Auditor's Report after MCA Notification on Notebandi

Auditor's Report after Notification by MCA on Notebandi

Implementation Guide on Auditor’s Report under Rule 11(d) of Companies (Audit and Auditors) Amendment Rules, 2017 and Amendment to Schedule III to Companies Act, 2013

Introduction

The Ministry of Corporate Affairs (Ministry) vide its notifications dated 30th March, 2017 has amended Schedule III to the Companies Act 2013 (the 'Act') and Companies (Audit and Auditors) Rule 2014.

The amendment to Schedule III (Division I and Division II) requires every company to disclose the details of Specified Bank Notes (SBN) held and transacted during the period from 8 November 2016 to 30 December 2016 in the specified format. This amendment is effective from the date of its publication in the Official Gazette i.e. 30th March 2017. As mentioned in the notification,‘Specified Bank Notes’ shall have the same meaning provided in the notification of the Government of India, in the Ministry of Finance, Department of Economic Affairs number S.O. 3407(E), dated the 8th November, 2016. The said notification, defines the term as "bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees".

In addition to amendment to Schedule III, Ministry has amended Rule 11 of the Companies (Audit and Auditors) Rule 2014 vide the Companies (Audit and Auditors) Amendment Rules, 2017 by inserting clause (d) which require auditors to report on whether the company had provided requisite disclosures in its financial statements as to holdings as well as dealings in Specified Bank Notes during the period from 8 November 2016 to 30 December 2016 and if so, whether these are in accordance with the books of accounts maintained by the company. These rules are effective from the date of its publication in the Official Gazette.

Frequently Asked Questions (FAQs)

1. For which accounting periods does the Amendment to Schedule III apply and whether disclosure given in the financial statements should also mention denominations along with the value?

The notification to amend Schedule III is issued under the powers conferred by Section 467(1) of the Act. Section 467(2) states that any alteration notified under Section 467(1) is effective from the date of the notification, unless the notification directs otherwise. This notification clearly states that it comes into effect from the date of its publication in the Official Gazette. Consequently, the disclosures are applicable to financial statements which are issued after March 30, 2017 and which include the period from 8th November 2016 to 30th December 2016.

Notification as mentioned above, seeks disclosure of closing cash in hand as on 08.11.2016 and as on 30.12.2016 with other detail, which should be mentioned in terms of INR, thus there is no specific requirement to mention the denomination also in which closing cash balance during the specified period was held.

2. What is the effective date for auditor's reporting under the new clause in Rule 11?

As mentioned in the notification, the Companies (Audit and Auditors) Amendment Rules, 2017 is effective from the date of its publication in the Official Gazette i.e. 30th March 2017 and thus audit reports issued on the financial statements as mentioned in reply to FAQ 1 above, should include a comment against clause(d) of Rule 11 as referred above.

3. What should be the manner of reporting against Rule 11(d) for companies to which Schedule III requirements are not applicable?

For companies which are not required to present their financial statements as per Schedule III (Reference may be made to Proviso (2) of sub-section (1) of Section 129 of Companies Act, 2013 in this regard). Refer Scenario 2, given herein below in this Guide, for the purpose of reporting against Rule 11(d).

4. Whether there could be a scenario for modifying the main audit report along with reporting against Rule 11(d)?

Where instance of non-compliance with relevant notifications are noted by the auditor and where in the auditor’s professional judgement it is concluded that the non-compliance is of such nature that it has an impact on the true and fair view of the financial statements, the auditor should consider modifying his report in accordance with SA 705, ‘Modifications to the Opinion in the Independent Auditor’s Report’.

Note: It should also be noted that above guidance is equally applicable in respect of disclosure and reporting on the consolidated financial statements.

Illustrative list of Audit Procedures

[Please note that these procedures are not substitute for ensuring compliance with Standards on Auditing and relevant Guidance Notes]

•Obtain closing cash balance certificate with denominations from the Management as at 8 November 2016 and as at 30 December 2016 in respect of Specified bank notes (SBNs) and other denomination notes.

