PRECUATIONS WHILST UNDERTAKING COMPANY AUDITS

PRECUATIONS WHILST UNDERTAKING COMPANY

AUDITSCommittee for Members in Practice - ICAI

12th September, 2020

ZFB & ASSOCIATES, Chartered Accountants

1

Contents

• Regulatory Aspects

• COVID -19 Considerations

ZFB & ASSOCIATES, Chartered Accountants 2

Regulatory Aspects

• Companies Act

• Others


Companies Act

• Increase in the time limits for registration andmodification of charges

• Disqualification of Directors – if in more than 20companies – to check form filed – Active –compliantor Non – compliant – Implications on Audit Reporting

• Concept of Significant Beneficial Ownership – Reviewof the Register- impact on shareholding and RelatedParty transactions and disclosures

• CSR provisions modified – not yet notified – tosensitise companies – CARO reporting implicationsfor next year – 80G deduction even if incurred upto30 June 2020 – Deferred Tax Liability?


Companies Act

• Mergers and Amalgamation – concept ofappointed date modified – can choose a date inthe scheme or link it with a specific event likeobtaining of a licence / approval etc.

• Related Party transaction – upper limits removed– based on 10% of turnover for specifiedtransactions for obtaining omnibus approval

• Board approval for Financial Statements – can beobtained through Audio visual means as againstphysical – preservation of the recording of theproceedings of the meetings


Others

• NFRA

• Other Laws and Regulations


NFRA

• Inspections started• Check whether firm needs to be registered if

undertaking the audits of following companies:- Listed Companies- Unlisted public companies having paid-up capital of

not less than rupees five hundred crores or having annualturnover of not less than rupees one thousand crores orhaving, in aggregate, outstanding loans, debentures anddeposits of not less than rupees five hundred crores as onthe 31st March of immediately preceding financial year

- Banking, Insurance and other public interest entities- Subsidiaries / associates of the above entities


NFRA

Significant Findings in Inspections undertaken so far:• Non- compliance with Independence Requirements – violation of

the provisions of Section 144 of the Companies Act, 2013 byproviding various prohibited services and also not taking theapproval of the Audit Committee, including in respect of servicesprovided by associated / connected firms / companies to both thecompany and its holding or subsidiary companies.

• Lack of communication between the Audit Firm and Those Chargedwith Governance (TCWG)

• Lack of evaluation and assessment of the Risk of MaterialMisstatement

• Lack of testing and application of mind on matters arising out ofregulatory inspections

• Lack of Documentation especially evidence in respect of IT SystemControls


Other Laws and Regulations

• MSME Disclosures and related matters - Interest provision due toCOVID -19 delays – interest not claimed not provided – interestprovided but not paid since not demanded

• SC Decision on PF in February 2019 – PF deduction on all elementsof pay – differences in implementation practices (retrospective orotherwise, since clarificatory in nature – provision or contingentliability disclosures – general note that impact is being examined -materiality considerations

• PF & ESIC – Due dates for payment not extended due to COVID -19– CARO reporting obligation

• Code of Wages Act, 2019 – to check if State Governments havepassed necessary legislations – repeals certain Acts includingPayment of Bonus Act– impact on minimum wages, deductions andbonus payments, amongst others



• Income Tax - Applying correct rates depending upon the turnover

and applicability of unabsorbed losses and unused tax credits

- Base rates could be different at 30%, 25% and 22% for different years – unwinding of deferred tax to be accordingly at different rates

- Vivad se Vishwas Scheme if opted; impact on provisioning and contingent liability

- Uncertainty over Tax Treatments under Ind AS; probability approach resulting in lower contingent liabilities



• GST

- Examine the audit report for 2017-18 foradditional GST liability or interest and anyqualifications or disclaimers

- ITC related relaxations; go as per financialrecords and adjust later

- Interest on delayed payment continues topayable for March 2020 though due dateextended



• Fulfilment of Export Obligations – can beextended with payment of interest – impacton contingent liability disclosures –provisioning made for old claims filed

• Merchandise Exports from India Scheme –filing of claims on a timely basis and impact onprovisioning due to delay in recovery – sunsetclause till 31 December 2020 and limit uptoRs. 2 crores



• RBI Moratorium and Relaxations – grace period ofthree months – interest continues to be payable –impact on current and non-current classification –consequential impact on provisioning (including ECL,wherever applicable) – increase in time limit forrealisation of export proceeds to 15 months asagainst 9 months


COVID -19 Considerations

• Increased Responsibilities of TCWG

• Audit Planning Considerations

• Reporting Timelines

• Assessing Risk Internal controlsand ExercisingProfessional Skepticism

• Obtaining Sufficient Appropriate AuditEvidence

• Impairment Testing


COVID -19 Considerations

• Inventory Valuation

• Debt Arrangements

• Revenue Recognition

• Evaluate Contracts with Customers and Suppliers

• Impact on Group Audits

• Going Concern Assessment

• Reporting and Disclosures


Increased Responsibilities of TCWG

• Consider creating a Special Committee / Task Force• Existence of proper reporting protocols to provide up to date and

relevant information to the Board, Senior Management, externalstakeholders and auditors on various matters as under:

a) Inventory managementb) IT Systems and Cyber Securityc) Logisticsd) Health and Safety Protocolse) Cash Flow Planning and Managementf) Supply Chain Management• Deficiencies to be acted upon promptly• Seek external advise, if required• Regular two way communication between Management / TCWG

and the Auditors


Audit Planning Considerations

• Focus on increased audit risks

• Impact on scope of the audit including any scopelimitations especially for group audits

• Greater use of specialists in valuation,impairment assessment etc.

