Objective: To provide comprehensive directions for conducting a statutory audit of “Other Current Liabilities” in an Indian company, ensuring compliance with Indian laws and accounting standards, and addressing common queries and confusions related to this balance sheet item.
Legal Framework:
- Companies Act, 2013
- Section 128: This section mandates that every company must maintain proper books of account that give a true and fair view of the state of the company’s affairs. These records must be kept on an accrual basis and according to the double-entry system of accounting.
- Section 129: Financial statements must comply with the accounting standards notified under the Companies Act. They should present a true and fair view of the state of affairs of the company and must comply with Schedule III.
- Schedule III: This schedule provides a format for the balance sheet and the statement of profit and loss of a company. It classifies liabilities into current and non-current and specifies the disclosures required for each category. “Other Current Liabilities” is a specific category under current liabilities, including items such as statutory dues, advances from customers, unclaimed dividends, outstanding expenses, and other payables.
- Section 134: This section requires the financial statements, including consolidated financial statements if any, to be approved by the Board of Directors before they are signed on behalf of the Board by the Chairperson and authorized by the Board. The Board’s report should also include a declaration from the directors regarding the adequacy of internal financial controls.
- Accounting Standards (AS)
- AS 1 (Disclosure of Accounting Policies): This standard mandates the disclosure of significant accounting policies followed in preparing and presenting financial statements. It is essential to disclose the policies related to the recognition and measurement of liabilities.
- AS 29 (Provisions, Contingent Liabilities, and Contingent Assets): This standard outlines the accounting and disclosure requirements for provisions, contingent liabilities, and contingent assets. It provides guidance on when to recognize a liability and how to measure it.
- AS 18 (Related Party Disclosures): Requires disclosure of related party transactions, which may include liabilities to related parties under “Other Current Liabilities”.
- Regulatory Guidelines
- RBI Guidelines: If the company is a financial institution, the Reserve Bank of India (RBI) has specific guidelines on provisioning and classification of liabilities. These guidelines ensure that financial institutions maintain adequate provisions for their liabilities.
- SEBI Guidelines: For listed companies, the Securities and Exchange Board of India (SEBI) mandates specific disclosure requirements under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. These include detailed disclosures about the classification and nature of liabilities in the financial statements.
- Income Tax Act, 1961: The provisions related to TDS (Tax Deducted at Source) under the Income Tax Act require companies to deduct and deposit tax at the source on specific payments. Any outstanding TDS liabilities must be disclosed under “Other Current Liabilities”.
Understanding Other Current Liabilities:
Other Current Liabilities generally include:
- Statutory Dues: Unpaid taxes (GST, VAT, TDS), PF, ESI, etc.
- Advances from Customers: Money received in advance for goods or services.
- Unclaimed Dividends: Dividends declared but not claimed by shareholders.
- Outstanding Expenses: Accrued but unpaid expenses such as salaries, rent, utilities.
- Other Payables: Any other short-term obligations not covered under specific headings.
Audit Procedures:
- Understanding Internal Controls
- Assess the internal controls over the recording and payment of liabilities.
- Evaluate the segregation of duties, authorization, and approval processes.
- Verification of Statutory Dues
- Documentation: Obtain records of statutory dues including tax returns, challans, and payment receipts.
- Verification: Check the accuracy of amounts, due dates, and ensure payments are made timely.
- Reconciliation: Reconcile the amounts with the general ledger and ensure no dues are outstanding.
- Advances from Customers
- Documentation: Review advance receipts, contracts, and sales orders.
- Verification: Confirm the validity and existence of advances. Match advances to subsequent sales or services.
- Disclosure: Ensure advances are correctly classified and disclosed.
- Unclaimed Dividends
- Documentation: Obtain the dividend declaration, payment records, and list of unclaimed dividends.
- Verification: Confirm the amounts and identify the period for which dividends are unclaimed.
- Compliance: Verify compliance with Section 124 of the Companies Act, 2013 regarding the transfer of unclaimed dividends to the Investor Education and Protection Fund (IEPF).
- Outstanding Expenses
- Documentation: Review expense accruals and supporting documents such as invoices and contracts.
- Verification: Validate the amounts, verify the period, and ensure correct accrual.
- Reconciliation: Reconcile with the general ledger and ensure completeness.
- Other Payables
- Documentation: Obtain details of other payables and supporting documents.
- Verification: Confirm the validity, existence, and accuracy of these payables.
- Disclosure: Ensure appropriate classification and disclosure.
Detailed Audit Procedures:
- Statutory Dues
- GST/VAT: Verify returns, challans, and ensure payments are made timely. Reconcile the balances with the books.
- TDS: Check TDS returns, payments, and ensure correct amounts are deducted and paid. Reconcile with the general ledger.
- PF/ESI: Review the calculation, payment, and filing of PF and ESI dues. Ensure timely payments and correct recording.
