Expert Advisory Committee

1.30 Query:

Reopening/revision of accounts after being adopted at the Annual General Meeting.

1.The accounts of a limited company for the year 1994-95 were adopted by the Board of Directors on 31.8.1995. The auditors had also audited the books of account and had signed the accounts on 1.9.1995. These audited accounts were adopted at the shareholders’ Annual General Meeting as on 30.9.1995.

2. Later, the directors found that the position reflected in the annual accounts is not reflected in the books of account and there is a variation in the figure of sales reported in annual accounts and in the books of account. The directors have decided to rectify this mistake and propose to appoint the new auditors to re-audit the books of account for the year 1994-95. The querist has informed that there was no negligence on the part of existing auditors while performing the audit function.

3. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(i) Whether the company can re-open and revise the audited and adopted accounts for the year 1994-95.

(ii) Whether the company can suggest for conducting audit of revised accounts for the year 1994-95 to other than the existing auditors.

(iii) The existing auditors have resigned as auditors. Whether newly appointed auditors can re-audit the audited and adopted accounts for the year 1994-95 in above circumstances.

(iv) It is imperative for the company to revise the accounts for the year 1994-95. After auditing the revised accounts, the accounts would be put up before the shareholders for the re-adoption. Kindly inform whether the above is permissible under any Guidance Note issued by the Institute of Chartered Accountants of India and also under the provisions of the Companies Act, 1956.

(v) What kind of qualification is required by the new auditors in their report for above situation?

Opinion February 17, 1997

1. The Committee notes that the ‘Guidance Note on Revision/Rectification of Financial Statements’, issued by the Institute of Chartered Accountants of India, inter alia, states that the Council of the Institute has “decided that the reopening or rectification of accounts after they have been adopted at the Annual General Meeting should not be permitted under any circumstances.” The Committee also notes the annexure to the aforesaid Guidance Note on “Auditor’s responsibility in case of revision/rectification of balance sheet and profit and loss account of a company already adopted by the company at its annual general meeting”, the relevant extracts of which are given in the Annexure to this opinion.

2. The committee notes that variation in the figure of sales as recorded in the books of account and that given in the financial statements is an error and, therefore, is a ‘prior period item’, in view of the following definition of the said term as per Accounting Standard (AS) 5 on ‘Prior Period and Extraordinary Items and Changes in Accounting Policies’, issued by the Institute of Chartered Accountants of India:

“Prior period items are material charges or credits which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.”

3. The Committee also notes that as per AS 5, “Prior period items should be separately disclosed in the current statement of profit and loss together with their nature and amount in a manner that their impact on the current profit or loss can be perceived.

4. Based on the above, the Committee is of the following opinion for issues raised at para 2 of the query:

(i) The company cannot re-open and revise the accounts once adopted at its annual general meeting. The amount of sales incorrectly shown in the financial statements should be treated as a prior period item in the current period and disclosed as per the requirements of AS 5, reproduced in para 3 above.

(ii) and (iii) Since the answer to (i) is in the negative these questions do not arise.

(iv) Please see para 1 above.

(v) In case contrary to the views of the Institute and the Department of Company Affairs, Government of India, the company still decides to reopen and revise its accounts, and get them audited, the auditors should qualify their report as per para 1 above.

ANNEXURE

The Council of the Institute of Chartered Accountants of India reiterates its view that accounts of a company once adopted at its annual general meeting cannot be reopened and revised. However, it has been brought to the notice of the Council that members are sometimes called upon to report on accounts reopened and revised by the Board of directors. In such situations members may adopt the following format for their qualified report on such revised accounts.

AUDITORS’ REPORT

I. We have examined the attached Balance Sheet of M/s. ___________as at ____________and the annexed Profit and Loss Account for the year ended on that date which are the revised statements of the original Balance Sheet and Profit and Loss Account covered by the audit report of M/s. _____________dated_____________and adopted by the shareholders at the __________Annual General Meeting held on ______.

II. As per the opinion of the Institute of Chartered Accountants of India and that of the Department of Company Affairs* a company cannot reopen and revise the accounts once adopted by the shareholders at an annual general meeting. Contrary to these opinions, the Board of Directors of the Company has reopened and revised the aforesaid accounts.

III. We have considered the earlier auditor’s report dated______on the original accounts and have examined the changes made therein which are as under;

(Deal with changes and their effect- state the qualifications, if any, required to be made. Qualifications in the previous auditor’s report, to the extent applicable, should also be given).

IV. As required by the Manufacturing and Other Companies (Auditor’s Report) Order, issued by the Company Law Board in terms of Section 227 (4A) of the Companies Act, 1956, we annex hereto a statement on the matters specified in paragraphs 4 and 5 of the said order.

V. Further, to our comments in the annexures referred to in paragraph IV above, and subject to the remarks in paragraphs II and III we report that: -

(a) We have obtained all the information and explanation which to the best of our knowledge and belief were necessary for the purpose of our audit;

(b) in our opinion, proper books of account as required by law have been kept by the company so far as appear from our examination of the books;

(d) in our opinion and to the best of our information and according to the explanations given to us, the accounts give the information required by the Companies Act, 1956, in the manner so required and give a true and fair view:

(i) in the case of the balance sheet, of the state of the affairs of the company as at ____________.

(ii) in the case of the profit and loss account, of the profit for the year ended on that date.

Date ___________________ Signature _____________

Chartered Accountants

Note: In case there is no change in the Auditors, the above form would have to be suitably changed.”

__________________________

*Subsequent to the issue of this Annexure to the Guidance Note, a circular dated 28.7.1987 has been issued by the Department of Company Affairs. The circular reads as below:

“It has been decided that revision of Balance Sheets for meeting technical requirements of taxation laws is not prohibited under the Companies Act, 1956, and as such the same may be taken as permitted.”

Accordingly, where the change is as per the aforesaid circular, the auditor may have to make an appropriate modification in the wording of the report. In such a situation the relevant paragraph of the report may appear as below:

“As per the opinion of the Institute of Chartered Accountants of India a company cannot reopen and revise the accounts once adopted by the shareholders at an annual general meeting. However, the Department of Company Affairs, vide its circular dated 28.7.1987 has opined that for meeting technical requirements of taxation laws, the accounts can be reopened. The Board of Directors of the company, contrary to the aforesaid opinion of the Institute, has reopened and revised the aforesaid accounts for adjusting (Here, specify the matter for meeting the technical requirements of taxation laws regarding which accounts were reopened).