After the much-debated enforcement of the Standard of Auditing 701 (SA 701) for listed corporate entities, the independent auditors of the Container Corporation of India Limited (Concor) have communicated the Key Audit Matters (KAM) in its recently-submitted audit report for the year 2018-19. This is the the first of such instances for any public sector undertaking (PSU).

The Navratna CPSE has pending recoveries of Rs 1044 crore from the Central Government under the Service Export from India Scheme (SEIS) accrued between 2015-16 and 2018-19.

Concor’s management had recognised this as income receivable under the scheme. But the claims filed by the company have, so far, not been approved by the concerned department in the Government of India.

The auditors had raised concerns regarding fair value of the amount receivable, as the same was factored in the balance sheet of the company as a recognised income. But no amount had been realised till March 31, 2019.

In their KAM, the auditors Arun K Agarwal & Associates noted, "Given the involvement of management judgement and estimate, any variation may have consequential impact on the recognised revenue."

However, speaking to BusinessLine on Wednesday, V Kalyana Rama, Chairman and Managing Director (CMD), Concor expressed confidence of recovering the entire amount from the Government. "There is a lot of progress in the matter (SEIS recoveries). This amount is receivable from the Government. There were some clarifications (required) and there were some budget issues. Now, we get a sense that we will be receiving it very soon," said Kalyana Rama.

The status of such claims was reviewed regularly. The auditors also made it clear that it will based on the expert's opinion regarding the benefits that the company would be eligible for under SEIS under the Foreign Trade Policy 2015-20. "The Management of the Company is of the view that there is no reduction in the fair value of the claim outstanding in the books," the report clarified.

SA 701 enforcement

Notably, the Institute of Chartered Accountants of India (ICAI) had earlier sought a deferment on enforcement of SA 701, which was declined by the Ministry of Corporate Affairs (MCA). In a letter to the ICAI last month, the MCA clarified that from April 1, 2018, the SA 701 was in force. It also mentioned that once a law is enforced , it cannot be deferred further.

Since, SA 701 applies to audits of financial statements of listed entities, there are public stakeholders. “By communicating KAM in auditor's report, the communicative value of the report will be enhanced by providing greater transparency about the audit," the MCA had said underlining the need for its enforcement.

Commenting on the broader issue of KAM reporting, a sector expert, Kaushik Patel, Partner at Manubhai & Shah LLP, said, "Under the KAM, the auditor has to underline what were the areas of significance and how he has dealt with them. That will help the reader in understanding the company better. However, there may be some confusion or misunderstanding in the minds of the people believing this to be a remark by the auditors, while these are not. There is a possibility of a conflicting situation to arise. Therefore, users and stakeholders have to be educated to read into these observations under KAM."

Till now, the auditors were not required to report issues, where the management satisfactorily explains their decisions, even if those decisions could bear material value to the investors.

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