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Cost

S. No. Topic

1.

Concept of Materiality

2.

Assurance of True and Fair View

3.

Ind AS 115

4.

Capital Gain on Shares and Mutual Funds

INDEX

This article aims to:

Provide a brief Description on Materiality Concept while

performing an audit of Financial Statement

CONCEPT OF

MATERIALITY

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Concept of Materiality

i. Relationship between materiality & Audit risk

(1) The auditor’s assessment of materiality and audit risk may be different at the time of initially

planning the engagement; at the time of evaluating the result. Hence, assessment of materiality

and audit risk may also change. The listed entity shall ensure that all activities in relation

to both physical and electronic (Removed) share transfer facility are maintained either in-

house or by Registrar to an issue and share transfer agent registered with the Board.

(2) There is an inverse relationship between materiality and the degree of audit risk. Higher the

materiality level, the lower the audit risk and vice versa .e.g. The risk of particular account

Introduction

Information is material if its misstatement (i.e. omission or erroneous statement) could influence

the economic decision of uses on the basis of financial information.

Judgment about Materiality depends on size and nature of item, judged in the particular

circumstances of its misstatement. Thus it provides the cutoff point.

The concept of materiality recognizes some matters either individually or in the aggregate. SA

320 – Materiality in Planning and performing an audit, Auditor considers materiality at both the

overall financial information level and in relation to individual account balances and classes of

transaction.

Materiality also be influenced by other considerations, such as legal and regulatory

requirements, non-compliances with which may have a significant bearing on the financial

information and consideration relating to individual account balances and relationships.

The auditor needs to consider the possibility of misstatement of relatively small amount, cumulatively

could have material effect on the financial information .e.g. month end or periodic error which is

repetitive.

• Relationship between Materiality & Audit Risk

• Different type of Materiality

• Specific Materiality Disclosure Guidance

• Summarize SA Requirement on Materiality

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balance or classes of transaction could be misstated by extremely large amount might be very

low. But the risk of misstated extremely small amount might be very high.

ii. Different Type of Materiality

1. Overall Materiality

• Determine benchmarks

• Apply benchmark %

• Apply weighting factors

2. Overall Performance Materiality

• Apply performance materiality %

3. Specific Materiality

• Determine items requiring specific materiality

• Apply specific materiality %

Overall Materiality (for the Financial Report as a whole)

The highest amount of information that if omitted, misstated or not disclosed, then that information has the potential to affect the economic decisions of users of the financial report or the discharge of accountability by management or those charged with governance. The determination of overall materiality should be made with the following questions in mind:

• Who are the major users of the financial report?

• What information is important to their economic decision making and discharging of their

responsibilities?

• In addition to quantitative amounts, what qualitative factors might impact upon the users

financial reporting requirements as they relate to materiality?

Overall Performance Materiality

The amount set by us as auditor at less than the Overall Materiality, to reduce to an appropriately low level, the probability that the aggregate of undetected misstatements exceeds Overall Materiality.

Overall Performance Materiality must be set at a % of the Overall Materiality so as to allow us

a margin or buffer for the possible undetected misstatements that may occur during the

engagement. We use a sliding scale of % based upon an estimate of the engagement risk

associated with the client.

1. Overall Materiality

2. Overall Performance Materiality

3. Specific Materiality

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Specific Materiality (for particular classes of transactions, account balances or disclosures) The misstatements or events that are used by the auditor to identify misstatements at lesser than the Overall Materiality.

Specific Materiality could relate to sensitive areas such as particular note disclosures (that is,

management remuneration or industry-specific data), compliance with legislation or certain

terms in a contract, or transactions upon which bonuses are based. It could also relate to the

nature of a potential misstatement such as an illegal act, non-compliance with loan covenants

and statutory/regulatory reporting requirements.

Other times we may wish to use Specific Materiality for particularly high risk items such as

cash, revenue or related party transactions. On such occasions the history of material

misstatements in relation to a particular balance or class of transaction is also relevant.

