{"id":21384,"date":"2023-04-13T17:19:55","date_gmt":"2023-04-13T11:49:55","guid":{"rendered":"https:\/\/gstguntur.com\/?p=21384"},"modified":"2023-04-13T17:19:55","modified_gmt":"2023-04-13T11:49:55","slug":"accounting-and-audit-related-issues-rpts-and-vigil-mechanism-cs-professional-study-material","status":"publish","type":"post","link":"https:\/\/gstguntur.com\/accounting-and-audit-related-issues-rpts-and-vigil-mechanism-cs-professional-study-material\/","title":{"rendered":"Accounting and Audit Related Issues, RPTs and Vigil Mechanism – CS Professional Study Material"},"content":{"rendered":"

Chapter 7 Accounting and Audit Related Issues, RPTs and Vigil Mechanism – CS Professional Governance, Risk Management, Compliances and Ethics Notes<\/a> is designed strictly as per the latest syllabus and exam pattern.<\/p>\n

Accounting and Audit Related Issues, RPTs and Vigil Mechanism – Governance, Risk Management, Compliances and Ethics Study Material<\/h2>\n

Question 1.
\nDiscuss the need for Internal Audit as a tool for Corporate Governance in the present day organizations. (Dec 2020, 5 marks)
\nAnswer:
\nThe demand for auditing both external and internal is sourced in the need to have some means of independent verification to reduce record-keeping errors, asset misappropriation, and fraud within business and non-business organizations. The concept of internal auditing evolved as an extension to external audit in testing the reliability of accounting records that contribute to published financial statements. International financial scandals and recent events including global financial crises have emphasised need for internal auditing within corporate governance structures of organisations. As organisations and the world they operate in are becoming more and more complex, internal audit is considered good practice & advisable as part of underlying internal control & risk management framework of an organisation.<\/p>\n

Internal Audit is an independent management function, which involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity including entity\u2019s strategic risk management and internal control system.<\/p>\n

An effective internal audit function can play a significant role within the corporate governance framework of a company. Over the last decade internal audit has developed and grown in importance. Eff icient internal audit functions provide objective assurance\/assessments to the board (and to the audit committee) about the adequacy and effectiveness of the processes by which risks are identified and prioritised; managed, controlled, and mitigated. Space to-write important points for revision<\/p>\n

\"Accounting<\/p>\n

Question 2.
\nWhen will a transaction with a related party be material? (Aug 2021, 3 marks)
\nAnswer:
\nAccording to Regulation 23(1) and (1A) of SEBI (LODR) Regulations- A transaction with a related parry shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds rupees one thousand crore or 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity. With effect from July 01, 2019, a transaction involving payments made to a related party with respect to brand usage or royalty shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed 5% of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity. Space to write important points for revision<\/p>\n

Question 3.
\nAs per Ind AS 24, what are the parameters of considering a person or an entity as related party? (June 2022, 3 marks)<\/p>\n

Question 4.
\n\u201cNational Financial Reporting Authority (NFRA) has the powers to oversee the quality of service of Auditor as well as to suggest measures for improvement.\u201d Discuss. (June 2022, 3 marks)<\/p>\n

Question 5.
\n2019 – Dec [1] (a) P Pvt. Ltd. was incorporated under the Companies Act, 1956 on 3rd October, 2011. The Authorised Share Capital of the Company is \u20b9 75 crores. The present paid-up Share Capital of the Company is \u20b9 60 crore. The turnover of the company for financial year 2017-18 was \u20b9 150 crores and because of good overseas marketability of the company\u2019s product, the turnover of the company for the year ended 31st March, 2019 increased to \u20b9 210 crores.
\nThe Secretarial Auditor of the company advised that the company should have internal audit in place, but the Managing Director of the company argued that since it is a private company, so it is not required.
\nBased on the facts in the above case, answer the following questions:
\n(i) Whether internal audit is compulsory for the Private Limited? (Dec 2019, 1 mark)
\n(ii) In the above case if the company had been an Unlisted Public Limited and Turnover for year ended 31st March, 2019 would be \u20b9 190 crore, what would have been your answer? (Dec 2019, 2 marks)
\n(iii) Can Company Secretary be appointed as Internal Auditor in an Unlisted Public Company where he is already appointed as Key Managerial Personnel? (Dec 2019, 2 marks)
\nAnswer:
\n(i) As per section 138 of the Companies Act, 2013 read with rule 13(1)(c) of The Companies (Accounts) Rules, 2014 every private company having-
\n(a) turnover of two hundred crore rupees or more during the orecedina financial vear; or
\n(b) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year shall be required to appoint an internal auditor.
\nAs the turnover of the P Pvt. Ltd is more than \u20b9 200 crore, for the year ended 3181 March, 2019 it is mandatory to appoint an internal auditor.<\/p>\n

