to the Members of Hathway Cable and Datacom Limited
Report on Audit of the Standalone Financial Statements Opinion
We have audited the accompanying standalone financial statements of Hathway Cableand Datacom Limited ("the Company") which comprise the Balance Sheet as atMarch 31 2020 the Statement of Profit and Loss (including Other Comprehensive Income)Statement of Changes in Equity and the Cash Flow Statement for the year then ended and asummary of significant accounting policies and other explanatory information (hereinafterreferred to as "the standalone financial statements").
In our opinion and to the best of our information and according to the explanationsgiven to us the aforesaid standalone financial statements give the information requiredby the Companies Act 2013 ("the Act") in the manner so required and give a trueand fair view in conformity with the Indian Accounting Standards prescribed under section133 of the Act read with the Companies (Indian Accounting Standards) Rules 2015 asamended ("Ind AS") and other accounting principles generally accepted in Indiaof the state of affairs of the Company as at March 31 2020 its profit (including othercomprehensive income) its changes in equity and its cash flows for the year ended on thatdate.
Basis for Opinion
We conducted our audit of standalone financial statements in accordance with theStandards on Auditing (SAs) specified under section 143(10) of the Act. Ourresponsibilities under those Standards are further described in the Auditor'sResponsibilities for the Audit of the Standalone Financial Statements section of ourreport. We are independent of the Company in accordance with the Code of Ethics issued bythe Institute of Chartered Accountants of India (ICAI) together with the ethicalrequirements that are relevant to our audit of the standalone financial statements underthe provisions of the Act and the Rules made thereunder and we have fulfilled our otherethical responsibilities in accordance with these requirements and the Code of Ethicsissued by ICAI. We believe that the audit evidence we have obtained is appropriate toprovide a basis for our opinion on the standalone financial statements.
Emphasis of Matter
We draw attention to Note 4.18 in which it is stated that the Board of directors ofthe Company has approved a Composite Scheme of Amalgamation and Arrangement involving theCompany Den Networks Limited (Den) Network18 Media & Investments Limited(Network18) TV18 Broadcast Limited (TV18) Media18 Distribution Services Limited (CableCo.) Web18 Digital Services Limited (ISP Co.) and Digital18 Media Limited (Digital Co.)and their respective shareholders and creditors ("Scheme"). The Scheme providesfor amalgamation of the Company Den and TV18 with Network 18 and subsequent consolidationof Cable ISP and Digital businesses of the amalgamating companies by way of transfer ofrelevant undertakings to the respective companies. On amalgamation the shareholders ofthe Company will be issued shares of Network 18. The appointed date of the Scheme isFebruary 1 2020 however it will take effect upon receipt of requisite approvals andfulfilment of conditions stated in the Scheme. Pending the Scheme coming in to force noeffect of the same have been considered in this standalone financial statements of theCompany. Our opinion is not modified in respect of this matter.
Key Audit Matters
Key audit matters are those matters that in our professional judgment were of mostsignificance in our audit of the standalone financial statements of the current period.These matters were addressed in the context of our audit of the standalone financialstatements as a whole and in forming our opinion thereon and we do not provide aseparate opinion on these matters. We have determined the matters described below to bethe key audit matters to be communicated in our report.
