Schedule 3 & CARO.pptx

PPT on Schedule 3 and CARO.

1. Key Challenges - Amendments in Schedule III And CARO 2020 under Companies Act, 2013 R Sogani & Associates Chartered Accountants 7 th May, 2022 Bharat Sonkhiya

2. Roadmap for updates 2 1 3 5 6 4 2 Before 1956: No Formalized Concept of presentation of Financial Statements 2011: Revised Schedule VI of Companies Act, 1956: Vertical format mandated for standardization Concept of Non-Current Assets and Liabilities were introduced Intangible assets to be separately disclosed (Bifurcation of Asset & Liability on Liquidity Pattern) 2015-16: Ind AS introduction: Part II of Schedule III was introduced providing different presentation for companies on which Ind AS was made applicable Schedule VI of Companies Act 1956: Formalized Concept of presentation of Financial Statements introduced Companies to choose between vertical or horizontal reporting Schedule III of Companies Act 2013: No significant changes Depreciation concept as per useful life was introduced 2021: Amendment in Schedule III : More Transparency and disclosure norms introduced (Extensive Disclosure for decision making)

3. Overview of Updates- Schedule III And CARO 2020 3 R Sogani & Associates Chartered Accountants Ageing schedule of Trade Payables to be disclosed . Ageing schedule of Trade Receivables to be disclosed . Reconciliation note of quarterly returns of current assets submitted with banks with financial statements. Ratio Analysis Disclosure of utilization of Borrowings not used for same specific purpose for which it was obtained. Rounding off of figures reported in Financial Statements is mandatory Details of transactions with struck off companies. Disclosure of Benami Properties, wilful defaulters and undisclosed income under Income Tax Act. Title deeds of Immovable Properties not held in the name of company. CSR Disclosure

4. Disclosure of Loans granted to promoters, directors, KMPs and the related parties Disclosure of utilization of borrowed funds and share premium CWIP Ageing Disclosure of Shareholding of Promoters Charges summary Change of heads: "Property, Plant and Equipment and Intangible Assets“ from “Property, Plant and Equipment” Current maturities of Long Term Borrowings to be disclosed under short term borrowings from other current liabilities Security deposits re-grouped under other non current assets from long term loans and advances 4 R Sogani & Associates Chartered Accountants Overview of Updates- Schedule III And CARO 2020 Contd .

5. Impact of Amendments – Schedule III And CARO Drastic Amendments & Far- reaching Impact 5 Increased level of transparency to establish higher level of Corporate Governance. Preparation of Comparative figures, i.e. related to the year ended 31 March, 2021 Enhanced Disclosures to be given. Assess, review and make changes to existing internal control systems and processes. Enhanced Auditor’s reporting in addition to CARO 2020 (Audit Report). Aligned with additional reporting like reporting with banks, CMA data, CARO, Companies Act and other laws applicable from time to time. New IT infrastructure will be required to meet the new disclosure requirements. R Sogani & Associates Chartered Accountants

6. 6 Increased involvement of management during finalization of financial statements due to the sensitive nature of information asked for. Basis of ROC scrutiny & Income Tax scrutiny. Benefit to owners- H ow management is running the business. Increased Responsibility of Management Need to strengthen Accounts Department of Company for ensuring correctness. Inquiry/Inspection under Companies Act, 2013 by ROC. R Sogani & Associates Chartered Accountants Impact of Amendments- Schedule III And CARO Contd .

7. Shift in Auditor’s Responsibilities upon Management 7 Mandatory preparation of Financial Statements in accordance with amended Schedule III requirements by the management. Need more accuracy of data. Burden of reporting is being shifted on management through additional disclosure requirements. Information disclosed as per amendments to Schedule III will be used by all the Government Departments through integration. Hence, increased involvement of owners is required during finalization of financials. R Sogani & Associates Chartered Accountants

8. Negligence identified by NFRA on completion of CARO by Auditor 8

9. OVERVIEW OF CARO 2020 I(A). For Safeguarding Interest of Banks on Loans taken by Companies – Ensuring Financial Discipline Utilization of Term Loans for Stipulated Purpose and diversions, if any Utilization of Funds taken on Short Term Basis not used for Long Term Purposes If Sanctioned Working Capital > 5 crores , reporting about quarterly returns submitted to bank and details to be provided in case of mismatch with Books of Account . Reporting of Default in Repayment of Interest and Principal to any lender Reporting about declared wilful defaulters by Bank or FI or other lender. 9

10. OVERVIEW OF CARO 2020 I(B). For Safeguarding Interest of Banks and Other Parties on Loans taken by Companies Reporting about Companies capacity to pay its Financial Liabilities in 12 months Reporting about Cash Losses of Companies Loan taken to meet obligations of Subsidiaries, Associates and Joint Ventures Loans taken by Company on pledge of securities held in its Subsidiaries, Joint Ventures and Associate Companies . 10

11. OVERVIEW OF CARO 2020 II. Effective Use of Equity Investment / Private Equity Funds Raised for Business Purpose – Whether the moneys have been applied for the purposes they were raised . Whether the moneys have been applied for the purposes they were raised. Also , Compliance with relevant provisions of Companies Act, i.e., Section 42 and 62 . III. Effective Control over Public Deposits - Any deposits other than Directors/Director Relatives in case of Private Company and Directors in case of Public Company. In case of Private Company, Deposits from shareholders not more than Net Worth of the Company 11

12. OVERVIEW OF CARO 2020 Whether Declaration has been taken from Directors and relative of Directors – Not Out of Borrowed Funds.’ Advance from Customer exceeding 365 days. Penal Consequence – Penalties up to Rs . 10 crore and Non Compoundable Prosecution. Control Over Diversion of Funds – Loans and Advances given to Subsidiaries, Associates, Joint Ventures and others – Agreement, Regularity in repayment or not, Overdue, Interest Rate, Repayment Terms, Renewal of Loan Not Prejudicial to the Interest of the Company Percentage of Total Loans Granted to Promoters and Related Parties without stipulating Terms and Conditions 12

