Reporting Requirement under the Companies Act, 2013 with respect to cash balance and transactions during Demonetization by Companies and Auditors

Demonetization of Rs. 500 and Rs. 1000 bank notes of Mahatma Gandhi series by the Modi Government declaring  the use of such five hundred and thousand rupees notes (also know as Specified Bank Notes (SBNs)) as invalid with effect from the midnight of 8th November, 2016 came as a surprise to the Indian Economy. Some of the effects of such a move by the Indian Government included, cash shortages throughout the economy, people having to stand on long queue to exchange or deposit their SBNs, cash-driven industries facing up huge turmoil and so on. This lasted for quite few months and slowly the economy started to stabilize when  most of the cash withdrawn was pumped into the economy by the Reserve Bank of India (RBI) through the issuance of new Rs. 500 and Rs. 2000 notes. While the economy is believed to have recovered from this turbulence, it's aftermath are still to be seen in the form of additional reporting requirements laid down by the Government to companies as well as the auditors.

Government vide Notification No. G.S.R 308(E) dated 30.03.2017 amended Schedule III to the Companies Act, 2013 adding the requirement to disclose the closing balance of cash as on 8th November, 2016 as well as closing balance of cash as on 30th December, 2016 in the notes to financial statements (Balance Sheet) of all the companies. Further, the companies are also required to disclose the details of transactions involving the Specified Bank Notes (SBNs) and other denomination notes including receipts, payments and their deposit with banks for the above period.

The amendment is made in both Division I and Division II of the Schedule III  and is thus, applicable to both standalone financial statements as well as consolidated financial statements and reads as follow:

Every company shall disclose the details of Specified Bank Notes (SBN) held and transacted during the period 08/11/2016 to 30/12/2016 as provided in the Table below:-

Format of Disclosing SBNs details by Companies in Financial Statements

That is not all. The law goes a step ahead and lays the responsibility upon the auditors to verify that the companies comply with the above disclosure requirement and ensure that such disclosure is in accordance with the books of accounts maintained by the company. 

Ministry of Corporate Affairs (MCA) vide Notification No. G.S.R. 307(E) dated 30.03.2017 notified Companies (Audit and Auditors) Amendment Rules, 2017, which inserted the following clause, after the existing clause (c), in Rule 11 of the Companies (Audit and Auditor) Rules, 2014. 

“(d) whether the company had provided requisite disclosures in its financial statements as to holdings as well as dealings in Specified Bank Notes during the period from 8th November, 2016 to 30th December, 2016 and if so, whether these are in accordance with the books of accounts maintained by the company.”

Keeping in view the above reporting requirement placed upon the auditors, the Auditing and Assurance Standards Board of the Institute of Chartered Accountants of India (ICAI) came up with the Implementation Guide on Auditor’s Report under Rule 11(d) of Companies (Audit and Auditors) Amendment Rules, 2017 and Amendment to Schedule III to Companies Act, 2013 on April 2017. 

The key guidelines and audit procedures detailed in the aforementioned Implementation guide to reporting under Rule 11(d), issued by AASB to help chartered accountants (CAs) comply with the provisions of law are discussed below:

• Obtain closing cash balance certificate with denominations from the Management as at 8th November, 2016 and as at 30th December, 2016 in respect of Specified Bank Notes (SBNs) as well as other denomination notes in the following format.
  
  

  Cash balance as on 08-11-2016		Cash balance as on 30-12-2016
  Denominations	Amount	Denominations	Amount
  Total		Total

• Obtain an understanding of controls and procedures implemented by the Company during the period from 9th November, 2016 to 30th December, 2016 to ensure compliance with RBI notifications regarding allowed payments and receipts in SBNs and whether such controls are reasonable to prevent and detect any non-permitted transactions. 
• Check and note down any payments or receipts made in SBNs during the period (other than those allowed as per RBI notifications https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3270). 
• Obtain listing from management as to how the SBNs were dealt with subsequent to 8th November, 2016 and do a reconciliation to arrive at the closing cash balance as at 30th December, 2016. Certification or representation in the following format should be obtained.
  

  	SBNs		Other Denomination notes		Total
  	Denominations	Amt	Denominations	Amt	Denominations	Amt
  Closing Balance as at 8 November 2016
  Transactions between 9 th November 2016 and 30th December 2016
  Add: Withdrawal from Bank accounts
  Add: Receipts for permitted transactions
  Add : Receipts for non-permitted transactions
  Less : Paid for permitted transactions
  Less : Paid for non-permitted transactions
  Less: Deposited in bank accounts
  Closing balance as at 30 December 2016

• Verify the cash balance certificate to ensure that it is in accordance with books of accounts. 
• Verify cash payment vouchers to ensure that payments in SBNs is made only towards permitted transactions. These would illustratively include payment for the medical treatment (hospitalization in Government hospitals, medicine etc. as per the relevant notifications), purchase at consumer cooperative stores operated under authorisation of Central or State Government, purchase of bus tickets at Government bus stands, train tickets at railway station, air tickets at airport, toll charges at National Highway, settlement of utility bills, purchase of LPG/gas cylinders, payment of school fees, payment towards any fees, charges, taxes or penalties, payable to the Central or State Government including Municipal and local bodies, fuel purchase, etc.
• Verify bank deposits with deposit slips or deposit form containing denomination wise details, acknowledged by the bank, as well as with the relevant bank statements.
• Finally obtain an Management Representation (in accordance with Standards on Auditing (SA) 280 "Written Representations", regarding the following:
1. Completeness of the disclosure made in the notes to the financial statements.
2. Manner of dealing in the SBNs during 9 November 2016 to 30 December 2016, deposited in bank, payment against permitted transactions, etc.
3. Permitted receipts and permitted payments made by the company as per the Government notifications issued from time to time.

For more in-depth guidance with illustrations please refer the full text of the the Implementation Guide on Rule 11(d) of Companies (Audit and Auditor) Rules, 2014. Further, attention is drawn to the fact that both this article as well as the implementation guide are to provide guidance and are not substitute to auditing procedures prescribed under the Standards on Auditing (SAs) and should be used in conjunction with such SAs.