|Sr. no Key Audit Matters ||How our audit addressed the Key Audit Matters |
|1. Valuation and Disclosure of Deferred tax Assets ||Our procedures included amongst others: |
|The Company has a significant assets mainly resulting from unused tax losses and unabsorbed depreciation allowance. The accounting for deferred tax assets is significant to our audit since the Company makes judgments and estimates of forecasted taxable income in relation to the realization of deferred tax assets. As at March 31 2020 the deferred tax assets are valued at Rs. 176.62 crores. Further reference is made to Note 2.06 ||We amount tested management's of deferred taxassumptions used to determine that there is a reasonable certainty that deferred tax assets recognized in the balance sheet will be realized. This is based upon forecasted taxable income and the periods when the deferred tax assets can be utilized. In this regards we also considered recent changes in the Income tax laws and decisions taken by the management pursuant to such changes. The forecasts were evaluated by us considering especially the performance of the Company post capital infusion related business plans approved by the management and regulatory changes. Such evaluation included obtaining an understanding of management's planned strategies around business expansion revenue stream growth strategies. We have also tested the effectiveness of the Company's internal controls around the valuation of deferred tax assets. We also assessed the adequacy of the Company's disclosures included in Note 2.06 |
|2. Impairment of property plant and Equipment ||Our procedures included amongst others: |
|There is a risk of impairment on the Company's property plant and equipment (PPE) due to the nature of its PPE and the business environment surrounding the PPE. As on March 31 2020 the carrying amount of PPE was Rs. 771.56 crores which represent 13.99% of total assets. ||We assessed the determination of the recoverable amount of the PPE based on our understanding of the nature of the Company's business and the economic environment in which its PPE operate. |
|The management determines at the end of each reporting period the existence of any objective evidence that the Company's PPE may be impaired. If there are indicators of impairment the deficit between the recoverable amount of the PPE and its carrying amount would be recognised as impairment loss in Statement of Profit and Loss. ||We reviewed the Company's historical performances and held discussions with management to understand their assessment of the Company's future performance. This included obtaining an understanding of management's planned strategies around business expansion revenue stream growth strategies and cost initiatives. We assessed management's estimates applied in the value-in-use model based on our knowledge of the Company's operations and compared them against historical forecasts and performance and tested the mathematical accuracy of the value-in-use model. We evaluated the sensitivity of the outcomes by considering the downside scenarios against changes to the key assumptions. We also assessed the adequacy of the related disclosures in the notes to the standalone financial statements |
|The process of identifying indicators of impairment and determining the recoverable amount of the PPE by management requires significant judgement and estimation. The determination of the recoverable amounts requires estimates of forecasted revenues growth rates profit margins tax rates and discount rates. || |
|As determined by the management the carrying amount of PPE was impaired by Rs. 42.80 crores in the current year as disclosed in Note 3.06 to the standalone financial statements. || |
|3. Impairment of carrying cost of investments and net receivables from subsidiaries joint ventures and associates ||Our procedures included amongst others: |
| ||We have reviewed and considered management's assessment on the net assets or liabilities of these entities. |
|Refer to Notes 1.07 1.11 and 1.12 for the relevant accounting policy and the critical judgements assumptions and estimation uncertainties used in impairment assessment of cost of investments in subsidiaries joint ventures and associates and net receivables due from such entities at the reporting year end. Refer to Note 2.03 and 4.13 for the investment in subsidiaries joint ventures and associates and amount due from such entities respectively. ||We have also assessed management's basis to determine potential impairment in both financial and non-financial assets of these entities. We also had discussions with management on the prospects and future plans of these entities. We have reviewed the valuation reports of key components carried out by the independent valuers and considered the appropriateness of the key assumptions used in the valuation for impairment assessment of investments in key components. |
|Total carrying cost of investment in subsidiaries joint ventures and associates amounted to Rs. 1089.32 crores and amount due from subsidiaries joint ventures and associates amounted to Rs. 81.45 crores. As these balances are significant they are a key focus area for our audit. ||We have also assessed the adequacy of the disclosures made in the standalone financial statements. |
|For the non-performing subsidiaries joint ventures and equityassociates or if they have significant balances the Company will have exposure to loss on cost of investments and amount due from the subsidiaries joint ventures and associates. Any impairment losses on the investments in subsidiaries joint ventures and associates and the related receivables from these entities have to be recognised in the standalone financial statements. || |
|Management made a comparison of carrying values of the subsidiaries joint ventures and associates with the Company's share of net assets or liabilities of the subsidiaries joint ventures and associates to identify indications of impairment loss on these investments and receivables due from them. A total exposure of Rs. 1170.77 crores was considered. This amount comprised Rs. 8.80 crores impairment of cost of investment in subsidiaries joint ventures and associates and Rs. 59.50 crores impairment of net receivables from subsidiaries joint ventures and associates. The total impairment loss allowance for the year was Rs. 68.30 crores || |
Information Other than the Standalone Financial Statements and Auditor's Report thereon
The Company's Board of Directors is responsible for the preparation of the otherinformation. The other information comprises the information included in Annual report butdoes not include the standalone financial statements and our auditor's report thereon.
Our opinion on the standalone financial statements does not cover the other informationand we do not express any form of assurance conclusion thereon.
In connection with our audit of the standalone financial statements our responsibilityis to read the other information and in doing so consider whether the other informationis materially inconsistent with the standalone financial statements or our knowledgeobtained in the audit or otherwise appears to be materially misstated.
If based on the work we have performed we conclude that there is a materialmisstatement of this other information we are required to report that fact. We havenothing to report in this regard.
