &roduction faci"ities.

Norma" ca&acit is the &roduction ex&ected to be achie!ed on an a!erage o!er a number of &eriods or seasons under norma" circumstances, ta8ing into account the "oss of ca&acit resu"ting from &"anned maintenance. The actua" "e!e" of &roduction ma be used if it a&&roximates> norma" ca&acit . The amount of fixed &roduction o!erheads a""ocated to each unit of &roduction is not increased as a conse=uence of "o# &roduction or id"e &"ant. ?na""ocated o!erheads are recognised as an ex&ense in the &eriod in #hich the are incurred. In &eriods of abnorma"" high &roduction, the amount of fixed &roduction o!erheads a""ocated to each unit of &roduction is decreased so that in!entories are not measured abo!e cost. -ariab"e &roduction o!erheads are assigned to each unit of &roduction on the basis of the actua" use of the &roduction faci"ities., 511. 0ther costs are inc"uded in the cost of in!entories on" to the extent that the are incurred in bringing the in!entories to their &resent "ocation and condition. 6or exam&"e, it ma be a&&ro&riate to inc"ude o!erheads other than &roduction o!erheads or the costs of designing &roducts for s&ecific customers in the cost of in!entories.5 Nature O! Excise Duty ;. Excise dut is a dut on manufacture or &roduction of excisab"e goods in India. (ection 3 of the Centra" Excise Act> 19.., dea"s #ith charge of Excise Dut This (ection &ro!ides that a dut of excise on excisab"e goods #hich are &roduced or manufactured in India sha"" be "e!ied and co""ected in such a manner as ma be &rescribed. This &rescri&tion is continued in the Centra" Excise 7u"es, 19.. #hich &ro!ide that excise dut sha"" be co""ected at the time of remo!a" of goods from factor &remises or from a&&ro!ed &"ace of storage )7u"e .9*. 7ate of dut and tariff !a"uation to be a&&"ied is the one in force on that date, ie., the date of remo!a" )7u"e 9A* and not the date of manufacture. This difference in the &oint of time bet#een taxab"e e!ent, !i'., manufacture and that of its co""ection has been examined and discussed in a number of @udgements. 6or instance, the (u&reme Court m the case of Aa""ace 6"our /i""s Co. Btd. !s. CCE 119$9 )..* EBT ;99 summed u& the "ega" &osition as under: 4It is #e"" sett"ed b the scheme of the Act as c"arified b se!era" decisions that e!en though the taxab"e e!ent is the manufacture or &roduction of an excisab"e artic"e, the dut can be "e!ied and co""ected at a "ater stage for administrati!e con!enience. The (cheme of the said Act read #ith the re"e!ant ru"es framed under the Act &articu"ar" 7u"e 9A of the said ru"es, re!ea"s that the taxab"e e!ent is the fact of manufacture of &roduction of an excisab"e artic"e, the &a ment of dut is re"ated to the date of remo!a" of such artic"e from the factor .5 (u&reme Court in another case, !i'., CCE !s. -a'ir (u"tan Tobacco Co. C199< )$3* EBT 3D he"d as under: 4Ae are of the o&inion that (ection 3 cannot be read as shifting the "e! from the stage of manufacture or &roduction of goods to the stage of remo!a". The "e! is and remains u&on the manufacture or &roduction a"one. 0n" the co""ection &art of it is shifted to the stage of remo!a"., <. The "e! of excise dut is not restricted on" to excisab"e goods manufactured and intended for sa"e. It is a"so "e!iab"e on excisab"e goods manufactured or &roduced in a factor for interna" consum&tion. (uch intermediate &roducts ma be used in manufacture of fina" &roducts or for re&airs #ithin the factor or for use as ca&ita" goods #ithin the factor . Excisab"e goods so used for ca&ti!e consum&tion ma be e"igib"e for exem&tion under s&ecific notifications issued from time to time. 6inished excisab"e goods c"eared from the &"ace of remo!a" ma a"so be e"igib"e for #ho"e or &artia" dut exem&tion in terms of notifications issued from time to time. (uch exem&tion, sub@ect to s&ecified "imits, if an ,

ma re"ate to a manufacturer, e.g., a sma"" sca"e industria" unit. Exem&tion ma be goods s&ecific, eg., handicrafts are current" #ho"" exem&t from dut . The exem&tion ma a"so be end9use s&ecific, e.g., goods for use b defence ser!ices. Excisab"e goods can be remo!ed for ex&ort out of India either #ho"" #ithout &a ment of dut or under bond or on &a ment of dut under c"aim for rebate of dut &aid. 7. Excisab"e goods, after com&"etion of their manufacturing &rocess, are re=uired to be 8e&t in a storeroom or other identified &"ace of storage in a factor ti"" the time of their c"earance. Each such storeroom or storage &"ace is re=uired to be dec"ared to the Excise Authorities and a&&ro!ed b them. (uch storeroom or storage &"ace is genera"" referred to as a Eonded (toreroom. Dutiab"e goods are a"so a""o#ed, sub@ect to a&&ro!a" of Excise Authorities, to be remo!ed #ithout &a ment of dut , to a Eonded Aarehouse outside factor . In such cases, excise dut is co""ected at the time of c"earance of goods from such Eonded Aarehouses. $. Amount of excise dut forming &art of the sa"e &rice of the goods is re=uired to be indicated se&arate" in a"" documents re"ating to assessment of dut , e.g., excise in!oice used for c"earance of excisab"e goods )(ection 1+A*. It is, ho#e!er, o&en to a manufacturer to reco!er excise dut se&arate" or not to ma8e a se&arate reco!er but charge a conso"idated sa"e &rice inc"usi!e of excise dut The incidence of excise dut is deemed to be &assed on to the bu er, un"ess contrar is &ro!ed b the &a er of excise dut )(ection 1+E*. Excise Duty As An Element O! Cost 9. In considering the a&&ro&riate treatment of excise dut for the &ur&ose of determination of cost for in!entor !a"uation, it is necessar to consider #hether excise dut shou"d be considered different" from other ex&enses. 1F. Admitted" , excise dut is an indirect tax but it cannot> for that reason a"one, be treated different" from other ex&enses. Excise dut arises as a conse=uence of manufacture of excisab"e goods irres&ecti!e of the manner of use G dis&osa" of goods thereafter, e.g., sa"e, destruction and ca&ti!e consum&tion. It does not cease to be a "e! mere" because the same ma be remitted b a&&ro&riate authorit in case of destruction or exem&ted in case goods are used for further manufacture of excisab"e goods in the factor . Tax )other than a tax on income or sa"e* &a ab"e b a manufacturer is as much a cost of manufacture as an other ex&enditure incurred b him and it does not cease to be an ex&enditure mere" because it is an exaction or a "e! or because it is una!oidab"e. In fact, in a #ider context an ex&enditure is an im&osition #hich a manufacturer #ou"d "i8e to minimise. 11. Excise dut contributes to the !a"ue of the &roduct. A ,dut &aid, &roduct has a higher !a"ue than a &roduct on #hich dut remains to be &aid and no sa"e or further uti"isation of excisab"e goods can ta8e &"ace un"ess the dut is &aid. It is, therefore, a necessar ex&ense #hich must be incurred if the goods are to be &ut in the "ocation and condition in #hich the can be so"d or further used in the manufacturing &rocess. 1+ Excise dut cannot therefore be treated different" from other ex&enses for the &ur&ose of determination of cost for in!entor !a"uation. To do so #ou"d be contrar to the basic ob@ecti!e of carr ing for#ard the cost re"ated to in!entories unti" these are so"d or consumed. 13 As stated in &ara < abo!e, "iabi"it to excise dut arises e!en on excisab"e goods manufactured and used in further manufacturing &rocess. In such a case excise dut &aid )if the same is not exem&ted* on the intermediar &roduct becomes a manufacturing ex&ense. Excise dut &aid on such intermediar &roducts must, therefore, be inc"uded in the !a"uation of #or89in9&rocess or finished goods manufactures b the subse=uent &rocessing of such &roducts. Provision For Unpaid Excise Duty

1.. (ince the &oint of time at #hich dut is co""ected is not necessari" the &oint of time at #hich the "iabi"it to &a the dut arises, situations #i"" often arise #hen dut remains to be co""ected on goods #hich ha!e been manufactured. The most common of these situations arises #hen die goods are stored under bond, i.e., in a bonded (tore 7oom, and the dut is &aid #hen the goods are remo!ed from such bonded (tore 7oom. 1;. Di!ergent !ie#s exist as to #hether &ro!ision shou"d be made in the accounts for the "iabi"it in res&ect of goods #hich are not c"eared or #hich are " ing in bond at the ba"ance sheet date. 1<. The arguments in fa!our of the creation of "iabi"it are brief" summarised under: )a* The "iabi"it for excise dut arises at the &oint of time at #hich the manufacture is com&"eted and it is on" its co""ection #hich is deferred, and )b* fai"ure to &ro!ide for the "iabi"it #i"" resu"t in the ba"ance sheet not sho#ing a true and fair !ie# of the state of affairs of the enter&rise. 17. The arguments against the creation of the "iabi"it brief" summarised, are as under: )a* Though the "iabi"it for excise dut arises at the &oint of time at #hich the manufacture is com&"eted, it gets =uantified on" #hen goods are c"eared from the factor or the bonded #arehouse, )b* the actua" "iabi"it for excise dut ma get modified b c"eared from the factor or bonded #arehouse, the time the goods are

)c* #here goods are damaged or destro ed before c"earance, excise dut ma be #ai!ed b the com&etent authorit and therefore the dut ma ne!er be &aid, and )d* fai"ure to &ro!ide for the "iabi"it does not affect the &rofits or "osses. 1$. (ince the "iabi"it for excise dut arises #hen the manufacture of the goods is com&"eted, it is necessar to create a &ro!ision for "iabi"it of un&aid excise dut on stoc8s " ing in the factor or bonded #arehouse. It is true that the reco!er of the dut is deferred ti"" the goods are remo!ed from the factor ot the bonded #arehouse and the exact =uantification #i"", therefore, be at the time of remo!a" and that estimate of dut made on ba"ance sheet date ma change on account of subse=uent e!ents, e.g., change in the rate of dut and ex&orts under bond. Eut, this is true of man other items a"so, e.g., &ro!ision for gratuit and this cannot be an argument for not ma8ing a &ro!ision for existing "iabi"it on estimated basis. 19. The estimate of such "iabi"it can be made at the rates in force on the ba"ance sheet date. 6or this &ur&ose, other factors affecting "iabi"it shou"d a"so be considered, e.g., exem&tions being a!ai"ed b the enter&rise, &attern of sa"es H ex&ort, domestic etc. Thus, if a sma"" sca"e underta8ing is a!ai"ing the benefit of exem&tion a""o#ed in a &articu"ar financia" ear and dec"ares that it #ishes to a!ai" such exem&tion during next financia" ear a"so, excise dut "iabi"it shou"d be ca"cu"ated after ta8ing into consideration the a!ai"abi"it of exem&tion under the re"e!ant notification. (imi"ar" , if an enter&rise is ca&ti!e" consuming a"" its &roduction of a s&ecific &roduct and has been a!ai"ing of exem&tion from &a ment of dut on that &roduct, no &ro!ision for excise dut ma be re=uired in res&ect of non9dut &aid stoc8 of that &roduct " ing in factor or bonded #arehouse. An auditor must, ho#e!er, a&&" a&&ro&riate audit tests #hi"e !erif ing statements and dec"arations made b an enter&rise in this regard. Auditor"s Responsi#ility +F.Theauditor has a res&onsibi"it to ex&ress his o&inion #hether the financia" statements on #hich he re&orts gi!e a true and fair !ie# of the o&erating resu"ts and state of affairs of the entit . In the case of com&anies, under /A0CA70, 19$$, the auditor has to ex&ress an

o&inion #hether the !a"uation of in!entories is fair and &ro&er in accordance #ith norma"" acce&ted accounting &rinci&"es and is on the same basis, as in the ear"ier ears. If there is an change in the basis of !a"uation, the effect of such change, if materia", is to be re&orted. +1. As ex&"ained in this Guidance Note, the "iabi"it for excise dut arises at the &oint of time at #hich the manufacture is com&"eted. The excise dut &aid or &ro!ided on finished goods shou"d, therefore, be inc"uded in in!entor !a"uation. (imi"ar" , excise dut &aid on &urchases )other than those subse=uent" reco!erab"e b the enter&rise from the taxing authorities* as #e"" as intermediar &roducts used for manufacture shou"d a"so be inc"uded in the !a"uation of #or89in9&rogress or finished goods. ++. If the method of accounting for excise dut is not in accordance #ith the &rinci&"es ex&"ained in this Guidance Note, the auditor shou"d =ua"if his re&ort. In the case of a com&an , reference to this =ua"ification shou"d a"so be made in the auditorIs re&ort under (ection ++7).9A* of the Com&anies Act, 19;<. +3. $ummary O! Recommendations )i* Excise dut shou"d be considered as a manufacturing ex&ense and "i8e other manufacturing ex&enses be considered as an e"ement of cost for in!entor !a"uation. )ii* Ahere excise dut is &aid on excisab"e goods and such goods are subse=uent" uti"ised in the manufacturing &rocess, the dut &aid on such goods, if the same is not reco!erab"e from taxing authorities, becomes a manufacturing cost and must be inc"uded in the !a"uation of #or89in9&rogress or finished goods arising from the subse=uent &rocessing of such goods. )iii* Ahere the "iabi"it for excise dut has been incurred but its co""ection is deferred, &ro!ision for the un&aid "iabi"it shou"d be made. )i!* Excise dut cannot be treated as a &eriod cost. )!* If the method of accounting for excise dut is not in accordance #ith the &rinci&"es ex&"ained in this Guidance Note, the auditor shou"d =ua"if his re&ort. %uidance Note On Audit O! Expenses Jara +.1 of the ,Jreface to the (tatements on (tandard Auditing Jractices, issued b the Institute of Chartered Accountants of India states that the ,main function of the AJC is to re!ie# the existing auditing &ractices in India and to de!e"o& (tatements on (tandard Auditing Jractices )(AJs* so that these ma be issued b the Counci" of the Institute., Jara +.. of the Jreface states that the ,AJC #i"" issue Guidance Notes on the issues arising from the (AJs #here!er necessar ., The Auditing Jractices Committee has a"so ta8en u& the tas8 of re!ie#ing the (tatements on auditing matters issued &rior to the formation of the Committee. It is intended to issue, in due course of time, (AJs or Guidance Notes, as a&&ro&riate, on the matters co!ered b such (tatements #hich #ou"d then stand #ithdra#n. According" , #ith the issuance of this Guidance Note on Audit of Ex&enses, &aragra&hs 11.+911.$ of Cha&ter 11 of the Statement on Auditing Practices, tit"ed IJrofit and Boss AccountI, sha"" stand #ithdra#n. In due course of time, the entire Statement on Auditing Practices sha"" be #ithdra#n. The fo""o#ing is the text of the Guidance Note on ,Audit of Ex&enses, issued b the Auditing Jractices Committee of the Counci" of the Institute of Chartered Accountants of India. This Guidance Note shou"d be read in con@unction #ith the (tatements on (tandard Auditing Jractices issued b the Institute. INTRODUCTION 1. An ex&ense is a cost re"ating to the o&erations of an accounting &eriod or to the re!enue

earned during the &eriod or the benefits of #hich do not extend be ond that &eriod. The ex&ression ,cost, means the amount of ex&enditure incurred on or attributab"e to a s&ecified artic"e, &roduct or acti!it . +. Ex&enses are recognised b the fo""o#ing a&&roaches: (a) Identification with revenue transactions Costs direct" associated #ith the re!enue recognised during the re"e!ant &eriod are considered as ex&enses and are charged to income for the &eriod. (b) Identification with a period of time In man cases, a"though some costs ma ha!e connection #ith the re!enue for the &eriod, the re"ationshi& is so indirect that it is im&racticab"e to attem&t to estab"ish it. Ko#e!er, there is a c"ear identification #ith a &eriod of time. 1 (uch costs are regarded as 1&eriod costsI and are ex&ensed in the re"e!ant &eriod, e.g, sa"aries, te"e&hone, tra!e""ing, de&reciation on office bui"ding, norma" interest, etc. (imi"ar" , the costs the benefits of #hich do not c"ear" extend be ond the accounting &eriod are a"so charged as ex&enses. 3. The fo""o#ing features of ex&enses affect the nature, timing and extent of the re"ated audit &rocedures: )a* In the case of most items of ex&enses, documentar third &arties is a!ai"ab"e. e!idence originating from

)b* The nature and re"ati!e significance of !arious items of ex&enses usua"" differ from one enter&rise to another, de&ending &rimari" on the nature of o&erations carried out b them. 6or exam&"e, in the case of most manufacturing enter&rises, the &rinci&a" items of ex&enses #ou"d inc"ude the cost of ra# materia"s consumed, "abour cost and other con!ersion costs. 0n the other hand in the case of a trading enter&rise, the &rinci&a" items of ex&enses #ou"d genera"" be the cost of goods so"d. In the case of an enter&rise su&&" ing, &ro!iding, maintaining and o&erating an ser!ices, the &rinci&a" items of ex&ense #ou"d inc"ude &ersonne" and &rofessiona" ex&enses, office maintenance, etc. )c* The amount of some ex&enses has a "ogica" re"ationshi& #ith certain other financia" statement items #hi"e the amount of some other ex&enses does not ha!e such a re"ationshi&. 6or exam&"e, in an enter&rise #here the &roduction &rocess is standardised, the consum&tion of ra# materia"s )and, therefore, the cost of ra# materia"s consumed* has a "ogica" re"ationshi& #ith the =uantum of out&ut. (imi"ar" , the &ro&ortion of !arious constituents of cost of &roduction is ex&ected to remain more or "ess constant in the absence of 8no#n conditions to the contrar . Bi8e#ise, &ro&ortion of the amount of interest for a &eriod to the amount of "oans outstanding during the &eriod is ex&ected to !ar #ithin certain s&ecific Emits. 0n the other hand, the ex&enditure on research and de!e"o&ment often has "itt"e re"ationshi& #ith other items in the financia" statements. )d* The amount of some items of ex&enses )e.g., gratuit , taxes, bonus, etc.* is significant" affected b a&&"icab"e "a#s. .. In an audit, the auditor em&"o s a&&ro&riate &rocedures to obtain reasonab"e assurance about !arious assertions )see (AJ ;, Audit Evidence). In carr ing out an audit of ex&enses, the auditor is &articu"ar" concerned #ith obtaining sufficient a&&ro&riate audit e!idence to corroborate the managementIs assertions regarding the fo""o#ing: 0ccurrence that recorded ex&enses arose from transactions or e!ents #hich too8 &"ace during the re"e!ant &eriod and &ertain to the entit .

Com&"eteness /easurement Jresentation Disc"osure and

that there are no unrecorded ex&enses. that ex&enses are recorded in the &ro&er amounts and are a""ocated to the &ro&er &eriod. that ex&enses are disc"osed, c"assified, and described in accordance #ith recognised accounting &o"icies and &ractices and re"e!ant statutor re=uire merits, if an .

;. In !ie# of the di!ergence in the nature of ex&enses incurred b different enter&rises, it is not &ossib"e to describe the audit &rocedures a&&"icab"e in carr ing out an audit of ex&enses in a"" situations. This Guidance Note &ro!ides guidance on &rocedures to be em&"o ed in carr ing out an audit of ex&enses #hich #ou"d be a&&"icab"e in the case of most enter&rises. It is recognised, ho#e!er, that audit &rocedures different from or additiona" to those described in this Guidance Note ma be necessar in a &articu"ar case de&ending u&on its s&ecific facts and circumstances. INTERNA& CONTRO& E A&UATION <. The auditor shou"d stud and e!a"uate the s stem of interna" contro" re"ating to ex&enses, to determine the nature, timing and extent of his other audit &rocedures. LKe shou"d &articu"ar" re!ie# the fo""o#ing as&ects of interna" contro" re"ating to ex&enses: + )a* The s stems and &rocedures re"ating to incurring of ex&enses inc"uding authorisation &rocedures. )b* Accounting &rocedures re"ating to recognition of ex&enses. )c* Existence of &eriodic re&orts on actua" &erformance !is a !is budgets and interna" management re&orts, if an . ERIFICATION 7. -erification of ex&enses ma be carried out b em&"o ing the &rocedures, !i'., )a* examination of records> and )b* ana" tica" &rocedures. The nature, timing and extent of substanti!e &rocedures to be &erformed is, ho#e!er, a matter of &rofessiona" @udgment of the auditor #hich is based, inter a"ia, on the auditorIs e!a"uation of the effecti!eness of the re"ated interna" contro"s. The auditor shou"d examine #hether the basis of recognition of ex&enses b the entit is in accordance #ith the recognised accounting &rinci&"es. 'a( Examination o! Records $. Examination of records and documents is one of the most im&ortant techni=ues of auditing. An auditor has to examine a "arge number of documents in the course of an audit since most transactions are su&&orted on" b documentar e!idence. The accounting s stems of business enter&rises are so designed that documentar e!idence is created in res&ect of each transaction. The auditor shou"d carr out an examination of the re"e!ant records to satisf himse"f about the !a"idit , accurac and other assertions #ith regard to !arious ex&enses incurred b the entit . The extent of such examination #ou"d de&end on the auditorIs e!a"uation of the efficac of interna" contro"s. '#( Analytical Procedures 9. The auditor shou"d conduct ana" tica" &rocedures #hich in!o"!e ana" sis of significant ratios and trends inc"uding the resu"ting in!estigation of f"uctuations and re"ationshi&s that are inconsistent #ith other re"e!ant information or #hich de!iate from &redicted amounts.3 1F. The fo""o#ing &aragra&hs describe the audit &rocedures a&&"icab"e in res&ect of !arious items of ex&enses.

%oods and Ra) *aterials Consumed 11. The auditorIs examination of the cost of goods, stores and materia"s consumed during the ear #ou"d in!o"!e, interalia, examination of &urchases of goods and materia"s made during the ear as #e"" as of &urchase returns and of o&ening and c"osing in!entories. Purc+ases and Purc+ase Returns 1+. The auditor shou"d examine #hether the entit has instituted ade=uate cut9off &rocedures in re"ation to &urchases and &urchase returns. The ob@ecti!e of cut9off &rocedures is to ensure that the transactions &ertaining to a &eriod are recorded in that &eriod and not in a &receding or subse=uent &eriod. The auditor shou"d examine the efficac of such &rocedures. The auditor can examine the se"ected recei&t documents )such as goods recei!ed notes* &ertaining to a fe# da s immediate" before the ear9end and !erif that the re"ated &urchase in!oices ha!e been recorded as &urchases of the current ear. The auditor shou"d &a &articu"ar attention to the cut9off &rocedures re"ating to &urchases, both indigenous and im&orted, to determine #hether these &rocedures ensure recognition of &urchases at the time the significant ris8s and re#ards of o#nershi& of the re"ated goods &ass on to the entit . 13. The auditor shou"d examine se"ected entries in the &urchase @ourna" #ith reference to the re"ated &urchase in!oices, recei&t records and other su&&orting documents such as the &urchase orders. The auditor shou"d a"so trace the se"ected entries to the su&&"iersI account. 1.. Ahi"e examining &urchase in!oices, the auditor shou"d examine #hether subsidies, rebates, dut dra#bac8s or other, simi"ar items ha!e been &ro&er" accounted for. As &er A(9+, costs of &urchase consist of the &urchase &rice inc"uding duties and taxes )other than those subse=uent" reco!erab"e b the enter&rise from the taxing authorities*, freight in#ards and other ex&enditure direct" attributab"e. to the ac=uisition. Trade discounts, rebates, dut dra#bac8s and other simi"ar items are deducted in determining the costs of &urchase. 1;. The auditor shou"d a"so examine se"ected recei&t records #ith reference to re"ated &urchase in!oices and the &urchase @ourna". 1<. The auditor shou"d examine se"ected entries of &urchase returns #ith reference to the goods returned notes, debit notes and entries in the su&&"iersI accounts. (imi"ar" , the auditor shou"d examine se"ected debit notes #ith reference to &urchase returns, goods returned ,notes, and entries in the su&&"iersI accounts. 17. In case of transactions bet#een re"ated &arties, the auditor shou"d &a s&ecia" attention to nature and descri&tion of such transactions.. 1$. The auditor shou"d obtain a re&resentation from the management to the effect that the entit has com&"ied #ith the "ega" and regu"ator re=uirements, if an . Ahen the auditor becomes a#are of non9com&"iance, the auditor shou"d obtain sufficient information to e!a"uate the Jossib"e effect in the financia" statements. The auditor shou"d a"so consider communicationGre&orting of non9com&"iance #ith the management inc"uding audit committee, users of financia" statements and to regu"ator authorities as ma be a&&ro&riate.; 19. In res&ect of im&orts, the auditor shou"d carr out the fo""o#ing &rocedures in addition to the usua" audit &rocedures a&&"icab"e in res&ect of domestic &urchases. )a* Eesides examining the usua" documents re"ating to &urchases, the auditor shou"d a"so examine such documents as bi"" of "ading, custom documents, etc. #hich9 are s&ecific to im&ort transactions. )b* The auditor shou"d &a s&ecia" attention to the terms of im&ort re"ating to the incidence of charges E8e insurance and freight, i.e., #hether the im&orts are on

C.I.6. basis, or 6.0.E. basis, or some other basis. )c* The auditor shou"d examine that im&orts for #hich consideration is &a ab"e in a foreign currenc are recorded at an a&&ro&riate amount in accordance #ith Accounting (tandard )A(* 11, Accounting for the Effects of Changes in oreign E!change "ates. +F. In addition to the audit &rocedures discussed abo!e, the fo""o#ing ana" tica" &rocedures ma often be he"&fu" as a means of obtaining audit e!idence regarding the !arious assertions re"ating to &urchases. )a* Com&arison, item9#ise and "ocation9#ise both =uantit and !a"ue, of &urchases for the current earG&eriod #ith the corres&onding figures for &re!ious earsG&eriods. )b* Com&arison of ratio of gross margin to sa"es for the current earG&eriod #ith the corres&onding figures for &re!ious earsG&eriods. )c* Com&arison of ratio of &urchase returns to Jurchases for the current earG&eriod #ith the corres&onding figures for &re!ious earsG&eriods. )d* Jroduct9#ise reconci"iation of =uantit so"d during the stoc8, &urchasesG&roduction and c"osing stoc8. earG&eriod #ith o&ening

A&art from the abo!e, the auditor ma a"so #or8 out =uantitati!e ratios and reconci"iations, e.g., he ma re"ate the =uantum of out&ut to the =uantum of in&ut to @udge its reasonab"eness. In case segment information is a!ai"ab"e, the abo!e &rocedures ma be carried out for each segment. +1. The auditor shou"d a"so !erif &a ments subse=uent to the date of the ba"ance sheet to identif an &urchases #hich ha!e not been recorded in the boo8s of account. ,ages and $alaries ++. The auditor shou"d examine the entries in the &a ro""G#age sheets #ith reference to re"e!ant records, e.g., em&"o eeIs records maintained b the &ersonne" de&artment sho#ing detai"s of &a such as basic &a , a""o#ances, annua" increments, "ea!es a!ai"ed, etc. (&ecia" attention ma a"so be &aid b auditor in res&ect of ne# em&"o ees @oining the entit during the ear. (imi"ar" , the &a ro"" ma a"so be examined #ith reference to the time recordsGattendance records and "ea!e records maintained b the &ersonne" de&artment. The deductions made in res&ect of income9tax, &ro!ident fund, Em&"o ees (tateI Insurance )E(1*, #e"fare schemes, hea"th schemes, etc. ma be examined #ith reference to the returns submitted to the authorities concerned and the recei&tsGac8no#"edgments issued b such authorities. +3. The auditor shou"d examine #hether an "ega", regu"ator or contractua" re=uirements ha!ing a bearing on the rate or amount of #ages and sa"aries ha!e been com &"ied #ith. (imi"ar considerations #ou"d a"so a&&" to &a ments made to a contractor for hire of "abour. (uch re=uirements #ou"d inc"ude, inter a"ia, the &ro!isions of the /inimum Aages Act, 19.$, agreement #ith the em&"o ees, a#ard of com&etent authorit and @udicia" ru"ings. +.. In the case of senior management officia"s, the auditor shou"d &a &articu"ar attention to determining #hether the sa"aries &a ab"e are as &er the terms of contract #ith the em&"o ees concerned. (&ecia" re=uirements of terms of contract such as granting stoc8 o&tions )as &er schemes formu"ated b (EE1*, a!ai"ing "ea!e encashment, tota" amount &a ab"e annua"" inc"uding ex9gratia, etc. shou"d be s&ecifica"" "oo8ed into. +;. In the case of casua" "abour, besides carr ing out the other audit &rocedures, the auditor shou"d s&ecifica"" examine the sanction of the com&etent authorit for em&"o ment of such "abour and ascertain #hether such em&"o ees are retained as &er the time rate or &iece9rate basis. In a&&ro&riate cases, the auditor ma &a a sur&rise !isit to the sites #here the

casua" "abour is em&"o ed to assess the correctness of the attendance records maintained in res&ect of such "abour. In cases #here com&"ete outsourcing of "abour has been gi!en to an outside agenc , the term of agreement and com&"iance thereof #ou"d be examined. +<. The auditor shou"d obtain a "ist of em&"o ees #ho ha!e retired or other#ise "eft the ser!ices of the entit during the &eriod under audit and examine that the ha!e not been inc"uded in the &a ro"". +7. In addition to the audit &rocedures discussed abo!e, the fo""o#ing ana" tica" &rocedures ma often be he"&fu" as a means of obtaining audit e!idence regarding the !arious assertions re"ating to #ages and sa"aries: )a* com&arison of #age bi"" for the earsG&eriods> earG&eriod #ith the #age bi"" of &re!ious