13. OVERVIEW OF CARO 2020 Compliance with Section 185 of Companies Act – Restriction on Loans and Advances to Directors and Related Parties. Compliance with Section 186 of Companies Act – Restriction on Loans to Related and Other Parties within limit and permission of Boards and Members along with stipulated rate of interest. Control Over Assets of the Company – Property, Plant and Equipment Records of PPE in the prescribed format - FAR Physical verification of PPE Title deeds of Immovable Properties in name of Company only Revaluation of PPE in excess of 10% Proceedings initiated under Benami Act. 13

14. OVERVIEW OF CARO 2020 Intangible Assets Records of full particulars of Intangible Assets. Inventory Physical verification of inventory and Discrepancies observed in excess of 10% in each class of inventory ; To give opinion about coverage and procedure of physical verification by management . Control over Related Party Transactions Approval or any Subsequent modification of transactions of the company with related parties Transaction at Arm’s Length Price. Requirement of Board Resolution / Member’s Resolution Section. 14

15. OVERVIEW OF CARO 2020 Ensuring Other Compliances Undisputed Statutory Dues Disputed Statutory Dues Recording of Unrecorded Surrendered Income under Income Tax Settlement Maintenance of Cost Records Resignation of Auditors Unspent CSR Non Cash Transactions. 15

16. F R About CARO 2020 C o m p a n i e s ( A u d i t o r ’ s R e p o r t ) O r d e r, 2 2 S t r i n g e n t P r o v i s i o n s I n t r o d u c e d R Sogani and Associates | CA Bharat Sonkhiya 16 CARO 2020 has been notified by the Ministry of Corporate Affairs as on 25 th February, 2020. It is applicable w.e.f. 1 st April 2019. Its applicability is as of the applicability criteria provided in CARO 2016. With this, MCA has provided 21 Clauses CARO Report (divided into 51 sub-clauses) out of which 17 Clauses have been Substantially Modified as Compared to Previous Year. With this Reporting Order, MCA has formulated a stringent reporting requirement by Auditors to ensure Qualitative Audited Financial Statements.

17. F R NEWS HEADLINES R Sogani and Associates | CA Bharat Sonkhiya 17

18. Stakeholders Tax Authorities/ Government Employees Investors Public/Society CARO 2020 Why Need of CARO-2020? Corporate Failures & Loss to Stakeholders Shareholders/Members Creditors Banks/Other Lenders R Sogani and Associates | CA Bharat Sonkhiya 4

19. F R Need of Introspection !! R Sogani and Associates | CA Bharat Sonkhiya 19 Continuous Corporate Failures & Scams in which Auditors found guilty of misreporting/no-reporting; Report of Committee of Experts dated 25 th October 2018 in compliance of Judgement of Supreme Court on S. Sukumar v/s ICAI 23 rd February 2018; Audit Quality Review Report by NFRA dated 12 th December 2019 – Audit by Deloitte in IL&FS; Rejection of petition of Deloitte by NCLAT regarding relaxation from penal consequences dated 4 th March 2020.

20. F R Need of Introspection !! F R R B C o m p i l a t i o n o f c o n ti nu o u s M i s - r e p o r t i n g & No-reporting by Auditors; MCA Consultation Paper dated 6 th February 2020 to ensure Independence of Auditors; C o d e o f E t h i c s 2 01 9 t o e n su r e I nd e p e n d e n c e o f Auditors applicable w.e.f. 1 st April 2020. R Sogani and Associates | CA Bharat Sonkhiya 20

21. F R I ntentional/Gross Negligence considered N o Reporting / Misreporting by FRRB ( G e n e r a l I n s t a n c e s o f M i s r e p o r t i n g / N o R e p o r t i n g i n p r e v i o u s C A R O r e p o r t s a s o b s e r v e d b y F R R B )  A dd iti o n al W or d s a d d e d t o R e p o rt Com p li a n c e S t a t us, i .e . , “Reasonable R e c or d s ” , “ G ene r a ll y M a i n t a i ne d ” , e t c. n ot p r e s en ti n g a c l e ar v i ew of Compliances In factual reporting, it was mentioned “As informed to us” – Audit Procedures not followed for verification, Professional Judgement not applied In various Clauses Complete reporting not done – Some Contents not reported Incorrect Reporting – Mismatch from Financial Statements Incorrect reference of law, authority and facts Requirements of Law not correctly understood Prescribed Format in CARO not followed while reporting Non-Compliance under law – Not reported as undisputed dues Clause of Previous CARO reports reported in Current CARO Report. R Sogani and Associates | CA Bharat Sonkhiya 21

22. D irectors Found Guilty for Non-Compliances CARO 2020 Company Default Penalty on D i r e c t o r s / P romo te rs Case d e a l t under Vasta C or p ora t i on Ltd. Failure to distribute dividend within 30 days of declaration; Default in transferring fund to IEPF; Mis-statement in prospectus; Inviting deposits without issuing advertisement; Altering memorandum without SR Multiple penalties on the director under various sections of Companies Act. SFIO ABG Shipyard Failure to disclose tax settlement order by Income tax department to Stock Exchange; Publishing incorrect and mis-stated financial results; Audit committee and board failed to perform their roles diligently. Penalty imposed Rs 8,00,000 on three independent directors NCLT/SEBI Usha India Ltd Siphoning off borrowed funds out of group companies; Diversion of loans from financial institution via 20 group companies; Wrongfully using loans to buy real estate. Multiple penalties on the director under various sections of companies act. SFIO/SEBI 63 Moons Te c h n o l o gi es (India) Ltd Failure to seek prior approval for change of name from stock exchanges. Changed the name after coming under the scanner regarding fraud of Rs 5600 crore in its subsidiary NSEL. Rs 1,00,000 on the company SEBI R Sogani and Associates | CA Bharat Sonkhiya 22

23. D irectors Found Guilty for Non-Compliances CARO 2020 Company Default Penalty on directors/promoters Case dealt under Satyam Computer services ltd No reporting of fake invoicing and bills; Auditing standards neglected; Financial statements did not reflect the actual position; Balances of accounts grossly inflated to show the company in good health Imprisonment of 7 yrs and penalty of Rs 5 Cr on Director SFIO Lakhani India Ltd Inadequate disclosures regarding change in promoter’s shareholding Rs. 4,00,000 on the company SEBI JVG Group (4 compa nies ) Money raised by NBFC Diverted to Sister concerns Raising of deposits exceeding the entitled limit Financial statements did not reflect the actual position 3 Directors penalized by a fine of Rs. 10,000 each SFIO National Spot Exchange Ltd. Inadequate internal control system and no reporting by the auditors; No verification of physical movement of stock at the designated warehouses leading to overvaluation of commodities in the exchange. Attachment of properties worth Rs 7063 crores, Penalty Rs 1.66 Cr under PMLA SFIO/FIU R Sogani and Associates | CA Bharat Sonkhiya 23