Responsibilities of Management and those Charged with Governance for the StandaloneFinancial Statements
The Company's Board of Directors is responsible for the matters stated in section134(5) of the Act with respect to the preparation of these standalone financialstatementsthat give a true and fair view of the financialposition financial performance
(including other comprehensive income) changes in equity and cash flows of the Companyin accordance with the Ind AS and other accounting principles generally accepted in India.This responsibility also includes maintenance of adequate accounting records in accordancewith the provisions of the Act for safeguarding the assets of the Company and forpreventing and detecting frauds and other irregularities; selection and application ofappropriate accounting policies; making judgments and estimates that are reasonable andprudent; and design implementation and maintenance of adequate internal financialcontrols that were operating effectively for ensuring the accuracy and completeness ofthe accounting records relevant to the preparation and presentation of the standalonefinancial statements that give a true and fair view and are free from materialmisstatement whether due to fraud or error. doubt on
In preparing the standalone financial statements management is responsible forassessing the Company's ability to continue as a going concern disclosing as applicablematters related to going concern and using the going concern basis of accounting unlessmanagement either intends to liquidate the Company or to cease operations or has norealistic alternative but to do so.
The Board of Directors are also responsible for overseeing the Company's financialreporting process.
Auditor's Responsibilities for the Audit of the Standalone Financial Statements
Our objectives are to obtain reasonable assurance about whether the standalonefinancial statements as a whole are free from material misstatement whether due to fraudor error and to issue an auditor's report that includes our opinion. Reasonable assuranceis a high level of assurance but is not a guarantee that an audit conducted in accordancewith SAs will always detect a material misstatement when it exists. Misstatements canarise from fraud or error and are considered material if
We consider individually or in the aggregate they could reasonably be expected toinfluence the economic decisions of users taken on the basis of these standalone financialstatements.
As part of an audit in accordance with SAs we exercise professional judgment andmaintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the standalone financialstatements whether due to fraud or error design and perform audit procedures responsiveto those risks and obtain audit evidence that is sufficient and appropriate to provide abasis for our opinion. The risk of not detecting a material misstatement resulting fromfraud is higher than for one resulting from error as fraud may involve collusionforgery intentional omissions misrepresentations or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to designaudit procedures that are appropriate in the circumstances. Under section 143(3)
(i) of the Act we are also responsible for expressing our opinion on whether thecompany has adequate internal financial controls system in place and the operatingeffectiveness of such controls.
Evaluate the appropriateness of accounting policies used and the reasonableness ofaccounting estimates and related disclosures made by management.
Conclude on the appropriateness of management's use of the going concern basis ofaccounting and based on the audit evidence obtained whether a material uncertaintyexists related to events or the conditions that may cast significant Company's ability tocontinue as a going concern. If we conclude that a material uncertainty exists we arerequired to draw attention in our auditor's report to the related disclosures in thestandalone financial statements or if such disclosures are inadequate to modify ouropinion. Our conclusions are based on the audit evidence obtained up to the date of ourauditor's report. However future events or conditions may cause the Company to cease tocontinue as a going concern.
Evaluate the overall presentation structure and content of the standalone financialstatements including the disclosures and whether the standalone financial statementsrepresent the underlying transactions and events in a manner that achieves fairpresentation.
Materiality is the magnitude of the misstatement in the standalone financial statementsthat individually or in aggregate makes it probable that the economic decisions of areasonably knowledgeable user of the standalone financial statements may be influenced.materiality and qualitative factors in;
(i) planning the scope of our audit work and evaluating the results of our work; and
(ii) to evaluate the effects of any identified misstatements in the standalonefinancial statements.
We communicate with those charged with governance regarding among other matters theplanned scope and timing of the audit and significant audit findings including anysignificant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have compliedwith relevant ethical requirements regading independence and to communicate with them allrelationships and other matters that may reasonably be thought to bear on ourindependence and where applicable related safeguards.
From the matters communicated with those charged with governance we determine thosematters that were of most significance in the audit of the standalone financial statementsof the current period and are therefore the key audit matters.
We describe these matters in our auditor's report unless law or regulation precludespublic disclosure about the matter or when in extremely rare circumstances we determinethat a matter should not be communicated in our report because the adverse consequences ofdoing so would reasonably be expected to outweigh the public interest benefits of suchcommunication.