)b* com&arison of the month" #age and sa"aries of a month #ith other months during the earG&eriod and #ith the corres&onding month of the &re!ious earsG&eriods> )c* com&arison of the #ageM bi"" for each de&artmentGunit for the current earG&eriod #ith the corres&onding figures for &re!ious earsG&eriods> )d* com&arison of the ratio of #ages and sa"aries to sa"es for the current earG&eriod #ith the corres&onding figures for the &re!ious earsG&eriods> )e* com&arison of the ratio of #ages and sa"aries to cost of &roduction for the current earG&eriod #ith the corres&onding figures for &re!ious earsG&eriods> )f* com&arison of the ratio of contribution to#ards &ro!ident fund to #ages and sa"aries for the current earG&eriod #ith the corres&onding figures for &re!ious earsG&eriods> )g* com&arison of the ratio of contribution to#ards &ro!ident fund to #ages and sa"aries for the current earG&eriod #ith the rate)s* of contribution s&ecified under the "a# go!erning &ro!ident fund> )h* com&arison of the ratio of contribution to#ards E(I to #ages and sa"aries for the current earG&eriod #ith the corres&onding figure for &re!ious earsG&eriods> )i* com&arison of the ratio of contribution to#ards E(I to #ages and sa"aries for the current earG&eriod #ith the rate)s* of contribution s&ecified under the "a# go!erning the E(I. -onus +$. In the case of &ro!ision for bonus, the auditor shou"d examine #hether the "iabi"it is &ro!ided for in accordance #ith the Ja ment of Eonus Act, 19<; andGor agreement #ith the em&"o ees or a#ard of com&etent authorit . Ahere the bonus actua"" &aid is in excess of the amount re=uired to be &aid as &er the &ro!isions of the a&&"icab"e "a#GagreementGa#ard, the auditor shou"d s&ecifica"" examine the authorit for the same )e.g., reso"ution of the board of directors in: the case of a com&an *. Retirement -ene!its +9. The auditor shou"d examine #hether the entit is "iab"e to &a an retirement benefits to its em&"o ees such as &ro!ident fund, su&erannuationG&ension, gratuit , etc., #hether in &ursuance of re=uirements of an "a# andGor in terms of agreement #ith the em&"o ees <. If so, the auditor shou"d examine #hether the amount &a ab"e has been com&uted in accordance #ith the re"e!ant "ega" andGor contractua" re=uirements. In res&ect of gratuit G&ension, the auditor shou"d s&ecifica"" examine #hether the &ro!ision for accruing gratuit G&ension "iabi"it has been made b the entit . The auditor shou"d examine the ade=uac of &ro!ision #ith reference to the actuaria" certificate obtained b the entit 7, in

case the entit has not obtained such an actuaria" certificate, the auditor shou"d examine that the method fo""o#ed b it, sa , grou& gratuit insurance scheme ta8en b the entit , for ca"cu"ating the accrued "iabi"it for gratuit is rationa". Ot+er Conversion Costs 3F. The auditor shou"d !erif the other con!ersion costs )such as &o#er and fue", &rocessing charges, etc.* #ith reference to the su&&orting documents and re"ated agreements. In case the materia" is sent outside to third &arties for &rocessing, necessar charges inc"uding exis9 tence of materia"s, #astage, etc. need to be ascertained and accounted for. In addition, the auditor ma a"so com&are the amount of ex&ense on a &articu"ar item #ith the corres&onding figure for &re!ious ears. (imi"ar" , he ma #or8 out the ratios of different items of con!ersion costs to tota" cost of &roduction for the current ear and com&are the same #ith the corres&onding figures for &re!ious ears. Esta#lis+ment and %eneral Administrative Expenses 31. The auditor shou"d !erif estab"ishment ex&enses and genera" administrati!e ex&enses such as insurance, rent, rates, con!e ance, tra!e""ing, te"e&hone, entertainment, &rinting and stationer , genera" ex&enses, etc. #ith reference to the sanction of the com&etent authorit , the su&&orting documents, re"ated agreements and the ru"es and regu"ations fo""o#ed b the entit . The auditor ma a"so com&are the amounts of these ex&enses #ith the corres&onding figures for &re!ious ears. (imi"ar" , he ma #or8 out the ratios of different items of ex&enses to sa"es for the current ear and com&are the same #ith the corres&onding figures for &re!ious ears. Interest and Financial c+arges 3+. The auditor shou"d !erif the amount of interest ex&ense for the ear #ith reference to the terms and conditions of re"e!ant agreements. The auditor ma a"so #or8 out the ratio of interest ex&ense for the ear to a!erage interest9bearing "oans and ad!ances outstanding during the ear and com&are it #ith the corres&onding figure for &re!ious ears and reconci"e the same. The auditor shou"d &articu"ar" examine that interest as #e"" as other financing costs such as commitment fees on funds borro#ed for a =ua"if ing asset inc"uded in the gross boo8 !a"ue of the asset to #hich the re"ate and ha!e not been charged to the &rofit and "oss account of the &eriod in #hich the are incurred $. If the entit has &aid an &ena" interest it shou"d a"so be examined. (uch interest shou"d be disc"osed as &art of norma" interest. The auditor shou"d consider, ha!ing regard to the materia"it , #hether it re=uires se&arate disc"osure. Depreciation 33. The auditor shou"d chec8 the ca"cu"ation of de&reciation. The tota" de&reciation arri!ed at shou"d be com&ared #ith that of &re!ious ears to identif reasons for !ariations. The auditor shou"d &articu"ar" examine #hether the de&reciation charge ha!ing regard to rate of de&redation and method of de&reciation fo""o#ed consistent" is ade=uate 8ee&ing in !ie# the genera"" acce&ted bases of accounting for de&reciation 9. A"ternati!e" , the auditor ma consider =ua"if ing his re&ort. In case, assets ha!e been re!a"ued b entit during the ear, the auditor shou"d ensure that the de&reciation has been com&uted &ro&er" . Researc+ and Development Expenses 3.. The auditor shou"d !erif !arious items of ex&enses incurred on research and de!e"o&ment #ith reference to su&&orting documents and re"ated agreements. 6or exam&"e, the cost of materia"s consumed for research and de!e"o&ment ma be !erified #ith reference to such documents as &urchase in!oices, goods recei!ed notes, records re"ating to issue of materia"s, etc. The auditor shou"d &articu"ar" examine #hether the accounting &o"9 ic fo""o#ed b the entit regarding treatment of research and de!e"o&ment costs is in accordance #ith Accounting (tandard )A(* #, Accounting for "esearch and $evelopment.

3;. The auditor shou"d examine #hether the deferra" meets the a&&ro&riate "ega" re=uirements, if an . If an accounting &o"ic for deferra" of research and de!e"o&ments is ado&ted, it shou"d be a&&"ied to a"" such &ro@ects #hich meet the criteria "aid do#n for deferra" under A( $. The auditor shou"d examine #hether the criteria "aid do#n in A(9$ #hich &re!ious" @ustified the deferra" of certain research and de!e"o&ment costs no "onger a&&" , the unamortised ba"ance has been charged as an ex&ense of the ear. (imi"ar" , the auditor shou"d examine that #here the criteria for deferra" continue to be met but the amount of unamortised ba"ance of the deferred research and de!e"o&ment costs and other re"e!ant costs exceed the ex&ected future re!enuesGbenefits re"ated thereto, such excess has been charged as an ex&ense immediate" . Repairs and *aintenance 3<. The auditor shou"d scrutinise the re&airs and maintenance account to ascertain that ne# fixed assets and substantia" im&ro!ements to existing assets ha!e not been inc"uded in re&airs and maintenance. The auditor shou"d exercise s&ecia" care &articu"ar" in case "arge amounts charged to the &rofit and "oss account. Contingencies . 37. In res&ect of &roduct #arranties, ser!ice contracts, &erformance #arranties, etc., the auditor shou"d examine #hether &ro!isions ha!e been made in accordance #ith Accounting (tandard )A(* %, Contingencies and Events &ccurring After the 'alance Sheet $ate. The auditor shou"d a"so examine the reasonab"eness of the basis ado&ted for =uantif ing the &ro!ision #ith reference to the re"e!ant agreements and the assessment based on his &ast ex&erience. Taxes on Income 3$. The auditor shou"d examine that tax ex&ense or tax sa ing has been &ro&er" com&uted and disc"osed in the financia" statements1F. The tax ex&ense for the &eriod #hich com&rises current tax and deferred tax is to be inc"uded in the determination of net &rofit or "oss for the &eriod under audit. In case of com&anies attracting minimum a"ternate tax, it has to be ensured that &ro&er &ro!ision has been considered in the accounts. The auditor shou"d examine that the deferred taxes ha!e been recognised for a"" timing differences sub@ect to consideration of &rudence in res&ect of deferred tax assets as set out in Accounting (tandard )A(* ++, Accounting for (a!es on Income. If there is a materia" de&arture from the &ro!isions of A( ++, the auditor shou"d =ua"if his re&ort. 39. In res&ect of assessments com&"eted, re!ised or rectified during the ear, the auditor shou"d examine #hether suitab"e ad@ustments ha!e been made in res&ect of additiona" demands or refunds, as the case ma be. The re"e!ant orders recei!ed u& to the time of audit shou"d be considered and, on this basis, it shou"d be examined #hether ad@ustment is re=uired in the financia" statements. .F. If the entit dis&utes its "iabi"it in regard to demands raised, the auditor shou"d examine #hether there is a &ositi!e e!idence or action on the &art of the entit to sho# that it has not acce&ted the demand for &a ment of tax or dut , e.g., #here it has gone into a&&ea" under re"e!ant &ro!isions of the Income9tax Act, 19<1. Ahere an a&&"ication for rectification of mista8e has been made b the entit , the amount shou"d be regarded as dis&uted. Ahere the demand noticeGintimation for the &a ment of tax is for a certain amount and the dis&ute re"ates to on" a &art and not the #ho"e of the amount, on" such amount shou"d be treated as dis&uted. A dis&uted tax "iabi"it ma re=uire a &ro!ision or suitab"e disc"osure )see Accounting (tandard %, Contingencies and Events &ccurring After the 'alance Sheet $ate). In determining #hether a &ro!ision is re=uired, the auditor shou"d, among other &rocedures, ma8e a&&ro&riate in=uiries of management, re!ie# minutes of the meetings of the board of directors and corres&ondence #ith the entit Is "a# ers, and obtain a&&ro&riate management re&resentations.

.1. The auditor shou"d obtain from the management a statement sho#ing the status of &ending tax matters. Ke shou"d examine the statements to assess the ade=uac of &ro!isions made in res&ect of those matters in the context of their current status. $PECIA& CON$IDERATION$ IN T.E CA$E OF A CO*PAN/ .+. In the case of audit of a com&an , in addition to the &rocedures described abo!e, the auditor shou"d a"so carr out a&&ro&riate audit &rocedures in res&ect of matters #hich are s&ecifica"" re=uired to be examined under the &ro!isions of the Com&anies Act, 19;<. (ome of the i""ustrati!e &rocedures s&ecifica"" a&&"icab"e in the case of audit of a com&an are described be"o#. It ma be c"arified that the fo""o#ing is not an exhausti!e "ist of additiona" &rocedures to be carried out in the case of audit of ex&enses in the case of a com&an . )a* The auditor shou"d examine #hether the manageria" remuneration &aid or &a ab"e b the com&an is #ithin the "imits "aid o#n under section 19$ and (chedu"e NIII to the Com&anies Act, 19;<. The auditor shou"d a"so examine #hether the remuneration &aid or &a ab"e to the directors of the com&an , inc"uding an managing or #ho"e9time director, has been determined b the Artic"es of Association of the com&an or b a reso"ution of the com&an &assed in a genera" meeting. The auditor shou"d a"so examine #hether the remuneration of directors com&"ies #ith the &ro!isions of section 3F9 of the Com&anies Act, 19;<. The auditor shou"d further examine #hether the com&utation of net &rofit for &ur&oses of manageria" remuneration is in accordance #ith sections 3.9 and 3;F of the Com&anies Act, 19;<. )b* The auditor shou"d examine #hether the contributions, if an , made b the com&an to charitab"e and other funds not direct" re"ating to the business of the com&an or the #e"fare of its em&"o ees com&" #ith the &ro!isions of section +93 of the Com&anies Act, 19;<. According to this section, the board of directors of a &ub"ic com&an cannot, exce&t #ith the consent of the com&an in genera" meeting, con9 tribute to charitab"e, and other funds not direct" re"ating to the business of the com&an or the #e"fare of its em&"o ees, an amounts the aggregate of #hich #i"", in an financia" ear, exceed 7s.;F,FFF or ; &er cent of the a!erage net &rofits of the com&an as determined in accordance #ith the &ro!isions of section 3.9 and section 3;F during the three financia" ears immediate" &receding, #hiche!er is greater. The auditor shou"d examine #hether the /emorandum of Association of the com&an em&o#ers it to ma8e contributions to charitab"e or other funds not direct" re"ating to the business of the com&an or the #e"fare of its em&"o ees. If the ob@ects c"ause in the /emorandum does not contain such authorit , the com&an has no &o#er to ma8e such contributions. The auditor shou"d as8 the management to &re&are a schedu"e of contributions to !arious funds co!ered b section +93 made during the ear, gi!ing the names of the institutions to #hich contributions ha!e been made, the amounts &aid and the dates on #hich the contributions #ere a&&ro!ed b the board of directors. Ke shou"d a"so as8 the management to &re&are a com&utation sho#ing the "imits of &ermissib"e contributions #hich can be made under this section. )c* The auditor shou"d examine #hether &o"itica" contributions made b the com&an are #ithin the "imit &rescribed in section +93A of the Com&anies Act, 19;<. 11 Ahere the "imit "aid do#n under section +93A is adhered to and the facts are &ro&er" dis 9 c"osed, the auditor has no further dut . Ahere, ho#e!er, the facts regarding such contributions are not &ro&er" disc"osed, the auditor shou"d =ua"if his re&ort and state the facts therein. Ahere the auditor has genuine doubt regarding the a&&"icabi"it of the (ection, he shou"d ensure that the fact is &ro&er" disc"osed in his audit re&ort.

Ahere the auditor is satisfied that &o"itica" contributions ha!e been made in excess of the "imit &rescribed in section +93A, he shou"d bring this to the attention of the shareho"ders b =ua"if ing his audit re&ort and ma8ing a mention of the excess amount in!o"!ed, if ascertainab"e. The auditor shou"d obtain a certificate from com&an Is board of directors to the effect that a"" amounts of contributions to &o"itica" &arties or for an &o"itica" &ur&ose to an &erson fa""ing under the &ro!isions of section +93A ha!e been brought into the boo8s of account of the com&an and that no amounts of such nature other than those so inc"uded in the boo8s ha!e been &aidGgi!en, direct" or indirect" . )d* The auditor shou"d examine #hether the contribution, if an , to the Nationa" Defence 6und or an other fund a&&ro!ed b the Centra" Go!ernment for the &ur&ose of nationa" defence com&"ies #ith the &ro!isions of section +93O3 of the Com&anies Act, 19;<.This section em&o#ers the board of directors to ma8e such contributions. It ma be noted that un"i8e the contributions to charitab"e or other funds n or direct" re"ating to the business of the com&an or to the #e"fare of its em&"o ees, contributions to Nationa" Defence 6und )or other simi"ar funds* can be made b a com&an e!en #here the /emorandum of Association of the com&an does not s&ecifica"" em&o#er it in this regard. The auditor shou"d examine #hether the tota" amount or amounts contributed b the com&an to the Nationa" Defence 6und )or other simi"ar funds* during the ear ha!e been suitab" disc"osed in the &rofit and "oss account. )e* In res&ect of &a ments to so"e9se""ing agents, the auditor shou"d examine #hether the &ro!isions of sections +9.,+9.A and +9.AA ha!e been com&"ied #ith. )f* The auditor shou"d examine #hether the &ro!isions of section +97 ha!e been com&"ied #ith in a&&ro&riate cases. Ke shou"d a"so examine com&"iance #ith the terms and conditions, if an , sti&u"ated b the Centra" Go!ernment in its a&&ro!a" under the &ro!iso to sub9section )1* of section +97, )g* In case an &artner or re"ati!e of a director of the com&an , an firm in #hich such director, or re"ati!e of such director, is a &artner, an &ri!ate com&an of #hich such director is a director or member, or an director, or manager of such a &ri!ate com&an , ho"ds an office or &"ace of &rofit under the com&an or under an subsidiar of the com&an , the auditor shou"d examine #hether the &ro!isions of section 31. ha!e been com&"ied #ith. )h* The auditor shou"d examine #hether an to re!enue account.1+ &ersona" ex&enses ha!e been charged

)i* The auditor shou"d examine #hether the transaction of &urchase of goods and materia"s and ser!ices, made in &ursuance of contracts or arrangements entered in the register)s* maintained under section 3F1 of the Com&anies Act, 19;<, as aggregating during the ear to 7s.;F,FFF )7u&ees 6ift Thousand* or more in res&ect of each &art , ha!e been made at &rices #hich are reasonab"e ha!ing regard to &re!ai"ing mar8et &rices for such goods,, materia"s and ser!ices or the &rices at #hich transaction for simi"ar goods or ser!ice ha!e been made #ith other &arties. 13 )@* The auditor shou"d examine #hether an undis&uted amounts &a ab"e in res&ect of income tax, #ea"th tax, sa"es tax, customs dut and excise dut #ere outstanding as at the "ast da of financia" ear concerned, for a &eriod of more than six months from the date the became &a ab"e ha!e been re&orted under /A0CA70, 19$$. E0A*INATION OF PRE$ENTATION AND DI$C&O$URE

.3. The auditor shou"d satisf himse"f that the ex&enses ha!e been &ro&er" c"assified and disc"osed in the financia" statements. Ahere the re"e!ant statute "a s do#n an disc"osure re=uirements in this beha"f, the auditor shou"d examine #hether the same ha!e been com&"ied #ith. *ANA%E*ENT REPRE$ENTATION ... The auditor shou"d consider obtaining a management re&resentation on ex&enses charged to the statement of &rofit or "oss #hen other sufficient a&&ro&riate audit e!idence cannot reasonab" be ex&ected to exist. 1. DOCU*ENTATION .;. The auditor shou"d maintain ade=uate #or8ing &a&ers regarding audit of ex&enses.
1;

1 7eference ma be made in this regard to Guidance Note on Accrua" Easis of Accounting. + The extent of re!ie# of interna" contro"s #ou"d de&end u&on the facts and circumstances of each case. 7eference ma be made in this regard to the ,Interna" Contro" Puestionnaire,, issued b the Institute of Chartered Accountants of India in 197< #hich contains, inter a"ia, an i""ustrati!e "ist of interna" contro"s in re"ation to &ett cash, cash and ban8 &a ments, sa"aries and #ages And &urchases. 3 7efer to (AJ91., Ana" tica" Jrocedures . 7efer to A(91 $, 7e"ated Jart Disc"osures. ; 7efer to (AJ9+1, Consideration of Ba#s and 7egu"ations in an Audit of 6inancia" (tatements. < Attention is in!ited in this regard to A( )*, Accounting for "etirement 'enefits in the inancial Statements of Emplo+ers. 7 Attention is a"so in!ited in this regard to (AJ 9, ,sing the -or. of an E!pert. $ Attention is in!ited A(91<, Eorro#ing Costs. 9 Attention is a"so dra#n to Accounting (tandard )A(* <, $epreciation Accounting. 1F Attention is dra#n to Accounting (tandard )A(* //, Accounting for (a!es on Income. 11 7eference ma be made in this regard to the Guidance Note on (ection +93A.of the Com&anies Act and the Auditor. 1+ 7eference ma be made in this regard to the (tatement on the /anufacturing and 0ther Com&anies )AuditorIs 7e&ort* 0rder, 19$$. 13 7eference ma be made in this regard to the (tatement on the /anufacturing and 0ther Com&anies )AuditorIs 7e&ort* 0rder, 19$$. 1. 7eference ma be made in this regard to (AJ 11, 7e&resentation b /anagement. 1; 7eference ma be made in this regard to (AJ93, Documentation. %uidance Note on Audit o! Cas+ and -an1 -alances The fo""o#ing is the text of the Guidance Note on Audit of Cash and Ean8 Ea"ances issued b the Auditing Jractices Committee of the Counci" of the Institute of Chartered Accountants of India. This Guidance Note shou"d be read in con@unction #ith the (tatements on (tandard Auditing Jractices issued b the Institute.1 1 . Jara +.1 of the Jreface to the (tatements on (tandard Auditing Jractices issued b the Institute of Chartered Accountants of India states that the ,main function of the AJC is to re!ie# the existing auditing &ractices in India and to de!e"o& (tatements on (tandard Auditing Jractices )(AJs* so that these ma be issued b the Counci" of the Institute., Jara +.. of the Jreface states that the ,AJC #i"" issue Guidance Notes on the issues arising from

the (AJs #here!er necessar ., +. The Auditing Jractices Committee has a"so ta8en u& the tas8 of re!ie#ing the (tatements on auditing matters issued &rior to the formation of the Committee. It is intended to issue, in due course of time, (AJs or Guidance Notes, as a&&ro&riate, on the matters co!ered b such (tatements #hich #ou"d then stand #ithdra#n. Aith the issuance of this Guidance Note on Audit of Cash and Ean8 Ea"ances, Cha&ter < of the (tatement on Auditing Jractices, tit"ed ICash and Ean8 Ea"ancesI, sha"" stand #ithdra#n. + In due course of time, the entire (tatement on Auditing Jractices sha"" be #ithdra#n. INTRODUCTION 3. Cash and ban8 ba"ances ma constitute a significant &ro&ortion of the tota" assets of an entit . An im&ortant feature of cash and ban8 ba"ances #hich has a significant im&act on the re"ated audit &rocedures is that these assets are high" &rone to misa&&ro&riation, misa&&"ication and other forms of fraud. .. In an auditing situation, the auditor em&"o s a&&ro&riate &rocedures to obtain reasonab"e assurance about !arious assertions )see (tatement of (tandard Auditing Jractices IAudit E!idence*. In carr ing out an audit of cash and ban8 ba"ances, the auditor is &articu"ar" concerned #ith obtaining sufficient a&&ro&riate audit e!idence to corroborate the management2s assertions regarding the fo""o#ing: Existence H that recorded cash and ban8 ba"ances exist as at the ear9end. 7ights and ob"igations H that recorded cash and ban8 ba"ances re&resent the assets of the entit . Com&"eteness H that there are no unrecorded cash and ban8 ba"ances. Eesides the abo!e, in certain situations, the auditors ma a"so be &articu"ar" concerned #ith the !a"uation of cash and ban8 ba"ances, e.g., in the case of )g* safe custod of cash, foreign currenc he"d b the entit or in the case of ban8 accounts designated in foreign currencies. INTERNA& CONTRO& E A&UATION ;. The auditor shou"d stud and e!a"uate the s stem of interna" contro" re"ating to cash and ban8 ba"ances to determine the nature, timing and extent of his other audit &rocedures. Ke shou"d &articu"ar" re!ie# the fo""o#ing as&ects of interna" contro" re"ating cash and ban8 ba"ances. 3 )a* (egregation of duties re"ating to authorisation of transactions, hand"ing of cashG issuance of che=ues and #riting of boo8s of account, and rotation of the duties &eriodica"" > )b* &ro&er authorisation of cash and ban8ing transactions> )c* dai" recording of cash transactions> )d* safeguards such as restricti!e crossing of che=ues, use of &re9&rinted, &re9 numbered forms> )e* &eriodic reconci"iation of ban8 ba"ances> )f* reconci"iation of cash9on9hand #ith boo8 ba"ance on a dai" basis or at other a&&ro&riate inter!a"s, inc"uding sur&rise chec8s b higher authorities> )g* safe custod of cash, che=ue boo8s, recei&t boo8s etc.> and )h* cashGfide"it insurance. ERIFICATION <. -erification of cash and ban8 ba"ances ma be carried out b em&"o ing the &rocedures described in &aragra&hs 79+7. It ma , ho#e!er, be em&hasised that the nature, timing and

extent of substanti!e &rocedures to be &erformed is a matter of &rofessiona" @udgment of the auditor #hich is based, inter a"ia, on the auditorIs e!a"uation of the effecti!eness of the re"ated interna" contro"s. eri!ication o! Cas+ -alances 7. The auditor shou"d carr out &h sica" !erification of cash at the date of the ba"ance sheet. Ko#e!er, if this is not feasib"e, &h sica" !erification ma be carried out, on a sur&rise basis, at an time short" before or after the date of the ba"ance sheet. In the "atter case, the auditor shou"d examine #hether the cash ba"ance sho#n in the financia" statements reconci"es #ith the resu"ts of the &h sica" !erification after ta8ing into account the cash recei&ts and cash &a ments bet#een the date of the &h sica" !erification and the date of the ba"ance sheet. Eesides &h sica" !erification at or around the date of the ba"ance sheet, the auditor shou"d a"so carr out sur&rise !erification of cash during the ear. $. A"" cash ba"ances in the same "ocation shou"d be !erified simu"taneous" . Ahere &ett cash is maintained b one or more officia"s, the auditor shou"d ad!ise the entit to re=uire the officia"s concerned to de&osit the entire &ett cash on hand on the "ast da #ith the cashier. The auditor shou"d en=uire #hether the cashier a"so hand"es cash of sister concerns, staff societies, etc. in such a case, cash &ertaining to them shou"d a"so be !erified at the same time so as to a!oid chances of cash ba"ances of one entit being &resented as those of another. 9. If I0?s )1I o#e ouI* or other simi"ar documents are found during &h sica" !erification, the auditor shou"d obtain ex&"anations from a senior officia" of the entit as to the reasons for such I0?sG other simi"ar documents remaining &ending. It shou"d a"so be ensured that such I0?sGother simi"ar documents are not sho#n as cash9on9hand. 1F. The =uantum of torn or muti"ated currenc notes shou"d be examined in the context of the si'e and nature of business of the entit . The auditor shou"d a"so examine #hether such currenc notes are exchanged #ithin a reasonab"e time. 11. If, during the course of the audit, it comes to the attention of the auditor that the entit is consistent" maintaining an undu" "arge ba"ance of cash9on9hand, he shou"d carr out sur&rise !erification of cash more fre=uent" to ascertain #hether the actua" cash on hand agrees #ith the ba"ance as sho#n b the boo8s. If the cash on hand is not in agreement #ith the ba"ance as sho#n in the boo8s, he shou"d see8 ex&"anations from a senior officia" of the entit . In case an materia" difference is not satisfactori" ex&"ained, the auditor shou"d state this fact a&&ro&riate" in his audit re&ort. In an case, he shou"d satisf himse"f regarding the necessit for such "arge ba"ances ha!ing regard to the norma" #or8ing re=uirements of the entit . The entit ma a"so be ad!ised to de&osit the #ho"e or the ma@or &art of the cash ba"ance in the ban8 at reasonab"e inter!a"s. 1+. Ahere &ost dated che=ues are on hand on the ba"ance sheet date, the auditor shou"d !erif that the ha!e not been accounted for as co""ections during the &eriod under audit. eri!ication o! -an1 -alances 13. The auditor shou"d ad!ise the entit to send a "etter to a"" its ban8ers to direct" confirm the ba"ances to the auditor. The A&&endix to this Guidance Note gi!es an i""ustrati!e &roforma "etter of re=uest for confirmation to be used for this &ur&ose. The re=uest for confirmation shou"d a"so co!er dormant accounts as #e"" as accounts c"osed during the ear. 1.. The auditor shou"d examine the ban8 reconci"iation statement &re&ared as on he "ast da of the ear. Ke ma a"so examine the reconci"iation statements as at other dates during the ear. It shou"d be examined #hether )i* che=ues issued b the entit but not &resented for &a ment, and )ii* che=ues de&osited for co""ection b the entit but not credited in the ban8 account, ha!e been du" debitedGcredited in the subse=uent &eriod. 6or this &ur&ose, the ban8 statements of the re"e!ant &eriod shou"d be examined. If the che=ues issued before the end of the ear ha!e not been &resented #ithin a reasonab"e time, it is &ossib"e

that the entit might ha!e &re&ared the che=ues before the end of the ear but not de"i!ered them to the &arties concerned. 1 n such a case, the auditor shou"d examine that the entit has re!ersed the re"e!ant entries. 1;. Ahere the auditor finds that &ost dated che=ues are issued b the entit , he shou"d !erif that an che=ues &ertaining to the subse=uent &eriod ha!e not been accounted for as &a ments during the &eriod under audit. 1<. The auditor shou"d &a s&ecia" attention to those items in the reconci"iation statements #hich are outstanding for an undu" "ong &eriod. The auditor shou"d ascertain the reasons for such outstanding items from the management. Ke shou"d a"so examine #hether an such items re=uire an ad@ustmentG#rite off. 17. 1he auditor shou"d be a"ert to the &ossibi"it that e!en though the ba"ance in an a&&arent" ino&erati!e account ma ha!e remained stagnant, transactions ma ha!e ta8en &"ace in that account during the ear. 1$. Ahere a "arge number of che=ues has been issuedG de&osited in the "ast fe# da s of the ear, and a si'eab"e &ro&ortion of such che=ues has subse=uent" remained un&aidGunc"eared, this ma indicate an intention of understating creditorsGdebtors or understatingGo!erstating ban8 ba"ances. In such a case, it ma be a&&ro&riate for the auditor to obtain confirmations from the &arties concerned, es&ecia"" in res&ect of che=ues in!o"!ing "arge amounts. The auditor shou"d a"so examine #hether a re!ersa" of the re"e!ant entries #ou"d be a&&ro&riate underthe circumstances. 19. The &rocedures discussed in &aragra&h 1$ shou"d a"so be considered b the auditor in cases #here a "arge number of che=ues is on hand at the date of the ba"ance sheet and a si'ab"e &ro&ortion of such che=ues has subse=uent" remained unde&ositedGunc"eared. +F. In re"ation to ba"ancesGde&osits #ith s&ecific charge on them, or those he"d under the re=uirements of an "a#, the auditor shou"d examine that suitab"e disc"osures are made in the financia" statements. +1. In res&ect of fixed de&osits or an other t &e of de&osits #ith ban8s, the re"e!ant recei&tsGcertificates, du" su&&orted b ban8 ad!ices, shou"d be examined. ++. 7emittances sho#n as being in transit shou"d be examined #ith reference to their credit in the ban8 in the subse=uent &eriod. Ahere the auditor finds that such remittances ha!e not been credited in the subse=uent &eriod, he shou"d ascertain the reasons for the same. Ke shou"d a"so examine #hether the entit has re!ersed the re"e!ant entries in a&&ro&riate cases. +3. The auditor shou"d examine that suitab"e ad@ustments are made in res&ect of che=ues #hich ha!e become sta"e as at the c"ose of the ear. +.. Ahere materia" amounts are he"d in ban8 accounts #hich are b"oc8ed, e.g, in foreign ban8s #ith exchange contro" restrictions or an ban8s #hich are under moratorium or "i=uidation, the auditor shou"d examine #hether the re"e!ant facts ha!e been suitab" disc"osed in the financia" statements. Ke shou"d a"so examine #hether suitab"e ad@ustments on this account ha!e been made in the financia" statements in a&&ro&riate cases. +;. Ahere the auditor finds that the number of ban8 accounts maintained b the entit is dis&ro&ortionate" "arge in re"ation to its si'e, the auditor shou"d exercise greater care in satisf ing himse"f about the genuineness of ban8ing transactions and ba"ances. Examination o! aluation and Disclosure +<. The auditor shou"d satisf himse"f that cash and ban8 ba"ances ha!e been !a"ued and disc"osed in the financia" statements in accordance #ith recognised accounting &o"icies and &ractices and re"e!ant statutor re=uirements, if an . . In this regard, the auditor shou"d examine that fo""o#ing items are not inc"uded in cash and ban8 ba"ances.