•Obtain an understanding of the controls and procedures implemented by the company during the period 9 November 2016 to as at 30 December 2016 to ensure that there were no payments and receipts made in SBN other than those permitted by regulators from time to time. Whether the controls (if implemented by the company) were reasonable to prevent and detect any non-permitted transactions.

•Confirm the balances as certified by the management from the books of accounts as at those dates.

•In case the auditor had conducted physical cash counts on 8 November 2016 and 30 December 2016 or a closer date before or after that date (for example 31 December 2016), he should consider performing roll-forward or roll-back procedures to confirm the balance as certified by the management has been arrived at correctly.

•Obtain a listing from the management as to how the SBNs available with the company as at closing on 8 November 2016 were dealt with, example.

(i)Used for payment for permitted transactions in accordance with the issued notifications* from time to time.

(ii)Deposited in bank accounts (with dates and amount, with denominations), as evident from bank deposit slips/bank statements. 

(iii)Used for Payment for non-permitted transactions [Where cases of non-permitted transactions were noted, the auditor should report the same against Rule 11(d) of Companies (Audit and Auditors) Amendment Rules, 2017 - Refer reporting scenario 6].

(iv)SBNs as available with the company as at closing hours of 30 December, 2016.

•Obtain a listing from the management if there were any receipts of the SBNs during the period from 9 November 2016 to 30 December 2016, including the nature of transaction and amount with denominations. Further examine with the relevant notification that they were eligible to accept SBNs.

•Obtain a reconciliation of the cash balance from the management. As explained in FAQ 1, the figures required to be disclosed in Schedule III in INR, but for auditors working and reconciliation, obtain the figures with denomination in the illustrative format as given below):

SBNs Other denomination notes Total

Denomi-nation Amount Denomi-nation Amount Denomi-nation Amount

Closing Balance as at 8 November 2016 

Transactions between 9th November 2016 and 30th December 2016

Add: Withdrawal from Bank accounts 

Add: Receipts for permitted transactions 

Add : Receipts for non-permitted transactions (if any) 

[Refer reporting scenario 6] 

Less : Paid for permitted transactions 

Less : Paid for non-permitted transactions (if any) 

[Refer reporting scenario 6] 

Less: Deposited in bank accounts 

Closing balance as at 30 December 2016

•For the details of payments given by the company, verify the following with reference to relevant notifications issued from time to time :

(i)Payments for permitted transactions: Verify cash payment vouchers and whether the purpose for which payments were made are covered under permitted/ non-permitted transactions 

(ii)Deposited in bank accounts (with dates and amount, with denominations): verify deposit slips or deposit form which would contain details of denominations and would also be acknowledged by the bank.

•Obtain bank statement regarding deposits made with the banks

•Where the entity is covered under the permitted list to receive payments in SBN (e.g. hospital, toll-collection companies, petrol pumps, air ticket etc.) as per the notifications issued from time to time, obtain details of receipts made by the company and deposits made with the bank. Also verify the same from the books of accounts of the company, bank deposit slips and Bank Statements.

•Obtain management representation regarding the following:

(i) Completeness of the disclosure made in the notes to the financial statements.

(ii) Manner of dealing in the SBNs during 9 November 2016 to 30 December 2016, deposited in bank, payment against permitted transactions etc.

(iii) Permitted receipts and permitted payments made by the company as per the Government notifications issued from time to time

Note: Permitted receipts and permitted payments are not specifically defined in the notification. However, these would include transactions of receipt and payment of Specified Bank Notes as permitted by Reserve Bank of India from time to time. These would include payment for the medical treatment (hospitalisation in Government hospitals, medicine etc. as per the relevant notifications), purchase at consumer cooperative stores operated under authorisation of Central or State Government, purchase of bus tickets at government bus stands, train tickets at railway station, air tickets at airport, toll charges at National Highway, utility bills, purchase of LPG/gas cylinders, school fees, payment towards any fees, charges, taxes or penalties, payable to the Central or State Government including Municipal and local bodies and fuel purchase etc.

