Few Commonly Observed Non Compliances in Financial Statements

Few Commonly Observed Non Compliances in Financial Statements:

1) Applicability of Accounting Standards for Corporates:

The Companies Accounting Standards Rules, 2006, was notified on 7th December 2006, by MCA in consultation with NACAS. Thus, from that date it is the Accounting Standards as notified under Companies Accounting Standards Rules, 2006, which are applicable to Corporates and not the Accounting Standards as pronounced by ICAI. Many companies in their Notes to Accounts continue to state that the company has complied with the Accounting Standards as prescribed by ICAI, which is incorrect.

2) SMC under Companies Accounting Standards Rules, 2006:

Para 1 (1.1) of General Instructions in the Annexure to the notification requires an SMC Company to disclose as under: 

“The Company is a Small and Medium Sized Company (SMC) as defined in the General Instructions in respect of Accounting Standards notified under the Companies Act, 1956. Accordingly, the Company has complied with the Accounting Standards as applicable to a Small and Medium Sized Company.”

This is not disclosed by many companies.

3) Inventories:

a) In many cases it is observed that under the item “Inventories”, a statement is made “As valued and certified by the Management”.

The Council of the Institute has issued a clarification in September 1999, stating that

“… despite the expression “as valued and certified by the management”, the duties and responsibilities of the auditors with regard to inventories are not diminished. Thus, in order that the auditor’s role with regard to inventories is properly appreciated by the users of the financial statements, the auditor may advise his clients to omit the words “as valued and certified by the management”, when describing inventories in the financial statements”.

b) Finished Goods:

Many companies indicate valuation of Finished Goods “At Cost or Market Value whichever is lower”. However, the Accounting Standard requires it to be valued “At Cost or Net Realizable Value, whichever is lower”.

c) Raw Materials:

Many companies indicate valuation of Raw Materials “At Cost” or “Estimated Cost” without having any reference to Net Realizable Value. However, the Accounting Standard mandates the concept of NRV, irrespective of the type of Inventory.

d) Cost Formulas:

Many Companies do not disclose the cost formula used such as specific identification, FIFO, or Weighted Average Cost. Para 26(a) requires such disclosure

 

CA. PUNEET DUGGAL