Understanding the Key Observations by NFRA

Table of Contents

1. Non-Compliances with Indian Accounting Standards (Ind AS)
2. Non-Compliances with Standards of Auditing
3. Other Non-Compliances

1. Non-Compliances with Indian Accounting Standards (Ind AS)

Key Observations

1.1 Impairment allowance (Ind AS 109)

• Impairment loss allowance (provisioning) not carried out for some of the financial assets viz. Trade Receivables and other financial assets.
• The company has not examined the credit risk and has not calculated the expected credit loss as required by Ind AS 109.
• Not evaluated impairment loss allowance on ‘Unbilled Revenue’ (under Other Current Asset) despite it being a contract asset.

1.2 Partial disclosure (Ind AS 19 Employee Benefits)

• Note provided by the Company lacks clarity on whether the employee benefit of Pension is a defined benefit plan or a defined contribution plan.
• Not made the required disclosure for Employee Benefits-Pensions in accordance with Para 135 of Ind AS 19 regarding defined contribution plans.

1.3 No disclosure of acquisition transaction (Ind AS 103)

• Acquired overseas company through one of its wholly owned subsidiaries during the year but the disclosure of this transaction in the consolidated financial statements was inadequate in accordance with IndAS 103 requirement.
• Another overseas company so acquired was in distress due to financial difficulties, impairment loss on its investment value not evaluated.

1.4 Non-disclosure Ind AS 115

• ‘Significant payment terms’, ‘obligations for returns, refunds, and other similar obligations’ not disclosed.
• Explanations, why the input method used, provides a faithful depiction of the transfer of goods and services not disclosed.

1.5 Corporate Guarantee

• As per notes on accounts: corporate guarantees given to banks to secure credit facilities to three of its subsidiary companies.
• Not accounted corporate guarantees in accordance with requirement of Ind AS 109.

1.6 Disclosure of Government loan

• Company has taken a loan under a government scheme in which a part of the interest shall be borne by the government in the form of interest subvention.
• Not disclosed as required under Ind AS 20.

1.7 Employee Benefits

• Not clarified in the financial statements regarding the bifurcation of leave encashments into long-term and short-term.

1.8 Contradictory GAAP disclosure

• Director’s report states the company has followed Accounting Standards, Notes on Accounts states in compliance with Ind AS.

1.9 SoCiE

• Disclosed details of Share capital and Reserve and Surplus however, Statement of Changes in Equity not presented.

1.10 Disclosures

• Income tax and related accounting policy erroneous.
• Inadequate disclosure of Ind AS 19 employee benefits.
• Disclosures required by para 45, 46, 48 of Ind AS 7 cash flows not provided.
• Ind AS 107 financial instruments and Ind AS 113 fair value measurement related inadequate disclosures.

1.11 Incomplete

• Absence of disclosures regarding PPEs.
• Failed to prepare Consolidated FS even though having associate.

1.12 Loans and advances

• No disclosure of nature of loans given and other advances.
• Deposit of taxes and duties with government disclosed in Current Loans & Advances – others is not financial assets.

1.13 Depreciation

• Not providing depreciation on Plant and machinery, violating Ind AS 16.

1.14 Other Non-compliances

• DTA recognised even though, no audit working paper of reasonable certainty.
• Wrong figure of EPS.
• Depreciation method (SLM/WDV) not mentioned in Signi. Acc. Policy.
• Not disclosed reason of non-recognition of retirement benefits (AS-15).

2. Non-Compliances with Standards of Auditing

Key Observations

Lapses in the Audit of Investments: Total value of investments as on 31/03/18 ₹12,320 Crore, (50% of its balance sheet size)

(a) Violation of SA 230 Audit Documentation

• Failed to provide board approved investment policy.
• No evidence found that management has tested EACH investment of impairment.
• Failed to show working regarding audit procedure for Rs. 1637 crore of investment.

(b) Using the work of management expert (SA 500 & SA 620)

• No record of objective evaluation as to whether the competence of the Expert was examined vis-à-vis his previous experience in dealing with such subjects.
• No evidence in the audit file as to whether any two-way communication took place between the Audit Firm and the auditor’s expert.

2.1 Lapses in the Audit of Loans and Advances

(a) Failed to obtain sufficient appropriate audit evidence (SA 500)

• failed to obtain the duly approved credit policy.
• failed to review the lending policies of the company, thus violating the requirements of SA 500 and Para 6.23 of the ICAI’s Technical Guide on Audit of NBFC.

(b) End use and ever-greening of loan

• Para 5.6 of TG-NBFC: “verify whether there has been any window dressing, i.e., sanction of new loans to repay an existing doubtful loan. This method may be resorted to by the NBFC to cover up bad loans.”
• Para 18 of SA 330 states that “irrespective of the assessed risks of material misstatement, the auditor shall design and perform substantive procedures for each material class of transactions, account balance, and disclosure.”

2.2 Materiality

• Audit Firm had determined materiality at ₹100 crore considering 0.5% of the total asset as at 31st March 2018.
• No review of Materiality WP by Engagement Partner (Para 17 of SA 220).
• Sign-off dates reflects mere formality: In the WP mentioned, materiality has been calculated using the financial results of 30th September 2017, and the final financial results of 31st March 2018, with date of sign-off of preparer and reviewer before 31st March, 2018.
• Factors considering Performance Materiality not documented: The Audit Firm had determined performance materiality at ₹50 crore (50% of the materiality determined). However, the FACTORS considered for determining the performance materiality at ₹50 crore are nowhere documented in the said WP.