Reporting scenarios

Please note that scenarios listed below are for illustrative purposes only and auditors are expected to exercise their professional judgement and make necessary changes while commenting against Rule 11(d)

Scenario 1: Where the company has provided requisite disclosures in the financial statements as to holdings as well as dealings in Specified Bank Notes and auditor is able to report on the same

The Company has provided requisite disclosures in the financial statements as to holdings as well as dealings in Specified Bank Notes during the period from 8th November, 2016 to 30th December, 2016. Based on audit procedures and relying on the management representation we report that the disclosures are in accordance with books of account maintained by the Company and as produced to us by the Management – Refer Note [*];

Scenario 2: Where the clause is not applicable to the company

The Company did not have any holdings or dealings in Specified Bank Notes during the period from 8th November, 2016 to 30th December, 2016 – Refer Note [*] OR

The disclosure requirement as envisaged in Notification G.S.R 308(E) dated 30th March 2017 is not applicable to the Company - Refer Note [* ];

Scenario 3: Where the company has provided requisite disclosures in the financial statements as to holdings as well as dealings in Specified Bank Notes, however, the auditor is not able to verify the same due to non-availability of sufficient and appropriate audit evidence resulting into scope limitation

The Company has provided requisite disclosures in the financial statements as to holdings as well as dealings in Specified Bank Notes during the period from 8th November, 2016 to 30th December, 2016. However, we are unable to obtain sufficient and appropriate audit evidence to report on whether the disclosures are in accordance with books of account maintained by the Company and as produced to us by the Management – Refer Note [*];

Scenario 4: Where the company has not provided requisite disclosures in the financial statements as to holdings as well as dealings in Specified Bank Notes

The Company has not provided requisite disclosures in the financial statements as to holdings as well as dealings in Specified Bank Notes during the period from 8th November, 2016 to 30th December, 2016.

Scenario 5: Where the company has not provided certain requisite disclosures in the financial statements as to holdings as well as dealings in Specified Bank Notes

The Company has not provided certain requisite disclosures in the financial statements as to holdings as well as dealings in Specified Bank Notes during the period from 8th November, 2016 to 30th December, 2016. Consequently we are unable to obtain sufficient and appropriate audit evidence to report whether the disclosures to the extent stated in the notes are in accordance with books of account maintained by the Company and as produced to us by the Management – Refer Note [*]

Scenario 6: Where the company has provided requisite disclosures in the financial statements as to holding as well as dealings in Specified Bank Notes but have transacted in non- permitted receipt/payments

The Company has provided requisite disclosures in the financial statements as to holdings as well as dealings in Specified Bank Notes during the period from 8th November, 2016 to 30th December, 2016. However, as stated in notes [*] to the financial statements amounts aggregating to Rs. [ ] as represented to us by the Management have been utilized for other than permitted transactions/received amount aggregating Rs. [ ] from transactions which are not permitted;

NOTES: 

1.For scenarios 3, 4 and 5, auditor should also consider to include a comment in the report against clause (a) of section 143(3) of the Companies Act 2013.

2.Also there could be a situation where the auditor is required to report on multiple matters relating to SBNs under Rule 11(d) and in such cases auditors are expected to make appropriate changes to the above suggested reporting scenarios.

Written Representation

This is a suggested language for management representation and thus auditor should consider modifying the same as may be considered relevant by him depending upon facts and circumstances.

We have appropriately disclosed {Refer Note [ ]}, the details of Specified Bank Notes (SBN) held and transacted during the period from 8th November, 2016 to 30th December, 2016 pursuant to the requirement of Notification G.S.R 308(E) dated 30th March 2017. Further we confirm that we have complied will all relevant guidelines/notifications issued by Reserve Bank of India from time to time in respect of holding and dealing with Specified Bank Notes, and that the company had proper controls, system and procedures in place for such compliances.