24. A uditors Found Guilty for Non-Compliances Company Relevant clause of CARO 2020 Case dealt un d e r Auditor’s default National Spot Exchange Ltd. (ii), (xiv) SFIO Inadequate internal control system and no reporting by the auditors; No verification of physical movement of stock at the d e s i g na t e d w a r e h o us e s l e a d i n g t o o v er v a l ua t i o n of commodities in the exchange. JVG Group (v), (iv), (ix) SFIO Money raised by NBFC Diverted to Sister concerns; Raising of deposits exceeding the entitled limit; Financial statements did not reflect the actual position ABG Shipyard (viii) S F I O/ SEBI Failure to disclose tax settlement order by Income tax department in the financial statements and to stock exchange; Publishing incorrect and mis-stated financial results. CARO 2020 R Sogani and Associates | CA Bharat Sonkhiya 10

25. A uditors Found Guilty for Non-Compliances Company Relevant clause of CARO 2020 Case dealt un d e r Auditor’s default Usha India Ltd (iv)(ix) S F I O/ SEBI Siphoning off borrowed funds out of group companies Fudging accounts; Diversion of loans from financial institution via 20 group companies. Satyam Computer Services Ltd (xix), (xvii) SFIO No reporting of fake invoicing and bills; Auditing standards neglected; Financial statements did not reflect the actual position; Balances of accounts grossly inflated to show the Company in good health. I n f ra s t r u c t u re leasing and financial services (xi) SFIO Possibility of frauds needed to be reported u/s 143(12) not reported by auditors. CARO 2020 R Sogani and Associates | CA Bharat Sonkhiya 11

26. Need to Take Additional Precautions while conducting this year CARO 2020 Audit – CARO 2020 Capacity Building of Firm Prepare CARO Compliance team in your office having good understanding of each and every clause under CARO More and more interaction/meeting/ communication directly with Top Management Meeting with Top Management by Key Personnel Effective Documentation of – Communication with Client Reply by Client Basis of Reporting Basis in detail along with acknowledgement by client in case of qualified opinion In case of disclaimer of Opinion, specific communication and acknowledgement by client. R Sogani and Associates | CA Bharat Sonkhiya 12

27. Mere Compliances v/s Need of Sustainable Business Model in Present Scenario – CARO 2020 Whether need to restructure Existing way of doing Business? Whether need to Enhance the Level of Corporate Governance with Greater Transparency? Whether need to review need of borrowed funds requirement and its end use – Financial Discipline ? Whether need to be 100% Law Compliant? Whether there is need of safeguarding business assets? Whether there is need of effective Internal Control System- Blue Book, Standard Operating Procedures, Risk and Control Matrix, IFC Testing? Whether there is need of creating Social Impact of our business? R Sogani and Associates | CA Bharat Sonkhiya 13

28. F R Applicability of CARO-2020 Banking C o mpa n y I n s u r a n c e Company Section 8 C o mpa ni e s (NPO) One Person Company / Small Company Small C o mpa n y Private Companies having - Paid up Share Capital and Reserve and Surplus not more than 1 Cr at year end and Borrowings from Banks and FIs not more than 1 Cr at any point of time during the year and Revenue not exceeding Rs. 10 Cr during the year R Sogani and Associates | CA Bharat Sonkhiya 1 4 ( S i m i l a r a s C A R O 2 1 6 ) E x e m pte d C l as s e s of C om pa n i e s

29. Effective Internal Control Mechanism - Consideration of Whistle Blower Complaints received by Company Consideration of the reports of Internal Auditors Reporting of frauds identified by Auditors u/s 143(12) Compliance with Standards on Auditing and Other Regulatory Requirements Effective Internal Audit System (Blue Book, SOPs, RCM and IFC Testing) CARO 2020 R Sogani and Associates | CA Bharat Sonkhiya 29

30. Clause (xiv) Regarding Effective Internal Audit System: CARO 2020 Sub C l a u s e No. Status Description ( a ) W h e t h e r t h e c o m pa n y h a s an in te r n al a u d i t s y s te m commensurate with the size and nature of its business ; ( b ) Whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor . R Sogani and Associates | CA Bharat Sonkhiya 30

31. Clause (xi) Regarding Effective Fraud Reporting including Preventive Measures: CARO 2020 Sub C l a u s e No. Status Description ( a) W h e t h e r a n y F r a u d b y t h e C o m pa n y o r an y F r a u d on t h e Company has been noticed during the year ; ( b) R e p o r ti n g of F ra u ds i d e n t i f i e d b y A u d i t o rs und e r s e c t i o n 143(12) ; ( c) Comments by Auditors on Whistle Blower Complaints received by the Company during the year. R Sogani and Associates | CA Bharat Sonkhiya 31

32. Comparative Data Additional Burden: Previous Year Data needs to be prepared by the company & verified by Auditors 32 Rounded off figures to be disclosed for previous year as well in the balance sheet, statement of profit and loss and detailed notes thereof. Ratio Analysis Details of transactions with struck off companies. Loans granted to promoters, directors, KMPs and the related parties . Trade Payables Ageing Trade receivables Ageing CWIP Ageing Promoter’s Holding R Sogani & Associates Chartered Accountants

33. 33 Proactive Role of MCA- Increased probability of MCA Inspection/ Scrutiny 33 Current Affairs: Recent Headlines: MCA seeks information from L&T on alleged Governance Issue between 2003 & 2008. MCA begins probe against MVA Leaders- Suspecting fraud by 6 companies under the Companies Act (Money Laundering Case) Other Recent News: MCA moves NCLT to recover Rs . 2,320 cr siphoned off by Amtek Auto promoters MCA issues notices to 272 companies for Non- Compliances with CSR Norms. Govt. sanctioned prosecution in 366 cases related to CSR norms violation. Public notice by MCA for striking off the companies who have not filed the Form relating to commencement of business. R Sogani & Associates Chartered Accountants