• Impact on sufficiency and appropriateness ofaudit evidence

• Reliability / authenticity of scanned documents

• Impact on “work from home”


Reporting Timelines

• Assessing adequacy of reporting timelineskeeping in mind the magnitude and spread ofoperations

• Discussing anticipated delays with statutoryauthorities

• Group audit considerations


Assessing Risk and Internal controls and Exercising Professional

Skepticism• On going assessment• Additional significant risks may arise closer to the year end• Updation of planned audit procedures• Impact on Design and Operating Effectiveness of Controls due to

Remote Working• Areas where risks may need to be reassessed:a) Impairment of Goodwill and Intangible Assetsb) Valuation of Receivables and Other Financial Assetsc) Depreciation and Impairment of PPEd) Inventory obsolescence and valuatione) Compliance with Debt Covenantsf) Contractual Penaltiesg) Force Majeure clause in contracts


Obtaining Sufficient Appropriate Audit Evidence

• Impact due to travel restrictions

• Conducting Inventory Verification is Impracticable

• Non Receipt / Delay in Receipt of Confirmations

• Receiving of Documents / Information remotelythrough email or other secure network

• Remote Access through video conferencing /other audio visual means

• Authenticity of Scanned Documents

• Consider Scope Limitations


Impairment Testing

• Potential adverse impact on cash flows may triggerimpairment testing

• Volatile share price may impact net asset value to bebelow the market capitalisation to trigger impairmenttesting

• Increased risk and uncertainty needs to be factoredwhilst preparing budgets and forecasts

• Multiple scenarios need to be considered• Discount and exchange rates would need to be

adjusted• Greater involvement of Valuation specialists


Inventory Valuation

• Write down of inventories to NRV afterfactoring in market conditions based on thebusiness and industry involved

• Reduced movement, lower commodity prices,expiry of items and higher obsolescence couldtrigger write downs

• Goods in Transit


Debt Arrangements

• Need to avail of additional financing due to lossof revenue, uninsured losses etc.

• Review of the suitability of the existing covenants

• Impact due to availment of moratorium

• Whether restructuring would result inmodification or extinguishment of debt -separate accounting implications

• Current and non current classification may needto be reviewed


Revenue Recognition

• Decline due to reduced economic activity

• Additional price concessions and volumediscounts

• Possible penalties or reduced rates for delayedsupplies

• Increased returns due to reduced demand


Evaluate Contracts with Customers and Suppliers

• Impact due to non performance of obligations

• Request for changes in terms and conditions

• Provision for Onerous Contracts

• Impact of Force Majeure


Impact on Group Audits

• Regular two way communication withcomponent auditors

• Delay or inability to complete audits due totravel and lock down restrictions

• Impact on audit opinion at the group level


Going Concern Assessment

• Evaluate the assessment of the Management and TCWG upto thedate of issuance of the financial statements – adjusting v/s nonadjusting events

• Factors to be considered in making the above assessment:a) Extent of buffer inventory in the event of a supply chain disruptionb) Alternative product sourcing availabilitiesc) Adequate funding sources availabled) Impact on employee productivity due to health and quarantine

issuese) Impact due to possible violation of contractual obligationsf) Adequacy of insurance coverage due to business ddisruptions


Going Concern Assessment

• Maintain professional skepticism andchallenge Management’s assessments andjudgements

• Evaluate adequacy of disclosures


Reporting and Disclosures

Reporting:

• Revisit KAM disclosures

• Consider inserting a para on “MaterialUncertainty Related to Going Concern”

• EOM or Modified Opinion to be evaluated

• Inconsistency between disclosures in OtherInformation (SA-720)

• CARO implications



• Significant judgements, estimates andassumptions

• Other information about specific challenges tothe business model and other areas ofoperations including risks arising out of theeconomic uncertainties

• Disclosure of Exceptional Items – Materialitytest and Predictability test (e.g. Impairmentv/s ECL provisioning)



• SEBI circular dated 20th May on on disclosure of material impact ofCOVID–19 pandemic on listed entities under SEBI (ListingObligations and Disclosure Requirements) Regulations, 2015 (‘LODRRegulations’/‘LODR’) would serve as a useful guide to evaluate thenature and extent of disclosures

• An illustrative list of information that entities may considerdisclosing, subject to the application of materiality, is given below:

a) Impact of the CoVID-19 pandemic on the business;b) Ability to maintain operations including the factories/units/office

spaces functioning and closed down;c) Schedule, if any, for restarting the operations;d) Steps taken to ensure smooth functioning of operations;e) Estimation of the future impact of CoVID-19 on its operations;



f) Details of impact of CoVID-19 on entity’s:i. capital and financial resources;ii. profitability;iii. liquidity position;iv. ability to service debt and other financing arrangements;v. assets;vi. internal financial reporting and controlvii. supply chain;viii. demand for its products/services;g) Existing contracts/agreements where non-fulfilment of theobligations by any party will have significant impact on thelisted entity’s business;


Questions????


PRECUATIONS WHILST UNDERTAKING COMPANY AUDITS

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