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KGS
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
KGS
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.
KGS
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.
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