34. Role of Auditor 1. To ensure finalization of Qualitative Audited Financial Statements of the Company 2 . To ensure correctness of information submitted to ensure true and fair view. 3 . To discuss key issues involved with management in compliance with Standard of Auditing with TCWG. 4 . To ensure true and fair view reporting. 5. To evaluate mechanism through which information have been derived and submitted by the Company. 6. Need management representation at number of places to ensure correctness of failure   34 R Sogani & Associates Chartered Accountants

35. Role of Auditor Contd. 7. Other challenges a. Extent of verification/checking of information provided by management. 8. Is there any need of qualification if schedule III not complied with ? 35

36. Audit Trail ( Postponed: Applicable w.e.f. 01-04-2023) Need to be enabled in Accounting Software 36 R Sogani & Associates Chartered Accountants An Audit trail (also called audit log) is defined as a step-by-step sequential record of the documented evidence of financial transactions that allows tracing of every step of the transaction. An auditor can trace the financial data of a particular transaction right from the general ledger to its source document with the help of the audit trail. Every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of: Recording audit trail of each and every transaction Creating an edit log of each change made in books of account along with the date when such change were made and, Ensuring that the audit trail cannot be disabled.

37. 1. Trade Payables: (Creditors for Goods) R Sogani & Associates Chartered Accountants Categorization Ageing

38. Trade Payables – Disputed v/s Undisputed 38 #similar information shall be given where no due date of payment is specified in that case disclosure shall be from the date of the transaction. Unbilled dues shall be disclosed separately As per the amendment, following ageing schedule shall be given for Trade payables due for payment: Particulars Outstanding for following periods from due date of payment#   Less than 1 Year 1-2 years 2-3 years More than 3 years Total MSME Others Disputed dues – MSME Disputed dues – Others           R Sogani & Associates Chartered Accountants

39. Impact Analysis 39 Long outstanding payables , for a period exceeding 2 year (depending upon the industry standards), will be analysed on the following basis: Deviation from Industry Norms Abnormal Trends Divergent Comparitive Trends It m ay lead to the following consequences: Bogus transactions Liquidity of the company The data filled here shall be aligned with MSME-1 form filed by the company with MCA. R Sogani & Associates Chartered Accountants

40. 40 R Sogani & Associates Chartered Accountants Presentation in Balance Sheet: On face of Balance Sheet & Form MSME-1 : Dues of Micro & Small Enterprises Ageing schedule : Dues of Micro, Small & Medium Enterprises Ageing will be done in the same format for the Current & Non- Current Trade Payables, separately . Earlier Ageing was not subject to audit, now detailed ageing will be disclosed and audited. Disputed Trade Payables will be part of liability or not?

41. 41 MSMED Criteria If the payment of Undisputed Dues is not made within 45 days, then interest can be charged by the MSME vendors under the MSMED Act (@ 3 times the rate prescribed under the RBI Rules) which are not allowable expenses under the Income Tax Act. No agreement with MSME vendors is valid if Payment Period is exceeding 45 days. Category Investment in Plant & Machinery (Upto) Turnover (Upto) Micro Enterprises 1 crore 5 crores Small Enterprises 10 crores 50 crores Medium Enterprises 50 crores 250 crores R Sogani & Associates Chartered Accountants

42. Challenges 42 Can the ageing be derived from the Accounting Software? How to analyze which payment is outstanding- FIFO basis or invoice basis? Whether disagreement conveyed through E-mail be categorised as a ‘Dispute’? A.1: The accounting software shall be upgraded to provide ageing reports of outstanding trade payables, in the required format. A.2: Practically, ageing is calculated on invoice to payment basis. The upgraded software can solve this issue easily. R Sogani & Associates Chartered Accountants

43. 43 A.3: Schedule III requires spilt of trade payables between disputed and undisputed. These terms have not been defined in Schedule III. A dispute is a matter of facts & circumstances of the case; however, dispute means a disagreement between the two parties demonstrated by some positive evidence which supports or corroborates the fact of disagreement. (It also refers to the word ‘Dispute’ as defined under the Insolvency & Bankruptcy Code, 2016 which is: ‘Dispute’ includes a suit or arbitration proceeding relating to the existence of the amount of debt, the quality of goods or service or the breach of a representation or warranty.) Thus, in the above mentioned case, it will be categorized as a Dispute , as the E-mail is an evidence of the fact of disagreement. R Sogani & Associates Chartered Accountants Dispute

44. Illustrations 44 R Sogani & Associates Chartered Accountants For instance, let’s take a case of Trade Payables where date of transaction is 15th December 2021 No due date on invoice 3 months credit term Not due (4 months credit period) Ageing bracket Ageing to be considered from 15th December 2021 i.e. date of transaction Ageing to be considered from 15th March 2022 This case will be covered in Not Due if the credit term for the same is, say 4 months . Hence, it will become due on 15 th April, 2022 and will be considered as not due as on 31 st March 2022. 1. Point of Ageing

45. 45 2. Case indicating Abnormal Trend: (Figures in Lakhs) (Figures in Lakhs) Particulars Outstanding for following periods from Total due date of payment (as on 31.03.22) Less than 1 year 1-2 years 2-3 years More than 3 years MSME 5 15 10 70 100 (ii) Others 100 150 150 1000 1400 1500 R Sogani & Associates Chartered Accountants The particular case indicates: Abnormal Trend Divergent Comparative Trend Industry Norms- Deviation Figures as a % of Total dues  Particulars Less than 1 year 1-2 years 2-3 years More than 3 years  Total P.Y . (as on 31.03.21) MSME 0.33 1.00 0.67 4.67 6.67 - (ii) Others 6.67 10.00 10.00 66.67 93.33 25% of C.Y. total 100.00

46. 2. Trade Receivables: (Debtors for Goods) R Sogani & Associates Chartered Accountants Categorization Ageing