(ii) As per Section 138 of the Companies Act, 2013 read with rule 13(1)(b) of The Companies (Accounts) Rules, 2014 every unlisted public company having-
\n(a) paid up share capital of fifty crore rupees or more during the preceding financial year; or
\n(b) turnover of two hundred crore rupees or more during the preceding financial year; or
\n(c) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or
\n(d) outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year shall be required to appoint an internal auditor.
\nIn the mentioned case, as the paid up capital is more than \u20b9 fifty crores hence the company needs to appoint the internal auditor.<\/p>\n

(iii) Section 138 of the Companies Act, 2013 states that an internal auditor, shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board. Further explanation to Rule 13 of The Companies (Accounts) Rules, 2014 states that the internal auditor may or may not be an employee of the company.
\nIn view of the above the Company Secretary who is appointed as Key Managerial Personnel in the company can be appointed as an internal auditor of the company.<\/p>\n

\"Accounting<\/p>\n

Question 6.
\n2019 – Dec [1] (b) M Pvt. Ltd. was registered in the year 2001 as a Private Limited Company and continuing with the same status. It is having a paid-up share capital of \u20b9 65 crore as on 31st March, 2019. The present company\u2019s auditor, X, Chartered Accountant, (a Proprietor Firm) who was appointed as auditor of the company in the year 2014.
\nThe term of the said auditor is going to expire and company wants to re-appoint the same person, since he is having well acquaintance with the company\u2019s officials and its working.
\nBased on the above facts, answer the following questions:
\n(i) Whether X can be reappointed as Statutory Auditor of the Company? (Dec 2019, 1 mark)
\n(ii) In the above case if, instead of the Individual Person as an auditor, the company would have appointed any Firm of Chartered Accountants, and now the tenure of the said firm is expiring, whether this firm is eligible for reappointment? (Dec 2019, 2 marks)
\n(iii) In the given case, if the paid-up capital of the company is \u20b9 5 crore and having cash credit limit and term loan facility from a bank to the tune of \u20b9 55 crore, what would have been your answer? (Dec 2019, 2 marks)
\nAnswer:
\n(i) Section 139(2) of the Companies Act, 2013 read with Rule 5(b) of the Companies (Audit and Auditors) Rules, 2014 provides that: all private limited companies having paid up share capital of rupees fifty crore or more shall not appoint or re-appoint
\n(a) an individual as auditor for more than one term of five consecutive years; and
\n(b) an audit firm as auditor for more than two terms of five consecutive years.
\nAlso, an individual auditor who has completed his term of five consecutive years shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term.
\nIn view of the above as the paid up share capital of the company is more than \u20b9 50 Crore, Mr. X cannot be appointed as Statutory Auditor for the second term.<\/p>\n

(ii) Section 139(2) of the Companies Act, 2013 read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014 provides that:
\nall private limited companies having paid up share capital of rupees fifty crore or more shall not appoint or re-appoint
\n(a) an individual as auditor for more than one term of five consecutive years; and
\n(b) an audit firm as auditor for more than two terms of five consecutive years.
\nAn audit firm which has completed its term shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such term:
\nProvided further that as on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years.
\nIn view of the above the firm of Chartered Accountants will not be eligible for the reappointment for five years on the completion of the term.<\/p>\n

(iii) Section 139(2) of the Companies Act, 2013 read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014 provides that no listed company or the following classes of companies excluding one person companies and small companies:
\n(a) all unlisted public companies having paid up share capital of rupees ten crores or more or
\n(b) all private limited companies having paid up share capital of rupees fifty crores or more or
\n(c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more shall not appoint or re-appoint\u2014
\n(a) an individual as auditor for more than one term of five consecutive years and
\n(b) an audit firm as auditor for more than two terms of five consecutive years
\nSince in the present case the company is having paid up share capital of \u20b9 5 crore i.e. within the threshold limit of \u20b9 50 crors but the company have borrowing facility from a bank of \u20b9 55 crores (i.e. exceeding the threshold limits of \u20b9 50 crores), hence the company cannot re-appoint X as auditor.<\/p>\n

