CA Inter Audit & Ethics

Net Owned Fund (NOF) of SR Finance Ltd.

As per the Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016, Net Owned Fund is computed as:

Step 1: Compute Owned Fund

Owned Fund = Paid-up Equity Capital + Free Reserves (less accumulated losses and intangible assets, if any)

Owned Fund = ₹300 + ₹900 = ₹1,200 lakhs

Step 2: Identify Investments requiring deduction

The following amounts must be deducted from Owned Fund to the extent they exceed 10% of Owned Fund:
- Investments in shares of subsidiaries = ₹375 lakhs
- Book value of debentures/bonds of group companies = ₹600 lakhs
- Total investments (qualifying deductions) = ₹975 lakhs

Step 3: Compute the deductible amount

10% of Owned Fund = 10% × ₹1,200 = ₹120 lakhs

Amount exceeding 10% of Owned Fund = ₹975 − ₹120 = ₹855 lakhs (this is the amount to be deducted)

Step 4: Compute Net Owned Fund

Net Owned Fund = Owned Fund − Excess investments over 10% of Owned Fund
= ₹1,200 − ₹855 = ₹345 lakhs

The Net Owned Fund of SR Finance Ltd. is ₹345 lakhs.

Statement (a): INCORRECT. The overall audit strategy, as described in SA 300, sets out the scope, timing, and direction of the audit and the nature of the engagement team's resources. While it includes a record of audit procedures, it encompasses much more: risk assessment areas, scoping decisions, reporting requirements, and resource allocation. The definition given in the statement is too narrow and incomplete. The strategy is a broader framework than just a record of procedures.

Statement (b): INCORRECT. Key Audit Matters (KAM) are communicated in accordance with SA 701. They represent matters of most significance during the audit of the financial statements, but they are NOT a separate opinion on individual matters. KAM is merely communication to those charged with governance about significant audit findings—not an independent audit opinion on those specific matters.

Statement (c): INCORRECT. The terminology is misapplied. Depreciation (not amortisation) is the systematic allocation of the depreciable amount of Property, Plant and Equipment over its useful life, as per Ind AS 16 (or AS 6). Amortisation refers to intangible assets and right-of-use assets. Applying the term "amortisation" to PPE is factually incorrect.

Statement (d): CORRECT. Section 143 of the Companies Act, 2013 explicitly provides that the remuneration of the auditor shall include both the remuneration payable to the auditor and any facility provided to him (such as office space, clerical assistance, etc.). This is a complete and accurate statement of the statutory provision.

Statement (e): INCORRECT. Appropriateness measures the quality of audit evidence—its relevance and reliability—not the quantity. As per SA 500, the quantity of evidence is determined based on the auditor's risk assessment. Sufficiency (quantity) and appropriateness (quality) are two distinct dimensions of audit evidence, and the statement conflates them.

Statement (f): CORRECT. Analytical procedures are required to be used in all three stages of an audit: (1) planning phase per SA 315, (2) substantive procedures per SA 330, and (3) overall review phase per SA 520. This is a mandatory requirement applicable to all audits, making the statement accurate.

Statement (g): CORRECT. In Co-operative societies, contribution to the Education Fund is a statutory charge on profit, not an appropriation of profit. It is deducted from profits before calculating the surplus available for distribution among members. This treatment is mandated under Co-operative Societies Act provisions and relevant accounting standards.

Statement (h): INCORRECT. The statement contains an internal contradiction and is factually misleading. Integrated ERP systems (SAP, Oracle, etc.) are complex and typically more difficult to audit, not easier. They require specialised knowledge, detailed understanding of system controls, and often extensive testing of integrated modules and data flows. Simpler off-the-shelf accounting software may be easier to audit, though potentially less robust. The statement is also self-contradictory ("time-consuming and easy").

Applicable Standard: AS 7 – Construction Contracts

Step 1 – Determine Stage of Completion

Under AS 7, the stage of completion is calculated using the cost-to-cost method:

Cost incurred to date = Work certified + Work not certified = ₹12,500 + ₹2,500 = ₹15,000 lakhs

Total estimated contract cost = Cost to date + Estimated further cost = ₹15,000 + ₹17,500 = ₹32,500 lakhs

Degree of completion = 15,000 / 32,500 × 100 = 46.15%

Step 2 – Check for Foreseeable Loss

Total contract price = ₹24,000 lakhs; Total estimated cost = ₹32,500 lakhs.

Since estimated cost (₹32,500) exceeds contract price (₹24,000), this is an onerous/loss contract. As per AS 7 (Para 35), the entire foreseeable loss of ₹8,500 lakhs (₹32,500 – ₹24,000) must be recognized as an expense immediately, irrespective of the stage of completion.

Step 3 – Revenue and Cost Recognition (Statement of P&L Extract)

Breakdown of costs: Costs incurred ₹15,000 + Provision for future losses ₹4,576.92 = ₹19,576.92 lakhs.

Step 4 – Balance Sheet Extract

Total progress billings = Progress received + To be received = ₹11,000 + ₹3,000 = ₹14,000 lakhs.

Since progress billings (₹14,000) > Revenue recognized (₹11,076.92):

Current Liabilities:
- Gross amounts due to customers (Excess billing): ₹14,000 – ₹11,076.92 = ₹2,923.08 lakhs
- Provision for foreseeable losses (future costs): ₹4,576.92 lakhs

Current Assets:
- Trade receivables (progress payment to be received): ₹3,000 lakhs

Conclusion: Fisher Construction Co. must recognize a net loss of ₹8,500 lakhs in FY 2022-23 due to the contract being a loss contract. The foreseeable loss is recognized fully in the current year as mandated by AS 7.