2.3 Too many EOMs

• Eight Emphasis of Matters (EOMs) in the financial statements of FY 2017-18.
• Para A3 of SA 706 states that the widespread use of Emphasis of Matter Paragraphs diminishes the effectiveness of the auditor’s communication of such matters.
• On combined reading of Para 5(a) and Para 6 of SA 706, the financial statement item on which an EOM can be issued must satisfy the following conditions:

1. 1. The matter has to be appropriately presented or disclosed in the financial statements and
   2. The auditor should have obtained sufficient appropriate audit evidence that the matter is not materially misstated in the financial statements.

2.4 Opinion on IFC

• Documented a ‘List of Questions for Evaluating Internal Financial Controls and Pre-Audit WPs’ which contained ET’s tests of control carried out with respect to their testing of:

(a) Purchases and Creditors,

(b) Stock,

(c) Fixed Assets and

(d) Sales and Debtors

• Merely a checklist which had a column for questions on the identified significant accounts and a separate column which provided answers in ‘Yes/No/NA’ without any explanation for the same.
• No documentation found in the Audit File to show the audit planning process followed by the Audit Firm on the basis of which significant account balances/disclosure items and relevant assertions that may carry potential of a misstatement had been identified.
• WPs: No documentation of audit procedure applied and conclusion drawn

2.5 Risk of material misstatement (ROMM)

• Not satisfactory rebut the presumption of ROMM due to fraud in respect of revenue recognition and management override of controls.
• Not identified and assessed ROMM through understanding the entity and its environment, including the entity’s internal control.
• Failed to obtain sufficient appropriate audit evidence to reduce ROMM to an acceptably low level.

2.6 Going concern assumption

• Several indicators in financials that could rise significant doubt on going concern.
• Non-compliance of SA570 – failed obtain sufficient appropriate audit evidence regarding management use of going concern.

2.7 Sundry balance written off and Miscellaneous Expenses

• PL includes Sundry balance written off Rs. 14.87 cr and Other Miscellaneous Expenses Rs. 24.06 cr. Constitutes 54.50% of total expenses.
• Non-compliance of SA 240 Auditor’s responsibility relating to fraud in an audit of financial statements.
• Failure to report as extraordinary items (AS-5).

2.8 Related party transactions

• Non-disclosures of all names and transactions of related parties.
• Non-compliance of SA 550 and AS-18.

2.9 Non-current Assets HFS

• Company’s disclosure to BSE dated 31st May 2017 stated that the expected date of completion was during October to December 2017, although the transaction was still pending on 19th May 2018 (date of signing of audit report).
• Failed to review the definitive agreement.
• Failed to discuss with the TCWG and the management, the actions being taken on the progress of the sale process of BJCL.

2.10 Documentation

• Backdate of documents.
• Name and date given in staff matrix not matching with that of audit programme.
• Mismatch of hours submitted with attendance sheet.

2.11 EQCR process

• Appointing the EP himself as its EQCR Partner, thereby negating the very fundamental objectives of the SAs.

2.12 Related party transactions

• Not performed any procedures to confirm the management representation obtained for the related parties:

1. 1. Related parties as per Ind AS-24 and as mentioned in Notes to Accounts are true and correct.
   2. RPTs are in ordinary course of business and at arm’s length.
   3. Company has not entered into any non-cash transactions with directors or persons connected with them.

3. Other Non-Compliances

Key observations

3.1 Companies Act 2013

Non-disclosure of purpose of loan to subsidiaries

• The company has given loans to two of its foreign subsidiaries but did not disclose the purpose of giving loans to its foreign subsidiaries in its Board Report as required by Sec. 186 of Co. Act 13.

Schedule III

• Not disclosed the nature of the balance sheet item “Others” under Other Non-Current Assets as required by Schedule III of the Companies Act.

Non-compliances

• Short term borrowing that to be presented on face of balance sheet shown in Note no. 8 to FS.
• DTA classified as Current asset.
• Cost of material consumed, purchase of stock in trade, changes in inventories to be shown on face of PL, shown in Notes.
• Disclosure of loan incomplete.
• Classification of short term borrowing and short term loans/advances not given.

Lapses in the Audit of Investments: Total value of investments as on 31/03/18 ₹12,320 Crore, (50% of its balance sheet size)

• No prior approval of authorisation of RPT (Sec. 177 of Companies Act, 2013)
• Word ‘approval’ in sec. 177 means prior approval, allows post facto approval only in some classes of cases involving relatively smaller amounts not exceeding Rs One Crore.

3.2 Code of Ethics

Threat to Independence

• Audit Firm and its associates received non-audit services fees amounting to ₹4.57 crore in 4 years (commencing from 2015-16), as opposed to audit fee revenue of ₹2.3 crore received for conducting the statutory audit for FY 18.

3.3 Engagement Quality Control Review (EQCR)

• Para 20 of SA 220 states that the engagement quality control reviewer shall perform an Objective evaluation of the significant judgments made by the engagement team, and the conclusions reached in formulating the auditor’s report.
• No specific observations or details of work done by EQCR partner on the pages where he signed in the said documents.
• EQCR partner did not objectively evaluate the significant judgements of the ET and conclusions reached by them.
• Audit firm failed to comply with requirement of SQC 1, SA 220, and SA 230 regarding EQCR and issued an audit report without an objective evaluation from the EQCR partner.