Report on Other Legal and Regulatory Requirements
1. As required by the Companies (Auditor's Report) Order 2016 ("the Order")issued by the Central Government of India in terms of Section 143 (11) of the Act we givein the "Annexure A" a statement on the matters specified in the paragraphs 3and 4 of the Order.
2. As required by Section 143 (3) of the Act we report that:
a) We have sought and obtained all the information and explanations which to the bestof our knowledge and belief were necessary for the purposes of our audit;
b) In our opinion proper books of account as required by law have been kept by theCompany so far as it appears from our examination of those books;
c) The Balance Sheet the Statement of Profit Loss (including Other ComprehensiveIncome) the Statement of Changes in Equity and the Cash Flow Statement dealt with by thisReport are in agreement with the relevant books of account;
d) In our opinion the aforesaid standalone financial statements comply with the Ind ASspecified under Section 133 of the Act read with relevant rules issued thereunder andrelevant provisions of the Act;
e) On the basis of the written representations received from the directors as on March31 2020 taken on record by the Board of Directors none of the directors is disqualifiedas on March 31 2020 from being appointed as a director in terms of Section 164(2) of theAct;
f) With respect to the adequacy of the internal financial controls over financialreporting of the Company and the operating effectiveness of such controls refer to ourseparate report in "Annexure B";
g) With respect to the other matters to be included in the Auditor's Report inaccordance with the requirements of section 197(16) of the Act as amended: In our opinionand to the best of our information and according to the explanations given to us theremuneration paid by the Company to its directors during the year is in accordance withthe provisions of section 197 of the Act;
h) With respect to the other matters to be included in the Auditor's Report inaccordance with Rule 11 of the Companies (Audit and Auditors) Rules 2014 as amended inour opinion and to the best of our information and according to the explanations given tous:
i. The Company has disclosed the impact of pending litigations as at March 31 2020 onits financial position in its standalone financial statements - Refer Note 4.02(g) to andthe standalone financial statements;
ii. The Company has made provision as required under the applicable law or accountingstandards for material foreseeable losses if any on long-term contracts includingderivative contracts
- Refer Note 4.02(f) to the standalone financial statements; and iii. There has been nodelay in transferring amounts which were required to be transferred to the InvestorEducation and Protection Fund.
AnnExuRE At OtHE InDEpEnDEnt AuDItOR'S REpORt
Referred to in paragraph 1 under "Report on Other Legal and RegulatoryRequirements" of our report on even date to the members of the Company on standalonefinancial statements for the year ended March 31 2020:
(i) (a) The Company has maintained proper records of Property Plant and Equipmentshowing particulars of assets including quantitative details and situation except in caseof certain types of distribution equipments like cabling line equipments access deviceswith end users. In view of the management nature of such assets and business is such thatmaintaining location-wise particulars is impractical;
(b) Distribution equipments like cabling and other line equipments of selected networkswere verified. The management plans to verify balance networks in a phased manner.Property Plant and Equipment other than distribution equipments and access devices withthe end users were physically verified during the year based on verification programmeadopted by the management. As per this programme all assets will be verified at leastonce in a period of three years. The management has represented that physical verificationof access devices with the end users is impractical; however the same can be tracked incase of most of the networks through subscribers management system;
The Company is in the process of reconciling book records with outcome of physicalverification wherever physical verification was carried out and have accounted for thediscrepancies observed on such verification;
(c) The Company does not hold any immovable properties which are freehold. In respectof immovable properties of land and building that have been taken on lease and classifiedas Right of Use Asset in the standalone financial statements the lease agreements are inthe name of the Company;
(ii) (a) Inventories have been physically verified during the year by the management.In our opinion the frequency of verification is reasonable; (b) The discrepancies noticedon physical verification as compared to the book records were not material having regardsto size and nature of operations and have been properly dealt with in the books ofaccount;
(iii) The Company has not granted any loans secured or unsecured to companies firmsLimited Liability Partnerships or other parties covered in the register maintained undersection 189 of the Act. Accordingly paragraph 3(iii)(a) (b) and (c) of the Order are notapplicable;