47. Trade Receivables – Disputed v/s Undisputed 47 Particulars Outstanding for following periods from due date of Payment#   Less than 6 months 6 months - 1 year 1-2 Years 2-3 years More than 3 years Total Undisputed Trade receivables – considered good Undisputed Trade Receivables – considered doubtful Disputed Trade Receivables –considered good Disputed Trade Receivables –considered doubtful             # 1. Similar information shall be given where no due date of payment is specified, in that case disclosure shall be from the date of the transaction 2. Due Date can be agreed upon in writing or verbally. Unbilled dues shall be disclosed separately As per the amendment, following ageing schedule shall be given: R Sogani & Associates Chartered Accountants

48. Impact Analysis 48 Long outstanding receivables , for a period exceeding 2 year (depending upon the industry standards), will be analysed on the following basis: Deviation from Industry Norms Abnormal Trends Divergent Comparitive Trends It m ay lead to the following consequences: Bogus transactions Recoverability status Ageing will be done in the same format for the Current & Non- Current Trade Receivables, separately. R Sogani & Associates Chartered Accountants

49. Challenges 49 It will be a time consuming activity and error prone area. How to analyze which payment is outstanding- FIFO basis or invoice basis? How to classify trade receivables as Disputed? Difference between Dispute & Doubtful for the disclosure purposes. F rom which date should the ‘Due Date’ be taken, in case no terms are agreed upon between the parties. A.1: The accounting software shall be upgraded to provide ageing reports of outstanding parties. A.2: Practically, ageing is calculated on invoice to payment basis. The upgraded software can solve this issue easily. R Sogani & Associates Chartered Accountants

50. 50 In some cases, customers specify the invoice against which they are making payments. In such cases, no other basis should be considered. A.3: Schedule III requires spilt of trade receivables between disputed and undisputed. These terms have not been defined in Schedule III.A dispute is a matter of facts & circumstances of the case; however, dispute means a disagreement between the two parties demonstrated by some positive evidence which supports or corroborates the fact of disagreement. A.4: ‘Dispute’ & ‘Doubtful’, are both considered as independent terminologies for the disclosure purpose. A.5: When no terms are agreed upon between the parties, either in written or verbally, the ‘due date’ shall be calculated from: the transaction date, or after the normal credit period. R Sogani & Associates Chartered Accountants

51. Illustration 51 R Sogani & Associates Chartered Accountants For instance, let’s take a case of Trade Receivables where date of transaction is 15th December 2021 No due date 3 months credit term Not due (4 months credit period) Ageing bracket Ageing to be considered from 15th December 2021 i.e. date of transaction Ageing to be considered from 15th March 2022 This case will be covered in Not Due if the credit term for the same is, say 4 months. Hence, it will become due on 15 th April, 2022 and will be considered as not due as on 31 st March 2022. 1. Point of Ageing

52. 52 2. Case indicating Abnormal Trend: (Figures in Lakhs) (Figures in Lakhs) Particulars Outstanding for following periods from due date of Payment (as on 31.03.22) Total Less than 6 months 6 months - 1 year 6 months - 1 year 1- 2 years 2- 3 years 2- 3 years More than 3 years More than 3 years Trade Receivables 30 50 50 90 150 150 670 1000 % of total receivables 3% 5% 5% 9% 15% 15% 67% 100% R Sogani & Associates Chartered Accountants The particular case indicates: Abnormal Trend Divergent Comparative Trend Industry Norms- Deviation

53. 3. Disclosure regarding Disagreement of quarterly returns or statements submitted to banks with books of account R Sogani & Associates Chartered Accountants

54. Schedule III Reporting If a company has borrowings from Bank or Financial Institution on security of current assets then disclose: a) Whether quarterly returns or statements of current assets filed by the company with banks or financial institutions are in agreement with the books of account. b) If not, summary of reconciliation and reasons of material discrepancies, if any, to be adequately disclosed. CARO ( Audit Report) Reporting : Whether during any point of time of the year, the company has been sanctioned working capital limits in excess of Rs. 5 crores, in aggregate, from banks or financial institutions on the basis of security of current assets; Whether the quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the books of account of the company. If not, give details. 54 R Sogani & Associates Chartered Accountants

55. 55 Quarterly Returns submitted to Bank Stock Statements Trade Receivables Statement Ageing Analysis of Trade Receivables Trade Payables Statement Ageing Analysis of Trade Payables R Sogani & Associates Chartered Accountants

56. 56 Reporting on Disagreement of Returns/Statements Case 1. If no disagreement found of returns/statements mentioned above with the books of account -Then no reporting requirement comes into existence. Case 2. If returns/statements found in disagreement with the books of account then following disclosure to be given for the discrepancies found- Quarter Name of Bank Particulars of securities Provided Amount as per books of account Amount as reported in the quarterly return /statement Amount of Difference Reasons for material discrepancies. June 20XX Bank X Finished Goods XX XX XX R Sogani & Associates Chartered Accountants

57. Challenges 57 R Sogani & Associates Chartered Accountants No Stock records maintained. Stock records not integrated with books. Submission of Statements/Data to banks on estimated basis. Stock get drastically changed due to changes in year end audit because of the following reasons- a. Deviation found in quantity b. Old material purchase price has been considered c. Change in Method of Stock Valuation.

58. Impact Analysis 58 R Sogani & Associates Chartered Accountants Need for Finalization of quarterly books of account to freeze details of current assets is required. We suggest Reconciliation of data on monthly basis. Deviation between records submitted to the Bank and as maintained by the Company may result into following consequences - Reduction in Bank Limit(Availment of Lower CC limit). Income tax Department can consider higher stock any conclude sales as out of books. Therefore generating additional tax liability. Other Departments(such as GST) can also consider this deviation. Physical verification Mechanism can be questioned. Internal Financial control System will be challenged which is the responsibility of Director u/s 134.