)a* Tem&orar ad!ances. )b* (ta"e or dishonoured che=ues. Jostage and re!enue stam&s, if materia" in amount, ma being inc"uded under cash and ban8 ba"ances. be sho#n se&arate" instead of

+7. The auditor shou"d a"so examine that suitab"e disc"osures as mentioned in &aragra&hs +F and +. abo!e are made in re"e!ant cases. AJJENDIN I&&U$TRATI E )7ef. Jaragra&h 13* CBetterhead of Entit D CDateD CName and Address of Ean8D Dear (irs, J"ease send direct" to our auditors ........... )name and address of the auditors* detai"s of ba"ances as at the c"ose of business on CdateD QQQQQ of a"" our accounts #ith ou as #e"" as detai"s of charges he"d against such ba"ances, #ith a co& to us. 6or our con!enience, #e enc"ose in du&"icate a form in #hich detai"s of our ba"ances #ith ou can be fi""ed in. If ou find the s&aces on the form insufficient to contain ai" the re"e!ant information, &"ease attach a se&arate statement. J"ease note that this re=uest co!ers a"" our accounts #ith ou as at the abo!e mentioned date, inc"uding an dormant accounts. Ae #ou"d a"so re=uest ou to gi!e &articu"ars of an of our accounts c"osed during the ear. Ae #ou"d re=uest ou to state ,Ni"5, #here!er a&&"icab"e. Rours faithfu"" , )(ignature of &erson authorised to o&erate accounts* 7e&" from )Ean8* Date .................. 7e: )Name of C"ient* At the re=uest of our c"ient #e submit be"o# &articu"ars of their accounts, in!estments, bi""s, etc., as at the c"ose of business on Q.QQQ. as sho#n b our records 1 . Current Accounts in Credit: Designation of Account +. 0!erdra#n Current Accounts, 0!erdraft Accounts, Cash Credit Accounts Designation of Account 3. Boan Accounts: Designation of Account .. 6ixed, Ca"" and (hort De&osit Accounts: Due Date Amount (ecurit Ke"d )Gi!e brief descri&tion. In the case of securities &"ease "ist fu"" * Jarticu"ars of an charges or "iens Amount (ecurit Ke"d )Gi!e brief descri&tion. In the case of securities &"ease "ist fu"" * Amount &ETTER OF CONFIR*ATION -AN2 -A&ANCE$

Amount. Interest C"osing Date

Accrued

to

the 6ace -a"ue or number of shares he"d

;. In!estments and 0ther Documents of Tit"e Ke"d in (afe Custod : Designation <. /argin against "etters of credit, Guarantees issued, etc: Designation of Account 7. Ei""s for Co""ection: Designation of Account $. Ei""s Discounted or Jurchased: Name of Dra#ee 9. Betters of 0utstanding: In fa!our of 1F. Guarantees gi!en on beha"f of c"ients: In fa!our of Amount Credit 0&en and Amount not uti"ised Amount Amount Amount

Due Date

Due Date

-a"id u& to

Date of ex&ir

Ae certif that the abo!e &articu"ars are fu"" and correct and do not exc"ude an ob"igations of the entit to us. Rours faithfu"" , Name Designation of (ignator of

other

Ean8

1. Aith the formation of the Auditing Jractices Committee in 19$+, the Counci" of the Institute has been issuing a series of (tatements on (tandard Auditing Jractices )(AJs*. (tatements on (tandard Auditing Jractices "a do#n the &rinci&"es go!erning an audit. These &rinci&"es a&&" #hene!er an inde&endent audit is carried out. (tatements on (tandard Auditing Jractices become mandator on the dates s&ecified in the res&ecti!e (AJs. Their mandator status im&"ies that, #hi"e discharging their attest function, it #i"" be. the dut of the members of the Institute to ensure that the (AJs are fo""o#ed in the audit of financia" information co!ered b their audit re&orts. If, for an reason, a member has not been ab"e to &erform an audit in accordance #ith the (AJs, his re&ort shou"d dra# attention to the materia" de&artures therefrom. The Auditing Jractices Committee has a"so been issuing, from time to time, guidance notes on issues arising from (AJs. The Guidance Notes &ro!ide guidance on &rocedures to be em&"o ed b an auditor in order to com&" #ith the &rinci&"es "aid do#n in (AJs. It is recognised that in determining the nature, timing and extent of audit &rocedures to be em&"o ed in a s&ecific situation, an auditor #i"" ha!e to exercise his &rofessiona" @udgment. The Guidance Notes, therefore, are recommendator . A member shou"d ordinari" fo""o# the recommendations in a guidance note re"ating to an auditing matter exce&t #here he is

satisfied that, in the circumstances of the case, it ma not be necessar to do so. +. The s&ecia" as&ects of audit of cash and ban8 ba"ances in the case of ban8s are dea"t #ith in the Guidance Note on Audit of Ean8s issued b the Auditing Jractices Committee. 3. The extent of re!ie# of contro"s #ou"d de&end u&on the facts and circumstances of each case. 7eference ma be made in this regard to the Interna" Contro" Puestionnaire, issued b the Institute of Chartered Accountants of India in 197< #hich contains, inter a"ia, an i""ustrati!e "ist of interna" contro"s in re"ation to cash and ban8 ba"ances. .. 6or !a"uation of foreign currenc he"d as cash on hand and ban8 ba"ances designated in foreign currencies, reference ma be made to Accounting (tandard 11, Accounting for the Effects of Changes in 6oreign Exchange 7ates, issued b the Institute of Chartered Accountants of India %uidance Note on Accounting !or Fringe -ene!its Tax ((he following is the te!t of the 0uidance 1ote on Accounting for ringe 'enefits (a!, issued b+ the Council of the Institute of Chartered Accountants of India ).) 1. The 6inance Act, +FF;, has introduced Cha&ter NII9K on 1Income9tax on 6ringe Eenefits2 Chereinafter referred to as 16ringe Eenefits Tax2D. The re"e!ant extracts from Cha&ter NII9K of the Income9tax Act, 19<1 )hereinafter referred to as 1the Act2*, go!erning the 6ringe Eenefits Tax, ha!e been re&roduced in the Annexure to this Guidance Note. This Guidance Note is being issued to &ro!ide guidance on accounting for 6ringe Eenefits Tax, &articu"ar" #ith regard to the recognition and &resentation of 6ringe Eenefits Tax in the financia" statements. The Guidance Note does not dea" #ith accounting for 1fringe benefits2 as such. +. The sa"ient features of 6ringe Eenefits Tax are as be"o#: 6ringe Eenefits Tax is tax &a ab"e b an em&"o er in res&ect of fringe benefits &ro!ided or deemed to ha!e been &ro!ided b the em&"o er to his em&"o ees during the &re!ious ear. 6ringe Eenefits Tax is in addition to the income9tax charged under the Act. 6ringe Eenefits Tax is &a ab"e at the s&ecified rate on the !a"ue of fringe benefits. The !a"ue of fringe benefits is ca"cu"ated in accordance #ith the &ro!isions of section 11;AC of the Income9tax Act, 19<1, re&roduced in the Annexure to this Guidance Note. An em&"o er is re=uired to &a 6ringe Eenefits Tax e!en if no income9tax on the tota" income is &a ab"e. The a a term 1em&"o er2 means: com&an > firm>

an association of &ersons or a bod of indi!idua"s, #hether incor&orated or not, but exc"uding an fund or trust or institution e"igib"e for exem&tion under c"ause )+3C* of section 1F or registered under section 1+AA of the Act> a "oca" authorit > and of the &receding sub9

e!er artificia" @uridica" &erson, not fa""ing #ithin an c"auses.

The term 1fringe benefits2 means an consideration for em&"o ment &ro!ided b #a of H

an

&ri!i"ege, ser!ice, faci"it or amenit , direct" or indirect" , &ro!ided b an em&"o er, #hether b #a of reimbursement or other#ise, to his em&"o ees )inc"uding former em&"o ee or em&"o ees*>

an free or concessiona" tic8et &ro!ided b the em&"o er for &ri!ate @ourne s of his em&"o ees or their fami" members> and an contribution b em&"o ees. the em&"o er to an a&&ro!ed su&erannuation fund for

The fringe benefits sha"" be deemed to ha!e been &ro!ided b the em&"o er to his em&"o ees, if the em&"o er has, in the course of his business or &rofession )inc"uding an acti!it #hether or not such acti!it is carried on #ith the ob@ect of deri!ing income, &rofits or gains*, incurred an ex&ense on or made an &a ment for the &ur&oses stated in section 11;AE)+* of the Act. Exam&"es of the &ur&oses stated under the said section are entertainment, festi!a" ce"ebrations, gifts, maintenance of guest house, em&"o ees2 #e"fare, hote", boarding and "odging, con!e ance, tour and tra!e" )inc"uding foreign tra!e"*, etc. E!er em&"o er #ho during a &re!ious ear has &aid or made &ro!ision for &a ment of fringe benefits to his em&"o ees, is re=uired to furnish a return of fringe benefits to the Assessing 0fficer in the &rescribed form, on or before the due date, in res&ect of the &re!ious ear. 6ringe Eenefits Tax, "i8e an other direct tax, is not an a""o#ab"e ex&enditure for the &ur&ose of com&utation of taxab"e income. NATURE OF FRIN%E -ENEFIT$ TA0 3. Aith a !ie# to recommend a &ro&er and uniform accounting treatment for the 6ringe Eenefits Tax, it is necessar to understand the nature of 6ringe Eenefits Tax #hich is discussed in &aragra&hs ..

.. The 6ringe Eenefits Tax has been introduced under the Income9tax Act, 19<1, as 1additiona" income9tax2, !ide section 11;AA)1* #hich &ro!ides as be"o#: 4In addition to the income9tax charged under this Act, there sha"" be charged for e!er assessment ear commencing on or after the 1st da of A&ri", +FF<, additiona" income9tax )in this Act referred to as fringe benefit tax* in res&ect of the fringe benefits &ro!ided or deemed to ha!e been &ro!ided b an em&"o er to his em&"o ees during the &re!ious ear at the rate of thirt &er cent on the !a"ue of such fringe benefits.5 Thus, the abo!e stated tax is an additiona" income9tax &a ab"e b the em&"o er on the !a"ue of fringe benefits &ro!ided or deemed to ha!e been &ro!ided to its em&"o ees. RECO%NITION AND *EA$URE*ENT OF FRIN%E -ENEFIT$ TA0 ;. An em&"o er becomes "iab"e to &a 6ringe Eenefits Tax as soon as it incurs an ex&ense #hich is considered to be a fringe benefit as &er the re=uirements of Cha&ter NII9K of the Income9tax Act, 19<1, e!en though the actua" &a ment of the tax andGor assessment of the tax ta8es &"ace on a "ater date. According" , the em&"o er shou"d recognise, in the financia" statements for the &eriod, ex&ense for the 6ringe Eenefits Tax &aidG&a ab"e in res&ect of a"" ex&enses gi!ing rise to such tax incurred during that &eriod. <. As discussed in &aragra&h +)c* abo!e, the 6ringe Eenefits Tax is &a ab"e at the s&ecified rate on the !a"ue of fringe benefits. The !a"ue of fringe benefits is ca"cu"ated in accordance #ith the &ro!isions of section 11;AC of the Act. The em&"o er shou"d, therefore, measure the amount of the 6ringe Eenefits Tax 8ee&ing in !ie# the aforesaid &ro!isions of the Act. PRE$ENTATION OF FRIN%E -ENEFIT$ TA0 IN FINANCIA& $TATE*ENT$ 7. Jaragra&h ; of Accounting (tandard )A(* ;, 1Net Jrofit or Boss for the Jeriod, Jrior Jeriod Items and Changes in Accounting Jo"icies2, issued b the Institute of Chartered Accountants of India, &ro!ides as be"o#: !" All items of income and ex#ense which are recognised in a #eriod should be included in the determination of net #rofit or loss for the #eriod unless an Accounting $tandard re%uires or #ermits otherwise & (ince the 6ringe Eenefits Tax is an additiona" tax for the em&"o er, it shou"d be inc"uded in the determination of net &rofit or "oss for the &eriod, i.e., the 6ringe Eenefits Tax, shou"d be charged to the &rofit and "oss account. $. In the context of &resentation of the 6ringe Eenefits Tax in the &rofit and "oss account of com&anies, it has been considered #hether the tax is co!ered b the re=uirement of c"ause 3)!i* of Jart II of (chedu"e -I to the Com&anies Act, 19;<, #hich &ro!ides as be"o#: ,The amount of charge for Indian income9tax and other Indian taxation on &rofits, inc"uding, #here &racticab"e, #ith Indian income9tax an taxation im&osed e"se#here to the extent of the re"ief, if an , from Indian income9tax and distinguishing, #here &racticab"e, bet#een income9tax and other taxation., As discussed in &aragra&h . abo!e, the 6ringe Eenefits Tax is an additiona" income tax. According" , the 6ringe Eenefits Tax is co!ered b the abo!e c"ause and shou"d be sho#n

se&arate" ,

if

materia".

9. %ee&ing in !ie# the abo!e, the 6ringe Eenefits Tax shou"d be disc"osed as a se&arate item after determining &rofit before tax on the face of the &rofit and "oss account for the &eriod in #hich the re"ated fringe benefits are recognised. An i""ustration of the disc"osure of 6ringe Eenefits Tax ma be as be"o#:

Jrofit before tax Bess: Income9tax ex&ense: Current tax Deferred tax 6ringe Eenefits Tax Jrofit after tax xx x xx x xx x xx x xx x xx x

xx x

1F. The amount of the 6ringe Eenefits Tax )net of the ad!ance tax thereon*, outstanding if an , at the ear9end, shou"d be disc"osed as a &ro!ision in the ba"ance sheet. Annexure T+e Relevant Extracts !rom C+apter 0II3. o! t+e Income3tax Act4 56754 %overning t+e Fringe -ene!its Tax 'For assessment year 899739:( A.S/eaning of certain ex&ressions De!initions 55;,< In this Cha&ter, un"ess the context other#ise re=uires,S

4em&"o er5

means,S

com&an >

firm>

an association of &ersons or a bod of indi!idua"s, #hether incor&orated or not, but exc"uding an fund or trust or institution e"igib"e for exem&tion under c"ause )+3C* of section 1F or registered under section 1+AA> a "oca" authorit > and of the &receding sub9

e!er artificia" @uridica" &erson, not fa""ing #ithin an c"auses>

4fringe benefit tax5 or 4tax5 means the tax chargeab"e under section 11;AA. E.SEasis of charge C+arge o! !ringe #ene!it tax 55;,A< )1* In addition to the income9tax charged under this Act, there sha"" be charged for e!er assessment ear commencing on or after the 1st da of A&ri", +FF<, additiona" income9tax )in this Act referred to as fringe benefit tax* in res&ect of the fringe benefits &ro!ided or deemed to ha!e been &ro!ided b an em&"o er to his em&"o ees during the &re!ious ear at the rate of thirt &er cent on the !a"ue of such fringe benefits. )+* Not#ithstanding that no income9tax is &a ab"e b an em&"o er on his tota" income com&uted in accordance #ith the &ro!isions of this Act, the tax on fringe benefits sha"" be &a ab"e b such em&"o er. Fringe #ene!its 55;,-< )1* 6or the &ur&oses of this Cha&ter, 4fringe benefits5 means an for em&"o ment &ro!ided b #a ofS an &ri!i"ege, ser!ice, faci"it em&"o er, #hether b #a )inc"uding former consideration

or amenit , direct" or indirect" , &ro!ided b an of reimbursement or other#ise, to his em&"o ees em&"o ee or em&"o ees*> the em&"o er for &ri!ate @ourne s of his fami" members> and

an

free or concessiona" tic8et &ro!ided b em&"o ees or their

an contribution b the em&"o er to an a&&ro!ed su&erannuation fund for em&"o ees. The &ri!i"ege, ser!ice, faci"it or amenit does not inc"ude &er=uisites in res&ect of #hich tax is &aid or &a ab"e b the em&"o ee. )+* The fringe benefits sha"" be deemed to ha!e been &ro!ided b the em&"o er to his em&"o ees, if the em&"o er has, in the course of his business or &rofession )inc"uding an

acti!it #hether or not such acti!it is carried on #ith the ob@ect of deri!ing income, &rofits or gains* incurred an ex&ense on, or made an &a ment for, the fo""o#ing &ur&oses, name" :S entertainment> &ro!ision of hos&ita"it of e!er 8ind b the em&"o er to an &erson, #hether b #a of &ro!ision of food or be!erages or in an other manner #hatsoe!er and #hether or not such &ro!ision is made b reason of an ex&ress or im&"ied contract or custom or usage of trade but does not inc"udeS

an

ex&enditure on, or &a ment for, food or be!erages &ro!ided b the em&"o er to his em&"o ees in office or factor > ex&enditure on or &a ment through &aid !ouchers #hich are not transferab"e and usab"e on" at eating @oints or out"ets> the em&"o ees in an conference*.

an

conference )other than fee for &artici&ation b

Ex&"anation.S6or the &ur&oses of this c"ause, an ex&enditure on con!e ance, tour and tra!e" )inc"uding foreign tra!e"*, on hote", or boarding and "odging in connection #ith an conference sha"" be deemed to be ex&enditure incurred for the &ur&oses of conference> sa"es Provided &romotion that an inc"uding ex&enditure on &ub"icit : ad!ertisement,S

being the ex&enditure )inc"uding renta"* on ad!ertisement of an form in an &rint )inc"uding @ourna"s, cata"ogues or &rice "ists* or e"ectronic media or trans&ort s stem> being the ex&enditure on the ho"ding of, or the &artici&ation in, an &ress conference or business con!ention, fair or exhibition> being the ex&enditure on s&onsorshi& of an organised b an Go!ernment agenc s&orts e!ent or an other e!ent or trade association or bod >

being the ex&enditure on the &ub"ication in an &rint or e"ectronic media of an notice re=uired to be &ub"ished b or under an "a# or b an order of a court or tribuna"> being the ex&enditure on ad!ertisement b #a of signs, art #or8, &ainting, banners, a#nings, direct mai", e"ectric s&ectacu"ars, 8ios8s, hoardings, bi"" boards or b #a of such other medium of ad!ertisement> and

being the ex&enditure b &ur&oses of

#a of &a ment to an c"auses )i*

ad!ertising agenc to )!*

for the abo!e,

sha"" not be considered as ex&enditure on sa"es &romotion inc"uding &ub"icit > em&"o ees2 Ex&"anation.S6or made to fu"fi" an first aid faci"ities considered con!e ance, use of #e"fare. the &ur&oses of this c"ause, an ex&enditure incurred or &a ment statutor ob"igation or mitigate occu&ationa" ha'ards or &ro!ide in the hos&ita" or dis&ensar run b the em&"o er sha"" not be as ex&enditure for em&"o ees2 #e"fare> and tra!e" boarding )inc"uding and foreign "odging tra!e"*> faci"ities>

tour hote",

re&air, running )inc"uding fue"*, maintenance of motor cars and the amount of de&reciation thereon> re&air, running )inc"uding fue"* and maintenance of aircrafts and the amount of de&reciation thereon> use of te"e&hone )inc"uding mobi"e &hone* other than ex&enditure on "eased te"e&hone "ines> maintenance of an accommodation festi!a" use use gifts> scho"arshi&s. )3* 6or the &ur&oses of sub9section )1*, the &ri!i"ege, ser!ice, faci"it or amenit does not inc"ude &er=uisites in res&ect of #hich tax is &aid or &a ab"e b the em&"o ee. alue o! !ringe #ene!its of of hea"th an c"ub other and simi"ar c"ub accommodation in the nature of guest house other than used for training &ur&oses> ce"ebrations> faci"ities> faci"ities> and

55;,C< )1* 6or the &ur&ose of this Cha&ter, the !a"ue of fringe benefits sha"" be the aggregate of the fo""o#ing, name" :S cost at #hich the benefits referred to in c"ause )b* of sub9section )1* of section 1I;AE, is &ro!ided b the em&"o er to the genera" &ub"ic as reduced b the amount, if an , &aid b , or reco!ered from, his em&"o ee or em&"o ees: Provided that in a case #here the ex&enses of the nature referred to in c"ause )b* of sub9section )1* of section 11;AE are inc"uded in an other c"ause of sub9section )+* of the said section, the tota" ex&enses inc"uded under such other c"ause sha"" be reduced b the amount of ex&enditure referred to in the said c"ause )b* for com&uting the !a"ue of fringe benefits> actua" amount of contribution referred to in c"ause )c* of sub9section )1* of section 11;AE> t#ent &er cent of the ex&enses referred to in c"auses )A* to )%* of subsection )+* of section 11;AE> fift &er cent of the ex&enses referred to in c"auses )B* to )J* of subsection )+* of section 11;AE.

)+* Not#ithstanding an thing contained in sub9section )1*,S in the case of an em&"o er engaged in the business of hote", the !a"ue of fringe benefits for the &ur&oses referred to in c"ause )E* of sub9section )+* of section 11;AE sha"" be 4fi!e &er cent5 instead of 4t#ent &er cent5 referred to in c"ause )c* of sub9section )1*> in the case of an em&"o er engaged in the business of construction, the !a"ue of fringe benefits for the &ur&oses referred to in c"ause )6* of subsection )+* of section 11;AE sha"" be 4fi!e &er cent5 instead of 4t#ent &er cent5 referred to in c"ause )c* of sub9section )1*> in the case of an em&"o er engaged in the business of manufacture or &roduction of &harmaceutica"s, the !a"ue of fringe benefits for the &ur&oses referred to in c"auses )6* and )G* of sub9section )+* of section 11;AE sha"" be 4fi!e &er cent5 instead of 4t#ent &er cent5 referred to in c"ause )c* of sub9section )1*> in the case of an em&"o er engaged in the business of manufacture or &roduction of com&uter soft#are, the !a"ue of fringe benefits for the &ur&oses referred to in c"auses )6* and )G* of sub9section )+* of section 11;AE sha"" be 4fi!e &er cent5 instead of 4t#ent 9&er cent5 referred to in c"ause )c* of sub9section )1*> in the case of an em&"o er engaged in the business of carriage of &assengers or goods b motor car, the !a"ue of fringe benefits for the &ur&oses referred to in c"ause )K* of sub9section )+* of section 11;AE sha"" be 4fi!e &er cent5 instead of 4t#ent &er cent5 referred to in c"ause )c* of sub9section )1*>

in the case of an em&"o er engaged in the business of carriage of &assengers or goods b aircraft, the !a"ue of fringe benefits for the &ur&oses referred to in c"ause )I* of sub9section )+* of section 11;AE sha"" be ta8en as Ni". C.2 Procedure for filing of return in respect of fringe benefits, assessment and pa+ment of ta! in respect thereof Return o! !ringe #ene!its 55;,D< )1* Aithout &re@udice to the &ro!isions contained in section 139, e!er em&"o er #ho during a &re!ious ear has &aid or made &ro!ision for &a ment of fringe benefits to his em&"o ees, sha"", on or before the due date, furnish or cause to be furnished a return of fringe benefits to the Assessing 0fficer in the &rescribed form and !erified in the &rescribed manner and setting forth such other &articu"ars as ma be &rescribed, in res&ect of the &re!ious ear. Ex&"anation.SIn this sub9section, 4due date5 means,S #here the em&"o er isS

com&an >

or

a &erson )other than a com&an * #hose accounts are re=uired to be audited under this Act or under an other "a# for the time being in force, the 31st da of 0ctober of the assessment ear> ear.

in the case of an

other em&"o er, the 31st da

of Ou"

of the assessment

Payment o! !ringe #ene!it tax 55;,I. Not#ithstanding that the regu"ar assessment in res&ect of an fringe benefits is to be made in a "ater assessment ear, the tax on such fringe benefits sha"" be &a ab"e in ad!ance during an financia" ear, in accordance #ith the &ro!isions of section 11;AO, in res&ect of the fringe benefits #hich #ou"d be chargeab"e to tax for the assessment ear immediate" fo""o#ing that financia" ear, such fringe benefits being hereafter in this Cha&ter referred to as the 4current fringe benefits5. Advance tax in respect o! !ringe #ene!its 55;,=< )1* E!er assessee #ho is "iab"e to &a ad!ance tax under section 11;AI, sha"" on his o#n accord, &a ad!ance tax on his current fringe benefits ca"cu"ated in the manner "aid do#n in sub9section )+*. )+* The amount of ad!ance tax &a ab"e b an assessee in the financia" ear sha"" be thirt

&er cent of the !a"ue of the fringe benefits referred to in section 11;AC, &aid or &a ab"e in each =uarter and sha"" be &a ab"e on or before the 1;th da of the month fo""o#ing such =uarter: Provided that the ad!ance tax &a ab"e for the =uarter ending on the 31st da of /arch of the financia" ear sha"" be &a ab"e on or before the 1;th da of /arch of the said financia" ear. )3* Ahere an assessee, has fai"ed to &a the ad!ance tax for an =uarter or #here the ad!ance tax &aid b him is "ess than thirt &er cent of the !a"ue of fringe benefits &aid or &a ab"e in that =uarter, he sha"" be "iab"e to &a sim&"e interest at the rate of one &er cent on the amount b #hich the ad!ance tax &aid fa""s short of, thirt &er cent of the !a"ue of fringe benefits for an =uarter, for e!er month or &art of the month for #hich the shortfa"" continues. 1. 7ecommendations contained in this Guidance Note are intended to a&&" on" #hich are materia". to items

%uidance Note on $pecial Considerations in t+e Audit o! $mall Entities INTRODUCTION Auditing and Assurance (tandards )AA(s* 3earlier .nown as Statements on Standard Auditing Practices )(AJs*T contain basic &rinci&"es and essentia" &rocedures together #ith re"ated guidance that a&&" to the audit of the financia" statements of an entit , irres&ecti!e of its si'e, its "ega" form, o#nershi& or management structure, or the nature of its acti!ities. The Counci" of the institute recognises that audit of sma"" entities gi!es rise to a number of s&ecia" considerations. This guidance is a su&&"ement to, and not a substitute for, the guidance contained in the re"e!ant AA( and ta8es account of the s&ecia" considerations re"e!ant to the audit of sma"" entities. 6or the s&ecific re=uirements of AA(s, the auditor shou"d refer to the AA( concerned. This Guidance Note does not estab"ish an ne# re=uirements for the audit of sma"" entities nor does it estab"ish an exem&tions from the re=uirements of AA(s. A"" audits of sma"" entities are to be conducted in accordance #ith AA(s. The ob@ecti!e of this Guidance Note is to describe the characteristics that are common" found in sma"" entities and indicate ho# the might affect the a&&"ication of AA(s. This Guidance Note, thus, inc"udes: )a* discussion of the characteristics of sma"" entities> and )b* guidance on the a&&"ication of AA(s to the audit of sma"" entities> In determining the nature and extent of the guidance &ro!ided in this Guidance Note, the Auditing and Assurance (tandards Eoard )AA(E* has aimed to &ro!ide a "e!e" of guidance that #i"" be of genera" a&&"icabi"it to a"" audits of sma"" entities and that #i"" assist the auditor in exercising &rofessiona" @udgement #ith res&ect to the a&&"ication of AA(s. Ko#e!er, detai"ed guidance of a &rocedura" nature has not been &ro!ided as the issue of such guidance ma undermine the &ro&er exercise of &rofessiona" @udgement in auditing. Norma"" , in the case of sma"" entities, the auditors &ro!ide ad!isor ser!ices on accounting matters. It ma be noted that #ith a !ie# to ensure the inde&endence of

auditor, the Counci" of the Institute of Chartered Accountants of India has c"arified that the members are not &ermitted to #rite the boo8s of accounts of their auditee c"ients. Therefore, a"though the auditor ma &ro!ide ad!isor ser!ices on accounting matters, he shou"d refrain from #riting the boo8s of accounts of the auditee. A"so, #hi"e &ro!iding the ad!isor ser!ices, the auditor must ensure that: )a* he does not "and in a situation #here there cou"d be conf"ict of interests and dut > )b* the c"ient acce&ts the res&onsibi"it for the financia" statements> and )c* &ro!ision of ad!isor ser!ices does not resu"t into breach of an &ro!isions of the Chartered Accountants Act, 19.9 and 7u"es and 7egu"ations framed thereunder. The Characteristics of $mall Entities The auditor of an entit ada&ts the audit a&&roach to the circumstances of the entit and the terms of engagement. The audit of a sma"" entit differs from the audit of a "arge entit as documentation ma be sim&"e, and audits of sma"" entities are ordinari" "ess com&"ex and ma be &erformed using fe#er assistants. The meaning of ,sma"" entit , in this context gi!es consideration not on" to the si'e of an entit but a"so to its t &ica" =ua"itati!e characteristics. Puantitati!e indicators of the si'e of an entit ma inc"ude ba"ance sheet tota"s, re!enue and the number of em&"o ees, but such indicators are not definiti!e. Therefore, it is not &ossib"e to gi!e an ade=uate definition of a sma"" entit so"e" in =uantitati!e terms. 6or the &ur&oses of this Guidance Note, a sma"" entit is an entit in #hich: )a* there is concentration of o#nershi& and management in a sma"" number of indi!idua"s )often a sing"e indi!idua"1*> and )b* one or more of the fo""o#ing are a"so found: U fe# sources ofincome and uncom&"icated acti!ities> U sim&"e and &ersona"i'ed record98ee&ing> U "imited interna" contro"s together #ith the &otentia" for management o!erride of contro"s. The =ua"itati!e characteristics described abo!e are not exhausti!e, the are not exc"usi!e to sma"" entities and sma"" entities do not necessari" dis&"a a"" of those characteristics. 6or the &ur&oses of this Guidance Note, sma"" entities #i"" ordinari" dis&"a characteristic 7)a* and one or more of the characteristics inc"uded mentioned at 7)b*. These characteristics need to be examined in e!er audit &eriod and if an entit doesnIt dis&"a these characteristics in the &eriod, the entit #ou"d not be categori'ed as sma"" entit in such &eriod. Concentration of 'wnershi# and (anagement (ma"" entities usua"" ha!e fe# o#ners, often there is a so"e &ro&rietor. /an o#ner9managers ado&t a Ihands onI a&&roach to interna" contro" issues b &ersona"" exercising su&er!isor contro"s. The o#ner ma em&"o a manager to run the business but in most cases is direct" in!o"!ed in running the business on a da 9to9da basis. As the &ro&rietor, the o#ner manager has a &ersona" interest in safeguarding the assets of the business, measuring its &erformance and contro""ing its acti!ities, but ma be unab"e to di!ert "imited management time to such matters as forma" interna" contro" &rocedures. Ko#e!er, the "ac8 of forma"it does not of itse"f indicate circumstances gi!ing rise to a high ris8 of fraud or error, the auditors of a sma"" entit ma8e their assessment of ris8 in the "ight of its &articu"ar circumstances. This Guidance Note uses the term ,o#ner9manager, to indicate the &ro&rietors of entities #ho are in!o"!ed in the running of the entit on a da to da basis. Ahere

&ro&rietors are not in!o"!ed on a da to da basis, the term ,o#ner9manager, is used to refer to both the &ro&rietors, and to an managers hired to run the entit . Few $ources of Income and )ncom#licated Activities (ma"" entities t &ica"" &roduct or ha!e a "imited range of acti!ities and often s&ecia"i'e in a sing"e se and o&erate from a sing"e "ocation.

