Page 33 - CA Final PARAM Digital Book.

identified that these practices were carried out since 2009 and a lot of damage has been done to the
environment by Abhinandan Limited. A show cause notice was already issued to Abhinandan Limited by
the National Green Tribunal for levying the penalty of an amount of ₹ 500 crore. The unaudited profit for
the financial year 2021-22 of Abhinandan Limited was ₹ 35 crore and the unaudited turnover was ₹ 100
crore. Upon inquiry it was identified that Abhinandan Limited has disclosed this matter in the financial
statements by way of footnote, the extract of which is provided below:

“The company has received a show cause notice from the National Green Tribunal for some potential
violation of environmental laws and the company’s legal department has assessed and found that the
judgment would be in favour of the company. Accordingly, no provision has been created for such
notices.”
In the light of the above scenario kindly provide what should be the appropriate option for the statutory
auditor of the company to report this matter"
Answer As per SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”, the auditor is
required to obtain an understanding and need to evaluate the impact of other laws and regulations that do

not have a direct effect on the determination of the amounts and disclosures in the financial statements,
but compliance with which may be fundamental to the operating aspects of the business, to an entity’s
ability to continue its business, or to avoid material penalties (for example, compliance with the terms of an
operating license, compliance with regulatory solvency requirements, or compliance with environmental
regulations); non-compliance with such laws and regulations may therefore have a material effect on the
financial statements.

The auditor shall perform the following audit procedures to help identify instances of non - compliance with
other laws and regulations that may have a material effect on the financial statements:

(a) Inquiring of management and, where appropriate, those charged with governance, as to whether the
entity is in compliance with such laws and regulations; and
(b) Inspecting correspondence, if any, with the relevant licensing or regulatory authorities

As per Section 143(3)(j) read with Rule 11(a), the auditor is required to report whether the company has
disclosed the impact, if any, of pending litigations on its financial position in its financial statement.

As per SA 570, “Going Concern”, if the auditor concludes that management’s use of the going concern basis
of accounting is appropriate in the circumstances but a material uncertainty exists, the auditor shall
determine whether the financial statements:

(i) Adequately disclose the principal events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern and management’s plans to deal with these events or conditions;
and
(ii) Disclose clearly that there is material uncertainty related to events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern and, therefore, that it may be
unable to realize its assets and discharge its liabilities in the normal course of business.

If adequate disclosure about the material uncertainty is not made in the financial statements, the auditor
shall (a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705; and (b)
In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material uncertainty
exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the
financial statements do not adequately disclose this matter.

In the current scenario, Abhinandan Limited has received a show cause notice from the National Green
Tribunal of an amount which is more than the net profit and the turnover of the company for the year. In
the event of an unfavourable order for Abhinandan Limited, there will be an impact on Abhinandan Limited’s
ability to continue as a going concern.

As a result, appropriate disclosure should be provided by management for such events which cast significant
doubt on the entity’s ability to continue as a going concern. As no appropriate disclosure has been provided
by Abhinandan Limited for such show cause notice, Subahu & Co. should report this matter in their audit
www.auditguru.in PARAM 2.12 | P a g e