59. Illustration 59 R Sogani & Associates Chartered Accountants Case Scenario 1: XYZ Pvt. Ltd. properly maintains stock records Quarter Ending Statement Submission Date Stock submitted to bank (A) Stock as per Stock Records (B) Stock considered in Audited FS (C) Deviation between (A) and (B) Deviation between (A) and (C) 30.06.2021 20.07.2021 10cr 7cr 3cr 30.09.2021 20.10.2021 11cr 9cr 2cr 31.12.2021 20.01.2022 13cr 10cr 3cr 31.03.2022 20.04.2022 9cr 10cr 7cr 1cr 2cr

60. Illustration 60 R Sogani & Associates Chartered Accountants Case Scenario 2: PQR Pvt. Ltd. does not maintain stock records Quarter Ending Statement Date Stock submitted to bank Stock as per Audited Financial Statements Deviation 31.03.2022 20.04.2022 9cr 7cr 2cr In the above two cases, stock as per statement submitted to bank > stock considered for profit computation. This is done in order to: Increase Credit Limit Reducing profitability, thereby reducing income tax liability

61. 4. Ratio Analysis Financial Health Indicators R Sogani & Associates Chartered Accountants

62. ‘Analytical Reporting’ Current Ratio, Net Profit ratio, Return on Capital employed, Return on Investment, Return on Equity Ratio , Debt-Equity Ratio, Debt Service Coverage Ratio , Inventory turnover ratio, Trade Receivables turnover ratio, Trade Payables turnover ratio, Net capital turnover ratio , 62 R Sogani & Associates Chartered Accountants Liquidity Ratio Profitability Ratio Solvency Ratio Turnover Ratio/ Efficiency Ratio Following ratios to be disclosed:

63. Required Disclosure 63 R Sogani & Associates Chartered Accountants Ratios to be calculated twice for the period of applicability (i.e. for F.Y. 2021-22, it is required to be calculated for F.Y. 2020-21 also) in the following format- Deviation to be identified between C.Y. and P.Y. , if found in excess of 25% reason for the same has to be explained. The company shall explain the items included in numerator and denominator for computing the above ratios. Any change in numerator and denominator from previous year need to be explained with reasons. Ratio Numerator Denominator Current Period Previous Period % Variance Reason for variance

64. 64 Corresponding reporting to CARO 2020 (Audit Report) On the basis of the financial ratios, ageing and expected dates of realization of financial assets and payment of financial liabilities, other information accompanying the financial statements, the auditor’s knowledge of the Board of Directors and management plans, whether the auditor is of the opinion that no material uncertainity exits as on the date of the audit report that company is capable of meeting its liabilities existing at the date of balance sheet as and when they fall due within a period of one year from the balance sheet date. R Sogani & Associates Chartered Accountants

65. 65 Ratio Numerator Denominator Current Ratio Current Assets Current Liabilities Debt-Equity Ratio Total Debts Shareholder’s Equity Debt service coverage ratio Earning available for debt service Debt service Return on equity ratio Net profit after tax -Pref. dividend Average shareholder’s equity Inventory turnover ratio Cost of goods sold or Sales Average Inventory Trade receivables turnover ratio Net Credit Sales Average Trade Receivable Trade payables turnover ratio Net Credit Purchases Average Trade Payables Net capital turnover ratio Net Sales Average Working Capital Net profit ratio Net Profit after tax Net Sales Return on capital employed Earning before interest and taxes Capital Employed Return on investment Market value on year end – Market value on beginning Market value on beginning R Sogani & Associates Chartered Accountants Basis of Ratio Calculation: # For detailed calculation of Numerator/ Denominator- Refer ICAI Guidance Note

66. 66 Impact Analysis The unusual variations in the computation of defferent ratios will be analysed on the following basis: Deviation from Industry Norms Abnormal Trends Divergent Comparitive Trends It m ay lead to the following consequences: Evaluation of Financial H ealth of the comapny Bogus transactions, if any Liquidity of the company Material uncertainty relating to Going Concern assumption. R Sogani & Associates Chartered Accountants

67. Illustration 67 R Sogani & Associates Chartered Accountants Abnormal Trend- Not in line with Industry Norms of Textile Company Let’s compare the Inventory Turnover Ratios of a company for two years: (Amount in lakhs) In this case, there is an abnormal and unusual deviation in the Inventory Holding Period when compared to industry trends. The same increased from 65 days to 445 days. This can raise suspicions about: Out of Books Sale Overvalued Inventory to show good profit to industry Overvalued Inventory to get more working capital Term Loan. Particulars F.Y. 2020-21 F.Y. 2021-22 Sales 225 150 Average Inventory 40 400 Inventory Turnover Ratio 5.62 times 0.38 times Inventory Holding Period 65 days 973 days

68. Illustration 68 R Sogani & Associates Chartered Accountants Abnormal Trend- Low liquidity Position Let’s compare the current ratios of 2 companies belonging to the same industry. Particulars F.Y. 2020-21 F.Y. 2021-22 Current Assets 4000 3000 Current Liabilities 1000 4000 Current Ratio 4 0.75 In case of F.Y. 2021-22, the current ratio is abnormally low. This implies that working capital management in the F.Y. 2021-22 is not upto the mark which indicates weak financial liquidity of the company. In F.Y. 2020-21, working capital situation is considered abnormal and this may done in order to- To attract Investment To get Bank Loan Creation of artificial assets/liabilities through bogus transactions

69. 5. Borrowings to be used for the specific purpose for which it was obtained R Sogani & Associates Chartered Accountants

70. Schedule III : New disclosures 70 R Sogani & Associates Chartered Accountants Where the company has not used the borrowings from banks and financial institutions for the specific purpose for which it was taken at the balance sheet date, the company shall disclose the details of where they have been used. Loan Type Purpose of sanction Purpose for which amount utilized. Cash Credit Working Capital Requirement For car purchase/ land purchase Construction Loan Building construction. For meeting working capital requirement.

71. 71 R Sogani & Associates Chartered Accountants Corresponding reporting to CARO 2020 (Audit Report) Whether term loans were applied for the purpose for which the loans were obtained; if not, the amount of loan so diverted and the purpose for which it is used may be reported. Guidance note on CARO 2020 (Audit Report) provides following suggested reporting format: Nature of the fund raised Name of the lender Amount diverted (INR) Purpose for which amount was sanctioned Purpose for which amount was utilized Remarks Whether funds raised on short term basis have been utilized for long term purposes, if yes, the nature and amount to be indicated.