?ncom&"icated acti!ities can ma8e it easier for the auditors to ac=uire, record and maintain 8no#"edge of the business. In addition, in man sma"" entities, accounting &o&u"ations are often sma"" and easi" ana" sed> the a&&"ication of a #ide range of audit &rocedures can often be straightfor#ard in such circumstances. 6or exam&"e, effecti!e &redicti!e mode"s for use in ana" tica" &rocedures can sometimes be constructed. $im#le *ecord+ ,ee#ing /ost sma"" entities em&"o fe#, if an , &ersonne" #ho are so"e" engaged in record 8ee&ing. Conse=uent" , the boo8 8ee&ing functions and accounting records are often sim&"e. 7ecord 8ee&ing ma be sim&"e, customised or &ersona"ised, #hich resu"ts in a greater ris8 that the financia" statements ma be inaccurate or incom&"ete. /an sma"" entities outsource some of or a"" their record 8ee&ing. (ma"" entities often find it con!enient to use branded accounting soft#are &ac8ages designed for use on &ersona" com&uter. (ma"" entities need to 8ee& sufficient accounting records to com&" #ith an re"e!ant statutor or regu"ator re=uirements and to meet the needs of the entit , inc"uding the &re&aration an audit of financia" statements. Therefore, the accounting s stem needs to be designed in such a manner so as to &ro!ide reasonab"e assurance that: )a* a"" the transactions and other accounting information that shou"d ha!e been recorded ha!e in fact been recorded> )b* assets and "iabi"ities recorded in the accounting s stem exist and are recorded at the correct amounts> and )c* 6raud or error in &rocessing accounting information can be detected. -imited Internal Controls (i'e and economic considerations in sma"" entities mean that so&histicated interna" contro"s are often neither necessar nor desirab"e, the fact that there are fe# em&"o ees "imits the extent to #hich segregation of duties is &racticab"e. Ko#e!er, for 8e areas, en in the !er sma"" entit , it can be &racticab"e to im&"ement some degree of segregation of duties or other form of unso&histicated but effecti!e contro"s. (u&er!isor contro"s exercised on a da 9to9da basis b the o#ner9manager ma a"so ha!e a significant beneficia" effect as the o#ner9manager has a &ersona" interest in safeguarding the assets of the entit , measuring its &erformance and contro""ing its acti!ities. The o#ner9manager occu&ies a dominant &osition in a sma"" entit . The o#ner9managerIs direct contro" o!er a"" decisions, and the abi"it to inter!ene &ersona"" at an time to ensure an a&&ro&riate res&onse to changing circumstances, are often im&ortant features of the management of sma"" entities. The exercise of this contro" can a"so com&ensate for other#ise #ea8 interna" contro" &rocedures. 6or exam&"e, in cases #here there is "imited segregation of duties in the area of &urchasing and cash disbursements, interna" contro" is im&ro!ed #hen the o#ner9manager &ersona"" signs a"" che=ues. Ahen the o#ner9manager is not in!o"!ed, there is a greater ris8 that em&"o ee fraud or error ma occur and not be

detected. Ahi"e a "ac8 of so&histication in interna" contro"s does not, of itse"f, indicate a high ris8 of fraud or error, an o#ner9managerIs dominant &osition can be abused: management o!erride of contro"s ma ha!e a significant ad!erse effect on the contro" en!ironment in an entit , "eading to an increased ris8 of management fraud or materia" misstatement in the financia" statements. 6or exam&"e, the o#ner9manager ma direct &ersonne" to ma8e disbursements that the #ou"d other#ise not ma8e in the absence of su&&orting documentation. The im&act of the o#ner9manager and the &otentia" for management o!erride of interna" contro"s on the audit de&end to a great extent on the integrit , attitude, and moti!es of the o#ner9manager. As in an other audit, the auditor of a sma"" entit exercises &rofessiona" s8e&ticism. The auditor neither assumes that the o#ner manager is dishonest nor assumes un=uestioned honest . This is an im&ortant factor to be considered b the auditor #hen assessing audit ris8, &"anning the nature and extent of audit #or8, e!a"uating audit e!idence, and assessing the re"iabi"it of management re&resentations. CO**ENTAR/ ON T.EAPP&ICATION OFAUDITIN% AND A$$URANCE $TANDARD$ The commentar that fo""o#s &ro!ides guidance on the a&&"ication of AA(s to the audit of a sma"" entit . It is reiterated that this guidance is a su&&"ement to, and not a substitute for, the guidance contained in the re"e!ant AA( and ta8es account of the s&ecia" considerations re"e!ant to the audit of sma"" entities. 6or the s&ecific re=uirements of AA(s, the auditor shou"d refer to the AA( concerned. Ahere a AA( is, in &rinci&"e, a&&"icab"e to audit of financia" statements of sma"" entities and there are no s&ecia" considerations a&&"icab"e to the audit of a sma"" entit , no guidance is gi!en in res&ect of that AA(. AA$ ./ Documentation Jaragra&h ; of AA( 3 states: ,The form and. content of #or8ing &a&ers are affected b matters such as: U The nature of the engagement. U The form of the auditorIs re&ort. U The nature and com&"exit of the c"ientIs business. U The nature and condition of the c"ientIs records and degree of re"iance on interna" contro"s. U The need in &articu"ar circumstances for direction, su&er!ision and re!ie# of #or8 &erformed b assistants., The auditor ma ha!e an in9de&th understanding of the entit and its business, because of the c"ose re"ationshi& bet#een the auditor and the o#ner9manager, or because of the si'e of the entit being audited, or the si'e of the audit team and the audit firm. Ko#e!er, that understanding does not e"iminate the need for the auditor to maintain ade=uate #or8ing &a&ers. Aor8ing &a&ers assist in the &"anning, &erformance, su&er!ision and re!ie# of the audit, and the record the e!idence obtained to su&9 &ort the audit o&inion. The disci&"ine im&osed b the re=uirement to record the reasoning and conc"usions on significant matters re=uiring the exercise of @udgment can often, in &ractice, add to the c"arit of the auditorIs understanding of the issues in =uestion and enhance the =ua"it of the conc"usions. This is so for a"" audits, e!en in the case of a so"e &ractitioner #ith no assistants. Different techni=ues ma be used to document the entit Is accounting and interna" contro" s stems, de&ending on their com&"exit . Ko#e!er in sma"" entities, the use of

f"o#charts or narrati!e descri&tions of the s stem are often the most efficient techni=ues. These can be 8e&t as &ermanent information and are re!ie#ed and u&dated as necessar in subse=uent ears. Jaragra&hs 11 V 1+ of AA( 3 &ro!ides exam&"es of the contents of #or8ing &a&ers. These exam&"es are not intended to be used as a chec8"ist of matters to be inc"uded in a"" cases. The auditor of a sma"" entit uses @udgement in determining the contents of #or8ing &a&ers in an &articu"ar case. Ne!erthe"ess, the auditor of a "arge or a sma"" entit , records in the #or8ing &a&ers: )a* the audit &"anning> )b* an audit &rogramme setting out the nature, timing, and extent of the audit &rocedures &erformed> )c* the resu"ts of those &rocedures> and )d* the conc"usions dra#n from the audit e!idence obtained together #ith the reasoning and conc"usions on a"" significant matters re=uiring the exercise of @udgement. In the audit of a sma"" entit , the nature and extent of the auditorIs &rocedures and, conse=uent" , of the documentation needed, are "i8e" to be inf"uenced b the fo""o#ing characteristics of sma"" entities: )a* (im&"e o#nershi& and management structures> )b* ?ncom&"icated acti!ities #ith fe# &roducts and ser!ices )and fe# "ocations*> )c* 6e#, if an . Em&"o ees> )d* (im&"ified accounting records> )e* Jac8aged accounting soft#are> and )f* 6e#, if an , interna" contro"s. AA$ 0/ The Auditor1s *es#onsibility to Consider Fraud and Error in an Audit of financial $tatements Jaragra&h 1F of AA( +, ,0b@ecti!e and (co&e of the Audit of 6inancia" (tatements5 states as fo""o#s: 5In forming his o&inion on the financia" statements, the auditor fo""o#s &rocedures designed to satisf himse"f that the financia" statements ref"ect a true and fair !ie# of the financia" &osition and o&erating resu"ts of the enter&rise. The auditor recognises that because of the test nature and other inherent "imitations of an audit, together #ith the inherent "imitations of an s stem of interna" contro", there is an una!oidab"e ris8 that some materia" misstatement ma remain undisco!ered. Ahi"e in man situations the disco!er of a materia" misstatement b management ma often arise during the conduct of the audit, such disco!er is not the main ob@ecti!e of audit nor is the auditorIs &rogramme of #or8 s&ecifica"" designed for such disco!er . The audit cannot, therefore, be re"ied u&on to ensure the disco!er of a"" frauds or errors but #here the auditor has an indication that some fraud or error ma ha!e occurred #hich cou"d resu"t in materia" misstatement, the auditor shou"d extend his &rocedures to confirm or dis&e" his sus&icions., Jaragra&h + of AA( . )7e!ised* states: ,Ahere &"anning and &erforming audit &rocedures and e!a"uating and re&orting the resu"ts thereof, the shou"d consider the ris8 of materia" misstatement in the financia" statements resu"ting from fraud and error.5

The &resence of a dominant o#ner9manager is an im&ortant factor in the o!era"" contro" en!ironment as the need for management authori'ation can com&ensate for other#ise #ea8 contro" &rocedures and reduce the ris8 of em&"o ee fraud and error. Ko#e!er, this can be a &otentia" #ea8ness since is the o&&ortunit for management o!erride of contro"s. The o#ner9managerIs attitude to contro" issues in genera" and to the &ersona" exercise of su&er!isor contro"s can ha!e a significant inf"uence on the auditorIs a&&roach. The auditorIs assessment of the effect on such matters is conditioned b 8no#"edge of that &articu"ar entit and the integrit of its o#ner9 manager. /atters that auditors ma ta8e into account this assessment inc"ude the fo""o#ing: U Ahether the o#ner9manager has a s&ecific identifiab"e moti!e )for exam&"e, de&endence of the o#ner9manager on the success of the entit * to distort the financia" statements, combined the o&&ortunit to do so. U Ahether the o#ner9manager ma8es no distinction bet#een &ersona" and business transactions. U Ahether the o#ner9managerIs "ife9st "e is materia"" inconsistent #ith the "e!e" of his or her remuneration )this inc"udes other sources of income #hich the auditor ma be a#are b com&"eting the o#ner9managerIs tax return, for exam&"e*. U Ahether there are fre=uent changes of &rofessiona" ad!isors. U Ahether the start date for the audit has been re&eated" de"a ed or there are unex&"ained demands to com&"ete the audit in an unreasonab" short &eriod of time. U Ahether there are unusua" transactions around the ear9 end that ha!e a materia" effect on &rofit. U Ahether there are unusua" re"ated &art transactions. U Ahether the &a ments of fees or commissions to agents and consu"tants a&&ear excessi!e. U Ahether there are dis&utes #ith tax authorities U Ahether &arts of the detai"ed accounting records are una!ai"ab"e or ha!e been "ost im&"ausib"e reasons> U Ahether there is a significant "e!e" of cash transactions #ithout ade=uate documentation> U Ahether there are man transactions #ithout ade=uate documentation. M Ahether numerous unex&"ained as&ects of audit e!idence )such as differences bet#een the accounting records and third9&art confirmations, or unex&ected resu"ts of ana" tica" &rocedures*> U Ahether there is ina&&ro&riate use of accounting estimates> U Ahether the o#ner9manager or 8e &ersonne" ha!e not ta8en annua" "ea!e for a "ong &eriod of time. U Ahether there is "ac8 of sufficient #or8ing ca&ita". U Ahether#ea8nesses re&orted ear"ier are continued. U Ahether there is non9maintenance of ear ending in!entor and stoc8 registers. AA$;4 Audit Evidence Jaragra&hs 1 to ; of AA( ; state: 51. (tatement on (tandard Auditing Jractices )AA(* 1, ,Easic Jrinci&"es Go!erning an Audit5, states )&aragra&hs 1;917*: ,The auditor shou"d obtain sufficient a&&ro&riate audit e!idence through the &erformance of com&"iance and substanti!e &rocedures to enab"e him to dra# reasonab"e conc"usions therefrom on #hich to base his o&inion on the financia" information. Com&"iance &rocedures are tests designed to obtain reasonab"e assurance that those interna" contro"s on #hich audit re"iance is to be &"aced are in effect. (ubstanti!e &rocedures are tests designed to obtain e!idence as to the

com&"eteness, accurac and !a"idit of the data &roduced b the accounting s stem. The are of t#o t &es: )a* Tests of detai"s of transactions and ba"ances> )b* Ana" sis of significant ratios and trends inc"uding the resu"ting en=uir f"uctuations and items. $u!!icient Appropriate Audit Evidence +. (ufficienc and a&&ro&riateness are interre"ated and a&&" to e!idence obtained from both com&"iance and substanti!e &rocedures. (ufficienc refers to the =uantum of audit e!idence obtained> a&&ro&riateness re"ates to its re"e!ance and re"iabi"it . Norma"" , the auditor finds it necessar to re" on e!idence that is &ersuasi!e rather than conc"usi!e. Ke ma often see8 e!idence from different sources or of different nature to su&&ort the same assertion. 3. The auditor shou"d e!a"uate #hether he has obtained sufficient a&&ro&riate audit e!idence before he dra#s his conc"usions therefrom. The audit e!idence shou"d, in tota", enab"e the auditor to form an o&inion on the financia" information. In forming such an o&inion, the auditor ma obtain audit e!idence on a se"ecti!e basis b #a of @udgmenta" or statistica" sam&"ing &rocedures. 6or exam&"e, the auditor ma se"ect on" certain account recei!ab"es for confirmation &ur&oses, or ma8e a se"ection of &ersonne" records for the &ur&ose of testing that changes in &a ro"" rates ha!e been &ro&er" authorised. .. The auditorIs @udgement as to #hat is sufficient a&&ro&riate audit e!idence is inf"uenced b such factors as: )a* The degree of ris8 of misstatement, #hich ma be affected b factors such as: )i* The nature of the item> )ii* The ade=uac of interna" contro"> )iii* The nature or si'e of the business carried on b the entit > )i!* (ituations #hich ma exert an unusua" inf"uence on management> )!* The financia" &osition of the entit . of unusua"

)b* The materia"it of the item. )c* The ex&erience gained during the &re!ious audits. )d* The resu"ts of the auditing &rocedures, inc"uding fraud and error #hich ma found. )e* The t &e of )f* The trend indicated b accounting ratios and ana" sis. information ha!e been a!ai"ab"e. assure

;. 0btaining audit e!idence from com&"iance &rocedures is intended to reasonab" the auditor in res&ect of the fo""o#ing assertions: Existence that the interna" contro" exists. Effecti!eness that the interna" contro" is o&erating effecti!e" . Continuit that &eriod of re"iance., the interna" contro" has so o&erated throughout

the

In the audit of sma"" entities, there are &articu"ar &rob"ems in obtaining audit e!idence to su&&ort the assertion of com&"eteness. There are t#o &rinci&a" reasons for this: )a* the o#ner9manager occu&ies a dominant &osition and ma be ab"e to ensure that

some transactions are not recorded> and )b* the entit ma not ha!e interna" contro" &rocedures that9&ro!ide documentar e!idence that a"" transactions are recorded. The auditor &"ans and conducts the audit #ith an attitude of &rofessiona" s8e&ticism. In the absence of e!idence to the contrar , the auditor is entit"ed to acce&t re&resentations as truthfu" and records as genuine. The auditor of a sma"" entit need not assume that there #i"" be "imited interna" contro"s o!er the com&"eteness of im&ortant &o&u"ations such as re!enue. /an sma"" entities ha!e some form of numerica"" based s stem to contro" the dis&atch of goods or the &ro!ision of ser!ices. Ahere there is such a s stem to ensure com&"eteness, the auditor ma obtain audit e!idence of its o&eration, b means of tests of contro", to assist in determining #hether contro" ris8 can be assessed at "ess than high in order to @ustif a reduction in the extent of substanti!e testing. Ahere there are no interna" contro"s re"e!ant to the assertion, the auditor ma be ab"e to obtain sufficient e!idence from substanti!e &rocedures a"one. (uch &rocedures ma inc"ude the fo""o#ing: U Com&aring recorded amounts #ith amounts ca"cu"ated on the basis of se&arate" recorded data, for exam&"e, goods issues recorded in &h sica" stoc8 records ma be ex&ected to gi!e rise to sa"es income, and @ob sheets or time records ma be ex&ected to gi!e rise to charges to c"ients. U 7econci"ing tota" =uantities of goods bought and so"d. U Ana" tica" &rocedures. U Externa" confirmation. U A re!ie# of transactions after the ba"ance sheet date. AA$ 2/ *is3 Assessments and Internal Control Jaragra&h + of A9A( < re=uires that the auditor shou"d obtain an understanding of the accounting and interna" contro" s stems sufficient to &"an the audit and de!e"o& an. effecti!e audit a&&roach. The auditor shou"d use &rofessiona" @udgement to assess audit ris8 and to design audit &rocedures to ensure that it is reduced to an acce&tab" "o# "e!e". In+erent Ris1 Jaragra&h 1+ of AA( < re=uires that in de!e"o&ing the o!era"" audit &"an, the auditor shou"d assess inherent ris8 at the "e!e" of financia" statements. In de!e"o&ing the audit &rogramme, the auditor shou"d re"ate such assessment to materia" account ba"ances and c"asses of transactions at the "e!e" of assertions made financia" statements, or assume that inherent ris8 is high for the assertion, ta8ing into account factors re"e!ant both to the financia" statements as a #ho"e and to the s&ecific assertions. Ahen the auditor ma8es an assessment that the inherent ris8 is not high, he shou"d document the reasons for such assessment. In the audit of a sma"" entit , contro" ris8 is often assumed or assessed as high, at "east for certain financia" statement assertions. The assessment of inherent ris8 for those assertions ta8es on a &articu"ar significance, as it has a direct im&act on the extent of substanti!e &rocedures. There are difficu"ties in the assessment of the inherent ris8 of a sma"" entit , for exam&"e there ma be increased ris8 as a resu"t of the concentration of o#nershi& and contro". Ko#e!er, the auditorIs assessment of inherent ris8 in a sma"" entit de&ends on its &articu"ar characteristics> carefu" assessment of inherent ris8 for materia" financia" statement assertions, rather than an assum&tion that it is high, ma enab"e the auditor to conduct a more efficient and

effecti!e audit. Control Ris1 Jaragra&h ++ of AA( < re=uires that after obtaining an understanding of the accounting s stem and interna" contro" s stem, the auditor shou"d ma8e a &re"iminar assessment of contro" ris8, at the assertion "e!e", each materia" account ba"ance or c"ass of transactions. An understanding of the contro" en!ironment is essentia" to the understanding of contro" ris8. The auditor considers the o!era"" inf"uence of the o#ner9manager and other 8e &ersonne". 6or exam&"e, the auditor considers #hether the o#ner9manager dis&"a s a &ositi!e contro" consciousness and considers the extent to #hich the o#ner9manager and other 8e &ersonne" are acti!e" in!o"!ed in da 9to9da o&erations. After obtaining an understanding of the accounting and interna" contro" s stems, the auditor ma8es a &re"iminar assessment of contro" ris8, at the assertion "e!e", for each materia" account ba"ance or c"ass of transactions. (ubstanti!e &rocedures ma be reduced if re"iance on these contro"s is #arranted after in!estigation and testing. Ko#e!er, man interna" contro"s re"e!ant to "arge entities are not &ractica" in the sma"" entit , and as a resu"t it ma not be &ossib"e to re" on interna" contro" to detect fraud or error. 6or exam&"e, segregation of duties ma be se!ere" "imited in sma"" entities because accounting &rocedures ma be &erformed b fe# &ersons #ho ma ha!e both o&erating and custodia" res&onsibi"ities. (imi"ar" , #hen there are fe# em&"o ees, it ma not be &ossib"e to set u& a s stem of inde&endent chec8ing of their #or8. Inade=uate segregation of duties and the ris8 of error ma , in some cases, be offset b other contro" &rocedures such as the exercise of strong su&er!isor contro"s b the o#ner9manager b means of direct &ersona" 8no#"edge of the entit and in!o"!ement in transactions. Ko#e!er this, in itse"f, ma introduce other ris8s such as the &otentia" for management o!erride and fraud. Jarticu"ar difficu"ties inc"ude the &ossib"e understatement of income b the non9recording or misrecording of sa"es. In circumstances #here segregation of duties is "imited and e!idence of su&er!isor contro"s is "ac8ing, the audit e!idence necessar to su&&ort the auditorIs o&inion on the financia" statements ma ha!e to be obtained entire" through the &erformance of substanti!e &rocedures. The auditor of a sma"" entit ma decide, based on the auditorIs understanding of the accounting s stem and contro" en!ironment, to assume that contro" ris8 is high #ithout &"anning or &erforming an detai"ed &rocedures )such as tests of contro"s* to su&&ort that assessment. E!en #here there a&&ear to be effecti!e contro"s it ma be more efficient for the auditor to confine audit &rocedures to those of a substanti!e nature. The auditor ma8es management a#are of materia" #ea8nesses in the design or o&eration of the accounting and interna" contro" s stems that ha!e come to the auditorIs attention. 7ecommendations for im&ro!ement ma a"so be made in this communication. (uch recommendations are &articu"ar" !a"uab"e for the de!e"o&ment of the sma"" entit Is accounting and interna" contro" s stems. Detection Ris1 Jaragra&h .3 of AA( < )7e!ised* states: ,The auditor shou"d consider the assessed "e!e"s of inherent and contro" ris8s in determining the nature, timings and extent of substanti!e &rocedures re=uired to

reduce the audit ris8 to an acce&tab" "o# "e!e". In this regard the auditor #ou"d consider: )a* The nature of substanti!e &rocedures, for exam&"e, using tests directed to#ard inde&endent &arties outside the entit rather than tests directed to#ard &arties or documentation #ithin the entit , or using tests of detai"s for a &articu"ar audit ob@ecti!e in addition to ana" tica" &rocedures> )b* The timing of substanti!e &rocedures, for exam&"e, &erforming them at &eriod end rather than at an ear"ier date> and )c* The extent of substanti!e &rocedures, for exam&"e, using a "arger sam&"e si'e., The auditor uses the assessments of inherent and contro"s ris8 to determine the substanti!e &rocedures that #i"" &ro!ide the audit e!idence to reduce detection ris8, and therefore audit ris8, to an acce&tab"e "e!e". In some sma"" entities, such as those #here most transaction are for cash and there is no regu"ar &attern of costs and margins, the a!ai"ab"e e!idence ma be inade=uate to su&&ort an un=ua"ified o&inion on the financia" statements. Accounting and Internal Control $ystems Jaragra&h 1. of AA( < states: ,Interna" contro"s re"ating to the accounting s stem are concerned #ith achie!ing the fo""o#ing ob@ecti!es: U Transactions are executed in accordance #ith managementIs genera" or s&ecific authorisation. U A"" transactions and other e!ents are &rom&t" recorded in the correct amount, in the a&&ro&riate accounts and in the &ro&er accounting &eriod so as to &ermit &re&aration of financia" statements in accordance #ith the a&&"icab"e accounting standards, other recogni'ed accounting &o"icies and &ractices and re"e!ant statutor re=uirements, if an , and to maintain accountabi"it for assets. U Assets and records are safeguarded from unauthori'ed access, use or dis&osition. U 7ecorded assets are com&ared #ith the existing assets at reasonab"e inter!a"s and a&&ro&riate action is ta8en #ith regard to an differences. Audit Ris1 in t+e $mall -usiness Jaragra&h .9 of AA( < states H 4The auditor needs to obtain the same "e!e" of assurance in order to ex&ress an un=ua"ified o&inion on the financia" statements of both sma"" and "arge entities. Ko#e!er, man interna" contro"s, #hich #ou"d be re"e!ant to "arge entities are not &ractica" in the sma"" business. 6or exam&"e, in sma"" businesses, accounting &rocedures ma be &erformed b a fe# &ersons #ho ma ha!e both o&erating and custodia" res&onsibi"ities, and therefore, segregation of duties ma be missing or se!ere" "imited. Inade=uate segregation of duties ma , in some cases, be offset b a strong management contro" s stem in #hich o#nerGmanager su&er!isor contro"s exist because of direct &ersona" 8no#"edge of the entit and in!o"!ement in transactions. In circumstances #here segregation of dudes is "imited and audit e!idence of su&er!isor contro"s is "ac8ing, the audit e!idence necessar to su&&ort the auditorIs o&inion on the financia" statements ma ha!e to be obtained entire" through the &erformance of substanti!e &rocedures., AA( $, J"anning Jaragra&h 1 of AA( $ states: ,(tatement on (tandard Auditing Jractices 1, /asic Jrinci&"es Go!erning an Audit,, states )&aragra&hs 1+91.*:

,The auditor shou"d &"an his #or8 to enab"e him to conduct an effecti!e audit in an efficient and time" manner. J"ans shou"d be based on 8no#"edge of the c"ientIs business. J"ans shou"d be made to co!er, among other things: )a* Ac=uiring 8no#"edge of the c"ientIs accounting s stems, &o"icies and interna" &rocedures> )b* Estab"ishing the ex&ected degree of re"iance to be &"aced on interna" contro"> )c* Determining and &rogramming the nature, timing and extent of the audit &rocedures to be &erformed> and )d* Coordinating the #or8 to be &erformed. J"ans shou"d be further de!e"o&ed and re!ised as necessar during the course of the audit., Jaragra&h 1< of AA( $ states, ,the audit &"anning idea"" commences at the conc"usion of the &re!ious earIs audit, and a"ong#ith the re"ated &rogramme, it shou"d be reconsidered for modification as the audit &rogresses. (uch consideration is based on the auditorIs re!ie# of the interna" contro", his &re"iminar e!a"uation thereof, and the resu"ts of his com&"iance and substanti!e &rocedures. /an audits of sma"" entities are conducted b the audit engagement &artner )or so"e &ractitioner* #or8ing #ith one audit assistant )or #ithout audit assistants*. These circumstances #i"" affect the auditorIs a&&roach to &"anning: &"anning can be &er9 formed on a "ess forma" sca"e. Aith a sma""er team, co9ordination and communication bet#een team members is "ess com&"icated. J"anning the audit of a sma"" entit need not be a com&"ex or time9consuming exercise. J"anning !aries according to the si'e of the entit and the com&"exit of the audit. 6or exam&"e, on some sma"" audits, &"anning ma be carried out at a meeting #ith the o#ner9manager of the entit or #hen the entit 2s records become a!ai"ab"e to the auditor for audit. J"anning the audit can, ho#e!er, start at the com&"etion of the &re!ious earIs audit as the auditor #i"" be #e"" &"aced to &"an ahead for the next ear. A fi"e note &re&ared at this time, based on a re!ie# of the #or8ing &a&ers and high"ighting issues identified in the audit @ust com&"eted that #i"" ha!e some bearing on the next ear, can be &articu"ar" he"&fu". This fi"e note, amended for changes arising during the subse=uent ear, cou"d be the initia" basis for &"anning the next audit. Discussion #ith the o#ner9manager is a !er im&ortant &art of &"anning, es&ecia"" in a first9 ear audit. (uch discussions do not need a s&ecia" meeting> the can often ta8e &"ace as a &art of other meetings, con!ersations or corres&ondence. In &rinci&"e, &"anning com&rises de!e"o&ing a genera" strateg )ref"ected in an o!era"" audit &"an* and a detai"ed a&&roach for im&"ementing the strateg in terms of the nature, timing and extent of the audit #or8 )ref"ected in an audit &rogram*. Ko#e!er, a &ractica" a&&roach to the audit of a sma"" entit need not in!o"!e excessi!e documentation. In the case of a sma"" entit #here, because of the si'e or nature of the entit , the detai"s of the o!era"" &"an can be ade=uate" documented in the audit &rogram, or !ice !ersa, se&arate documentation of each ma not be necessar . Ahen standard audit &rograms are used, these shou"d be tai"ored to the &articu"ar circumstances of the c"ient. AA$ 554 Representations #y *anagement Jaragra&hs +, 3, ; V < of AA( 11 state 9 ,+.The auditor shou"d obtain re&resentation from management, #here considered a&&ro&riate. 3. The Auditor shou"d obtain e!idence that management ac8no#"edges its

res&onsibi"it for the a&&ro&riate &re&aration and &resentation of financia" information and that management has a&&ro!ed financia" information., , ;. During the course of an audit, management ma8es man re&resentations to the auditor, either unso"icited or in res&onse to s&ecific en=uiries. Ahen such re&resentations re"ate to matters #hich are materia" to the financia" information, the auditor shou"d: )a* see8 corroborati!e audit e!idence from sources inside or outside the entit > )b* e!a"uate #hether the re&resentations made b management a&&ear reasonab"e and consistent #ith other audit e!idence obtained, inc"uding other re&resentations> and )c* consider #hether the indi!idua"s ma8ing the re&resentation can be ex&ected to be #e""9informed on the matter. <. 7e&resentation b management cannot be a substitute for other audit e!idence that the auditor cou"d reasonab" ex&ect to be a!ai"ab"e. 6or exam&"e, a re&9 resentation b management as to the =uantit , existence and costs of in!entories is no substitute for ado&ting norma" audit &rocedures regarding !erification and !a"uation of in!entories. If the auditor is unab"e to obtain sufficient a&&ro&riate audit e!idence that he be"ie!es #ou"d be a!ai"ab"e regarding a matter #hich has or ma ha!e a materia" effect on the financia" information, this #i"" constitute a "imitation on the sco&e of his examination e!en if he has obtained a re&resentation from management on the matter., In !ie# of the &articu"ar characteristics of sma"" entities, the auditor ma @udge it a&&ro&riate to obtain #ritten re&resentations from the o#ner9manager as to the com&"eteness and accurac of the accounting records and of the financia" statements )for exam&"e, that a"" income has been recorded*. (uch re&resentations, on their o#n, do not &ro!ide sufficient audit e!idence. The auditor assesses the re&resentation in con@unction #ith the resu"ts of other re"e!ant audit &rocedures, the auditorIs 8no#"edge of the business and of its o#nermanager, and considers #hether, in the &articu"ar circumstances, it #ou"d be reasonab"e to ex&ect other audit e!idence to be a!ai"ab"e. In !ie# of s&ecific characteristics of sma"" entities described in &aragra&h <, #hi"e assessing the e!identiar !a"ue of management re&resentation it ma be !ie#ed #ith circums&ection. The &ossibi"it of misunderstandings bet#een the auditor and the o#ner9manager is reduced #hen ora" re&resentations are confirmed b the o#ner9manager in #riting. AA$ 5>4 Audit *ateriality Jaragra&h 3 of AA( 13 states: ,Information is materia" if its misstatement )i. e., omission of erroneous statement* cou"d inf"uence the economic decisions of users ta8en on the basis of the financia" information. /ateria"it de&ends on the si'e and nature of the item, @udged in the &articu"ar circumstances of its misstatement. Thus, materia"it &ro!ides a thresho"d or cut9off &oint rather than being a &rimar =ua"itati!e characteristic #hich the information must ha!e if it is to be usefu"., 6or audit &"anning &ur&oses, it is genera"" necessar to assess materia"it from a =ua"itati!e and =uantitati!e &ers&ecti!e. 0ne &ur&ose of this &re"iminar @udgment about materia"it is to focus the auditorIs attention on the more significant financia" statement items #hi"e determining the audit strateg . As there are no authoritati!e &ronouncements on ho# materia"it is assessed in =uantitati!e terms, the auditor in each case a&&"ies &rofessiona" @udgment in the "ight of the circumstances. 0ne a&&roach to the assessment of =uantitati!e materia"it is to use a &ercentage of a

8e figure in the financia" statements such as one of the fo""o#ing. U Jrofit or "oss before tax )ad@usted, if a&&ro&riate, for the effect of an abnorma" "e!e"s of items of ex&enditure such as the o#ner9managerIs remuneration*. U 7e!enue. U Ea"ance sheet tota". 0ften in the case of sma"" entities, draft financia" statements are not a!ai"ab"e to the auditor at the commencement of the audit. Ahen this is the case, the auditor uses the best information a!ai"ab"e at the time. The current earIs tria" ba"ance ma be used, if a!ai"ab"e. 0ften an estimate of re!enue for the current &eriod can be more readi" obtained than of &rofit )or "oss* or of a ba"ance sheet tota"9 A common a&&roach in the &re"iminar @udgment of materia"it is to ca"cu"ate materia"it on the &re!ious earIs audited financia" statements as amended for 8no#n circumstances in re"ation to the ear sub@ect to audit. Assessing materia"it as a &ercentage of &re9tax resu"ts ma be ina&&ro&riate #hen the entit is at or near the brea89e!en &oint as it ma gi!e an ina&&ro&riate" "o# "e!e" of materia"it , "eading to unnecessari" extensi!e audit &rocedures. In such cases, the auditor ma a&&" the &ercentage method to, for exam&"e, re!enue or ba"ance sheet tota"s. A"ternati!e" , materia"it ma be assessed ha!ing regard to assessed "e!e"s of materia"it in &rior ears and the norma" "e!e" of resu"ts. In addition to con 9 sidering materia"it at the o!era"" financia" statement "e!e", the auditor considers materia"it in re"ation to indi!idua" account ba"ances, c"asses of transactions, and disc"osures. Ahate!er basis ma be used to assess materia"it for audit &"anning &ur&oses, #hen the auditors assess Ithe aggregate of uncorrected misstatementsI, their conc"usion as to #hether the financia" statements gi!e a true and fair !ie# is based on a re9assessment of materia"it . This reassessment ta8es account of the fina" !ersion of the draft financia" statements, incor&orating a"" agreed ad@ustments and information obtained during the course of the audit. A"though materia"it at the re&orting stage is considered in =uantitati!e terms, there is no c"ear thresho"d !a"ue but rather a range of !a"ues #ithin #hich the auditor exercises @udgment. Amounts abo!e the u&&er "imit of the range ma be &resumed materia" and amounts be"o# the "o#er "imit ma be &resumed not materia", a"though either &resum&tion ma be rebutted b a&&" ing =ua"itati!e considerations. In addition, a"though &"anning ma ha!e been based on a =uantitati!e assessment of materia"it , the auditorIs o&inion #i"" ta8e into account not on" the amount but a"so the =ua"itati!e nature of unad@usted misstatements #ithin the financia" statements. AA$ 40/ Analytical 5rocedures Jaragra&hs + and 3 of AA( 1. state 9 ,+. The auditor shou"d a&&" ana" tica" &rocedures at the &"anning and o!era"" re!ie# stages of the audit. Ana" tica" &rocedure ma a"so be a&&"ied at other stages. 3. ,Ana" tica" &rocedures, means the ana" sis of significant ratios and trend inc"uding the resu"ting in!estigation of f"uctuations and re"ationshi&s that are in consistent #ith other re"e!ant 9information or #hich de!iate from &redicted amounts., Analytical Procedures in Planning t+e Audit The auditor a&&"ies ana" tica" &rocedures at the &"anning stage of the audit. The nature and extent of ana" tica" &rocedures at the &"anning stage of the audit of a sma"" entit ma be "imited b the time"iness of &rocessing of transactions b the sma"" entit and the "ac8 of re"iab"e financia" information at that &oint in time. (ma""

entities ma not ha!e interim or month" financia" ana" tica" &rocedures at the &"anning stage. The conduct a brief re!ie# of the genera" "edger or such be readi" a!ai"ab"e. In man cases, there ma be can be used for this &ur&ose, and the auditor ma through discussion #ith the o#ner9manager. Analytical Procedures as $u#stantive Procedures

information that can be used in auditor ma , as an a"ternati!e other accounting records as ma no documented information that obtain the re=uired information

Ana" tica" &rocedures can often be a cost9effecti!e means of obtaining e!idence re=uired b the auditor. The auditor assesses the contro"s o!er the &re&aration of information used in a&&" ing ana" tica" &rocedures. Ahen such contro"s are effecti!e, the auditor #i"" ha!e greater confidence in the re"iabi"it of the information and, therefore, in the resu"ts of ana" tica" &rocedures. An unso&histicated &redicti!e mode" can sometimes be effecti!e. 6or exam&"e, #here a sma"" entit has em&"o ed a 8no#n number of staff at fixed rates of &a throughout the &eriod, it #i"" ordinari" be &ossib"e for the auditor to use this data to estimate the tota" &a ro"" costs for the &eriod #ith a high degree of accurac , thereb &ro!iding audit e!idence for a significant item in the financia" statements and reducing the need to &erform tests of detai"s on the &a ro"". The use of #ide" recogni'ed trade ratio )such as &rofit margins for different t &es of retai" entities* can often be used effecti!e" in ana" tica" &rocedures to &ro!ide e!idence to su&&ort the reasonab"eness of recorded items. The extent of ana" tica" &rocedures in the audit of a sma"" entit ma be "imited because of the non9a!ai"abi"it of information on #hich the ana" tica" &rocedures are based. Jredicti!e ana" tica" &rocedures can often be an effecti!e means of testing for com&"eteness, &ro!ided the resu"ts can be &redicted #ith a reasonab"e degree of &recision and confidence. -ariations from ex&ected resu"ts ma indicate &ossib"e omissions that ha!e not been detected b other substanti!e tests. Ko#e!er, different t &es of ana" tica" &rocedure &ro!ide different "e!e"s of assurance. Ana" tica" &rocedures can be a !er &ersuasi!e source of e!idence and ma e"iminate the need for further !erification b means of tests of detai"s. In contrast, ca"cu"ation and com&arison of gross margin &ercentages as a means of confirming a re!enue figure ma be a "ess &ersuasi!e source of e!idence, but ma &ro!ide usefu" corroboration if used in combination #ith other audit &rocedures. Analytical Procedures as Part o! t+e Overall Revie) The ana" tica" &rocedures ordinari" &erformed at this stage of the audit are !er simi"ar to those that #ou"d be used at the &"anning stage of the audit. These inc"ude the fo""o#ing: U Com&aring the financia" statements for the current ear to those of &re!ious ears. U Com&aring the financia" statements #ith an budgets, forecasts, or management ex&ectations, U 7e!ie#ing trends in an im&ortant financia" statement ratios. U Considering #hether the financia" statements ade=uate" ref"ect an changes in the entit of #hich the auditor is a#are. U In=uiring into unex&"ained or unex&ected features of the financia" statements. AA$ 5;4 Audit $ampling Jaragra&hs +9. of AA( 1; state:9

,+.Ahen using either statistica" or non9statistica" sam&"ing methods, the auditor shou"d design and se"ect an audit sam&"e, &erform audit &rocedures thereon, and e!a"uate sam&"e resu"ts so as to &ro!ide sufficient a&&ro&riate audit e!idence. ,3. Audit sam&"ing, means the a&&"ication of audit &rocedures to "ess than 1FFW of the items #ithin an account ba"ance or c"ass of transactions to enab"e the auditor to obtain and e!a"uate audit e!idence about some characteristic of the items se"ected in order to form or assist in forming a conc"usion concerning the &o&u"ation. .. It is im&ortant to recogni'e that certain testing &rocedures do not come #ithin the definition of sam&"ing. Tests &erformed on 1FFW of the items #ithin a &o&u"ation do not in!o"!e sam&"ing. Bi8e#ise, a&&" ing audit &rocedures to a"" items #ithin a &o&u"ation #hich ha!e a &articu"ar characteristic )for exam&"e, a"" items o!er a certain amount* does not =ua"if as audit sam&"ing #ith res&ect to the &ortion of the &o&u"ation examined, nor #ith regard to the &o&u"ation as a #ho"e, since the items #ere not se"ected from the tota" &o&u"ation on a basis that #as ex&ected to be re&resentati!e. (uch items might im&" some characteristic of the remaining &ortion of the &o&u"ation., There are a !ariet of methods of se"ecting items for testing, the auditorIs choice of an a&&ro&riate method #i"" be guided b considerations of effecti!eness and efficienc . The means a!ai"ab"e to the auditor are: )a* se"ecting a"" items )1FFW examination*> )b* se"ecting s&ecific items> or )c* audit sam&"ing. The sma"" &o&u"ation ordinari" encountered in test: )a* 1FFW of )b* 1FFW of some &art of the &o&u"ation, amount, a&&" ing ana" tica" &rocedures to materia". sma"" entities ma ma8e it feasib"e to

the &o&u"ation> or for exam&"e, a"" items abo!e a gi!en the ba"ance of the &o&u"ation, if it is

Ahen the abo!e methods of obtaining audit e!idence are not ado&ted, the auditor considers the use of &rocedures in!o"!ing audit sam&"ing. Ahen the auditor decides to use audit sam&"ing, the same under" ing &rinci&"es a&&" in both "arge and sma"" entities. The auditor se"ects sam&"e items in such a #a that the sam&"e can be ex&ected to be re&resentati!e of the &o&u"ation. 0ne choice to be made b the auditor is #hether to use statistica" or non9statistica" sam&"ing methods. Eoth methods in!o"!e the exercise of a high degree of @udgement b the auditor. Ko#e!er, in the audit of sma"" entities the re=uired "e!e" of assurance can often be obtained in a cost9effecti!e manner b the use of non9statistica" methods of determining the sam&"e si'e and se"ecting the sam&"e items. Aith non9statistica" methods, auditors a&&" the auditing standards set out in the AA( #hen using their @udgement to design the si'e and structure of the audit sam&"e and to se"ect the sam&"e items. 6or exam&"e, the consider: U the audit ob@ecti!e, to ensure the &rocedure is "i8e" to achie!e the ob@ecti!e> U the &o&u"ation, to ensure it is a&&ro&riate and com&"ete )a sam&"e cannot &ro!ide e!idence about the com&"eteness of the &o&u"ation from #hich it is dra#n*. The auditors se"ect the sam&"e items in such a#a that the can reasonab" be ex&ected to be re&resentati!e of the &o&u"ation in res&ect of the re"e!ant characteristics. Three methods common" used are random, s stematic and

ha&ha'ard se"ection: these are described in &ara 19 of the AA(. (o9ca""ed Ib"oc8I testing methods )for exam&"e, examining a"" items of a &articu"ar t &e in one month* are not designed to be re&resentati!e of the tota" &o&u"ation and are therefore not an a&&"ication of audit sam&"ing. )E"oc8 testing ma , ho#e!er, form &art of other audit techni=ues, such as ana" tica" &rocedures*. AA$ 42/ Going Concern AA( 1< &aragra&hs 1 to < state as fo""o#s: 41 . The &ur&ose of this (tatement on (tandard Auditing Jractices )AA(* is to estab"ish standards on the auditorIs res&onsibi"ities in the audit of financia" statements regarding the a&&ro&riateness of the going concern assum&tion as a basis for the &re&aration of the financia" statements. +. Ahen &"anning and &erforming audit &rocedures and in e!a"uating the resu"ts thereof, the auditor shou"d consider the a&&ro&riateness of the going concern assum&tion under" ing the &re&aration of the financia" statements. 3. The auditorIs re&ort he"&s estab"ish the credibi"it of the financia" statements. Ko#e!er, the auditorIs re&ort is not a guarantee as to the future !iabi"it of the entit . .. An entit Is continuance as a going concern for the foreseeab"e future, genera"" a &eriod not to exceed one ear after the ba"ance sheet date, is assumed in the &re&aration of financia" statements in absence of information to the contrar . According" , assets and "iabi"ities are recorded on the basis that the entit #i"" be ab"e to rea"i'e its assets and discharge its "iabi"ities in the norma" course of business. If this assum&tion is un@ustified, the entit ma not be ab"e to rea"i'e its assets at the recorded amounts and there m a be changes in the amount and maturit dates of "iabi"ities. As a conse=uence, the amounts and c"assification of assets and "iabi"ities in the financia" statements ma need to be ad@usted. ;. The auditor shou"d consider the ris8 that the going concern assum&tion ma no "onger be a&&ro&riate <. Indications of ris8 that continuance as a going concern ma be =uestionab"e cou"d come from the financia" statements or from other sources. Exam&"es of such indications that #ou"d be considered b the auditor are "isted be"o#. This "isting is not a""9inc"usi!e nor does the existence of one or more a"#a s signif that the going concern assum&tion needs to be =uestioned., Financial Indications

* * * * * * * * * *

Negati!e net #orth or negati!e #or8ing ca&ita". 6ixed term borro#ing a&&roaching maturit #ithout rea"istic &ros&ects of rene#a" or re&a ment, or excessi!e re"iance on short9term borro#ings to finance "ong9term assets. Ad!erse 8e financia" ratios. (ubstantia" o&erating "osses. (ubstantia" negati!e cash f"o#s from o&erations. Arrears or discontinuance of di!idends. Inabi"it to &a creditors on due dates. Difficu"t in com&" ing #ith the terms of "oan agreements. Change from credit to cash9on9de"i!er transactions #ith su&&"iers. Inabi"it to obtain financing for essentia" ne# &roduct de!e"o&ment or other essentia" in!estments.

* * * * * * * *

Entering into a scheme of arrangement #ith creditors for reduction of "iabi"it . Boss of 8e management #ithout re&"acement. Boss of a ma@or mar8et, franchise, "icence, or &rinci&a" su&&"ier. Babour difficu"ties or shortages of im&ortant su&&"ies. Non9com&"iance #ith ca&ita" or other statutor re=uirements. Jending Bega" Jroceedings against the entit @udgements that cou"d not be met. Changes in "egis"ation or go!ernment &o"ic . (ic8ness of the entit under an statutor definition.5 that ma , if successfu", resu"t in

Operating Indications

Ot+er Indications

The assessment of going concern ma be de&endent on a &articu"ar assum&tion. 6or exam&"e> )a* if the entit Is o&erations are "arge" financed b a "oan from the o#ner9manager, it ma be im&ortant that these funds are not #ithdra#n from the business. 6or exam&"e, the continuance of the sma"" entit ma be de&endent on the o#ner9 manager subordinating his "oan account to the entit in fa!our of other creditors, ban8, other financia" institutions> )b* if the entit has, in effect, a sing"e customer, it #i"" be im&ortant that the trading re"ationshi& continues> or )c* If aggregate contingent "iabi"ities are more than net #orth. In such circumstances, the auditor considers the e!idence a!ai"ab"e to su&&ort the assum&tion in =uestion. 6or exam&"e, the auditor ins&ects a&&ro&riate e!idence of the subordination. Ahere the entit is de&endent on additiona" su&&ort from the o#ner9manager, the auditor needs to consider the o#ner9managerIs abi"it to meet the ob"igation under the su&&ort arrangement, in addition, the auditor ma as8 for a #ritten re&resentation confirming the o#ner9managerIs intention or understanding. AA$ 5:4 ?uality Control !or Audit ,or1 The &rimar ob@ecti!e of =ua"it contro" is to &ro!ide assurance that audits are conducted in accordance #ith genera"" acce&ted auditing standards. The auditor of a sma"" entit 8ee&s this ob@ecti!e in mind #hen determining the nature, timing, and extent of the &o"icies and &rocedures a&&ro&riate to the circumstances. Jaragra&h 1 of AA( 17 states: IThe &ur&ose of this (tatement on (tandard Auditing Jractices )AA(* is to estab"ish standards on the =ua"it contro": )a* &o"icies and &rocedures of an audit firm regarding audit #or8 genera"" > and )b* &rocedures regarding the #or8 de"egated to assistants on an indi!idua" audit., Jaragra&h < of AA( 17 states that the ob@ecti!es of =ua"it contro" &o"icies to be ado&ted b an audit firm #i"" ordinari" incor&orate the fo""o#ing: )a* &rofessiona" re=uirements> )b* s8i""s and com&etence> )c* assignment> )d* de"egation> )e* consu"tation>

)f* )g*

acce&tance

and

retention

of

c"ients>

and monitoring

Aith the &ossib"e exce&tion of ,assignment, and 4de"egation, )#hich ma not be re"e!ant to so"e &ractitioners #ith no assistants*, each of these #i"" ordinari" be ref"ected in the arrangements estab"ished b firms auditing sma"" entities. The re=uirements of AA( 17 re"ating to =ua"it contro" on indi!idua" audits are most" re"e!ant to engagements #here some of the #or8 is de"egated to one or more assistants. /an sma"" entit audits are carried out entire" b the audit engagement &artner )#ho ma be a so"e &ractitioner*. In such situations, =uestions of direction and su&er!ision of assistants and re!ie# of their #or8 do not arise as the audit engagement &artner, ha!ing &ersona"" conducted a"" significant as&ects of the #or8, is a#are of A materia" issues. The audit engagement &artner )or so"e &ractitioner* ne!erthe"ess needs to he satisfied that the audit has been conducted in accordance #ith AA(s. De!e"o&ing or obtaining a suitab" designed form of audit com&"etion chec8"ist ma &ro!ide a usefu" too" for testing the com&"eteness and ade=uac of the &rocess fo""o#ed in an audit. 6orming an ob@ecti!e !ie# on the a&&ro&riateness of the @udgements made in the course of the audit can &resent &ractica" &rob"ems #hen the same indi!idua" a"so &erformed the entire audit. It can often therefore be he"&fu" for that indi!idua" to a""o# a short inter!a" after &erforming the entire audit #or8 before re!ie#ing the #or8ing &a&ers re"ating to an materia" issues #ith, so far as &ossib"e, a Ifresh e eI. Ahen &articu"ar" com&"ex or unusua" issues are in!o"!ed, and the audit is &erformed b a so"e &ractitioner, it ma be desirab"e to consu"t #ith other suitab" 9ex&erienced auditors or the auditorIs &rofessiona" bod , on a confidentia" basis. AA$ 46/ Audit of Accounting Estimates Jaragra&hs + V 3 of AA( 1$ state H 4+. The auditor shou"d obtain sufficient a&&ro&riate audit e!idence regarding accounting estimates. 3. ,Accounting estimate,, means an a&&roximation of the amount of an item in the absence of a &recise means of measurement. Exam&"es are: U A""o#ances to reduce in!entor and accounts recei!ab"e to their estimated rea"isab"e !a"ue. U Jro!isions to a""ocate the cost of fixed assets o!er their estimated usefu" "i!es. U Accrued re!enue. U Jro!ision for taxation. U Jro!ision for a "oss from a "a#suit. U InsurerIs "iabi"it for outstanding c"aims. U Bosses on construction contracts in &rogress. U Amorti'ation of certain items "i8e good#i"" and deferred re!enue ex&enditure. U Jro!ision to meet #arrant c"aims U Jro!ision for retirement benefits in the financia" statements of em&"o ers., The ste&s ordinari" in!o"!ed in re!ie#ing and testing of the &rocess used b management are: )a* E!a"uation of the data and consideration of assum&tions on #hich the estimate is based> )b* Testing of the ca"cu"ations in!o"!ed in the estimate,

)c* Com&arison, #hen &ossib"e, of estimates made for &rior &eriods #ith actua" resu"ts of those &eriods> and )d* Consideration of managementIs a&&ro!a" &rocedures. A"though the o#ner9manager is res&onsib"e for determining the amount of the estimate to be inc"uded in the financia" re&ort, the auditor of a sma"" entit ma often be as8ed to assist #ith or ad!ise on the &re&aration of an accounting estimates. E assisting #ith the &rocess of &re&aring the accounting estimate, the auditor at the same time gains e!idence re"e!ant to meeting the re=uirement of AA( 1$. Ko#e!er, assisting #ith this &rocess does not re"ie!e the auditor from obtaining sufficient and a&&ro&riate audit e!idence regarding accurac and the under" ing assum&tions used in arri!ing at the estimates. AA$ 47/ $ubse%uent Events AA( 19, &aragra&hs + and . state as fo""o#s: ,+. The auditor shou"d consider the effect of subse=uent e!ents on the financia" statements and on the auditorIs re&ort. .. The auditor shou"d &erform &rocedures designed to obtain sufficient a&&ro&riate audit e!idence that a"" e!ents u& to the date of the auditor2s re&ort that ma re=uire ad@ustment of, or disc"osure in, the financia" statements ha!e been identified., $u#se@uent Events -et)een t+e Period and t+e Date o! t+e Auditor"s Report It is not common for sma"" entities to he re=uired to re&ort short" after their &eriod end. It is often the case that more time e"a&ses bet#een the &eriod end and the a&&ro!a" or signature of the financia" statements b the o#ner9manager in the case of sma"" entities than in the case of "arge entities. The &eriod to be co!ered b the auditorsI subse=uent e!ents &rocedures is therefore often "onger in the audit of a sma"" entit , a""o#ing more o&&ortunities for the occurrence of subse=uent e!ents that can affect the financia" statement. The subse=uent e!ent &rocedures that the auditor of sma"" entities &erforms #i"" de&end on the information that is a!ai"ab"e and, in &articu"ar, the extent to #hich the accounting records ha!e been #ritten u& since the &eriod end. Ahen the accounting records are not u&to date and minutes of the meetings of the directors ha!e not been &re&ared, re"e!ant &rocedures can ta8e the form of en=uir of the o#ner9 manager, recording the o#ner9managerIs res&onses and ins&ection of ban8 statements. The auditor, ma , de&ending on the circumstances, consider that the "etter of re&resentation shou"d co!er subse=uent e!ents. The "etter of re&resentation is ordinari" dated on the same da as the audit re&ort, thus co!ering the entire &eriod since the &eriod end. $u#se@uent Events -et)een t+e Date o! Auditor"s Report and t+e Financial $tatements -eing Issued Ahere, as in man sma"" entities, the meeting at #hich )he financia" statements are a&&ro!ed or signed is immediate" fo""o#ed b the annua" genera" meeting, the inter!a" bet#een the t#o does not to re=uire an se&arate consideration b the auditor as it is so short. If the auditor becomes a#are of a fact that materia"" affects the financia" statements,

the auditor considers #hether the financia" statements re=uire amendments, discusses the matter #ith management, and ta8es action a&&ro&riate in the circumstances. AA$89/ ,nowledge of the :usiness Jaragra&h + of AA( +F re=uires that in &erforming an audit of financia" statements, the auditor shou"d ha!e or obtain 8no#"edge of the business sufficient to enab"e the auditor to identif and understand the e!ents, transactions and &ractices that, in the auditorIs @udgement, ma ha!e a significant effect on the financia" statements or on the examination or audit re&ort. (uch 8no#"edge is used b the auditor in assessing inherent and contro" ris8s and in determining the nature, timing and extent of audit &rocedures. The a&&endix to AA( +F gi!es a "ist of matters that the auditor ma consider in re"ation to 8no#"edge of the business. This "ist is i""ustrati!e on" , it is not exhausti!e, nor are a"" the matters "isted re"e!ant to e!er audit. In &articu"ar, the auditor of a sma"" entit #i"" often find that man of the &oints in this "ist are sim&" not re"e!ant. It #ou"d therefore be ina&&ro&riate to regard this A&&endix as a form of chec8"ist to be a&&"ied routine" in a"" audits. It ma ho#e!er be sufficient for the auditor to use a chec8"ist that has been a&&ro&riate" tai"ored to the &articu"ar sma"" entit , such a chec8"ist can be re!ie#ed and u&dated in subse=uent ears. The auditor of a sma"" entit is often in a &osition to ha!e a #ide and u&9to9date 8no#"edge of the business b !irtue of the fact that there ma be regu"ar c"ose contact #ith the o#ner9manager. This re"ationshi& often &ro!ides information on matters such as the fo""o#ing: U The acti!ities of the sma"" entit , its main &roducts and ser!ices, and the industr in #hich it o&erates. U The management st "e, aims, and attitudes of the o#ner9manager. U An &"ans for changes to the nature, managemerit or o#nershi& of the entit . U Trends in &rofitabi"it or "i=uidit and the ade=uac of #or8ing ca&ita". U Bega" or regu"ator issues facing the entit , inc"uding its re"ationshi& #ith the taxation authorities. U The accounting records. U The contro" en!ironment. Documenting the auditorIs 8no#"edge of the business is e=ua"" im&ortant in a"" audits, irres&ecti!e of the si'e of the entit . Ko#e!er, the extent of the documentation de&ends on the com&"exit of the entit and the number of &ersons #hich are being engaged in the audit. (ma"" entities are ordinari" not com&"ex and their audit rare" in!o"!es "arge teams of assistants. In man cases, the &artner and &erha&s, a sing"e assistant ma &erform the audit. Therefore, #hi"st the auditor of a sma"" entit #i"" &re&are documentation to a "e!e" sufficient to: )a* faci"itate &ro&er &"anning of the audit> and )b* Jro!ide for an change of res&onsibi"it #ithin the audit firm, such as changes of audit engagement &artner or the de&arture, i""ness or inca&acit of assistants. (uch documentation #i"" ordinari" be unso&histicated in format and as brief as circumstances a""o#. AA$ 84/ Consideration of -aws and *egulations in an Audit of Financial $tatements Jaragra&h + of AA( +1, IConsideration of Ba#s and 7egu"ations in an Audit of 6inancia" (tatementsI re=uires that #hen &"anning and &erforming audit &rocedures and in