Specific Materiality – Disclosure Guidance

Disclosure of the following transactions, balances or events would normally be subject to a

Specific Materiality level lower than Overall Materiality:

• Related party transactions and balances

• Disclosure of items such as those related to financial instrument risk

• Significant management estimates or valuations including sensitivity analysis

• Director’s remuneration

• Director’s expense accounts

• Auditor’s remuneration, particularly non-audit services

• Significant accounting policies or changes in accounting policies

• Sensitive income and expense accounts such as management fees and commissions.

Summarize SA Requirement on Materiality

Determine the Materiality

Accumlate the Misstatements

Evaluate Misstatemets based on the size and Nature

Reassess Overall Materiality

Communicate those charge with Governance

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Concept of Materiality

1. According to SA 200 (Revised) “Overall Objectives of the Independent Auditor and

the Conduct of an Audit in Accordance with Standards on Auditing”, Financial reporting

frameworks often discuss the concept of materiality in the context of the preparation and

presentation of financial statements. Although financial reporting frameworks may

discuss materiality in different terms, they generally explain that:

Misstatements, including omissions, are considered to be material if they,

individually or in the aggregate, could reasonably be expected to influence the

economic decisions of users taken on the basis of the financial statements;

Judgments about materiality are made in the light of surrounding circumstances,

and are affected by the size or nature of a misstatement, or a combination of both;

and

Judgments about matters that are material to users of the financial statements are

based on a consideration of the common financial information needs of users as a

group. The possible effect of misstatements on specific individual users, whose

needs may vary widely, is not considered.

2. Such a discussion, if present in the applicable financial reporting framework,

provides a frame of reference to the auditor in determining materiality for the audit. If

the applicable financial reporting framework does not include a discussion of the

concept of materiality, the characteristics referred to in paragraph 2 provide the auditor

with such a frame of reference.

The auditor’s determination of materiality is a matter of professional judgment, and is

affected by the auditor’s perception of the financial information needs of users of the

financial statements. In this context, it is reasonable for the auditor to assume that users:

(a) Have a reasonable knowledge of business and economic activities and accounting and

a willingness to study the information in the financial statements with reasonable

diligence;

(b) Understand that financial statements are prepared, presented and audited to levels of

materiality;

(c) Recognize the uncertainties inherent in the measurement of amounts based on the

use of estimates, judgment and the consideration of future events; and

(d) Make reasonable economic decisions on the basis of the information in the financial

statements.

3. The concept of materiality is applied by the auditor both in planning and performing

the audit, and in evaluating the effect of identified misstatements on the audit and of

uncorrected misstatements, if any, on the financial statements and in forming the opinion

in the auditor’s report.

CA Gaurav Bhatia and Shivam Sharma

This article aims to: What points we may consider to ensure that Accounts

show True and Fair View.

Assurance of True

and Fair View

Assurance of True and Fair View Meaning

True and fair view in auditing means that the financial statements are free from material

misstatements and faithfully represent the financial performance and position of the entity.

True suggests that the financial statements are factually correct and have been prepared according to

applicable reporting framework such as the IFRS and they do not contain any material misstatements

that may mislead the users. Misstatements may result from material errors or omissions of

transactions & balances in the financial statements.

Fair implies that the financial statements present the information faithfully without any element of bias

and they reflect the economic substance of transactions rather than just their legal form.

Specific Attributes

Attributes Explanation

Authority All transactions are official and person authorized for the same could validate it.

Accurate All information provided is in exact terms both qualitatively and quantatively.

Complete There should be no missing dockets in the accounting system. Loopholes is the system are to be identified and corrected

Requisite for True and Fair View:

1) In preparing the financial statements, all mandatory provision of Companies Act and other

relevant laws have been followed.

2) The financial statements that have been prepared by the company are in conformity with the

books of account.

3) The books of accounts have been in accordance to the principles of accountancy and have

followed accounting standards issued by different regulatory body.

4) The book of accounts have recorded all business transactions correctly.

When all the above facts are taken care by a concern in preparing the financial statements , it

wil be said that these statements show True and Fair View of the affairs of that business

concern.

Supporting Concepts and Conventions

There are some Concepts and Conventions which help to ensure that accounting information is

present accurately and consistently.