72. Challenges Providing details for every application of said funds can be cumbersome for the company. Any default in this disclosure c an be considered in the Wilful Defaulter Category and attract strict penal consequences. This can also have an adverse implication in the company’s dealing with banks. 72 R Sogani & Associates Chartered Accountants

73. Impact Analysis 73 Reporting is also applicable for short term loan facilities and CC limits sanctioned by banks and financial institutions. That is, if loans/CC limit is sanctioned for working capital requirements, it shall not be utilized for capital expenditures. As per guidance note issued by ICAI, “It is not necessary to establish a one-to-one relationship with the amount of borrowings and its utilization. Accordingly, this needs to be determined based on overall position of balance sheet at the reporting period.” Sanction letters to be properly documented and studied to find out whether the loans are used for the purpose they were obtained. R Sogani & Associates Chartered Accountants

74. 74 R Sogani & Associates Chartered Accountants Illustration A granite manufacturing company want to purchase land of Rs.4 crore. Company have following source of funds: If 4 Crore utilized from company’s profit then, no disclosure required. In above case, if amount of land purchased is Rs.17 crore, it means that remaining 2 crores are utilized from cash credit. In this case, disclosure will be required. Cash Credit Rs.10 crore Company’s Profit Rs.15 crore

75. 6. Mandatory Rounding off R Sogani & Associates Chartered Accountants

76. Changes summary Depending upon the Total Income* of the Company, the figures appearing in the Financial Statements be rounded off as given below: 76 TOTAL INCOME ROUNDING OFF ( a ) less than one hundred crore rupees To the nearest hundreds, thousands, lakhs or millions, or decimals thereof. ( b ) one hundred crore rupees or more To the nearest lakhs, millions or crores, or decimals thereof Total income is the sum of revenue from operations and other income. We suggest preparing balance sheet in lakhs. R Sogani & Associates Chartered Accountants

77. Illustration 77 R Sogani & Associates Chartered Accountants ABC Ltd. has revenue from operations of Rs.98 Cr. and other income of Rs.5 Cr. The total income to be considered in this case would be Rs. 103 Cr. In this case, rounding off is to be done to the nearest lakhs and cannot be done to the nearest thousands or hundreds. Particulars Amount as per Books Amount to be presented in Financials (Rounded off in lakhs)# Property Plant and Equipment 10,48,63,210 1,048.63 Trade Payables 2,98,25,817 298.26 Total Assets 98,54,12,600 9,854.13 Total Liabilities 98,54,12,600 9,854.13 #Restricted to 2 decimal places

78. Challenges 78 Rounding off of figures stated in Financial Statements is mandatory for all the Companies. Absolute figures are not permissible now onwards in the final set of Financial Statements. Manual rounding off is prone to errors. Formula in MS Excel to be used to prevent occurrence of such errors. W e strongly recommend to prepare Financial Statements through software. Two sets of financial statements should be signed by directors: Rounded off- for Statutory Audit purposes Absolute figures- For filling data in Company L a w Forms, GST Annual Returns and ITRs The figures stated in Financial Statements will not exactly match with data present in accounting software due to rounding off. Comparative data also needs to be modified as the changes are applicable for last year also. R Sogani & Associates Chartered Accountants

79. 7. Relationship with struck off companies R Sogani & Associates Chartered Accountants

80. Changes summary Where the company has any transactions with companies struck off under section 248 of the Companies Act, 2013 or section 560 of Companies Act, 1956, the Company shall disclose the following details: 80 Name of struck off Company Nature of transactions with struck-off Company Balance outstanding Relationship with the Struck off company, if any, to be disclosed Investments in securities Receivables Payables Shares held by stuck off company Other outstanding balances (to be specified) R Sogani & Associates Chartered Accountants

81. Challenges 81 How to determine companies struck off during the year? Will the companies under liquidation or liquidated or amalgamated be covered? Implications of shares held by struck off companies Will company struck off but subsequently revived pursuant to NCLT order be covered? R Sogani & Associates Chartered Accountants

82. 82 IMPACT & INSTANCES 1. It will have impact on the recoverability of assets For instance, if sales has been made to the struck off company during the financial year and it’s subsequent striking off will have impact on the recoverability of amount from the struck off company. 2. In case of Bogus transactions, it can be triggered easily R Sogani & Associates Chartered Accountants

83. 8. Corporate Social Responsibility R Sogani & Associates Chartered Accountants

84. Changes Summary Where the company is covered under section 135 of the companies act, the following shall be disclosed with regard to CSR activities:- (a) amount required to be spent by the company during the year, (b) amount of expenditure incurred, (c) shortfall at the end of the year, (d) total of previous years shortfall, (e) reason for shortfall, (f) nature of CSR activities, (g) details of related party transactions, e.g., contribution to a trust controlled by the company in relation to CSR expenditure as per relevant Accounting Standard, (h) where a provision is made with respect to a liability incurred by entering into a contractual obligation, the movements in the provision during the year should be shown separately. 84 R Sogani & Associates Chartered Accountants

85. Changes Summary CARO (Audit Report) Reporting : Whether , in respect of other than ongoing projects, the company has transferred unspent amount to a Fund specified in Schedule VII to the Companies Act within a period of six months of the expiry of the financial year in compliance with second proviso to sub-section (5) of section 135 of the said Act; Whether any amount remaining unspent under sub-section (5) of section 135 of the Companies Act , pursuant to any ongoing project, has been transferred to special account in compliance with the provision of sub-section (6) of section 135 of the said Act; 85 R Sogani & Associates Chartered Accountants

86. 9. Benami Property held, Wilful Defaulter and Undisclosed Income R Sogani & Associates Chartered Accountants

87. Changes comparison Wilful Defaulter: Where a company is a declared wilful defaulter by any bank or financial institution or other lender, following details shall be given: Date of declaration as wilful defaulter , Details of defaults (amount and nature of defaults ) CARO (Audit Report) Reporting : Whether the company is a declared wilful defaulter by any bank or financial institution or other lender 87 R Sogani & Associates Chartered Accountants

88. Changes comparison Benami Property: Where any proceedings have been initiated or pending against the company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and the rules made thereunder, the company shall provide adequate disclosure CARO (Audit Report) Reporting : W hether any proceedings have been initiated or are pending against the company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made thereunder , if so, whether the company has appropriately disclosed the details in its financial statements 88 R Sogani & Associates Chartered Accountants