(iv) Based on the audit procedures applied by us the Company has complied with theterms of the provisions contained in the section 185 or section 186 of the Act in respectof investment made during the year under audit. The Company has not granted loansguarantees and made securities during the year under audit which require compliance interms of the provisions contained in the section 185 or section 186 of the Act. Themanagement has based on legal opinion represented that overdue book debts are not in thenature of loan and hence do not fall within the scope of section 185 of the Act. In suchcircumstances para 3(iv) of the Order is not applicable;
(v) In our opinion and according to the information and explanation given to us theCompany has not accepted deposits from the public and therefore the provisions ofsections 73 to 76 or any other relevant provisions of the Act and the rules framed thereunder are not applicable to the Company. We have been informed by the management that noorder has been passed by the
Company Law Board or National Company Law Tribunal or Reserve Bank of India or anycourt or any other tribunal in this regard;
(vi) The Central Government has prescribed maintenance of cost records under section148(1) of the Act for the services rendered by the Company. We have broadly reviewed thebooks of account maintained and in our opinion; prima facie the prescribed accounts andrecords have been made and maintained by the Company. We have not however made adetailed examination of the records with a view to determine whether they are accurate orcomplete;
(vii) (a) The Company has generally been regular in depositing with appropriateauthorities undisputed statutory dues such as provident fund employees' state insuranceincome tax sales tax service tax duty of customs duty of excise value added taxgoods and service tax cess and other applicable statutory dues. According to informationand explanations given to us no undisputed statutory dues payable were in arrears as atMarch 31 2020 for a period of more than six months from the date they became payable;
(b) The details of dues of income tax sales tax service tax duty of customs duty ofexcise or value added tax or cess which have not been deposited with the concernedauthorities on account of dispute are given below:
|name of the Statute ||nature of the Dues ||Amount involved (Rs. in crores) ||period to which the amount relates ||Forum where dispute is pending |
|1 Karnataka Value Added Tax Act 2003 ||Value Added tax ||0.57 ||April 2012 - March 2013 ||Deputy Commissioner of Commercial taxes (Audit) |
|2 West Bengal Value Added Tax Act 2003 ||Entry tax ||0.03 ||April 2015 - March 2016 ||Senior Joint Commissioner of Sales Tax |
|3 West Bengal Value Added Tax Act 2003 ||Entry tax ||0.01 ||April 2014 - March 2015 ||Senior Joint Commissioner of Sales Tax |
|4 West Bengal Value Added Tax Act 2003 ||Entry tax ||0.05 ||April 2016 - March 2017 ||Senior Joint Commissioner of Sales Tax |
|5 West Bengal Value Added Tax Act 2003 ||Value Added Tax and Central Sales Tax ||0.01 ||April 2016 - March 2017 ||Senior Joint Commissioner of Sales Tax |
|6 Income tax Act 1962 ||Income Tax (Penalty) ||0.16 ||April 2014 - March 2015 ||Commissioner of Income Tax (Appeals) |
|7 The Telangana Value added Tax 2005 ||Value Added Tax ||0.151 ||April 2015 - March 2016 ||Appellate Joint Commissioner (ST) |
|8 The Custom Act 1962 ||Custom duty ||17.902 (includes penalty Rs. 8.95) ||April 2011 - March 2012 ||Customs and Excise and Service Tax Appellate Tribunal (CESTAT) |
1Amount paid Rs. 0.02 crores 2Amount paid Rs. 0.67 crores
(viii) Based on our audit procedure and according to the information and explanationsgiven to us the Company has not defaulted in repayment of dues to the financialinstitutions banks and government. The Company has not issued any debentures;
(ix) In our opinion and according to the information and explanations given to us andbased on overall examination of records the term loans have been applied for the purposefor which the loans were obtained. The Company did not raise any money by way of initialpublic offer or further public offer (including debt instruments);
(x) To the best of our knowledge and belief and according to the information andexplanations given to us no material fraud by the Company or on the Company by itsofficers or employees has been noticed or reported during the year;
(xi) According to the information and explanations given to us and based on ourexamination of the records of the Company the Company has paid/provided for managerialremuneration in accordance with the requisite approvals mandated by the provisions ofsection 197 read with Schedule V to the Act;
(xii) In our opinion and according to information and explanation given to us theCompany is not a Nidhi Company. Accordingly paragraph 3 (xii) of the Order is notapplicable to the Company;
(xiii) According to the information and explanations given to us and based on ourexamination of records of the Company the Company is in compliance with the provisions ofsection 177 and 188 of the Act where applicable for transactions with the relatedparties and the details of the related party transactions have been disclosed in thestandalone financial statements as required by the applicable accounting standards.