- Advances from Customers
- Verification: Obtain confirmations from customers regarding the advance amounts. Match the advances with subsequent invoices.
- Cut-off Procedures: Ensure that advances are recorded in the correct accounting period.
- Unclaimed Dividends
- Verification: Review the dividend ledger, confirm the amounts with shareholders, and ensure compliance with transfer requirements to IEPF.
- Disclosure: Ensure unclaimed dividends are appropriately disclosed in the financial statements.
- Outstanding Expenses
- Review and Verification: Cross-check expense accruals with supporting documents. Ensure expenses are recorded in the correct period.
- Cut-off Procedures: Verify the completeness and accuracy of expense accruals at year-end.
- Other Payables
- Verification: Review the nature of other payables, supporting documents, and confirm the validity of amounts.
- Reconciliation: Ensure payables are reconciled with supplier statements and the general ledger.
Practical Examples:
- Scenario 1: Statutory Dues
- Scenario: The company has outstanding GST dues of INR 1,00,000 as of the year-end.
- Audit Approach: Verify the GST return, payment challans, and reconcile with the general ledger.
- Practical Insight: Ensure the dues are paid before the due date to avoid penalties.
- Scenario 2: Advances from Customers
- Scenario: The company received an advance of INR 2,00,000 from a customer for a future delivery.
- Audit Approach: Review the sales order and advance receipt. Confirm with the customer and ensure proper recording.
- Practical Insight: Verify that the advance is adjusted against the subsequent sale.
- Scenario 3: Unclaimed Dividends
- Scenario: The company has unclaimed dividends of INR 50,000 for the financial year 2020-2021.
- Audit Approach: Obtain the list of shareholders with unclaimed dividends, verify the amounts, and ensure compliance with Section 124 of the Companies Act.
- Practical Insight: Ensure timely transfer of unclaimed dividends to IEPF.
- Scenario 4: Outstanding Expenses
- Scenario: The company has accrued salaries of INR 3,00,000 for March 2024, payable in April 2024.
- Audit Approach: Review salary accruals, payroll records, and reconcile with the general ledger.
- Practical Insight: Ensure that the accrual is accurate and recorded in the correct period.
- Scenario 5: Other Payables
- Scenario: The company has other payables amounting to INR 1,50,000 for legal services.
- Audit Approach: Review the invoice from the legal firm, confirm the payable amount, and ensure proper recording.
- Practical Insight: Verify the nature and validity of other payables to ensure accuracy.
- Scenario 6: Statutory Dues (TDS)
- Scenario: The company has outstanding TDS of INR 75,000 as of the year-end.
- Audit Approach: Verify the TDS returns, payment challans, and reconcile with the general ledger.
- Practical Insight: Ensure timely payment of TDS to avoid interest and penalties.
- Scenario 7: Advances from Customers (Multiple Advances)
- Scenario: The company received multiple advances from customers totaling INR 5,00,000.
- Audit Approach: Review advance receipts, confirm with customers, and ensure proper recording and adjustment against sales.
- Practical Insight: Ensure advances are recorded in the correct period and matched against subsequent sales.
- Scenario 8: Unclaimed Dividends (Multiple Years)
- Scenario: The company has unclaimed dividends from multiple financial years amounting to INR 1,00,000.
- Audit Approach: Obtain the list of shareholders with unclaimed dividends, verify the amounts for each year, and ensure compliance with transfer requirements to IEPF.
- Practical Insight: Ensure timely transfer of unclaimed dividends to IEPF for each financial year.
- Scenario 9: Outstanding Expenses (Multiple Items)
- Scenario: The company has accrued expenses for utilities, rent, and salaries totaling INR 4,00,000.
- Audit Approach: Review the accruals, supporting documents, and ensure proper recording and reconciliation with the general ledger.
- Practical Insight: Verify that the accruals are accurate and recorded in the correct period.
- Scenario 10: Other Payables (Multiple Items)
- Scenario: The company has other payables for consulting, legal, and audit fees amounting to INR 2,50,000.
- Audit Approach: Review the invoices, confirm the payable amounts, and ensure proper recording and reconciliation.
- Practical Insight: Verify the nature and validity of other payables to ensure accuracy and completeness.
Conclusion:
Conducting a statutory audit of Other Current Liabilities requires a thorough understanding of the legal framework, careful verification of balances, and ensuring compliance with regulatory requirements. By following detailed audit procedures and using practical examples, auditors can effectively audit Other Current Liabilities, ensuring they are accurately recorded, classified, and disclosed in the financial statements.
Author
CA Sourabh Kothari (C.A., B.Com)
He is currently working as Partner – Risk and Transaction advisory with a renowned firm in Jaipur having experience in Internal Audit, IFC Audit, Business consultancy, Due Diligence and Management consultancy.
E-mail: Sourabh.kothari@jainshrimal.in | LinkedIn: Sourabh Kothari
