Audit approach under the Ind- AS regime

With Indian Companies expanding their horizons across the globe at a rapid clip, a need has emerged to prepare Financial Statements that are in line with the globally accepted accounting standards so as to enable the companies to report to various stakeholders spread across multiple geographies an easily understandable and comparable picture of their financial performance and position.

In light of the above, Ministry of Corporate Affairs (MCA) introduced Indian Accounting Standards, popularly known as “Ind-AS” in India in February 2015 and made it mandatory for certain class of companies to follow these standards for the preparation and presentation of Financial Statements in a phased manner commencing period beginning April 01, 2016.

These standards are an adapted version of the globally accepted International Financial Reporting Standards (IFRS) and have been implemented with a view to ensure that Financial Reporting in India is in line with requirements of international standards.

The adoption of the Ind-AS framework in India has resulted in changes not only in the way the Financial Statements are presented but also in the audit procedures carried out by the auditors while discharging their attest functions. This has necessitated the auditors to be more diligent and cognizant of new requirements while expressing their opinion on the Ind-AS Financial Statements.

Discussed below are some of the key factors that both the preparer and the auditor of Ind-AS Financial Statements have to specifically bear in mind.

  • Presentation of Financial Statements

The MCA vide notification dated April 06, 2016 changed the format of Financial Statements in respect of companies whose books of account are required to be prepared in accordance with Ind-AS. Due to this, the format of the Balance Sheet and the Statement of Profit and Loss has changed drastically.

There is an additional requirement of giving a ‘Statement of Changes in Equity’ which was not required to be included in the erstwhile schedule III. Apart from this, the Profit / Loss of the Company as reported in Statement of Profit and Loss has to include an additional head namely, Other Comprehensive Income (OCI).

In light of this major development in Financial Reporting, ICAI has recently released “Guidance Note on Division II – Ind AS Schedule III to the Companies Act, 2013”.  The requirements of the said guidance note increase the effort required by the auditor to enable him/her to obtain reasonable assurance about the amounts and disclosures reported in Ind-AS Financial Statements.

  • Changes in Rules of Classification

The new Schedule III has not only brought about changes in the reporting format of the Financial Statements but has also resulted in changes in classification of various heads of the financials.

Previously, the Balance Sheet was classified under 5 major heads namely Shareholders’ Funds, Non – Current Liabilities, Current Liabilities, Current Assets and Non-Current Assets. The classification was done mainly on the basis of realization or payment of the asset or liability in comparison with the operating cycle. There was no classification based on future cash flows on crystallization of asset or liability. However, as per the new Schedule III, there is an additional classification of the asset or liability under financial and non-financial assets or liabilities based on the impact of the asset or liability on future cash flows.

Due to this additional classification, it must now be ascertained whether the Balance Sheet head is a financial head or a non-financial head based on its impact on the future cash flows. This means that in the previous regime, the auditor was only required to ensure that a particular asset or liability is Non-Current or Current but now the auditor is also required to ensure whether a particular head of Financial Statements could affect the cash flows of the Company in future or not, based on which the further classification into Financial or Non-Financial needs to be decided.

  • Availability of three Comparatives

As mentioned in the preface, the notification has made it mandatory for the concerned class of companies to follow Ind–AS and also to prepare and present the Financial Statements for the year ended March 31, 2017, along with the comparatives of March 31, 2016.

In light of the Notification issued by MCA dated February 16, 2015, the concerned class of are not only required to prepare the Financial Statements of the Current year as per Ind-AS but are also required to provide comparatives in accordance with Ind-AS. Hence, they need to apply Ind -AS retrospectively from the date of transition i.e. April 01, 2015 in case of Phase-I companies.

Since the date of transition of Ind-AS is April 01, 2015 the opening balances are also required to be adjusted in accordance with the Ind-AS and these adjusted balances should also be stated in the financial statements as comparatives of balance sheet along with the current and previous year figures.

Accordingly, the auditor is not only required to check the current and previous year balances but is also required to ensure that the opening comparatives which are being provided with the Financial Statements are fairly stated as these will also form part of the Financial statements. To ensure this, the auditor is required to check compliance with Ind-AS 101 “First-time Adoption of Indian Accounting Standards” and is also required to check whether the opening balances considered for the conversion are properly classified and stated correctly.

Further, Ind-AS 101 also requires that along with the Financial Statements there must be a disclosure presenting a reconciliation of re-instated previous year figures along with its opening figures with financials prepared in accordance with the previous standards. Hence, there is a requirement of an additional disclosure on account of reconciliation of comparative financials prepared in accordance with erstwhile standards with Ind-AS.

The requirements as explained above have resulted in increase in the work of the auditor and verification of the opening balances considered for transition of the Financial Statements. The auditor is not only required to check whether the differences identified have been fairly stated; in addition to disclosing the same in the Financial Statements along with the reasons of such differences.

  • Changes in Accounting Policies

The adoption of Ind-AS has resulted in changes in presentation of financial statements of the Company, and also in the accounting policies. The auditor now has to ensure that the accounting policies of the Company has been appropriately modified in accordance with Ind-AS. Further, the auditor is also required to ensure that the treatment of various heads of the financial statement are properly documented in the accounting policies of the Company.

As a result of the above, it must also be ensured that clauses of various Contracts entered into by the Company with its vendors and customers are in accordance with its accounting policies.


With the introduction of the Ind-AS framework, the auditor now must gear up and modify his approach while conducting the audit of Financial Statements. The auditor should ensure compliance of the new Schedule III in respect of the Ind-AS which requires additional checks as compared to the previous framework.

Classification between financial and non-financial, availability of three Comparatives and change in accounting policies as given above are some of the key areas which will necessitate a change in the audit approach.

The new framework with an objective of facilitating comparison and better presentation is being implemented in a phased manner to enable the companies to transition into the new Financial Reporting Framework smoothly. The auditors and other accounting professionals impacted by the introduction of the new framework have challenging yet rewarding times ahead of them in managing this transition of Indian companies to a new globalized accounting regime.

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