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Gaurav Bhansali asked 1 year ago

CA S is an auditor of KM Private Limited. During the course of audit CA S noted that Enforcement Directorate has issued a show cause notice for various non-compliances of Foreign Exchange Management Act and Regulations thereunder which is on-going as at the year end Management however contended that they hat e done nothing wrong. CA S would like to highlight the same in his Audit Report. Guide him suitably as to where in Audit Report, this matter should be reported. Consider the applicability of relevant SA, if any.

3 Answers
RaviRavi Staff answered 1 year ago

its a old question Apply
SA 250
AS 29 
CARO

RaviRavi Staff answered 1 year ago

Old Question
Big and Small Ltd. received a show cause notice in December 2013 from the Central Excise department intending to levy a sum of ` 25 lakhs. The Company replied to the above notice in January, 2014 contending that it is not liable for the proposed levy. No
further action was initiated by the Central Excise department up to the finalization of the audit for the year ended on 31st March, 2014. As the Auditor of the Company, how would you deal with this matter in your report?

RaviRavi Staff answered 1 year ago

Answer
As per SA 250
“Consideration of Laws and Regulations in an Audit of Financial Statement”, the auditor shall obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally recognised to have a direct effect on
the determination of material amounts and disclosures in the financial statements including tax and labour laws.

During the audit, the auditor shall remain alert to the possibility that other audit procedures applied may bring instances of non-compliance or suspected non-compliance with laws and regulations to the auditor’s attention. Then the auditor shall discuss the
matter with management and, where appropriate, those charged with governance. If management or, as appropriate, those charged with governance do not provide sufficient information that supports that the entity is in compliance with laws and regulations and, in the auditor’s judgment, the effect of the suspected non-compliance may be material to the financial statements, the auditor shall consider the need to obtain legal advice. In case, if the auditor concludes that the non-compliance has a material effect on the financial statements, and has not been adequately reflected in the financial statements, the auditor shall express a qualified or adverse opinion on the financial statements.


Further, as per AS 29 “Provisions, Contingent liabilities and Contingent Assets”, future events that may affect the amount required to settle an obligation should be reflected in the amount of a provision where there is sufficient objective evidence that the event will
occur.

Furthermore, the auditor’s report under section 143 of the Companies Act, 2013 has to specifically include certain matters specified in Para 3 of CARO, 2016.

One of such matter is non-payment of dues to Government, on account of any dispute. As per clause (vii)(b) of Para 3 of CARO, 2016, in case dues of income tax or sales tax or wealth tax or service tax or duty of customs or duty of excise or value added tax or
cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned.

In the present case of Big and Small Ltd., issuance of show cause notice by Excise Department does not tantamount to demand payable by the Company. In so far as the Company has replied to the notice and no further correspondence was received from the
Department. This show cause notice may be an alert or indication of non-compliance for the auditor. So auditor need to discuss with management and apply additional procedure.

If the auditor concludes that there is non-compliance then provision for the same should be made as per AS 29. The auditor should also report the amount of dues not deposited on account of dispute and the forum where dispute is pending, in his audit report. If the management does not accept the request, the auditor should qualify the audit report accordingly or vice versa.
 

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