Compliance Memoranda
______Limited
Board of Directors:Bankers:
Contents:
1. Questionnaire as to certain Accounting Standards
2. Consideration of points as to applicability of the CARO 2003 / Auditors:
Registered Office:
Questionnaire AS-1 – Disclosure of Accounting Policies
Sr. No. / Question / Answer1 / Whether the fundamental accounting assumptions are followed:
Is the concern a going concern. If no, disclose and report.
Going concern - the enterprise has neither the intention nor the necessity of liquidation or curtailing materially the scale of operations.
2 / Are the accounting policies consistantly being followed from one period to another. If no, disclose and report.
Consistency – Compare with the previous year through accounting entries
3 / Are accounts on accrual. If no, disclose and report Accrual - Recording of transaction in the period in which revenues/ costs are earned / incurred. List out major areas in 10% or more of total revenues / costs and disclose.
4 / Is anticipated profits recognized, though not realised. If yes, report.
5 / Is provisions for all known liabilities and losses recorded. If no, report.
6 / Whether the Company has a list of significant accounting policies in the form of a manual? If no, list out the areas where policies may be formulated.
Are all significant policies disclosed at one place on the following matters
1. Methods of depreciation, depletion and amortisation
2. Treatment of expenditure during construction
3. Conversion or translation of foreign currency items
4. Valuation of investments
5. Treatment of retirement benefits
6. Recognition of profit on long-term contracts
7. Valuation of fixed assets
8. Treatment of contingent liabilities.
7 / Does the change in any accounting policy has a material effect
8 / Is the amount by which it will have effect on the financial statement disclosed.
9 / If the amount is not ascertainable, is the fact indicated
10 / Whether any change in an accounting policy, which has a material effect has been discussed and the amount by which any item is effected by such change is disclosed to the extent ascertainable and if not ascertainable wholly or in part, and the fact of such disclosure / non disclosure should be indicated.
11 / Whether the accounting policy affect the Profit and Loss a/c, BS preparation & presentation.
12 / Whether the Companies Act or Institute guidelines or any other law regulating the company prescribe specific disclosures.
13 / Whether the significant accounting policies are forming part of the financial statements and whether they are disclosed in one place.
14 / Whether the Company is having specific accounting principles and does it apply it to the preparation / presentation of accounts.
15 / Are the accounting policies selected on the basis of
Prudence
Substance over form
Materiality - Items the knowledge of which might influence the decision of the user of the financial statements.
Questionnaire AS-2 – Valuation of Inventory
Sr. No. / Question / Answer1 / Is the auditee Manufacturer/Trader ?
If manufacturer, classify inventories in following broad heads
1. Raw Material (RM)
2. Packing Material (PM)
3. Work in progress (WIP)
4. Finished goods (FG)
5. Consumables & spares
If the assessee is a trader, only one category of stock i.e. traded material would be there.
2 / Is inventory valued at lower of cost or Net Realisable Value ?
3 / While valuing the stock of RM/PM, whether deduction for Excise Cenvat available & Sales Tax set off availed is taken into account ?
4 / Does valuation of WIP & FG comprise of all costs of purchases, cost of conversion & other cost incurred for bringing the inventories to their present condition & location ?
5 / Is fixed & variable production overheads systematically allocated for valuing the cost of conversion ?
Whether fixed production overheads are allocated on the basis of normal production capacity (ignoring the abnormal expenses or abnormally high production or abnormal production loss)?
6 / Have you verified that the interest and warehousing/storage charges for FG are not included as the cost ? Interest may be included as the cost only in abnormal cases where the time period required for producing the unit is very long. Storage charges may be included only if the storage is required prior to the completion of manufacturing process.
7 / Have you verified that administrative & selling & distribution cost is not included in the valuation of stock ?
8 / What cost formula is assigned to inventories ?
Only FIFO & weighted average cost formulas are acceptable.
Questionnaire as to AS-4
Sr. No / Question / Answer1 / Whether any contingency is in existence on the Balance Sheet date, which may result in gain or loss on some future date?
2 / If such contingency exists, ask the management to quantify the probable amount of gain or loss based on judgement on the available information and based on the past experience:
- If such contingency is likely to result in gain, whether the same has been ignored?
- If the gain is virtually certain, whether the income is accounted for?
3 / If the contingency is likely to result in loss, whether the same has been provided in the Financial Statements?