e!a"uating and re&orting the resu"ts thereof, the auditor shou"d recogni'e that non9 com&"iance b the entit #ith "a#s and regu"ations ma materia"" affect the financia" statements. Ko#e!er, an audit cannot be ex&ected to detect non9com&"iance #ith A "a#s and regu"ations. Detection of non9com&"iance, regard"ess of materia"it , re=uires consideration of the im&"ications for the integrit of management or em&"o ees and the &ossib"e effect on other as&ects of the audit. A&art from those "a#s and regu"ations that re"ate direct" to the &re&aration of the financia" statements, there ma a"so be "a#s and regu"ations that &ro!ide a "ega" frame#or8 for the conduct of the entit and that are centra" to the entit Is abi"it to conduct its business. As most sma"" entities ha!e uncom&"icated acti!ities, the "ega" and regu"ator en!ironment to #hich the are sub@ect is "ess com&"icated than the en!ironment in #hich "arge or more di!ersified entities o&erate. 0nce the auditor of a sma"" entit has identified an re"e!ant industr 9s&ecific "a#s and regu"ations, this information is recorded as &ermanent information as &art of the 8no#"edge of the entit and is re!ie#ed and u&dated as necessar in subse=uent ears. AA$ 88/ Initial Engagements+ '#ening :alances Jaragra&h 3 of AA(++ states: ,6or initia" audit engagements, the auditor shou"d obtain sufficient a&&ro&riate audit e!idence that: )a* the c"osing ba"ances of the &receding &eriod ha!e been correct" brought for#ard to the current &eriod> )b* the o&ening ba"ances do not contain misstatements that materia"" affect the financia" statements for the current &eriod> and )c* a&&ro&riate accounting &o"icies are consistent" a&&"ied., AA( ++ gi!es guidance on circumstances in #hich the o&ening ba"ances are deri!ed from financia" statements of the &receding &eriod #hich #ere not audited. The fact that the &receding &eriod financia" statements #ere not audited does not reduce the auditorsI need to obtain sufficient audit e!idences regarding the o&ening ba"ances and com&arati!es. Information about some of the o&ening ba"ances ma be readi" a!ai"ab"e )for exam&"e, cash, debtors and creditors* and e!idence ma a"so be obtained through some of the audit &rocedures in the current &eriod )for exam&"e, debtor #rite offs, stoc8 obso"escence and fixed assets*. Ahere the auditors cannot obtain such e!idence b other means, the consider the im&"ications for their re&ort. AA$ 8./ *elated 5arties Jaragra&h + of AA( +3 states: ,+. The auditor shou"d &erform audit &rocedures designed to obtain sufficient a&&ro&riate audit e!idence regarding the identification and disc"osure b management of re"ated &arties and the re"ated &art transactions that are materia" to the financia" statements. Ko#e!er, an audit cannot be ex&ected to detect a"" re"ated &art transactions., (ignificant transactions are often entered into bet#een the sma"" entit and the o#ner9manager, or bet#een the sma"" entit and entities re"ated to the o#ner9manager. (ma"" entities se"dom ha!e so&histicated &o"icies and codes of

conduct on re"ated &art transactions. Indeed, re"ated &art transactions are a regu"ar feature of man entities that are o#ned and managed b an indi!idua" or b a fami" . 6urther, the o#ner9manager ma not fu"" understand the definition of a re"ated &art , es&ecia"" #here re"e!ant accounting standards deem certain re"ationshi&s to be re"ated and others not. The &ro!ision of management re&resentations in res&ect of the com&"eteness of disc"osure ma entai" some ex&"anation b the auditor of the technica" definition of a re"ated &art . The auditor of a sma"" entit ordinari" &erforms substanti!e &rocedures on the identification of re"ated &arties and re"ated &art transactions. Ko#e!er, if the auditor assesses the ris8 of undisc"osed re"ated &art transactions, as "o#, such substanti!e &rocedures need not be extensi!e. The auditor often acts as the auditor of other entities re"ated to the sma"" entit , #hich ma assist in identif ing re"ated &arties. Ahere detai"ed substanti!e tests are re=uired, the fact that the accounting &o&u"ations in sma"" entities are genera"" sma"" ma enab"e the auditor to examine a"" items. The auditorIs in9de&th 8no#"edge of the sma"" entit ma be of assistance in the identification of re"ated &arties, #hich in man instances, #i"" be #ith entities contro""ed b the o#ner9manager. This 8no#"edge can a"so he"& the auditor assess #hether re"ated &art transactions might ha!e ta8en &"ace #ithout recognition in the entit Is accounting records. In this context, #hen &erforming audit &rocedures #hich ma identif re"ated &arties and re"ated &art transactions, the auditor shou"d con9 sider the substance of the re"ationshi& andG or transaction being tested and not mere" the "ega" form. AA$ 8:4 Comparatives Jaragra&hs + and 3 of AA( +; state: 5+.The auditor shou"d determine #hether the com&arati!es, com&" , in a"" materia" res&ects, #ith the financia" re&orting frame#or8 re"e!ant to the financia" statements being audited. 3. The existence of differences in financia" re&orting frame#or8s resu"ts in com&arati!e financia" information being &resented different" in each frame#or8. Com&arati!es in financia" statements, for exam&"e, ma &resent amounts )such as financia" &osition, resu"ts of o&erations, cash f"o#s* and a&&ro&riate disc"osures of an entit for more than one &eriod, de&ending on the frame#or8. The frame#or8s and methods of &resentation that are referred to in this AA( are as fo""o#s: )a* corres&onding figures #here amounts and other disc"osures for the &receding &eriod are inc"uded as &art of the current &eriod financia" statements, and are intended to be read in re"ation to the amounts and other disc"osures re"ating to the current &eriod )referred to as ,current &eriod figures, for the &ur&ose of this AA(*. These corres&onding figures are not &resented as com&"ete financia" statements ca&ab"e of standing a"one, but are an integra" &art of the current &eriod financia" statements intended to be read on" in re"ationshi& to the current &eriod figures> and )b* com&arati!e financia" statements #here the amounts and other disc"osures for the &receding &eriod. are inc"uded for com&arison #ith the financia" statements of the current &eriod, but do not form &art of the current &eriod financia" statements,, AA$ 874 Terms of Audit Engagement AA( +<, &aragra&hs + and ; state: ,+.The auditor and the c"ient shou"d agree on the terms of the engagement. The agreed terms #ou"d need to be recorded in an audit engagement "etter or other

suitab"e form of contract., ,;. In the interest of both c"ient and auditor, the auditor shou"d send an engagement "etter, &referab" before the commencement of the engagement, to he"& a!oiding an misunderstandings #ith res&ect to the engagement. The engagement "etter documents and confirms the auditor2s acce&tance of the a&&ointment, the ob@ecti!e and sco&e of the audit and the extent of the auditorIs res&onsibi"ities to the c"ient. In man cases, o#ner9managers of sma"" entities are not fu"" a#are of their o#n res&onsibi"ities or those of the auditors. In &articu"ar, o#ner9managers ma not a&&reciate that the financia" statements are their res&onsibi"it , &articu"ar" #here the o#ner9manager has outsourced the &re&aration of the financia" statements. 0ne of the &ur&oses of an engagement "etter is to communicate c"ear" the res&ecti!e res&onsibi"ities of the o#ner9manager and the auditor. The A&&endix to AA( +< &ro!ides an exam&"e of an audit engagement "etter. AA$ 8A4 T+e Auditor"s Report on Financial $tatements AA( +$, &aragra&hs + and ., state: ,+. The auditor shou"d re!ie# and assess the conc"usions dra#n from the audit e!idence obtained as the basis for the ex&ression of an o&inion on the financia" statements., ,.. The auditorIs re&ort shou"d contain a c"ear #ritten ex&ression of o&inion on the financia" statements ta8en as a #ho"e., The ob@ecti!e of an audit is for the auditor to obtain sufficient a&&ro&riate audit e!idence to be ab"e to ex&ress an o&inion on the financia" statements. In man cases the auditor #i"" be ab"e to ex&ress an un=ua"ified o&inion on the financia" statements sma"" entities. Ko#e!er there ma be circumstances that necessitate a modification of the auditorIs re&ort. Ahen the auditor is unab"e to design or carr out &rocedures to obtain sufficient a&&ro&riate audit e!idence as to the com&"eteness of accounting records, this ma constitute a "imitation in the sco&e of auditorIs #or8. The "imitation #ou"d "ead to a =ua"ification of the o&inion or, in circumstances #here the &ossib"e effects of the "imitation are so significant that the auditor is unab"e to ex&ress an o&inion on the financia" statements, a disc"aimer of o&inion. AA$ 87/ Auditing in a Com#uter Information $ystems Environment AA( +9, &aragra&hs 3 and ., state: ,3.The auditor shou"d consider the effect of a CI( en!ironment on the audit. The auditor shou"d e!a"uate, inter alia, the fo""o#ing factors to determine the effect of CI( en!ironment on the audit: )a* the extent to #hich the CI( en!ironment is used to record, com&i"e and ana" se accounting information. )b* the s stem of interna" contro" in existence in the entit #ith regard to: )i* f"o# of correct and com&"ete data to the &rocessing centre> )ii* &rocessing, ana" sis and re&orting tas8s underta8en in the insta""ation> and )c* the im&act of com&uter9based accounting s stem on the audit trai" that cou"d other#ise be ex&ected to exist in an entire" manua" s stem. .. The auditor shou"d ha!e sufficient 8no#"edge of the Com&uter Information ( stems to &"an, direct, su&er!ise, contro" and re!ie# the #or8 &erformed. The sufficienc of 8no#"edge #ou"d de&end on the nature and extent of CI( en!ironment. Ahen the CI( are significant the auditor shou"d a"so obtain an understanding of the CI(

en!ironment and #hether it ma inf"uence the assessment of inherent and contro" ris8. The nature of the ris8s and the interna" contro" characteristics in CI( en!iron9 ments inc"ude the fo""o#ing: M Bac8 of transaction trai"s M ?niform &rocessing of transactions M Bac8 of segregation of functions M Jotentia" for errors and irregu"arities M Initiation or execution of transaction. M De&endence of other contro"s o!er com&uter &rocessing U Jotentia" for increased management su&er!ision U Jotentia" for use of com&uter9assisted audit techni=ues Eoth the ris8s and the contro"s introduced as a resu"t of these characteristics of CI( ha!e a &otentia" im&act on the auditorIs assessment of ris8, and the nature, timing and extent of audit &rocedures. The increasing a!ai"abi"it of com&uter9based accounting s stems that are ca&ab"e of meeting both functiona" and economic circumstances of e!en the sma""est entit im&acts on the audits of those entities. (ma"" entities accounting s stems often ma8e use of &ersona" com&uters, (ma"" entities are "i8e" to use "ess so&histicated hard#are and soft#are &ac8ages than "arge entities )often ,&ac8aged, rather than de!e"o&ed ,in house,*. Ne!erthe"ess, the auditor shou"d ha!e sufficient 8no#"edge of the com&uter information s stem to &"an, direct, su&er!ise, and re!ie# the #or8 &erformed. The auditor shou"d consider #hether s&ecia"i'ed s8i""s are needed in an audit. Eecause of the "imited segregation of duties, the use of com&uter faci"ities b a sma"" entit ma ha!e the effect of increasing contro" ris8. 6or exam&"e, it is common for users to be ab"e to &erform t#o or more of the fo""o#ing functions in the accounting s stem: U Initiating and authori'ing source documents. U Entering data into the s stem. U 0&erating the com&uter. U Changing &rograms and data fi"es. U ?sing or distributing out&ut. U /odif ing the o&erating s stems. O ERA&& RE IE, OF FINANCIA& $TATE*ENT$ 6or the &ur&ose of o!era"" re!ie# of financia" statements ana" tica" &rocedures are to be carried out on the basis of considerations enumerated in Jaragra&h . and of AA( 1.. The o!era"" re!ie# of the financia" statements is not &rimari" a matter of com&"etion of chec8"ists on com&"iance matters. In addition it re=uires the auditors to Istand bac8I from the detai" of accumu"ated audit e!idence re"ating to indi!idua" com&onents of the financia" statements, so as to be ab"e to ex&ress an ob@ecti!e o&inion on the financia" statements as a #ho"e. The auditorsI consideration of #hether the financia" statement assertions are: )a* consistent #ith their 8no#"edge of the business and the resu"ts of other audit &rocedures> and )b* fair" disc"osed, is a matter of the auditorsI @udgement, re=uiring a&&ro&riate "e!e"s of ex&erience and s8i"".

The auditorsI ana" tica" &rocedures a&&"ied #hen com&"eting the audit are designed to assist in arri!ing at an o!era"" conc"usion as to #hether the financia" statements as a #ho"e are consistent #ith their 8no#"edge of the business> the resu"ts of such &roce9 dures are therefore an im&ortant factor to be considered for this &ur&ose.
1

The #ord ,indi!idua", denotes o#nershi& b a natura" &erson, rather than b other entit . An entit o#ned b other enter&rises ma , ho#e!er, be regarded as a ,sma"" entit , for the &ur&ose of this Guidance Note, if the o#ner exhibits the re"e!ant characteristics. %uidance Note on Audit o! Consolidated Financial $tatementsB INTRODUCTION The Counci" of the Institute of Chartered Accountants of India has issued Accounting (tandard )A(* +1 IConso"idated 6inancia" (tatementsI #hich "a s do#n &rinci&"es and &rocedures for &re&aration and &resentation of conso"idated financia" statements. Conso"idated financia" statements are &resented for a grou& of entities under the contro" of a &arent. A I&arentI is an entit that has one or more subsidiaries. A grou& com&rises a &arent and its subsidiaries. Thus, conso"idated financia" statements are the financia" statements of a grou& &resented as those of a sing"e entit . A( +1 is a&&"icab"e to a &arent that &resents conso"idated financia" statements. In other #ords, #hene!er a &arent decides to &re&are and &resent conso"idated financia" statements, it shou"d do so in accordance #ith the re=uirements of Accounting (tandard )A(* +1, Conso"idated 6inancia" (tatements. Conso"idated financia" statements norma"" inc"ude conso"idated ba"ance sheet, conso"idated statement of &rofit and "oss, and notes, ex&"anator materia" that form an integra" &art thereof, and a"so conso"idated cash f"o# statement )in case a &arent &resents its o#n cash f"o# statement*. Conso"idated financia" statements are &resented, to the extent &ossib"e, in the same format as ado&ted b the &arent for its se&arate financia" statements. An entit #hich &re&ares the conso"idated financia" statements, either under an "a# or regu"ation go!erning the entit or suo motu, might be re=uired to or other#ise engage a member for conducting the audit of conso"idated financia" statements 1. The auditor of the conso"idated financia" statements ma not necessari" be the auditor of the se&arate financia" statements of the &arent or one or more of the com&onents+ inc"uded in the conso"idated financia" statements. Ko#e!er, a "a# or regu"ation go!erning the entit ma re=uire the conso"idated financia" statements to be audited b the statutor auditor of the entit . This Guidance Note &ro!ides guidance on the s&ecific issues and audit &rocedures to be a&&"ied in an audit of conso"idated financia" statements. DEFINITION$ -arious terms used in this Guidance Note, ha!e the same meaning as in Accounting (tandard )A(* +1, IConso"idated 6inancia" (tatementsI, Accounting (tandard )A(* +3, IAccounting for In!estments in Associates in Conso"idated 6inancia" (tatementsI and Accounting (tandard )A(* +7, I6inancia" 7e&orting of Interests in Ooint -enturesI res&ecti!e" . RE$PON$I-I&IT/ OF PARENT The res&onsibi"it for the &re&aration and &resentation of conso"idated financia"

statements, among other things, is that of the management of the &arent. This inc"udes: )a* identif ing com&onents, and inc"uding the financia" information of the com&onents to be inc"uded in the, conso"idated financia" statements> )b* #here a&&ro&riate, identif ing re&ortab"e segments for segmenta" re&orting> )c* identif ing re"ated &arties and re"ated &art transactions for re&orting> )d* obtaining accurate and com&"ete financia" information from com&onents> and )e* ma8ing a&&ro&riate conso"idation ad@ustments. A&art from the abo!e, the &arent ordinari" issues instructions to the management of the com&onent s&ecif ing the &arentIs re=uirements re"ating to financia" information of the com&onents to be inc"uded in the conso"idated financia" statements. The instructions ordinari" co!er the accounting &o"icies to be a&&"ied, statutor and other disc"osure re=uirements a&&"icab"e to the &arent, inc"uding the identification of and re&orting on re&ortab"e segments, and re"ated &arties and re"ated &art transactions, and a re&orting timetab"e. RE$PON$I-I&IT/ $TATE*ENT$ OF T.E AUDITOR OF T.E CON$O&IDATED FINANCIA&

The auditor of the conso"idated financia" statements is res&onsib"e for ex&ressing an o&inion on #hether the conso"idated financia" statements are &re&ared, in a"" materia" res&ects, in accordance #ith the financia" re&orting frame#or8 under #hich the &arent &re&ares the conso"idated financia" statements. Therefore, the auditorIs ob@ecti!es in an audit of conso"idated financia" statements are: )a* to satisf himse"f that the conso"idated financia" statements ha!e been &re&ared in accordance #ith the re=uirements of Accounting (tandard )A(* +1, Conso"idated 6inancia" (tatements. Accounting (tandard )A(* +3, Accounting for In!estments in Associates in Conso"idated 6inancia" (tatements and Accounting (tandard )A(* +7, 6inancia" 7e&orting of Interests in @oint -entures> and )b* to enab"e himse"f to ex&ress an o&inion on the true and fair !ie# &resented b conso"idated financia" statements. the

Auditing and Assurance (tandards, (tatements and Guidance Notes on auditing matters issued b the Institute of Chartered Accountants of India a&&" in the same manner to audit of conso"idated financia" statements as the a&&" to audit of se&arate financia" statements. It means that the auditors, #hi"e conducting the audit of conso"idated financia" statements are, inter a"ia, ex&ected to: )a* &"an their #or8 to enab"e them to conduct an effecti!e audit in an efficient and time" manner> )b* obtain an understanding of the accounting and interna" contro" s stems sufficient to &"an the audit and determine the nature, timing and extent of his audit &rocedures. (uch an understanding #ou"d he"& the auditors to de!e"o& an effecti!e audit a&&roach> )c* use &rofessiona" @udgement to assess audit ris8 and to design audit &rocedures to ensure that the ris8 is reduced to an acce&tab"e "e!e"> etc. AUDIT CON$IDERATION$ The fo""o#ing features of conso"idated financia" statements ha!e an im&act on the re"ated audit &rocedures: )a* The conso"idated financia" statements are &re&ared oi" the basis of se&arate financia"

statements of the &arent and its subsidiaries and associates andGor @oint !entures, using the conso"idation &rocedures &rescribed b Accounting (tandard )A(* +1, Conso"idated 6inancia" (tatements, Accounting (tandard )A(* +3, Accounting for In!estments in Associates in Conso"idated 6inancia" (tatements and Accounting (tandard )A(* +7, 6inancia" 7e&orting of Interests, in @oint -entures> and )b* The auditor of the conso"idated financia" statements has to use the #or8 of other auditors un"ess the auditor of conso"idated financia" statements is not the auditor of the other com&onents of the grou&. This ma , ho#e!er, not be true in a"" cases. The conso"idated financia" statements are &re&ared using the se&arate financia" statements of the &arent, subsidiaries, associates and @oint !entures and a"so other financia" information, #hich might not he co!ered b the se&arate financia" statements of these entities. The Iother financia" informationI #ou"d inc"ude disc"osures to be made in the conso"idated financia" statements about the subsidiaries associates and @oint !entures, &ro&ortion of items inc"uded in the conso"idated financia" statements to #hich different accounting &o"icies ha!e been a&&"ied, ad@ustments made for the effects of significant transactions or other e!ents that occur bet#een the financia" statements of subsidiaries, associates or @oint !entures and the &arent, as the case ma be, etc. Thus, this other financia" information #ou"d be re=uired to be additiona"" generated. Ahen an auditor acce&ts the audit of conso"idated financia" statements, the auditor shou"d assess #hether based on his #or8 a"one he #ou"d be ab"e to ex&ress an o&inion on the true and fair !ie# &resented b the conso"idated financia" statements. If the auditor is of the !ie# that his o#n &artici&ation ma not be enough or sufficient, he shou"d consider using the #or8 of Iother auditorsI. (uch Iother auditorsI might be the auditors of the se&arate financia" statements of one or more of the com&onents of the conso"idated financia" statements or the auditors a&&ointed s&ecifica"" for assisting the auditor of the conso"idated financia" statements )the &rinci&a" auditor*. Ahere the statutor auditors of one or more of the com&onents of the conso"idated financia" statements are a"so re=uested to assist the &rinci&a" auditor, the #or8 to be &erformed b such statutor auditors for use b the &rinci&a" auditor #ou"d constitute an assignment se&arate from the assignment to conduct the statutor audit of the res&ecti!e com&onent. The Auditing and Assurance (tandard )AA(* 1 IEasic Jrinci&"es Go!erning an AuditI, states )&aragra&h 9*: ,Ahen the auditor de"egates #or8 to assistants or uses #or8 &erformed b other auditors and ex&erts, he #i"" continue to be res&onsib"e for forming and ex&ressing his o&inion on the financia" information. Ko#e!er, he #i"" be entit"ed to re" on #or8 &erformed b others, &ro!ided he exercises ade=uate s8i"" and care and is not a#are of an reason to be"ie!e that he shou"d not ha!e so re"ied. In the case of an inde&endent statutor a&&ointment to &erform the #or8 on #hich the auditor has to re" in forming his o&inion, such as in the case of the #or8 of branch auditors a&&ointed under the Com&anies Act, 19;< the auditorIs re&ort shou"d ex&ress" state the fact of such re"iance,. Auditing and Assurance (tandard )AA(* 1F,I?sing the Aor8 of Another AuditorI estab"ishes standards #hen an auditor, re&orting on the financia" statements of an entit )the grou&9in the case of conso"idated financia" statements*, uses the #or8 of another auditor on the financia" information of one or more com&onents inc"uded in the financia" statements of the entit . The &rinci&a" auditor, if he decides to use the

#or8 of another auditor in re"ation to the audit of conso"idated financia" statements, shou"d com&" #ith the re=uirements of AA( 1F. Ahi"e com&" ing #ith the re=uirements of AA( 1F, I?sing the Aor8 of Another AuditorI, the &rinci&a" auditor shou"d 8ee& the fo""o#ing under consideration: )a* Ahen &"anning to use the #or8 of another auditor, the &rinci&a" auditor is not re=uired to consider the &rofessiona" com&etence of the other auditor if the other auditor is a member of the Institute of Chartered Accountants of India )b* The &rinci&a" auditor shou"d &erform &rocedures to obtain sufficient a&&ro&riate audit e!idence, that the #or8 of the other auditor is ade=uate for the &rinci&a" auditorIs &ur&oses, in the context of the audit of conso"idated financia" statements. Ahen using the #or8 of another auditor, the &rinci&a" auditor shou"d ordinari" &erform the fo""o#ing &rocedures: )i* The &rinci&a" auditor shou"d determine the informationGassurance re=uired b the other auditor> this emanatesG&rec"udes the &rinci&a" auditorIs determination of ho# the #or8 of the other auditor #ou"d affect the audit of conso"idated financia" statements, for exam&"e, the information re=uired from the auditor of a subsidiar #ou"d be different from that re=uired from the auditor of a @oint !enture. )ii* Ad!ise the other auditor of the use that is to be made of the other auditorIs #or8 and re&ort and ma8e sufficient arrangements for co9ordination of their efforts at the &"anning stage of the audit. The &rinci&a" auditor #ou"d inform the other auditor of matters such as areas re=uiring s&ecia" consideration, &rocedures for the identification of inter9com&onent transactions that ma re=uire disc"osure and the timetab"e for com&"etion of audit. It ma , ho#e!er, be noted that the &rinci&a" auditor, if using the #or8 of the auditors of one or more of the com&onents un"ess such other auditors are s&ecifica"" a&&ointed for the &ur&ose, shou"d not en"arge the sco&e of the audit of the se&arate financia" statements of the subsidiar or com&onent to be inc"uded in the conso"idated financia" statements. Thus, the instructions that are to be issued shou"d be confined to the other information re=uired for conso"idation. )iii* Ad!ise the other auditor of the significant accounting, auditing and re&orting re=uirements and obtain re&resentation as to com&"iance #ith them. AUDITIN% T.E CON$O&IDATION Eefore commencing an audit of conso"idated financia" statements, the auditor shou"d &"an his #or8 to enab"e him to conduct an effecti!e audit in an efficient and time" manner. The auditor shou"d ma8e &"ans, among other things, for the fo""o#ing: )a* understanding of accounting &o"icies of the &arent, subsidiaries, associates and @oint !entures> )b* determining the extent of use of other auditorIs #or8 in the audit> )c* determining and &rogramming the nature, tim ing, and extent of the audit &rocedures to be &erformed., and )d* coordinating the #or8 to be &erformed. A &arent #hich &resents conso"idated financia" statements is re=uired to conso"idate a"" subsidiaries inc"ude a"" associates and @oint" contro""ed entities in the conso"idated financia" statements other than those for #hich exce&tions ha!e been &ro!ided in the re"e!ant Accounting (tandards. The auditor shou"d obtain a "isting of subsidiaries, associates and @oint !entures inc"uded in the conso"idated financia" statements. The auditor shou"d re!ie# the information &ro!ided b the management of the &arent identif ing the subsidiaries, associates and @oint !entures. The auditor shou"d !erif that a"" the subsidiaries, associates and

@oint !entures ha!e been inc"uded in the conso"idated financia" statements un"ess a subsidiar , associate or @oint !enture meets a criterion for exc"usion. In res&ect of com&"eteness of this information, the auditor shou"d &erform the fo""o#ing &rocedures: )a* re!ie# his #or8ing &a&ers for the &rior ears for the 8no#n subsidiaries, associates and @oint !entures> )b* re!ie# the &arentIs &rocedures for identification of subsidiaries, associates and @oint !entures> )c* re!ie# the in!estments to determine the share ho"ding in other entities> )d* re!ie# the @oint !enture and other re"e!ant agreements entered into b the &arent> )e* re!ie# the statutor records maintained b section 3F+, 37+A of the Com&anies Act, 19;<. The auditor shou"d a"so identif &"ace since the "ast audit. the &arent, for exam&"e registers under

the changes in the shareho"ding that might ha!e ta8en

It is a"so im&ortant to note that o#nershi& of !oting &o#er is not necessar for an entit to o#n more than one9ha"f of the !oting &o#er of another to contro" the other enter&rise. Contro" of the com&osition of the Eoard of Directors )in the case of a com&an * or corres&onding go!erning bod )in the case of an other enter&rise*, #ith a !ie# to obtain economic benefits from its acti!ities, o#nershi& of !oting &o#er is not im&ortant. 6or exam&"e, an entit ho"ds on" 1F &ercent of the share ca&ita" of another entit but it has contro" o!er the com&osition of the Eoard of DirectorsGgo!erning bod of the second entit . In such a case, the first entit #ou"d be considered as a &arent of the second entit and, therefore, it #ou"d conso"idate the second entit in the conso"idated financia" statements as subsidiar . The auditor, therefore, a&art from carr ing out abo!e &rocedures, shou"d !erif #hether the &arent contro"s the com&osition of the Eoard of Directors or corres&onding go!erning bod of an entit . There #ou"d be !arious means b #hich such 8ind of contro" can be obtained. In this regard, the auditor ma !erif the EoardIs minutes, shareho"der agreements entered into b the &arent, agreements #ith the entities to #hich the &arent might ha!e &ro!ided an techno"og or 8no# ho#, enforcement of statute, as the case ma be, etc. The auditor #ou"d ha!e to use his &rofessiona" @udgement to determine #hether the &arent contro"s the com&osition of the Eoard of Directors of an other entit . If es, #hether that entit has been conso"idated as a subsidiar in the conso"idated financia" statements. Ahere a subsidiar or an associate or a @oint" contro""ed entit is exc"uded from the conso"idated financia" statements, the auditor shou"d examine the reasons for exc"usion. There cou"d be t#o reasons for exc"usion of a subsidiar , associate or @oint" contro""ed entit 9 one, that the re"ationshi& of &arent #ith the subsidiar , associate or @oint" contro""ed entit is intended to be tem&orar or the subsidiar , associate or @oint !enture o&erates under se!era" "ong9term restrictions #hich significant" im&air its abi"it to transfer funds to the &arent. The auditor shou"d satisf himse"f that the exc"usion made b the management fa""s #ithin these t#o categories. The auditor shou"d !erif such "ong9term restrictions from the re"e!ant "a#s and regu"ations, agreements entered b the &arent #ith such entities #hich &rohibit transfer of funds. In the case of an entit #hich is exc"uded from conso"idation on the ground that the re"ationshi& of &arent #ith the other entit as subsidiar , associate or @oint !enture is tem&orar , the auditor shou"d !erif that the intention of the &arent, to dis&ose the subsidiar , in!estment in associate or interest

in @oint" contro""ed entit , in the near future, existed at the time of ac=uisition of the subsidiar , ma8ing in!estment in associate or @oint" contro""ed entit . The auditor shou"d a"so !erif that the reasons for exc"usion are gi!en in the conso"idated financia" statements. If an entit is exc"uded from the conso"idated financia" statements for reasons other than those a""o#ed b the re"e!ant accounting standards, the auditor shou"d consider its effect on the re&ort to be issued. The auditor shou"d consider the need to issue a modified re&ort on the conso"idated financia" statements. The auditor shou"d a"so !erif that in conso"idated financia" statements, in!estments in such subsidiaries, associates or @oint" contro""ed entities shou"d be accounted for in accordance #ith Accounting (tandard )A(* 13, Accounting for In!estments. The auditor shou"d a"so examine #hether an subsidiar , associate or @oint" contro""ed entit has ceased to be a subsidiar , associate or @oint" contro""ed entit during the &eriod under audit. It is a"so &ossib"e that a subsidiar might ha!e become an associate or an associate might ha!e become a subsidiar of the &arent. The auditor, in such cases, shou"d examine #hether these changes ha!e been a&&ro&riate" accounted for in the conso"idated financia" statements as re=uired b the res&ecti!e accounting standards. In &re&aring conso"idated financia" statements, the financia" statements of the &arent and its subsidiaries are combined on a "ine b "ine basis b adding together "i8e items of assets, "iabi"ities, income and ex&enses and then certain ca"cu"ations "i8e determination of good#i"" or ca&ita" reser!e, minorities interest and ad@ustments "i8e e"imination of intra grou& transactions, ba"ances and unrea"ised &rofits etc. are made in accordance #ith the re=uirements of Accounting (tandard )A(* +1, Conso"idated 6inancia" (tatements. In!estments in associates are accounted for using the E=uit /ethod as &rescribed in Accounting (tandard )A(* +3, Accounting for In!estments in Associates in Conso"idated 6inancia" (tatements. A &arent that has an interest in a @oint" contro""ed entit , re&orts its interest in the conso"idated financia" statements using &ro&ortionate conso"idation method in accordance #ith Accounting (tandard )A(* +7, 6inancia" 7e&orting of Interests in @oint -entures. /an of the &rocedures a&&ro&riate for the a&&"ication of e=uit method and the &ro&ortionate conso"idation are simi"ar to the conso"idation &rocedures set out in Accounting (tandard )A(* +1, Conso"idated 6inancia" (tatements. The auditor shou"d !erif that the ad@ustments #arranted b the re"e!ant accounting standards ha!e been made #here!er re=uired and ha!e been &ro&er" authorised b the management of the &arent The &re&aration of conso"idated financia" statements gi!es rise to &ermanent conso"idation ad@ustments and current &eriod conso"idation ad@ustments. $PECIA& CON$IDERATION$ 5ermanent Consolidation Ad;ustments. Jermanent conso"idation ad@ustments are those ad@ustments that are made on" on the first occasion of the &re&aration and &resentation of conso"idated financia" statements. Jermanent conso"idation ad@ustments are: )a* determination of excess or deficit of the cost to the &arent of its in!estment in a subsidiar o!er the &arentIs &ortion of e=uit of the subsidiar , at the date on #hich in!estment in the subsidiar is made )determination of good#i"" or ca&ita" reser!e*>