Accounting Concepts and Contraventions Go hand in hand to accomplish true

and fair view

Do small errors show that accounts don’t show true and fair view

1) It is based on subjective and objective judgements depending on familiarity with the

organisation. The accounts can be manipulated in many ways. The more experienced management

the easier for them to hide mistakes an frauds.

2) There are inherent risks in each accounting system or there might not be system of control due

to which detection of fraud becomes almost impossible. Limited sampling can give only little

assurance to the auditor and conclude that accounts show true and fair view.

Approach to be taken by Auditors

The obligations of an auditor when giving an opinion on a company’s financial statements are set

out in company’s act.

Those obligations include:

Stating whether in opinion the account show true and fair view.

It is clear that if auditors are to discharge properly their legal and professional duties.

They should stand back as they approach finalisation of those accounts and consider on

view of the issues that they have addressed in course of the audit, the accounts do indeed

give a true and fair view.

1) Going

Concern

2) Consistency

3) Prudence

4) Accruals

(Matching)

Accounting Concepts Accounting Conventions

1) Monetary

Measurement

2) Separate

Entity

3) Realization

4) Materiality

Ind AS-115 [Revenue from Contracts with

Customers]

This article aims to

Introduction & Scope to Ind AS 115

Provide overview of Ind AS-115 five

step model

Contract cost

Disclosures w.r.t Ind AS-115

Lakshay Chugh & CA Gaurav Bhatia

KGS

Identify the contract with the customer

Identify the performance obligation in the contract

Determine the transaction price

Allocate the transaction price to the performance obligation

Recognise revenue when (as or) the entity satisfies its performance obligations

Ind AS-115 [Revenue from Contracts with Customers]

Introduction

The Ministry of Corporate Affairs (MCA), on 28 March 2018, notified Ind As -115, Revenue from Contracts with Customers as a part of Companies (Indian Accounting Standards) Amendment Rules, 2018.It is aligned to IFRS 15 issued by International Accounting Standard Board. Ind AS 115 is effective from accounting period beginning on or after 1 April, 2018 and

Replaces Ind AS 18, Revenue and Ind AS 11, Construction Contracts

Establishes a new control-based revenue recognition model

Provides more guidance for deciding whether revenue is recognized at a point in time or over time

Provides new and more detailed guidance on specific topics such as multiple element arrangements, variable consideration, rights of return, warranties, , consignment arrangements and licensing

Scope

Ind AS 115 applies to contracts with customers to provide goods or services, licensing of intellectual property and exchanges of non-monetary assets other than scoped out exchanges, but it excludes

Lease contract within scope of Ind AS-104, Leases

Insurance contracts within the scope of Ind AS 104, Insurance Contracts

Financial instruments and other contractual rights or obligations within the scope of Ind AS 109

Overview of Ind AS 115

Five Step Model

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Step 1: Identify the contract with the customer

The standard defines the term contract as ‘an agreement between two or more parties that creates enforceable

rights and obligations.’ Contract can be written, oral, or implied by customary business practices. An entity shall

account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met:

Parties to the contract have approved the contract and are committed to perform their respective

obligations

Entity can identify each party’s rights and payment term for the goods or services to be transferred

The contract has commercial substance

It is probable that the entity will collect the consideration.

If a customer contract does not meet these criteria and an entity receives consideration from the customer,

revenue is recognized only when either:-

The entity’s performance is complete and substantially all of the consideration in the arrangement has

been collected and is non-refundable

The contract has been terminated and the consideration received is non-refundable.

Combination of Contract

An entity shall combine two or more contracts entered into at or near the same time with the same customer (or

related parties of the customer) and account for the contracts as a single contract if one or more of the following

criteria are met:

The contracts are negotiated as a package with a single commercial objective.

The amount of consideration to be paid in one contract depends on the price or performance of the other

contract.

The goods or services promised in the contracts are a single performance obligation.

Step 2: Identify the performance obligation in the contract

A performance obligation is a promise in a contract with a customer to transfer either

A good or service, or a bundle of goods or services, that is ‘distinct’

A series of distinct goods or services that are substantially the same and have the same pattern of

transfer to the customer

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Distinct

Separately Identifiable

Readily available resource

No Int ion egrat

No modif ion or icat

Service customisation

Not highly inter related

If a promised goods or service under the contract does not qualify to be separate performance obligation, the

entity would need to combine such good or service with the other goods or services until the bundled arrangement

qualifies to be a performance obligation. Identification of performance obligation requires significant judgment

and entails an assessment of the promised goods and services under the contract.