\"Accounting<\/p>\n

Question 7.
\nUnder the Energy Department, Govt, of Tamil Nadu, three Companies as Government Company were incorporated as below:
\nA Ltd. for Generation of Electricity
\nB Ltd. for Transmission of Electricity
\nC Ltd. for Distribution of Electricity.
\nFurther, three subsidiaries namely X Ltd., Y Ltd. and Z Ltd. were incorporated as wholly owned subsidiary companies of C Ltd. C Ltd. purchases the Power (Electricity) from A Ltd. and sale all Power to subsidiary Companies. Subsidiary Company through B Ltd. distributes the Power in the State.
\nApart from that, C Ltd. also purchases cables from manufacturer and sells it to Subsidiary Companies with margin of 5% on sale price. In the power supply, C Ltd. also charge 0.05 paisa per unit as service charge from Subsidiary Companies.
\nDuring the Audit, Auditors raised the question that there are lot of related party transactions and directors and members are same in all the Companies. Further, Chairman is also common. Neither the Board nor the Members of the Company approved any transaction which comes under the definition of Related Party Transaction. The Company Secretary replied that the transactions are pre-approved by Energy Department, Govt, of Tamil Nadu but Auditor is dissatisfied with this reply.
\nIn such situation, check the validity of the transactions between related parties. (Dec 2019, 5 marks)
\nAnswer:
\nAccording to Section 2(76) of Companies Act 2013, “related party”, with reference to a company includes any body corporate which is –
\n(a) a holding, subsidiary or an associate company of such company; or
\n(b) a subsidiary of a holding company to which it is also a subsidiary; or
\n(c) an investing company or the venture of the company.
\nTransactions referred to in the question are covered under Section 188 (1) of the Companies Act, 2013 which deals with the related party transactions.<\/p>\n

All related party transactions require the approval of the Audit Committee as per section 177 of the Companies Act, 2013 except to a transaction, other than a transaction referred to in section 188 of the Companies Act, 2013, between a holding company and its wholly owned subsidiary company, as stated under fourth proviso to section 177(4) of the Companies Act, 2013. Up to certain limits, the approval of the Board is required and above the limits, approval of the members must be taken.<\/p>\n

As per proviso two of section 188(1) of the Companies Act, 2013 member of the company shall not vote where he is related party. However as per proviso three of the section 188(1) of the Companies Act, 2013 , if 90% or more members are related party, members can vote. As per proviso four of the section 188(1) of the Companies Act, 2013, the approval of the Board is not required where the transactions are on arms length basis in ordinary course of business. Further, as per proviso five of the section 188(1) of the Companies Act, 2013, the approval of members is not required in case of transaction between holding and wholly owned subsidiary.<\/p>\n

Further, as per the exemption notification dated 5th June, 2015 issued by Ministry of Corporate Affairs, the first and second proviso to sub- section(1) to section 188 of the Companies Act, 2013 shall not apply to
\n(a) a Government Company where the contracts\/arrangements to be entered into by it with any other Government Company;
\n(b) a Government company (other than a listed company), in respect of contracts\/arrangements other than those mentioned in (a) above, if it has obtained approval of the administrative ministry of the concerned Central\/State Government.<\/p>\n

In this case, C Ltd, being a Government company has entered into the following transactions:
\n(i) Purchase of power from A Ltd.( Government Company)
\n(ii) Sale of power to subsidiary companies (all Government companies, as they are subsidiaries of a Government company)
\n(iii) X Ltd, Y Ltd. and Z Ltd (wholly owned subsidiaries, being Government companies) distribute power through B Ltd. (Government company)
\n(iv) Purchase of cables from a manufacturer and sale to its Subsidiary companies (Government companies)
\n(v) Levy of service charges at 0.05 paise per unit on its Subsidiary companies (Government companies)
\nTherefore, in the present case, assuming that the transactions are at arm\u2019s length and in the ordinary course of business, neither the approval of the Board nor the members of the company is required and the related party transactions would be valid.<\/p>\n

\"Accounting<\/p>\n

Question 8.
\nM\/s. LMN & Co. Chartered Accountants have been appointed as the statutory auditors of AB Ltd. for the financial year 2019-20. During the course of their audit, certain transactions were observed to be irregular and on further scrutiny, the auditors uncovered a series of fraudulent transactions involving the Sales Manager and the Finance Manager. The amount involved was \u20b9 50 lakhs. Under the circumstances, explain the reporting responsibilities of M\/s. LMN & Co. (Dec 2021, 5 marks)
\nAnswer:
\nAs per section 143 (12) of the Companies Act, 2013 read with Companies (Audit and Auditors) Rules, 2015, if an auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of \u20b9 1 crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as prescribed.
\nWhere the fraud is of an amount lesser than \u20b9 1 crore, the auditor shall report the matter to Audit Committee constituted under section 177 of the Companies Act, 2013 or to the Board immediately, but not later than two days of the knowledge of the fraud, specifying the following:<\/p>\n