4 / If the contingent loss can not be estimated with accuracy, whether the disclosure is made in the Financial Statements as to existence and nature of contingency.
5 / If such contingent loss can be set off against counter claim or claim against third party, whether the provision as to contingent loss is provided only after taking into account the probable recovery from such third party? It is to be ensured that suitable disclosure regarding the nature and gross amount of the contingent liability is made.
6 / Whether any event has occurred which have material effect on the Financial Statements, between the Balance sheet date and the date on which the Financial Statements are approved, which needs any adjustments in the Financial Statements? (Special consideration should be given to the fundamental accounting assumptions like Going Concern.)
7 / If the effect of such event is not material, whether there is adequate disclosure of the same in the Financial Statements?
Questionnaire as to AS - 5
Sr. No. / Question / Answer1 / Whether all the items of income and expense accrued (in case of Mercantile System), received / paid (in case of Cash System) during the year have been included in the Financial Statements including extraordinary items, if any?
2 / In case of inclusion of any extraordinary item of income and/or expense, whether the same has been disclosed in the Financial Statements in such a manner that its impact on current profit or loss can be perceived?
3 / Whether there is any major head of income or expense from ordinary activities, affecting the performance of the enterprise? If yes, whether such items are disclosed separately?
4 / In case of inclusion of any prior period item of income and/or expense, whether the same has been disclosed in the Financial Statements in such a manner that its impact on current profit or loss can be perceived?
5 / Whether there is any change in the accounting estimates, having material effect on the Financial Statements of the current period or subsequent period? If yes, whether the amount and nature of change in an accounting estimate have been disclosed? Where the quantification of change is not practicable, whether the fact has been disclosed in the Financial Statements?
6 / To ensure that the effect of a change in an accounting estimate have been classified using the same classification in the profit & loss statement as was used previously for the estimation.
7 / To ensure that the change in the Accounting Policies have been carried out only under the following circumstances:
a) adoption of a different accounting policy is required by statute;
b) for compliance with an accounting standard;
c) if it is considered that the change would result in a more appropriate presentation of the Financial Statements of the enterprise.
8 / If the change in Accounting Policies is in accordance with above guidelines, having material effect should be disclosed and impact of such change should be reflected in the Financial Statements of the period in which such Financial Statements is made. If the change is not in accordance with above guidelines than the auditor should qualify his Audit Report.
9 / If the effect of change is not ascertainable, wholly or in part, the fact should be indicated in the Financial Statements.
Questionnaire as to AS 6 - DEPRECIATION ACCOUNTING
Sr. No. / Questions / Answers1.
i.
ii.
iii.
iv.
v.
vi. / The standard applies to all depreciable assets other than the following items to which special considerations apply:-
Forests, plantations and similar regenerative natural resources;
Wasting assets including expenditure on the exploration for and extraction of minerals, oils, natural gas and similar non-regenerative resources;
Expenditure on research and development;
Goodwill;
Livestock;
Land unless it has limited useful life for the enterprise.
2.
i.
ii.
iii. / Whether the assets come within the purview of the definition of “Depreciable assets” i.e.
Are they expected to be used during more than one accounting period;
Have a limited useful life;
Are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for the administrative purpose and not for the sale in the ordinary course of business.
3.
i.
ii.
iii. / Whether the useful life of a depreciable asset has been estimated on a reasonable basis after considering the following factors:-
Expected physical wear and tear;
Obsolescence;
Legal or other limits on the use of the asset;
4.
i.
ii.
iii.
iv. / Depreciation on additions or extensions to existing assets:
In cases where additions or extensions becomes an integral part of the existing asset:
Whether the depreciation rate applied is the same as applicable to the existing asset and whether depreciation would be allowed over the useful life of the existing asset.
In cases where addition or extension retains separate identify and is capable of being used after the existing asset is disposed of:
Whether depreciation has been provided independently on the basis of an estimate of its own useful life.
5. / If there is a revision of the estimate useful life of an asset:
Whether the unamortised depreciable amount would be charged over the revised remaining useful life.
6. / Whether the basis for computation of depreciation is as per the statute governing the enterprise.
7. / Whether the depreciation method selected has been applied consistently from period to period.
8.
i.
ii. / Change in the method of depreciation:
Is the change / adoption of a new method required by statue or for compliance with an accounting standard;
Is it considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise.
