Page 208 - CA Final PARAM Digital Book.

QNO Cl 7--Statutory Due (Pending Disputes) Old Course – (M11E, M13R, M14R, N16R, PM17, M18M,
400.000 TITANIUM CNO—CARO.160 N18M, M19M)

Shahjahan Pvt. Ltd. has submitted the financial statements for the year ended 31-3-13 for audit. The
audit assistant observes and brings to your notice that the company's records show following dues:
Income Tax relating to Assessment Year 2007-08 ₹ 157 lacs - Appeal is pending before Hon'ble ITAT since

30-9-10.
Customs duty ₹ 65 lakhs - Demand notice received on 15-9-12 but no action has been taken to pay or
appeal.
As an auditor, how would you bring this fact to the members?
Answer Part I -- Relevant Standards & Laws
▪ SA 250 “Consideration of Laws and Regulations”
▪ Clause (vii)(b) of Para 3 of CARO, 2020
Part II -- Requirements of Relevant Standards & Laws
➢ Clause (vii)(b) of Para 3 of CARO, 2020
Where statutory dues referred to in sub clause (a) have not been deposited on account of any
dispute, then the amounts involved and the forum where dispute is pending shall be mentioned. (A
mere representation to the concerned Department shall not be treated as a dispute).

➢ Requirements of SA 250 “Consideration of Laws and Regulations”
• Responsibility of Management –
As per SA 250“Consideration of Laws and Regulations in an Audit of Financial Statement”,
the auditor shall obtain sufficient appropriate audit evidence regarding compliance with
the provisions of those laws and regulations generally recognised to have a direct effect
on the determination of material amounts and disclosures in the financial statements
including tax and labour laws.

• Responsibility of Auditor
During the audit, the auditor shall remain alert to the possibility that other audit
procedures applied may bring instances of non-compliance or suspected non-compliance
with laws and regulations to the auditor’s attention.

Then the auditor shall discuss the matter with management and, where appropriate,
those charged with governance. If management or, as appropriate, those charged with
governance do not provide sufficient information that supports that the entity is in
compliance with laws and regulations and, in the auditor’s judgment, the effect of the
suspected non-compliance may be material to the financial statements, the auditor shall
consider the need to obtain legal advice.

This show cause notice may be an alert or indication of non-compliance for the auditor. So
auditor need to discuss with management and apply additional procedure.

In case, if the auditor concludes that the non-compliance has a material effect on the
financial statements and has not been adequately reflected in the financial statements,
the auditor shall express a qualified or adverse opinion on the financial statements.

• Inherent limitations-
Owing to the inherent limitations of an audit, there is an unavoidable risk that some
material misstatements in the financial statements may not be detected, even though the
audit is properly planned and performed in accordance with the SAs.
Case Discussion
➢ In the present case, there is –
• Income Tax demand of 157 Lacs and the company has gone for an appeal,
• Demand notice received for Customs duty of 65 lakhs on 15-9-12 but no action has been
taken to pay or appeal
It needs to consider as to whether the entire demand is disputed, because it is difficult to
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