)b* determination of the amount of e=uit attribut ab"e to minorities at the date on #hich in!estment in subsidiar is made> and )c* determination ofgood#i"" or ca&ita" reser!e arising on a&&"ication of e=uit account for in!estments in associates in conso"idated financia" statements. method to

The auditor shou"d !erif that the abo!e ca"cu"ations ha!e been made a&&ro&riate" . The auditor shou"d &a &articu"ar attention to the determination of &re9ac=uisition reser!es of the subsidiar and associates. Date)s* of in!estment in subsidiar and associates assumes im&ortance in this regard. The auditor shou"d a"so examine #hether the &re9ac=uisition reser!es ha!e been a""ocated a&&ro&riate" bet#een the &arent and the minorities of the subsidiar . The auditor shou"d a"so !erif the changes that might ha!e ta8en &"ace in these &ermanent ad@ustments on account of subse=uent ac=uisition of shares in the subsidiar Gassociates, dis&osa" of the subsidiar G associate in the subse=uent ears. The auditor shou"d a"so examine the @oint !enture agreements, to estab"ish #hether an change has ta8en &"ace in the interest of the &arent in the @oint !enture. It ma ha&&en that in the case of one subsidiar , good#i"" arises and in the case of another subsidiar a ca&ita" reser!e arises. The &arent ma choose to net off these amounts to disc"ose a sing"e amount in the conso"idated ba"ance sheet. In such cases, the auditor shou"d !erif that the gross amounts of good#i"" and ca&ita" reser!es arising on ac=uisition of !arious subsidiaries ha!e been disc"osed in the notes to the conso"idated financia" statements to ref"ect the excessGshortage o!er the &arentsI &ortion of the subsidiar Is e=uit . Current 5eriod Consolidation Ad;ustments0 Current &eriod ad@ustments are those ad@ustments that are made in the accounting &eriod for #hich the conso"idation of financia" statements is done. Current &eriod conso"idation ad@ustments &rimari" re"ate to e"imination of intra9grou& transactions and account ba"ances inc"uding. )a* intra9grou& interest &aid and recei!ed, or management fees, etc> )b* unrea"ised intra9grou& &rofits on assets ac=uired 1 from other subsidiaries> )c* intra9grou& indebtedness> )d* ad@ustments re"ated to harmonising the different accounting &o"icies being fo""o#ed b the &arent enter&rise and its subsidiaries> )e* ad@ustments made for the effects of significant transactions or other e!ents that occur bet#een the date of the financia" statements of the &arent and one or more of the com&onents, if the financia" statements to be used for conso"idation are not dra#n u&to the same re&orting date> and )f* determination of mo!ement in e=uit ac=uisition of the subsidiar . attributab"e to the minorities since the date of

The ad@ustments re=uired for &re&aration of conso"idated financia" statements are made in memorandum records 8e&t for the &ur&ose b the &arent. The auditor shou"d re!ie# the memorandum records to !erif the ad@ustment entries made in the &re&aration of conso"idated financia" statements. This #ou"d a"so he"& the auditor in ascertaining #hether there is an difference in the e"imination. A&art from re!ie#ing the memorandum records, the auditor shou"d:

)a* !erif that the inter9grou& transactions and account ba"ances ha!e been e"iminated> )b* !erif that the conso"idated financia" statements ha!e been &re&ared using uniform accounting &o"icies for "i8e transactions and other e!ents in simi"ar circumstances> )c* !erif that ade=uate disc"osures ha!e been made in the conso"idated financia" statements of a&&"ication of different accounting &o"icies in case, it #as im&racticab"e to do so> )d* !erif the ad@ustments made to harmonise the different accounting &o"icies> and )e* !erif that the ca"cu"ation of minorities interest Ihas been correct" done. The auditor shou"d gain an understanding of the &rocedures ado&ted b the management of the enter&rise to ma8e the abo!e mentioned ad@ustments. This he"&s the auditor in reducing the audit ris8 to an acce&tab" "o# "e!e". 0ne of the im&ortant ad@ustment that ma be re=uired in the current &eriod is determination of im&airment "oss that might exist for good#i"" arising on conso"ida9 tion. Good#i"" arising on conso"idation is carried at the !a"ue determined at the date of ac=uisition of the subsidiar , and the same is to be tested for im&airment at e!er ba"ance sheet date. The auditor shou"d examine #hether an im&airment "oss has been determined b the &arent. If es, the auditor shou"d examine the &rocedure fo""o#ed for determination of im&airment. The auditor shou"d satisf himse"f that the amount of im&airment "oss determined is fair. The auditor shou"d a"so !erif that the disc"osures re=uired b Accounting (tandard )A(* +1, Conso"idated 6inancia" (tatements, Accounting (tandard )A(* +3, Accounting for In!estments in Associates in Conso"idated 6inancia" (tatements and Accounting (tandard )A(* +7, 6inancia" 7e&orting of Interests in @oint -entures ha!e been made in the conso"idated financia" statements. A&art from !erif ing that the ca"cu"ation and disc"osures regarding minorities interest ha!e been made a&&ro&riate" , the auditor a"so determines, in cases #here the minorit interestsI share of the "osses exceed the minorit interestsI share of the e=uit , the excess, and an further "osses a&&"icab"e to the minorit interest, ha!e been accounted for in accordance #ith the re"e!ant accounting standards. Ahere the minorit interest has a binding ob"igation to ma8e good "osses, the auditor of the conso"idated financia" statements determines #hether it is ab"e to do so. If the financia" statements of one or more of the com&onents are dra#n u&to different financia" re&orting dates, the auditor of the conso"idated financia" statements shou"d re!ie# the com&onentIs resu"ts bet#een its financia" re&orting date and that of the &arent for significant transactions or other e!ents that ha!e ta8en &"ace during the &eriod and therefore, need to be ref"ected in the conso"idated financia" statements. 6or exam&"e, #here a subsidiar has a different accounting &eriod and after the end of its accounting &eriod, the subsidiar has discontinued its one of the ma@or o&erations, ad@ustments #ou"d be re=uired to be made to ref"ect this in the conso"idated financia" statements. The fundamenta" accounting assum&tion of ,consistenc , re=uires the auditor of the conso"idated financia" statements to consider #hether the "ength of the re&orting &eriods and an difference in financia" ear9ends are the same from &eriod to &eriod.

Notes to accounts and other ex&"anator materia" are an integra" &art of an financia" statements since the &ro !ide information #hich isperse not ref"ected in the ba"ance sheet and &rofit and "oss account. Conso"idated financia" statements are not an exce&tion to the need of notes to accounts and other ex&"anator materia". In this regard &aragra&h < of Accounting (tandard )A(* +1, Conso"idated 6inancia" (tatement states as be"o#: 5<. Conso"idated financia" statements norma"" inc"ude conso"idated ba"ance sheet, conso"idated statement of &rofit and "oss, and notes, other statements and ex&"anator materia" that form an integra" &art thereof. Conso"idated cash f"o# state9 ment is &resented in case a &arent &resents its o#n cash f"o# statement. The conso"idated financia" statements are &resented, to the extent &ossib"e, in the same format as that ado&ted b the &arent for its se&arate financia" statements,. The Accounting (tandards Eoard of the Institute has issued Genera" C"arification )GC*9;G+FF+ on Notes to the Conso"idated 6inancia" (tatements. The C"arification "a s do#n certain &rinci&"es that shou"d be obser!ed in res&ect of notes and other ex&"anator materia" that form integra" &art of the conso"idated financia" statements. The auditor shou"d !erif that the &rinci&"es enunciated b the C"arification ha!e been fo""o#ed in &re&aration of notes to accounts. The auditor to !erif , the com&"iance, shou"d: )a* examine that the notes #hich are necessar for &resenting a true and fair !ie# of the conso"idated financia" statements ha!e been inc"uded in the conso"idated financia" statements as an integra" &art thereof> and )b* examine that additiona" statutor information disc"osed in se&arate financia" statements of the subsidiar andGor a &arent ha!ing bearing on the true and fair !ie# of the conso"idated financia" statements ha!e been disc"osed in the conso"idated financia" statements. If as a resu"t of the abo!e examinations, the auditor is of the !ie# that the conso"idated financia" statements do not disc"ose a"" the information #hich is necessar for &resenting a true and fair !ie#, the auditor shou"d gi!e a modified re&ort. *ANA%E*ENT REPRE$ENTATION$ Auditing and Assurance (tandard )AA(* 11, ,7e&resentations b /anagement, re=uires the auditor to obtain a&&ro&riate re&resentations from management The auditor of the conso"idated financia" statements shou"d obtain e!idence that the management of the &arent ac8no#"edges its res&onsibi"it for a true and fair &resentation of the conso"idated financia" statements in accordance #ith the financia" re&orting frame9 #or8 a&&"icab"e to the &arent and that &arent management has a&&ro!ed the conso"idated financia" statements. In addition, the auditor of the conso"idated financia" statements obtains #ritten re&resentations from &arent management on matters materia" to the conso"idated financia" statements. Exam&"es of such re&resentations inc"ude: )a* Com&"eteness of com&onents inc"uded in the conso"idated financia" statements> )b* Identification of re&ortab"e segments for segmenta" re&orting> )c* Identification of re"ated &arties and re"ated &art transactions for re&orting> )d* A&&ro&riateness and com&"eteness e"imination of intra9grou& transactions. of conso"idation ad@ustments, inc"uding the

REPORTIN%B There cou"d be t#o situations in an audit of conso"idated financia" statements9#hen the &arentIs auditor is a"so the auditor of a"" the com&onents to be inc"uded in the conso"idated financia" statements and #hen the &arentIs auditor is not the auditor of one or more subsidiaries and therefore, uses the #or8 of other auditors in the audit. The auditor shou"d, #hi"e &re&aring the re&ort, shou"d consider the re=uirements of Auditing and Assurance (tandard )AA(* +$, The AuditorIs 7e&ort on 6inancia" (tatements. Ahere, the auditor uses the #or8 of other auditors in the audit of conso"idated financia" statements, the re=uirements of Auditing and Assurance (tandard )AA(* 1F, ?sing the Aor8 of Another Auditor shou"d a"so be considered ,.EN T.E PARENT"$ AUDITOR I$ A&$O T.E AUDITOR OF IT$ $U-$IDIARIE$ Ahi"e drafting the audit re&ort, the auditor shou"d re&ort #hether &rinci&"es and &rocedures for &re&aration and &resentation of conso"idated financia" statements as "aid do#n in the re"e!ant accounting standards ha!e been fo""o#ed. In case of an de!iation, the auditor shou"d ma8e ade=uate disc"osure in the audit re&ort so that users of the conso"idated financia" statements are a#are of such de!iation. Auditor shou"d issue an audit re&ort ex&ressing o&inion #hether the conso"idated financia" statements gi!e a true and fair !ie# of the state of affairs of the Grou& as on ba"ance sheet date and as to #hether conso"idated &rofit and "oss statement gi!es true and fair !ie# of the resu"ts of conso"idated &rofit or "osses of the Grou& for the &eriod under audit. Ahere the conso"idated financia" statements a"so inc"ude a cash f"o# statement, the auditor shou"d a"so gi!e his o&inion on the true and fair !ie# of the cash f"o#s &resented b the conso"idated cash f"o# statements. (uggested for9 mat of the audit re&ort to be issued in such circumstance is gi!en as Annexure I to this Guidance Note. ,.EN T.E PARENT"$ AUDITOR I$ NOT T.E AUDITOR OF IT$ $U-$IDIAR/'IE$( In a case #here the &arentIs auditor is not the auditor of the com&onents inc"uded in the conso"idated financia" statements, the auditor of the conso"idated financia" statements shou"d a"so consider the re=uirement of AA( 1F. Ahen the &arentIs auditor decides that he #i"" ma8e reference to the audit of the other auditors, the auditorIs re&ort on conso"idated financia" statements shou"d disc"ose c"ear" the magnitude of the &ortion of the financia" statements audited b the other auditor)s*. This ma be done b stating the ru&ee amounts or Jercentages of tota" assets and tota" re!enue of subsidiar )s* inc"uded in conso"idated financia" statements not audited b the &arentIs auditor. Ko#e!er, reference in the re&ort of the auditor of conso"idated financia" statements to the fact that &art of the audit of the grou& #as made b other auditor)s* is not to be construed as a =ua"ification of the o&inion but rather as an indication of the di!ided res&onsibi"it bet#een the auditors of the &arent and its subsidiaries. (uggested format of the audit re&ort to be issued b the auditor of conso"idated financia" statements in this circumstance is gi!en in Annexure II to this Guidance Note. Annexure I Illustrative Auditor"s Report on t+e Consolidated Financial $tatements ,+en t+e Parent"s Auditor is also t+e Auditor o! all t+e Components Auditor"s Report The Eoard of Directors

XXXXXXXXXXX )Name of the Jarent*; Ae ha!e audited the attached conso"idated ba"ance sheet of NRY Grou&, as at 31st /arch +NNN, and a"so the conso"idated &rofit and "oss account and the Zconso"idated cash f"o# statementT< for the ear ended on that date annexed thereto. These financia" statements are the res&onsibi"it of the NRYIs management. 0ur res&onsibi"it is to ex&ress an o&inion on these financia" statements based on our audit. Ae conducted our audit in accordance #ith the auditing standards genera"" acce&ted in India. Those (tandards re=uire that #e &"an and &erform the audit to obtain reasonab"e assurance about #hether the financia" statements are free of materia" misstatement. An audit inc"udes examining, on a test basis, e!idence su&&orting the amounts and disc"osures in the financia" statements. An audit a"so inc"udes assessing the accounting &rinci&"es used and significant estimates made b management, as #e"" as e!a"uating the o!era"" financia" statement &resentation. Ae be"ie!e that our audit &ro!ides a reasonab"e basis for our o&inion. Ae re&ort that the conso"idated financia" statements ha!e been &re&ared b the NRYIs management in accordance #ith the re=uirements of Accounting (tandards )A(* +1, Conso"idated financia" statements, )Accounting (tandards )A(* +3, Accounting for In!estments in Associates in Conso"idated 6inancia" (tatements and Accounting (tandard )A(* +7, 6inancia" 7e&orting of interests in @oint -enturesT4 issued b the Institute of Chartered Accountants of India. In our o&inion and to the best of our information and according to the ex&"anations gi!en to us, the conso"idated financia" statements gi!e a true and fair !ie# in conformit #ith the accounting &rinci&"es genera"" acce&ted in India: )a* in the case of the conso"idated ba"ance sheet, of the state of affairs of the NRY Grou& as at 31st /arch +NNN> )b* in the case of the conso"idated &rofit and "oss account, of the &rofit G "oss ended on that date> and
$

for the ear

)c* in the case of the conso"idated cash f"o# statement, of the cash f"o#s for the ear ended on that date. 6or Chartered Accountants (ignature (1ame of the 6 ($esignaiion ) 5embership 1umber J"ace of (ignature Date Annexure II Illustrative Auditor"s Report on t+e Consolidated Financial $tatements ,+en t+e Parent"s Auditor is Not t+e Auditor o! All t+e Components Auditor"s Report The Eoard of Directors XXXXXXXXXX )Name of the Jarent*1F Ae ha!e audited the attached conso"idated ba"ance sheet of NRY Grou&, as at 31st /arch +NNN, and a"so the conso"idated &rofit and "oss account and the Zconso"idated cash f"o# statementT11 for the ear ended on that date annexed thereto. These financia" statements AEC and Co.

5ember

Signing

the

Audit

"eport)

are the res&onsibi"it of the NRYIs management and ha!e been &re&ared b the management on the basis of se&arate financia" statements and other financia" information regarding com&onents. 0ur res&onsibi"it is to ex&ress an o&inion on these financia" statements based on our audit. Ae conducted our audit in accordance #ith the auditing standards genera"" acce&ted in India. Those (tandards re=uire that #e &"an and &erform the audit to obtain reasonab"e assurance about #hether the financia" statements are free of materia" misstatement. An audit inc"udes examining, on a test basis, e!idence su&&orting the amounts and disc"osures in the financia" statements. An audit a"so inc"udes assessing the accounting &rinci&"es used and significant estimates made b management, as #e"" as e!a"uating the o!era"" financia" statement &resentation. Ae be"ie!e that our audit &ro!ides a reasonab"e basis for our o&inion. Ae did not audit the financia" statements of certain subsidiaries, #hose financia" statements ref"ect tota" assets of 7s. as at 31 st /arch +NNN, the tota" re!enue of 7s. XXXX and cash f"o#s amounting to 7s.XXXX for the ear then ended. These financia" statements and other financia" information ha!e been audited b other auditors #hose re&ort)s* has )ha!e* been furnished to us, and our o&inion is based so"e" on the re&ort of other auditors. Ae re&ort that the conso"idated financia" statements ha!e been &re&ared b the NRYs management in accordance #ith the re=uirements of Accounting (tandards )A(* +1, Conso"idated financia" statements, ZAccounting (tandards )A(* +3, Accounting for In!estments in Associates in Conso"idated 6inancia" (tatements and Accounting (tandard )A(* +7, 6inancia" 7e&orting of interests in @oint -enturesT 1+ issued b the Institute of Chartered Accountants of India. Eased on our audit and on consideration of re&orts of other auditors on se&arate financia" statements and on the other financia" information of the com&onents, and to the best of our information and according to the ex&"anations gi!en to us, #e are of the o&inion that the attached conso"idated financia" statements gi!e a true and fair !ie# in conformit #ith the accounting &rinci&"es genera"" acce&ted in India: )a* in the case of the conso"idated ba"ance sheet, of the state of affairs of the NRY Grou& as at 31st /arch +NNN> )b* in the case of the conso"idated &rofit and "oss account, of the &rofitG "oss 13 for the ended on that date> and ear

)c* in the case of the conso"idated cash f"o# statement, of the cash f"o#s for the ear ended on that date. 6or Chartered Accountants J"ace Date: (ignature (1ame of )Designation1.* 5embership 1umber Appendix I Consolidated -alance $+eet o! a %roup (he appendi! is illustrative onl+ and does not form part of the 0uidance 1ote. (he purpose of this appendi! is to illustrate the application of Accounting Standard (AS) /), Consolidated inancial Statements. the 5ember AEC of and Co. (ignature:

Signing

the

Audit

"eport)

1. The exam&"e sho#s on" current &eriod amounts. +. The amounts gi!en in the brac8ets indicate deductions. 3. The #or8ing notes gi!en to#ards the end of this a&&endix are intended to assist in understanding the manner in #hich the !arious figures a&&earing in the conso"idated ba"ance sheet ha!e been deri!ed. These #or8ing notes do not form &art of the conso"idated ba"ance sheet and, according" , need not be &ub"ished. .. The fo""o#ing are the ba"ance sheets as at 31st /arch, +FF3 of N Bimited )the ho"ding com&an *, R "imited and Y Bimited )both subsidiaries of N Bimited* )7s.IFFF* $ources o! Funds (hare Ca&ita" 7eser!es and (ur&"us <W Debentures Current Biabi"ities Tota" 0 &imited .,;FF.FF 1;F.FF 99 .+F.FF ;49:9<99 / &imited 1,FFF.FF 19;.FF +;F.FF +1F.FF 547;;<99 C &imited +,FFF.FF 39F.FF 999 3FF.FF 84769<99

Application o! Funds 6ixed Assets In!estments in (ubsidiaries In!entories Cash 0ther Current Assets Tota"

0 &imited 1,<FF.FF +,;<F.FF ;+F.FF +FF.FF 19F.FF ;49:9<99

/ &imited .9F.FF 99 <;F.FF +3F.FF +$;.FF 547;;<99

C &imited 1,.FF.FF 99 $;F.FF 1<F.FF +$F.FF 84769<99

;. The fo""o#ing additiona" information is a"so re"e!ant for the &re&aration of the conso"idated ba"ance sheet: )i* The brea89u& of in!estments of N Bimited is as fo""o#s: Carrying Cost )a* $F,FFF e=uit shares of 7s.1F each of R "imited )b* 1,3;,FFF e=uit shares of 7s.1F each of Y "imited )c* .,FFF &reference shares of 7s.1FF each of Y Bimited )d* $FF <W Debentures of 7s.1FF each of R Bimited Total $$F.FF 1,+FF.FF .FF.FF $F.FF 84;79<99

<. A"" the abo!e in!estments #ere made on 3Fth (e&tember, 199$. The summarised ba"ance sheets of R Bimited and Y Bimited as on that date #ere as fo""o#s: )7s.IFFF* $ources o! Funds (hare Ca&ita" 7eser!es and (ur&"us <W Debentures Current Biabi"ities Tota" / &imited 1,FFF.FF 1;+.;F +;F.FF 3FF.FF 54:98<;9 C &imited +,FFF.FF 3;F.FF 999 .FF.FF 84:9;<99

Application o! Funds 6ixed Assets Current Assets Tota"

/ &imited ;FF.FF 1,+F+.;F 54:98<;9

C &imited 1.;F.FF 1,+;;.FF 84:9;<99

7. The (hare Ca&ita" of (ubsidiar consisted of $ources o! Funds E=uit (hares of 7s.1FG9 each Jref. (hares of 7s.1FFG9 each Total / &imited 1,FFF.FF Ni" 54999<99 C &imited 1,;FF.FF ;FF.FF 84999<99

$. Current assets of R Bimited inc"udes bi""s recei!ab"es for 7s.$,FFF acce&ted b N Bimited. 9. Current "iabi"ities of Y Bimited. Inc"ude 7s.+,FFF due to N Bimited. 1F. (toc8 of N Bimited inc"ude goods of 7s.1F,FFF &urchased from R Bimited on #hich the "atter com&an made a &rofit of 7s.+,FFF. Consolidated -alance $+eet o! 0 &imited and its $u#sidiaries / &imited and C &imited as at >5st *arc+4 899> )7s.IFFF* $ources o! Funds (hare Ca&ita" 7eser!es and (ur&"us Ca&ita" 7eser!e <W Debentures 0 &imited .,;FF.FF 1;F.FF 99 99 / &imited 1,FFF.FF 19;.FF 99 +;F.FF C &imited +,FFF.FF 39F.FF 99 99 Elimination Entries )3,FFF.FF*1 ).7<.;F*+ .<<.;F3 )$F.FF*. Consolidation Amounts .,;FF.FF +;$.;F .<<.;F 17F.FF

Current Biabi"ities /inorities Interest Total

.+F.FF 99 ;49:9<99

+1F.FF 99 547;;<99

3FF.FF 99 84769<99

)+$.FF*; ;+$.FF< '8;69<99(

9F+.FF ;+$.FF 74A8;<99

Application o! Funds 6ixed Assets In!estments Cash In!entories 0ther Current Assets

0 &imited 1,<FF.FF +,;<F.FF +FF.FF ;+F.FF 19F.FF ;49:9<99

/ &imited .9F.FF 99 +3F.FF <;F.FF +$;.FF 547;;<99

C &imited 1,.FF.FF 99 1<F.FF $;F.FF +$F.FF 84769<99 99 )+,;<F.FF* 99 )+.FF*7 )+$.FF*; '8;69<99( 3,.9F.FF NIB ;9F.FF +,F1$.FF 7+7.FF 74A8;<99

,OR2IN% NOTE$ 1. E"imination of share ca&ita" of subsidiaries

1;

/ &imited E=uit (hare Ca&ita" )i* ?sed in e"imination of carr ing cost of in!estment in each subsidiar )ii* Inc"uded in the /inorities Interest Jreference (hare Ca&ita" )i* Ke"d #ithin the Grou& )he"d b com&an * )ii* Inc"uded in the /inorities Interest Total s+are capital eliminated ho"ding Ni" Ni" 1,FFF.FF $FF.FF +FF.FF

C &imited

Total

1,3;F.FF 1;F.FF

+,1;F.FF 3;F.FF

.FF.FF 1FF.FF +,FFF.FF

.FF.FF 1FF.FF 3,FFF.FF

+. Erea89u& of reser!es and sur&"us e"iminated: / &imited )i* 7eser!es u& to the date of in!estment>1< )a* Attributab"e to the ho"ding com&an )uti"ised in e"iminating carr ing cost of in!estment* 17 )b* Attributab"e to /inorities )inc"uded in 1++.FF +7.F;F 39<.;F C &imited Total

3F.;F

3F.;F

<1.FF

minorities interest*

)ii* /o!ement in reser!es and sur&"us after the date if in!estment: )a* Attributab"e to /inorities )inc"uded in minorities interest )b* Jrofit earned b the subsidiar R Bimited on account of sa"e of goods to N Bimited Total reserves and surplus eliminated $.;F +.FF 1<3.FF $.;F 99 313.;F 17.FF +.FF .7<.;F

3. E"imination of carr ing cost of in!estments in e=uit shares of each subsidiar : / &imited Carr ing Cost 7ess8 E=uit attributab"e to the ho"ding com&an at the date at #hich in!estment #as made )see #or8ing note $ be"o#* Negative %ood)ill 'capital reserve( $$F.FF )9++.FF* C &imited 1,+FF.FF )1,<+..;F*

'D8<99(

'D8D<;9(

.. The e"imination of in!estment in R BimitedIs <W Debentures needs ex&"anation. The ho"ding com&an ac=uired debentures at face !a"ue of 7s.$F,FFF. The conso"idated amounts shou"d re&resent debentures of the subsidiar R Bimited outside the grou&. ;. Ei""s &a ab"e of 7s.$,FFF and debtors of 7s.+F,FFF are inter com&an therefore e"iminated. <. Com&utation of /inorities Interest / &imited )a* Amount of e=uit attributab"e to minorities at the date at #hich in!estment in each subsidiar is made )as com&uted in #or8ing note $ be"o#* )b* /inoritiesI share in mo!ement in e=uit since the date of in!estment in each subsidiar )as com&uted in #or8ing note 9 be"o#* )c* Amount of Jreference (hare Ca&ita" he"d outside the Grou& Total C &imited Total o#ings and

+3F.;F

1$F.;F

.11.FF

$.;F

$.;F

17.FF

Ni" 8>6<99

1FF.FF 8A6<99

1FF.FF ;8A<99

7. The &rofit earned b R Bimited is reduced from the conso"idated amount of in!entories so that it can be !a"ued at cost to the grou& as a #ho"e. $. E=uit of the subsidiar in!estment is made: com&anies R Bimited and Y Bimited at the date at #hich

/ &imited 6ixed Assets Current Assets Debentures Current Biabi"ites Jreference (hare Ca&ita" E@uity on t+e date o! investment E=uit attributab"e to the ho"ding com&an Zsee &ara 13)a*T E=uit attributab"e to the minorities Zsee &ara 13)c*T Total ;FF.FF 1,+F+.;F )+;F.FF* )3FF.FF* 99 545;8<;9 9++.++ +3F.;F 545;8<;9

C &imited 1,.;F.FF 1,+;;.FF 99 ).FF.FF* );FF.FF* 54A98<99 1,<+..;F 1$F.;F 54A9;<99

9. /o!ement in e=uit of subsidiaries since the date of in!estment in each subsidiar : / &imited E=uit as on 31st /arch, 1999 Bess: E=uit on the date of In!estmen as com&ared in #or8ing note )$* abo!e *ovement in e@uity 5ovement in E9uit+ attributable to the holding compan+ 3see paragraph ):(a); 5ovement in E9uit+ attributable minorities 3see paragraph ):(c); to the 1,19;.FF )1,1;+.;F* D8<;9 3..FF $.;F D8<;9 Appendix II Consolidated Pro!it and &oss $tatement (he appendi! is illustrative onl+ and does not form part of the 0uidance 1ote. (he purpose of this appendi! is to illustrate the application of the Accounting Standard (AS) /), Consolidated inancial Statements. 1. The exam&"e sho#s on" current &eriod amounts. +. The fo""o#ing additiona" information is a"so re"e!ant for the &re&aration of the conso"idated &rofit and "oss statement )figures are in 7s.IFFF*: )a* The ho"ding com&an A Bimited &urchased +,7F,FFF e=uit shares of 7s.1F each )7;W of the tota" e=uit share ca&ita"* and 9,FFF 9W&reference shares of 7s.1FF each );FW of the tota" &reference share ca&ita"* of the subsidiar com&an E Bimited on 1st No!ember, 199$. C &imited 1,$9F.FF )1,$F;.FF* A;<99 7<.;F $.;F A;<99

)b* A Bimited &ro&oses to &a a fina" di!idend on e=uit shares [ +;W. A Bimited &aid an interim di!idend 7s. 1,3;F during the financia" ear +FF+9+FF3. )c* E Bimited &ro&oses to &a a fina" di!idend on e=uit shares [ +FW. E Bimited &aid an interim di!idend of 7s.7+F on 1st 0ctober, +FF+. An interim di!idend of 7s.$1 #as &aid on &reference shares a"so. The ho"ding com&an did not &artici&ate in the interim di!idend. )d* E Bimited so"d to A "imited in /arch, 1999 materia" for 7s.7;F at cost &"us +;W of #hich A Bimited unso"d stoc8 of 7s. ;FF as on 31st /arch, +FF3. Consolidated Pro!it and &oss $tatement o! A &imited and its $u#sidiary - &imited !or t+e year ended >5st *arc+4 899> Income A Bimited - &imited Eliminatio n Entries )7;F.FF*1 );.F.FF*+ ).F.;F*+ '54>>9<;9 ( Consolidat ed Amounts 3F,7;F.FF NIB NIB >94:;9<99

(a"es Jro&osed Di!idend from E Bimited Di!idend on &reference (hares of E Btd. Total Income 'A(

1<,+FF.FF ;.F.FF .F.;F 574:A9<;9

1;,3FF.FF 99 99 5;4>99<99

Expenditure

A &imited

- &imited

Eliminatio n Entries )7;F.FF*1 99 99 99 )7;F.FF* ';A9<;9(

Consolidat ed Amounts 1<,3;F.FF 3,F1;.FF +,F+;.FF .,<...FF +<,F3..FF D4:57<99

Consum&tion of ra# materia"s 0!erhead Ex&enses (e""ing Ex&enses Jro!ision for Tax Tota" Ex&enditure )E* Net Pro!it !or t+e year 'A3-(