(xiv) The Company has not made any preferential allotment or private placement ofshares or fully or partly convertible debentures during the current financial year.However during the previous financial year 2018-19 the Company had made preferentialallotment of shares and the requirement of section 42 of the Act as applicable had beencomplied with. According to the information and explainations given by the management outof the funds so raised Rs. 99.64 crores have been utilized for the purposes for whichthose were raised and balance funds to the extent of Rs. 2940 crores pending suchutilization have been temporarily invested in Fixed Deposits with Banks;
(xv) Based on our audit procedures performed for the purpose of reporting the true andfair view of the standalone financial statements the Company has not entered into anynon-cash transactions with directors or persons connected with them covered under section192 of the Act. We have been informed that no such transactions have been entered intowith person connected with directors. Accordingly paragraph 3(xv) of the Order is notapplicable to the Company; and
(xvi) The Company is not required to be registered under section 45-IA of the ReserveBank of India Act 1934.
AnnExuRE tO tHE InDEpEnDEnt AuDItOR'S REpORt
Referred to in paragraph 2(f) under "Report on Other Legal and RegulatoryRequirements" of our report on even date to the members of the Company on standalonefinancial statements for the year ended March 31 2020
We have audited the internal financial controls with reference to financial statementsof the Company as of March 31 2020 in conjunction with our audit of the standalonefinancial statements of the Company for the year ended on that date.
In our opinion the Company has in all material respects an adequate internalfinancial controls system with reference to financial statements and such internalfinancial controls with reference to financial statements were operating effectively as atMarch 31 2020 based on the internal controls with reference to financial statementscriteria established by the Company considering the essential components of internalcontrols stated in the Guidance Note.
Management's Responsibility for Internal Financial Controls
The Company's management is responsible for establishing and maintaining internalfinancial controls based on the internal controls with reference to financial statementscriteria established by the Company considering the essential components of internalcontrol stated in the Guidance Note on Audit of Internal Financial Controls over FinancialReporting
(Guidance Note') issued by the ICAI. These responsibilities include the designimplementation and maintenance of adequate internal financial controls that were operatingconduct of effectively its business including adherence to Company's policies thesafeguarding of its assets the prevention and detection of frauds and errors theaccuracy and completeness of the accounting records and the timely preparation ofreliable financial information as required under the Act.
Our responsibility is to express an opinion on the Company's internal financialcontrols with reference to financial statements based on our audit. We conducted our auditin accordance with the Guidance Note and the Standards on Auditing specified under section143(10) of the Act to the extent applicable to an audit of internal financial controlsboth issued by ICAI. Those
Standards and the Guidance Note require that we comply with ethical requirements andplan and perform the audit to obtain reasonable assurance about whether adequate internalfinancial controls with reference to financial statements was established and maintainedand if such controls operated effectively in all material respects.
Our audit involves performing procedures to obtain audit evidence about the adequacy ofthe internal financial controls system with reference to financial statements and theiroperating effectiveness. Our audit of internal financial controls with reference tofinancial statements included obtaining an understanding of internal financial controlswith reference to financial statements assessing the risk that a material weaknessexists and testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk.
The procedures selected depend on the auditor's judgment including the assessment ofthe risks of material misstatement of the standalone financial statements whether due tofraud or error.
We believe that the audit evidence we have obtained is and appropriate to provide abasis for our audit opinion on the Company's internal financial controls system withreference to financial statements.
Meaning of Internal Financial Controls with reference to Financial Statements
A company's internal financial controls with reference to financial statements is aprocess designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of standalone financial statements for external purposes inaccordance with generally accepted accounting principles. A company's internal financialcontrols with reference to financial statements includes those policies and proceduresthat (1) pertain to the maintenance of records that in reasonable detail accurately andfairly reflect the transactions and dispositions of the assets of theCompany; (2) providereasonable assurance that transactions are recorded as necessary to permit preparation ofstandalone financial statements in accordance with generally accepted accountingprinciples and that receipts and expenditures of the Company are being made only inaccordance with authorizations of management and directors of the Company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorized acquisitionuse or disposition of the Company's assets that could have a material effect on thestandalone financial statements.
Inherent Limitations of Internal Financial Controls with reference to FinancialStatements
Because of the inherent limitations of internal financial controls with reference tofinancial statements including the possibility of collusion or improper managementoverride of controls material misstatements due to error or fraud may occur and not bedetected. Also projections of any evaluation of the internal financial controls withreference to financial statements to future periods are subject to the risk that theinternal financial controls with reference to financial statements may become inadequatebecause of changes in conditions or that the degree of compliance with the policies orprocedures may deteriorate.