89. Changes comparison Undisclosed Income: The Company shall give details of any transaction not recorded in the books of accounts that has been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961. CARO (Audit Report) Reporting : Whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961 (43 of 1961), if so , whether the previously unrecorded income has been properly recorded in the books of account during the year 89 R Sogani & Associates Chartered Accountants

90. 10. Title deeds of Immovable Properties not held in the name of Company R Sogani & Associates Chartered Accountants

91. Changes Summary Disclose title deeds of immovable property not held (excluding leased properties) in the name of the Company in the prescribed format which, inter alia, would include details of title deed held in the name of, held since date, reasons for not being held in the name of the company, etc. Disclose company’s share – if jointly held CARO (Audit Report) Reporting : Whether the title deeds of all the immovable properties (other than properties where the company is a lessee and the lease agreements are duly executed in favour of the lessee) disclosed in the financial statements are held in the name of the company. If not, provide prescribed details [Clause 3( i )(c)] 91 R Sogani & Associates Chartered Accountants

92. 11. Valuation by Registered Valuer R Sogani & Associates Chartered Accountants

93. Changes Summary Disclosure regarding revaluation of PPE/Intangible Assets : Amount of change due to revaluation (if change is 10% or more in the aggregate of the net carrying value of each class of PPE/ intangible assets) Fair Value of investment property or revaluation of PPE/ intangible assets (if any) is based on the valuation by a registered valuer defined under the Companies Act, 2013 CARO (Audit Report) Reporting : Whether the company has revalued its PPE (including right of use assets) or intangible assets or both during the year. If so, whether the revaluation is based on the valuation by a registered valuer; specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each class of PPE or intangible assets [Clause 3(i)(d)] 93 R Sogani & Associates Chartered Accountants

94. 12. Loans/Advances granted to promoters, directors, KMPs and the related parties R Sogani & Associates Chartered Accountants

95. Changes Summary Disclosure to be provided in prescribed format where loans/ advances in the nature oa loans are granted to promoters, directors, key managerial personnel and related parties, either severally or jointly with any other person, that are : Repayable on demand or Without specifying any terms or repayment period CARO (Audit Report) Reporting : Whether the company has granted any loans or advances in the nature of loans either repayable on demand or without specifying any terms or period of repayment, if so, specify the aggregate amount, percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters, related parties as defined in section 2(76) of the Companies Act, 2013 [Clause 3(iii)(f)] 95 R Sogani & Associates Chartered Accountants

96. Analysis/Review of Financial Statements of Listed Companies Following are the disclosures as presented in the financial statements of listed companies: 1. Trade Payables/Receivables: Billed Dues Unbilled Dues Ageing 2. Shareholding of Promoters 3. Capital work-in-progress Ageing 4. Corporate Social Responsibilty Expenditure 5. Ratios analysis and its elements 6. Relationship with struck off companies 96 R Sogani & Associates Chartered Accountants

97. Penal Consequences- Cost of Compliances v/s Cost of Non- Compliances 97 PENALTY UNDER SECTION NATURE OF NON COMPLIANCE PENAL CONSEQUENCE Sec 129- Financial statements Contravention with the provisions of section 129 (Financial Statements) Imprisonment up to 1year Fine which shall not be less than Rs. 50,000 b ut which may extend to Rs. 5,00,000 With both Sec 447- Punishment for fraud any act, any omission, concealment of any fact, or, abuse of position committed by a person or any other person with the connivance in any manner – , (a) Imprisonment not less than 6 months but may extend to 10 years (b) Fine which shall not be less than the amount involved in the fraud, but which may extend to 3 times the amount involved in the fraud (c) If f raud in question involves public interest, the term of imprisonment shall not be less than three years. R Sogani & Associates Chartered Accountants

98. 98 a. with intent to deceive, b. to gain undue advantage from, or ( i ) to injure the interests of; (ii)the company, or, (iii)its shareholders , or, (iv)its creditors, or, (v)any other person, whether or not there is any: any wrongful gain, or any wrong loss. 448- Punishment for false Statement If in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this Act or the rules made thereunder, any person makes a statement, which is false in any material particulars, knowing it to be false; or which omits any material fact, knowing it to be material, he shall be liable under section 447. Imprisonment for a term which shall not be less than 3 years but which may extend to 7 years and With fine which may extend to Rs. 10,00,000 R Sogani & Associates Chartered Accountants

99. 99 “Fraud” in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss; “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled; “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled. R Sogani & Associates Chartered Accountants Meaning of Fraud

100. 100 R Sogani & Associates Chartered Accountants Strengthen your Accounts Department Add competent professional team members to your Accounts Team Ensuring Entries on day- to- day basis Finalization of Books on Monthly basis Use of technically upgraded (ERP) Accounting Software Discussion with the Board of Directors/ Audit committee on Quarterly basis

101. 101 Non Compliance with Schedule III Omission No reconciliation of Stock Statement submitted to Bank with Books, even if huge difference in both. Utilization of Cash Credit done for purchase of capital assets, but no disclosure given in Financial Statements. False Statement Grouping of ratios changed to improve; Incorrect ageing of Trade Receivable/ Trade Payable disclosures. R Sogani & Associates Chartered Accountants

102. 102 Amendments Implementation Ministry of Corporate Affairs (MCA) notification dated 24th March, 2021 for the Financial Year 2021-22. Our updates on Amendments to Schedule- III (Dated 15th March, 2022); Requirement Letter- Roadmap to finalize Financial Statements (Dated 17th March, 2022) ; Detailed Presentation; Template of Draft Financials; ICAI Guidance Note on changes in Schedule- III. R Sogani & Associates Chartered Accountants Reference Materials

103. 103 Help Desk For consultation and implementation of Schedule III, please contact: Bharat Sonkhiya - [email protected] Nitin Sharma- Chartered Accountant- [email protected] Harleen Kaur- Company Secretary- Neha Dangayach - Company Secretary- Piyush Agrawal- Pahal Jain- Sparsh Garg- Anshita Mittal- Contact Details: Bharat Sonkhiya - [phone] CS Harleen Kaur- [phone] [email protected]

104. Q&A Session!

105. Thank You! 105 R Sogani & Associates Chartered Accountants