$,+$F.FF +,F7F.FF $1F.FF +,7FF.FF 13,$<F.FF 84689<;9

$,$+F.FF 9.;.FF 1,+1;.FF 1,9...FF 1+,9+..FF 84>:7<99

Consolidated Pro!it and &oss Appropriation Account o! A &imited and its $u#sidiary - &imited !or t+e year ended >5st *arc+4 899> A &imited 0&ening Ea"ance Add8 Net Jrofit for the ear 7ess8 Jreference Di!idend for the ear .$1.;F +,9+F.;F - &imited ;7<.FF +,37<.FF )1<+.FF* Elimination Entries 99 );$F.;F* .F.;F+ Consolidated Amounts 1,F;7.;F .,71<.FF )1+1.;F*

7ess8 E=uit di!idend for the ear -alance to #e consolidation adEusted !or

)+,7FF.FF* :98<99

)1,..F.FF* 54>;9<99

;.F.FF+ 999<99

)3,<FF.FF* 849;8<99

Amount credited Account

to

In!estment

99

3+1.7;

Amount uti"ised in e"imination of the Cost of In!estment in (ubsidiar Ea"ance attributab"e to minorities ?nrea"ised Jrofit on (toc8 )stoc8 reser!e* Amounts transferred conso"idated Ea"ance (heet Total to

;.;.<+. 337.;F; 1FF.FF< )9$3.1+* 999<99

;.;.<+ 337.;F 1FF.FF 7.7.13 849;8<99

,or1ing Notes 6or the &ur&ose of the #or8ing notes, it is assumed that &rofits accrued e!en" throughout the financia" ear +FF39F.. According" , the &rofits are a&&ortioned as IJrofits u&to the date of In!estmentI and IJrofits after the date of In!estment2 on the basis of months. An a"ternati!e treatment ca""s for &re&aration of Jrofit and Boss (tatement and Ea"ance (heet of the subsidiar com&an on the date at #hich in!estment is made b the Ko"ding Com&an . 1. (ince sa"es made b the subsidiar com&an E "imited to A Bimited in /arch, +FF3 is an inter9com&an transaction, it is therefore, e"iminated. +. The ho"ding com&an did not &artici&ate in the interim di!idend dec"ared b subsidiar . The ho"ding com&an is entit"ed to recei!e the fina" di!idend as fo""o#s: )a* 6ina" di!idend on e=uit shares C7+ x F.7;D )b* 6ina" di!idend on &reference share C$1 x F. ;1 7s.;.F.FF 7s..F.;F the

3. Amount credited to In!estment Account: The ho"ding com&an A Bimited credited to its Jrofit and Boss (tatement the di!idends recei!ed from the subsidiar E Bimited. The di!idends &ertaining to &re9ac=uisition &eriod re&resent reco!er of cost and do not form &art of income. Therefore, the same is re=uired to be credited to the In!estment Account. Jre9ac=uisition &eriod is for 7 months i.e., A&ri" 199$ to 1st No!ember 1999 )a* Jre9ac=uisition e=uit di!idend C7s.;.F x 7G1+D )b* Jre9ac=uisition &reference di!idend C7s..F.;F x 1G<1 7s.31.;F 7s.<.7;

.. Ko"ding com&an Is share in the &rofit u&to the date of in!estment in subsidiar forms &art of e=uit on the date at #hich in!estment in subsidiar is made. Therefore, such &rofits

are uti"ised in e"iminating the cost of in!estments in subsidiar . Jrofits are com&uted as under: )a* 0&ening Ea"ance of the Jrofit and Boss Account )b* Net Jrofit earned during the &eriod 1...9$ to 1. 11.9$ i.e.,, +37< x 7G1+ )c* Interim di!idend on e=uit shares )d* 6ina" di!idend on e=uit shares for the &eriod +FF+9+FF3 )a&&ortioned in the ratio of months 7:;* C7+F x 7G1+D )e* Interim di!idend on &reference shares )f* 6ina" di!idend on &reference shares )it re"ates to the "ast six months of the financia" ear, therefore, a&&ortioned in the ratio of E;* C7s.$1.FF x 1G<D Tota" &rofits of the subsidiar u&to the date of In!estment Ko"ding Com&an Is share in the &rofits com&uted )F.7; x 7+7.;* 7s.;7<.FF 7s.1,3$<.FF 7s.)7+F.FF* 7s.).+F.FF* 7s.)$1.FF* 7s.)13.;F* 7s.7+7.;F Rs<;D;<78

;. /inorities ha!e a share of +;W in the tota" &rofit of the subsidiar com&an . C7s.1,3;F x F.+;D <. Com&utation of ?nrea"ised Jrofit on (toc8 )i* -a"ue of unso"d stoc8 )ii* Jrofit inc"uded is +FW on cost ?nrea"ised &rofit C7s.;FF.FF x F.+FD

7s.337.;F

7s.;FF.FF 7s.1FF.FF

M Issued in (e&tember, +FF3. Aith the issuance of this Guidance Note, the 6ormat of AuditorIs 7e&ort to the Eoard of Directors on Conso"idated 6inancia" (tatements #hich #as &ub"ished in /arch, +FF+ issue of IThe Chartered AccountantI stands #ithdra#n.
1

The (ecurities and Exchange Eoard of India, !ide its circu"ar (/I37JGJo"ic GCir...GF1 dated August 31, +FF1 has amended c"ause 3+ of the "isting agreement #hich no# re=uires the "isted com&anies to &ub"ish conso"idated financia" statements in addidon to the se&arate financia" statements in its annua" re&ort. The amended c"ause further re=uires that the statutor auditors of the com&an shou"d audit the conso"idated financia" statements. The fi"ing of conso"idated financia" statements #ith stoc8 exchanges has a"so been made mandator . (imi"ar" , the 7eser!e Ean8 of India, !ide its circu"ar no. DE0D No. E713C. 7+G+1.F.,F1$G+FF19F+ dated 6ebruar +;,+FF3 ha!e re=uired the ban8s to &re&are conso"idated financia" statements to faci"itate conso"idated financia" su&er!ision.
+

Jaragra&h $ of Auditing and Assurance (tandard )AA(* 1F, ?sing the Aor8 of Another Auditor defines ,com&onents, as a di!ision, branch, subsidiar , @oint !enture, associated enter&rises or other entit #hose financia" information is inc"uded in the financia" information audited b the &rinci&a" auditor

7eference ma be made to A&&endix I Conso"idated Ea"ance (heet of Grou& for an understanding of &ermanent conso"idation ad@ustments.
.

7eference ma ad@ustments.

be made to A&&endices I and II for current &eriod conso"idation

M Aith the issuance of the Guidance Note, the format of re&ort on Conso"idated 6inancia" (tatements issued in /arch, +FF1 sha"" stand #ithdra#n,
;

As &er &aragra&h $ of AA( +$, ,The AuditorIs 7e&ort on 6inancia" (tatements5, ,The auditorIs re&ort shou"d be a&&ro&riate" addressed as re=uired b the circumstances of the engagement and a&&"icab"e "a#s and regu"ations. 0rdinari" , the auditorIs re&ort is addressed to the authorit a&&ointing the auditor,.
< 7 $ 9

Ahere a&&"icab"e. ibid. ibid. Jartner or &ro&rietor, as the case ma be (ee 6ootnote ;. Ahere a&&"icab"e. ibid ibid. Jartner or &ro&rietor, as the case ma be. Jermanent conso"idation ad@ustments. ibid. Current &eriod conso"idation ad@ustments

1F 11 1+ 13 1. 1; 1< 17

%uidance Note on Audit o! *iscellaneous Expenditure F899>GB INTRODUCTION The fo""o#ing is the text of the Guidance Note on Audit of /isce""aneous Ex&enditure. This Guidance Note &ro!ides guidance on audit &rocedures to be a&&"ied #hi"e auditing misce""aneous ex&enditure. This Guidance Note a"so &ro!ides guidance for audit of items that genera"" constitute misce""aneous ex&enditure #hen Accounting (tandard )A(* +<, Intangib"e Assets comes into effect or is !o"untari" a&&"ied b an enter&rise in accounting for intangib"e assets. This Guidance Note, ho#e!er, does not &ro!ide an guidance on audit of intangib"e assets that are recognised in accordance #ith A( +<. The guidance &ro!ided herein is restricted to on" those items #hich #ere hitherto )before a&&"ication of A( +<9#hether mandator or other#ise* being c"assified as items of misce""aneous ex&enditure, but because of a&&"ication of A( +<, accounting treatment of such items #ou"d change. I/isce""aneous ex&enditureI sho#n in the ba"ance sheet of com&anies )or sho#n under this or some other a&&ro&riate heading in the ba"ance sheet of other enter&rises* embraces #ithin its fo"d a !ariet of items of ex&enditure #hich are not entire" charged to income in the ear in #hich the are incurred, but are carried for#ard in the ba"ance sheet to be #ritten9off in subse=uent &eriods. ?n"ess some benefit from the ex&enditure can reasonab" be ex&ected to be recei!ed in future and un"ess the amount of such benefit is reasonab" determinab"e, there is no @ustification for carr ing for#ard the ex&enditure for being #ritten9off in subse=uent &eriods. A"so, the amount of ex&enditure to be carried for#ard shou"d not exceed the ex&ected

future

re!enueGother

benefits

re"ated

to

the

ex&enditure.

The Guidance Note dea"s #ith the audit considerations re"ated to the fo""o#ing items that norma"" constitute Imisce""aneous ex&enditure2: )a* &re"iminar ex&enses> )b* ex&enses inc"uding commission or bro8erage on under#riting or subscri&tion of shares or debentures inc"uding discount a""o#ed on the issue of shares or debentures> )c* research and de!e"o&ment ex&enditure, etc. The Counci" of the Institute of Chartered Accountants of India has issued Accounting (tandard )A(* +<, 1Intangib"e Assets2. The ob@ecti!e of this A( +< is to &rescribe the accounting treatment for intangib"e assets that are not dea"t #ith s&ecifica"" in another Accounting (tandard. A( +< re=uires an enter&rise to recognise an intangib"e asset if, and on" if, certain criteria are met. The accounting stand a"so s&ecifies ho# to measure the carr ing amount intangib"e assets and re=uires certain disc"osures about intangib"e assets. Conse=uent" , the accounting treatment of some of the items that genera"" constitute Imisce""aneous ex&enditureI #ou"d change and #hen an enter&rise ado&ts Accounting (tandard +< 1Intangib"e AssetsI to account for intangib"e assets. Accounting (tandard )A(* +<, IIntangib"e Assets2 comes into effect in res&ect of ex&enditure incurred on intangib"e items during accounting &eriods commencing on or after 19.9+FF3 and is mandator nature from that date for the fo""o#ing: )i* Enter&rises #hose e=uit or debt securities are "isted on a recognised stoc8 exchange in India, and enter&rises that are in the &rocess of issuing e=uit or debt securities that #i"" be "isted on a recognised stoc8 exchange in India as e!idenced b the board of directorsI reso"ution in this regard. )ii* A"" other commercia", industria" and business re&orting enter&rises, #hose turno!er for the accounting &eriod exceeds 7s. ;F crores. In res&ect of a"" other enter&rises, the Accounting (tandard comes into effect in res&ect of ex&enditure incurred on intangib"e items during accounting &eriods commencing on or after 19.9+FF. and is mandator from that date. The Accounting (tandard, ho#e!er, encourages ear"ier a&&"ication. In res&ect of intangib"e items a&&earing in the ba"ance sheet as on the aforesaid date, i.e., 19.9+FF3 or 19.+FF., as the case ma be, the (tandard has "imited its a&&"ication as stated in &aragra&h 99 of A( +<. 6rom the date of this (tandard becoming mandator for the concerned enter&rises, the fo""o#ing stand #ithdra#n: )i* Accounting (tandard )A(* $, Accounting for 7esearch and De!e"o&ment> )ii* Accounting (tandard )A(* <, De&reciation Accounting, #ith res&ect to the amortisation )de&reciation* of intangib"e assets> and )iii* Accounting (tandard )A(* 1F, Accounting for 6ixed Assets 9 &aragra&hs 1<.3 to 1<.7,37 and 3$. (ince A( +<, a&&"ies to different entit from different dates, it ma ha&&en that certain enter&rises, ti"" the date the standard becomes mandator for them ma continue to defer the ex&enditure incurred on items that norma"" constitute ,misce""aneous ex&enditure,. 0nce an entit a&&"ies A( +< to account for intangib"e assets, the ex&enditure incurred on items that norma"" constitute misce""aneous ex&enditure sha"" be go!erned b the (tandard, exce&t in the case of a"read a&&earing

misce""aneous ex&enditure in the ba"ance sheet #hich is to be accounted for using &aragra&h 99 of A( +<. The fo""o#ing features of misce""aneous ex&enditure ha!e an im&act on the re"ated audit &rocedures. )a* The items of ex&enditure inc"uded under this heading do not re&resent an asset. )b* The ex&enditure on these items is usua"" of a non9recurring nature. )c* There is a @ustification for deferring the ex&enditure on the basis that the benefits from the ex&enditure can reasonab" be ex&ected as f"o#ing into the future the amount of such benefits is reasonab" determinab"e, and the amount of deferred ex&enditure does not exceed the ex&ected future benefits re"ated thereto. )d* ?n"ess some fresh ex&enditure is incurred, the ba"ance in these items reduces each ear b the amount #ritten9off in the ear. The auditorIs &rimar ob@ecti!e in audit of items that genera"" ex&enditure is to satisf himse"f that H constitute misce""aneous tangib"e

)a* in case #here some items are sho#n in the ba"ance sheet under the head /isce""aneous Ex&enditure #hether it is &ro&er to defer the ex&enditure> )b* in case #here some items are sho#n in ba"ance sheet under the head I/isce""aneous Ex&enditureI, the &eriod of amortisation of the ex&enditure is reasonab"e> )c* the ex&enditure sho#n to ha!e been incurred during the ear actua"" occurred during the ear and there is &ro&er authorit for the ex&enditure and for its deferra"> )d* the criteria #hich &re!ious" @ustified the deferra" of the ex&enditure continue to be met and the ex&ected future re!enueGother benefits re"ated to the ex&enditure continue to exceed the amount of unamortised ex&enditure> )e* #here the entit has a&&"ied A( +<, for accounting for items that norma"" constitute misce""aneous ex&enditure, #hether the same has been done in accordance #ith the (tandard and the a"read a&&earing items under the head misce""aneous ex&enditure ha!e been dea"t #ith in accordance #ith &aragra&h 99 of A( +<. INTERNA& CONTRO& E A&UATION The auditor shou"d stud . and e!a"uate the s stem of interna" contro" re"ating to the !arious items of misce""aneous ex&enditure to determine the nature, timing and extent of his other audit &rocedures. Ke shou"d &articu"ar" re!ie# the fo""o#ing as&ects. )a* There shou"d be a s stem of contro" o!er ex&enditure incurred on these items. An effecti!e method of exercising such contro" is budgeting #hich, a&art from ensuring &ro&er authorisation of the ex&enditure incurred, a"so sho#s in genera" ho# effecti!e" such ex&enditure is being contro""ed. This is accom&"ished through &eriodica" com&arisons of actua" #ith budgeted figures. )b* Accountabi"it shou"d be estab"ished o!er each item of such ex&enditure. This can be achie!ed, inter a"ia, b u&9to9date maintenance of &ro&er records. )c* The s stem shou"d ensure that re"iab"e information )inc"uding re&orts of ex&erts* is a!ai"ab"e for assessment of the resu"ts achie!ed against the ob@ecti!es and estimates of the ex&enditure determined origina"" . ERIFICATION The nature, timing and extent of substanti!e &rocedures to be &erformed are matters of

&rofessiona" @udgment of the auditor #hich is based, inter aha, on the auditorIs e!a"uation of the effecti!eness of the re"ated interna" contro"s. Ahi"e !erif ing an item of misce""aneous ex&enditure in the ear in #hich the re"e!ant ex&enditure is incurred, the auditor shou"d satisf himse"f regarding the amount of such ex&enditure and its deferra" as a"so regarding the reasonab"eness of the &eriod of amortisation of the ex&enditure. Ti"" the amount is fu"" amortised, the auditor shou"d examine e!er ear that a &ro&er amount is amortised during the ear b #a of a charge to income for the ear )and not as its a&&ro&riation*. The auditor shou"d a"so examine e!er ear that the criteria #hich &re!ious" @ustified the deferra" of the ex&enditure continue to be met. If those criteria no "onger a&&" , the auditor shou"d examine #hether the unamortised ba"ance has been charged as ex&ense immediate" . Ahere the auditor finds that the criteria for deferra" continue to be met but the amount of unamortised ba"ance of the ex&enditure exceeds the ex&ected future re!enueGother benefits re"ated thereto, the auditor shou"d examine #hether such excess has been charged as an ex&ense immediate" . The a&&"icabi"it of A( +< on items that genera"" constitute misce""aneous ex&enditure and s&ecia" considerations in audit of !arious items of misce""aneous ex&enditure #hen A( +< is a&&"ied are discussed in subse=uent &aragra&hs of this Guidance Note. 5reliminary Ex#enses Jre"iminar ex&enses are the ex&enses re"ating to the formation of an enter&rise. 6or exam&"e, in the case of a com&an , &re"iminar ex&enses #ou"d norma"" inc"ude the fo""o#ing. )a* Bega" cost in drafting the memorandum and artic"es of association. )b* 6ees for registration of the com&an . )c* Cost of &rinting of the memorandum and artic"es of association and statutor the com&an . boo8s of

)d* An other ex&enses incurred to bring into existence the cor&orate structure of the com&an . Jaragra&h ;; of A( +< re=uires that ex&enditure on an intangib"e item shou"d be recognised as an ex&ense #hen it is incurred un"ess: )a* it forms &art of the cost of an intangib"e asset that meets the recognition criteria "aid do#n in &aragra&hs 199;. of A( +<> or )b* the item is ac=uired in an ama"gamation in the nature of &urchase and cannot be recognised as an intangib"e asset. If this is the case, this ex&enditure )inc"uded in the cost of ac=uisition* shou"d form &art of the amount attributed to good#i"" )ca&ita" reser!e* at the date of ac=uisition. Jaragra&h ;< ofA( +< &ro!ides some exam&"es #here the ex&enditure is recognised as an ex&ense #hen it is incurred. The exam&"es gi!en inc"ude, ex&enditure on start9u& of acti!ities )start9u& costs*, un"ess the ex&enditure is inc"uded in the cost of an item of fixed asseet under A( 1F. (tart9u& costs ma consist of &re"iminar ex&enses incurred in estab"ishing a "ega" entit such as "ega" and secretaria" costs, ex&enditure to o&en a ne# faci"it or business )&re9o&ening costs* or ex&enditure for commencing ne# o&erations or "aunching ne# &roducts or &rocesses )&re9o&erating costs*. Jre"iminar ex&enses, therefore, incurred on or after, the date on #hich the (tandard becomes mandator for an enter&rise or the &re"iminar ex&enses incurred on or

after the date on #hich the enter&rise o&ts to a&&" the (tandard in the &re&aration and &resentation of financia" statements #ou"d be #ritten off in the ear in #hich the are incurred. The ex&enditure on &re"iminar ex&enses sha"" not be carried for#ard in the ba"ance sheet to be #ritten off in subse=uent accounting &eriods. Jre"iminar ex&enses a"read sho#n in the ba"ance sheet on the date the (tandard is first a&&"ied #ou"d be re=uired to be accounted for in accordance #ith the re=uirements "aid do#n b &aragra&h 99 of A( +<. The auditor shou"d !erif these ex&enses #ith reference to su&&orting documents such as in!oices and contracts re"ating to these ex&enses. In the case of a com&an , auditor shou"d a"so examine that the reimbursement of such ex&enses to &romoters is in accordance #ith disc"osures made in the &ros&ectus. Com&"iance #ith "ega" &ro!isions regarding reimbursement of the &romotersI ex&enses shou"d he s&ecifica"" examined. In addition to the audit &rocedures mentioned abo!e, auditor shou"d a"so a&&" the fo""o#ing audit &rocedures #ith regard to &re"iminar ex&enditure: )a* The auditor shou"d !erif #hether the &re"iminar ex&enses incurred on or after the date (tandard is a&&"ied b the enter&rise are entire" charged to the &rofit and "oss account in the ear in #hich the are incurred. )b* In the case of &re"iminar ex&enses a"read a&&earing in the ba"ance sheet on the date the (tandard is a&&"ied, the auditor shou"d satisf himse"f that the estimate made b the management of the enter&rise of the usefu" "ife &re"iminar ex&enses is a&&ro&riate. )c* The auditor shou"d !erif #hether the carr ing amount of the &re"iminar ex&enses a&&earing in the ba"ance sheet is e"iminated #ith a corres&onding ad@ustment to the o&ening ba"ance of the re!enue reser!e in case the amortisation &eriod determined under &aragra&h <3 of A( +< has a"read ex&ired. )d* The auditor shou"d satisf himse"f that the &re"iminar ex&enses a"read a&&earing in the ba"ance sheet are being amortised in accordance #ith the re=uirements of A( +< in case the amortisation &eriod determined under &aragra&h <3 of A( +< has not ex&ired. Ex#enses *elated to $ubscri#tion or Issue of $hares Ex&enses re"ated to subscri&tion or issue of shares inc"ude commission or bro8erage on under#riting or subscri&tion of shares or debentures, discount a""o#ed on issue of shares or debentures. A( +< exc"udes from its sco&e certain acti!ities or transactions #hich are so s&ecia"ised that the gi!e rise to accounting issues that ma need to be dea"t #ith in a different #a . (uch accounting issues, inter a"ia, are accounting for discount or &remium re"ating to borro#ings and anci""ar costs incurred in connection #ith the arrangement of borro#ings, share issue ex&enses and discount a""o#ed on the issue of shares. The auditor shou"d examine #hether the &a ment of bro8erage, commission, etc., is authorised b artic"es of association or other ru"esGregu"ations and is in accordance #ith the &ro!isions of the re"e!ant statute. The auditor shou"d a"so examine #hether the rates of commission &aid or &a ab"e to bro8ers and under#riters are in accordance #ith the disc"osures made in the &ros&ectus. The auditor shou"d !erif the commission #ith reference to the agreements #ith bro8ers and under#riters. The auditor shou"d examine the certificate issued b the merchant ban8ers #ith regard

to commission &a ab"e to under#riters, and ensure that the &a ment made to under#riters is in accordance #ith such certificate. 0ther ex&enses on issue of shares or debentures, such as fees of the managers to the issue, fees of the registrars to the issue inc"uding mai"ing and hand"ing charges, fees of the ad!isors to the issue, ad!ertisement ex&enses, ex&enses on &rinting and su&&" of &ros&ectus and a&&"ication forms, ex&enses on &rinting of shareGdebenture certificates, etc., shou"d be !erified #ith reference to su&&orting documents such as in!oices, agreements, etc. The auditor shou"d a"so examine #hether the Emits on such ex&enses as "aid do#n in the a&&"icab"e statute ha!e been com&"ied #ith. *esearch and Develo#ment Ex#enditure Entities genera"" incur ex&enditure on research and de!e"o&ment acti!ities. Jaragra&h .1 of A( +<, Intangib"e Assets &ro!ides that no intangib"e asset arising from research or from the research &hase of an interna" &ro@ect shou"d he recognised and shou"d therefore, be charged as an ex&enses, as and #hen incurred. According to A( +<, ex&enditure incurred, in the de!e"o&ment or during the de!e"o&ment &hase of an enter&rise is re=uired to be recognised as an intangib"e asset if, and on" if, the re=uirements of &aragra&h .. of A( +< are met. It ma be noted that the ex&enditure incurred on research or incurred during the research &hase of an enter&rise are re=uired to be recognised as an ex&ense #hen such ex&enses are incurred. The ex&enditure, therefore, incurred in the de!e"o&ment or during the de!e"o&ment &hase of an enter&rise on or after the date on #hich the (tandard becomes mandator for an enter&rise or the &re"iminar ex&enses incurred on or after the date on #hich the enter&rise o&ts to a&&" the (tandard in the &re&aration and &resentation of financia" statements #ou"d be recognised as an asset if the re=uirements of &aragra&h .. of A( +< are met. Ahere the ex&enditure =ua"ifies to be recognised as an intangib"e asset then the re=uirements, re"ated to carr ing amount of the intangib"e asset, its amortisation and disc"osures, "aid do#n b A( +< sha"" a&&" to the de!e"o&ment ex&enditure. The de!e"o&ment ex&enditure sho#n in the ba"ance sheet on the date on #hich the (tandard is first a&&"ied sha"" be accounted for in accordance #ith the re=uirements of &aragra&h 99 of A( +< from that date. If an ex&enditure incurred on the research or during the research &hase of an enter&rise a"read a&&ears in the ba"ance sheet, the same sha"" a"so be re=uired to be accounted for in accordance #ith &aragra&h 99 of A( +< from the date the (tandard is first a&&"ied b the enter&rise. The auditor shou"d &erform the fo""o#ing audit &rocedures #ith regard to research and de!e"o&ment ex&enditure: )a* The auditor shou"d !erif the research ex&enditure and de!e"o&ment ex&enditure #ith reference to su&&orting documents such as &urchase in!oices, agreements #ith third &arties etc. A !ariet of ex&enses ma be incurred b an enter&rise during the research &hase or de!e"o&ment &hase of an enter&rise. The auditor shou"d a&&" the &rocedures mentioned in the Guidance Note on Audit of Ex&enses #ith regard to the items of ex&enditure co!ered therein. )b* The auditor shou"d !erif that the ex&enses incurred on research incurred on research or incurred during the research &hase of an interna" &ro@ect on or after the date the (tandard is first a&&"ied b the enter&rise are entire" charged to the &rofit and "oss account in the ear in #hich the are incurred> )c* In the case of research and de!e"o&ment ex&enses a"read a&&earing in the ba"ance

sheet on the date the (tandard is first a&&"ied, the auditor shou"d satisf himse"f that the estimate made b the management of the enter&rise of the usefu" "ife of such ex&enses is a&&ro&riate> )d* The auditor shou"d !erif #hether the carr ing amount of the research and de!e"o&ment ex&enses a"read a&&earing in the ba"ance sheet is e"iminated #ith a corres&onding ad@ustment to the o&ening ba"ance of the re!enue reser!e in case the amortisation &eriod determined under &aragra&h <3 of A( +< has a"read ex&ired. )e* The auditor shou"d satisf himse"f that the research and de!e"o&ment ex&enses a"read a&&earing in the ba"ance sheet are being amortised in accordance #ith the re=uirements of As +< in case the amortisation &eriod determined under &aragra&h <3 of A( +< has not ex&ired. )f* The auditor shou"d a"so examine that the intangib"e asset recognised is accounted for in accordance #ith the re=uirements of A( +<. )g* Ahere an intangib"e asset has been recognised, the auditor shou"d !erif #hether the asset so recognised is tested for im&airment in accordance #ith Accounting (tandard )A(* +$, Im&airment of Assets. The auditor shou"d examine #hether the test of im&airment is a&&ro&riate and #here im&airment has occurred, an im&airment "oss has be &ro!ided for in the financia" statements. OT.ER ITE*$ Ex&enditure during construction &eriod inc"udes a !ariet of ex&enditure. (ome of the ex&enditure during construction &eriod ma a"so constitute rnisce""aneous ex&enditure. Ahere an enter&rise a&&"ies A( +< to account for intangib"e assets, either !o"untari" or is re=uired to do so b o&eration of the accounting standard itse"f, the accounting treatment of some of the items of ex&enditure during construction &eriod might be go!erned b the &rinci&"es enunciated in A( +<. The auditor, in such cases, shou"d !erif the ex&ense incurred during the construction &eriod #ith reference to the su&&orting documents, such as, in!oices, contracts, etc., re"ating to those ex&enses. The auditor shou"d a"so !erif that the re=uirements of A( +< ha!e been com&"ied #ith in accounting for such items. 3F. In case #here an enter&rise does not a&&" A( +< to account for intangib"e assets because it is not re=uired to do so, the auditor a&art from !erif ing the ex&ense incurred during the constructionI &eriod #ith reference to the su&&orting documents, such as, in!oices, contracts, etc., re"ating to those ex&enses shou"d a"so examine #hether the deferra" and the amortisation of ex&enditure incurred during the construction &eriod are in accordance #ith recognised accounting &o"icies and &ractices )see, for exam&"e, Guidance Note on Treatment of Ex&enditure During Construction Jeriod, issued b the Institute of Chartered Accountants of India*. Ahere the entit incurs hea! ex&enditure of a re!enue nature during the ear, the benefits of #hich are "i8e" to extend be ond that ear, the ex&enditure ma sometimes be deferred and #ritten9off o!er the number of ears for #hich the benefits are ex&ected to be deri!ed b the entit . (ome instances of such ex&enditure are remo!a" of business from one "ocation to another and massi!e ad!ertisement in one ear to introduce a &roduct or de!e"o& a mar8et. In such cases, the auditor shou"d examine #hether the deferred of the ex&enditure meets the re"e!ant criteria and #hether the amount of &eriodic #rite9off of the ex&enditure is a&&ro&riate. DI$C&O$URE$ The auditor shou"d examine #hether the financia" statements contain ade=uate disc"osures as re=uired b A( +<. The auditor shou"d a"so examine that the financia" statements disc"ose the accounting &o"ic #ith regard to misce""aneous ex&enditure. 0n the first occasion #hen A( +< is a&&"ied b an enter&rise for accounting for items

of misce""aneous ex&enditure, the financia" statements shou"d a"so disc"ose the change in accounting &o"ic #ith regard to misce""aneous ex&enditure. in accordance #ith the re=uirements of &aragra&h 3+ of Accounting (tandard )A(* ;, Net Jrofit or Boss for the Jeriod, Jrior Jeriod Items and Changes in Accounting Jo"icies. MIssued in (e&tember, +FF3. The Guidance Note on Audit of /isce""aneous Ex&enditure sho#n in the Ea"ance (heet sha"" stand #ithdra#n in res&ect of audit of financia" statements of enter&rises for #hich A( +<, ,Intangib"e Assets, has become mandator , and in res&ect of entit that has chosen to a&&" A( +< to account for intangib"e assets.