Step 3: Determine the transaction price

An entity shall consider the terms of the contract and its customary business practices to determine the

transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in

exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of

third parties.

When determining the transaction price, an entity shall consider the effects of all of the following:

Variable consideration and the constraint: - If the consideration includes variable amount, an entity

shall estimate the amount of consideration to which the entity will be entitled in exchange for

transferring the promised goods or services to a customer. An amount of consideration can vary because

of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other

similar items.

The existence of a significant financing component in the contract: - In determining the transaction

price, an entity shall adjust the promised amount of consideration for the effects of the time value of

money if significant financing component exist regardless of financing being explicit or implicit. If a

contract contains a significant financing component then entity should consider the relevant facts

including both of the following:

Difference between the amount of promised consideration and the cash selling price of the goods

or services.

Prevailing interest rate in the market

Non-cash consideration: - To determine the transaction price for contracts in which a customer

promises consideration in a form other than cash, an entity shall measure the non-cash consideration at

fair value. It may also vary because of the form of consideration.

If an entity cannot reasonably estimate the fair value of the non-cash consideration, the entity shall

measure the stand-alone selling price of the goods or services promised to the customer in exchange for

the consideration.

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Consideration payable to a customer: - Consideration payable to the customer includes cash amounts,

credits or other items (voucher or coupon) and entity account it as a reduction of transaction price

(revenue).

Step 4: Allocate the transaction price to the performance obligation

An entity allocate the transaction price to each performance obligation that depicts the amount of consideration

to which the entity expects to be entitled in exchange for transferring the promised goods or services to the

customer. On a relative stand-alone selling price basis, an entity shall determine the stand-alone selling price and

allocate the transaction price in proportion to those stand-alone selling prices.

The stand-alone selling price is the price at which an entity would sell a promised good or service separately to a

customer. The best evidence of a stand-alone selling price is the observable price of a good or service when the

entity sells that good or service separately in similar circumstances and to similar customers. If not observable

then following methods are used:-

Adjusted market assessment approach—an entity could evaluate the market in which it sells goods or

services and estimate the price that a customer in that market would be willing to pay for those goods or

services.

Expected cost plus a margin approach—an entity could forecast its expected costs of satisfying a

performance obligation and then add an appropriate margin for that good or service.

Residual approach—an entity may estimate the stand-alone selling price by reference to the total

transaction price less the sum of the observable stand-alone selling prices of other goods or services.

Step 5:- Recognize revenue when (as or) the entity satisfies its performance

obligations

An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a

promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains

control of that asset.

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For each performance obligation identified, an entity shall determine at contract inception whether it satisfies the

performance obligation over time or satisfies the performance obligation at a point in time. If an entity does not

satisfy a performance obligation over time, the performance obligation is satisfied at a point in time

An entity transfers control of a good or service and recognizes revenue over time, if one of the following criteria is met:

The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.

The entity’s performance creates or enhances an asset

An entity transfers control of a good or service and recognizes revenue at a point and satisfies performance

obligation. The following are the indication of transfer of control:-

Customer has legal title to the Asset

The entity has transferred physical possession of the asset

The customer has the significant risks and rewards of ownership of the asset

Contract cost:-

Incremental cost of obtaining a contract with a customer – Entity should recognize as an asset if the entity expects to recover those costs. These are expenses which an entity would not have incurred if the contract had not been obtained (e.g. sales commission)

Cost to fulfil a contract – Entity should recognize an asset from the cost incurred to fulfil a contract if those costs:

Relate directly to a contract that an entity can specifically identify Generate or enhance resources of the entity used in satisfying the performance obligation in future. Is expected to recover

Disclosures:-

The objective of the disclosure requirements is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

To achieve that objective, an entity shall disclose qualitative and quantitative information about all of the

following:

Disaggregation of Revenue

Contract balance

Performance Obligations

Significant Judgment

Costs to fulfill the contract

CA SAHIL BABBAR & PRAKASH MISHRA

This article aims to:

Highlighting concepts of

taxation of shares and mutualfunds

TAXABILITY OF

CAPITAL GAINS

CAPITAL GAIN ON SHARES AND MUTUAL FUND

• A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. • The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. • The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. • Thus, a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

How do Mutual Fund Work? • Each fund's investments are chosen and monitored by professionals who use this money to create a portfolio. • Professionals are called Fund Managers. •That portfolio could consist of stocks, bonds, money market instruments or a combination of those. • The Portfolio comprises of the assets the investment is diversified into. The investment objective is the goal that the fund manager sets for the mutual fund when deciding which stocks and bonds should be in the fund's portfolio. For example, an objective of a growth stock fund might be long-term capital appreciation.

Advantage of Investing in Mutual Funds

Types of Mutual Funds

M ut Mutua Equity funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. The objective of Debt Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. A mutual fund scheme can be classified into open-ended scheme or clos

Balanced Funds are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.

Mutual Fund Taxation :

How mutual funds are taxed?

The basic motivation behind investing in mutual funds is to earn interest/dividends

and capital gains. You need to know that these capital gains are taxed by the income

tax authorities. The amount of tax to be paid on capital gains depends on the time

for which you stay invested in them. It is referred to as the holding period of mutual

funds.

Funds Short-term Long-term

Equity funds Less than 12 months 12 months and more

Balanced funds Less than 12 months 12 months and more

Debt funds Less than 36 months 36 months and more

Fixed Deposits:-

Fixed Deposits (FDs) are a popular form of savings. It allows you to exploit complete potential of Section 80C tax exemption while keeping your money safe for the said period. You can also earn a fair amount of income in the form of interest. But this income is taxable, seldom do investors think about paying tax on the interest income. This article will cover on when and how to pay income tax on FD interest income.

How is interest income taxed?

Interest income from Fixed Deposits is fully taxable. Add interest income to your total income in your Income Tax Return each year (even though, it may not be paid out) and calculate your tax liability accordingly It is shown under the head ‘Income from Other Sources’ at Gross amount (i.e. add TDS on amount received) Banks deduct TDS on interest income: when it is accrued and not when the FD matures & interest is paid out. So if you have a FD for 3 years – banks shall deduct TDS at the end of each year. Tax on Interest is calculated a per Slab rate of assesses accordingly.

FD vs Mutual Funds:

With bank FD interest rates around 6.7-7 per cent, investors looking for higher returns for their capital often find a good choice in mutual funds. Mutual funds or bank FD (fixed deposits)? Financial planners usually recommend mutual fund investment to investors who have at least a moderate degree of risk appetite

Capital Gains on share:

General rates:

LTCG: It is taxed at 20 per cent (plus education cess @ 3 percent for FY 2017-

18/Ay 2018-19 and 4% for FY2018-19/AY 2019-20). You cannot avail any

deductions under Chapter VI-A .

Special rates :

LTCG:

Sale of equity shares and held for more than one year, on or after April 1, 2018

will be chargeable to tax at 10 percent plus cess @ 4 percent. Budget

2018 has increased cess from3 percent to 4 percent.

No indexation benefit will be allowed on such transactions.

STCG:

Similarly, STCG from the sale of equity shares STT is charged on sale transaction

are taxed at 15 percent (plus education cess) instead of your normal slab rates.

Option to the taxpayer : As an individual, you have an option to pay tax @ 10% on your LTCG, instead of

20% with some minor changes in computation methodology.

Calculate your LTCG without giving effect to indexation. This means that instead of

deducting indexed cost of acquisition (ICOA) and indexed cost of improvement

(ICOI), you need to deduct the COA and COI from the sale value.

Exemption from Capital Gains : There are certain exemptions available under section 54 of the Income Tax Act

which helps the assessee reduce his capital gains subject to tax.

For example: Buying a new residential house could exempt your capital gains

earned from sale of the old house. Also, investment in certain bonds notified by the

government (NHAI bonds) could reduce your capital gains up to Rs 50 lakh.