9. / Whether the deficiency or surplus arising from retrospective re-computation of depreciation in accordance with the new method is adjusted in the profit and loss account.
10. / Whether surplus or deficiency arising on assets, which are disposed of, discarded, demolished, or destroyed, is disclosed separately, if material.
11. / Whether the change has been treated as a change in an accounting policy and its effect is quantified and disclosed.
12. / If the historical cost of a depreciable asset has undergone a change
Ø Due to increase or decrease in the long term liability on account of exchange fluctuations
Ø Price adjustments,
Ø Changes in duties or similar factors,
Whether the unamortised depreciation amount would be provided prospectively over the residual useful life.
13. / If depreciable assets are revalued:
Whether provision for depreciation is based on revalued amount and on the estimate of the remaining useful life.
14.
i.
ii.
iii.
iv.
v.
vi.
vii.
viii. / Disclosure:
Historical cost or other amount substituted for historical cost of each class of depreciable asset;
Total depreciation for the period for each class of assets;
The related accumulated depreciation;
Depreciation method used;
Any change in the method;
Depreciation rates or the useful lives of the assets if they are different from the principal rates specified in the statue governing the enterprise;
Material change in depreciation if any, due to revaluation of assets.
A change in the method of depreciation is treated as a change in accounting policy and is disclosed accordingly.
Questionnaire as to AS 9 - REVENUE RECOGNITION
Sr. No. / Questions / Answers1.
i.
ii.
iii. / Does the enterprise derive income from
Sale of goods
Rendering of services
Use by others of enterprise resources yielding interest, royalties and dividends
2.
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix. / Does the enterprise have separate accounting policies for
Revenue from construction contracts
Revenue from hire purchase, lease agreements
Revenue arising from government grants and other similar subsidies
Revenue of insurance companies arising from insurance contracts.
Realised gains resulting from the disposal of, and unrealised gains resulting from the holding of non current assets eg., appreciation in the value of fixed assets.
Unrealised holding gains resulting from the change in value of current assets, and the natural increases in herds and agricultural and forest products.
Realised or unrealised gains resulting from changes in foreign exchange rates and adjustments arising on the translation of foreign currency financial statements.
Realised gains resulting from the discharge of an obligation at less than its carrying amount.
Unrealised gains resulting from the restatement of the carrying amount of an obligation.
3.
i.
ii.
iii.
iv. / Sale of goods.
Seller should have transferred property in the goods to the buyer for a consideration.
There should be transfer of risks and rewards of ownership to the buyer.
Pt b will prevail over Pt a above.
No significant uncertainty exists regarding the amount of consideration that will be derived from the sale of the goods.
4.
i.
ii. / Rendering of services
Proportionate completion method
Ø There should be execution of more than one act.
Ø Contract value, associated costs, number of acts may be considered for this.
Ø Revenue should be recognised on SLM over the specified period unless there is evidence that some other method better represents the pattern of performance.
Completed Service contract method
Ø Execution of Single Act or
Ø Services yet to be performed are significant in relation to the transaction as a whole that the performance cannot be deemed to have been completed until execution of those acts.
Ø No significant uncertainty should exist regarding the amount of the consideration that will be derived from rendering the service.
5. / Interest revenue
On a time proportion basis taking into account the amount outstanding and the rate applicable.
Royalties
On an accrual basis in accordance with the terms of the relevant agreement.
Dividends
When the owner’s right to receive payment is established.
6. / Where the ability to assess the ultimate collection is lacking at the time of raising the claim eg. price escalation etc, revenue recognition is postponed to the extent of uncertainty involved.
7. / When uncertainty regarding collection arises subsequent to the time of sale/ rendering of service, a separate provision may be created to reflect uncertainty rather than adjusting the revenue amount recorded.
8. / When revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised. To consider an accounting policy for the same.
10. / For specific cases, please refer the accounting standard
Questionnaire as to Accounting Standard 10 – Accounting for fixed assets
S. No. /Questions
/Answers
1. /Have the assets been classified as land, building, plant and machinery, vehicles, furniture and fittings, goodwill, patents, trade marks and designs.
/2. /
Are the financial statements prepared on historical cost basis. If changing prices are given effect to in the FS, this standard will not be applicable.
/3. /
Does the enterprise have separate accounting policies for the following:
/i) Forests, plantations and similar regenerative natural resources.
/ii) Wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oil, natural gas and similar non regenerative resources.