TO THE MEMBERS OF RICOH INDIA LIMITED
1. Report on the standalone financial statements
We were engaged to audit the accompanying standalone financial statements of RicohIndia Limited ('the Company') which comprise the balance sheet as at 31 March 2017the statement of profit and loss and the cash flow statement for the year then ended anda summary of significant accounting policies and other explanatory information.
2. Management's responsibility for the standalone financial statements
The Company's Board of Directors is responsible for the matters stated in Section134(5) of the Companies Act 2013 ('the Act') with respect to the preparation of thesestandalone financial statements that give a true and fair view of the financial positionfinancial performance and cash flows of the Company in accordance with the accountingprinciples generally accepted in India including the Accounting Standards specified underSection 133 of the Act read with Rule 7 of the Companies (Accounts) Rules 2014. Thisresponsibility also includes maintenance of adequate accounting records in accordance withthe provisions of the Act for safeguarding the assets of the Company and for preventingand detecting frauds and other irregularities; selection and application of appropriateaccounting policies; making judgments and estimates that are reasonable and prudent; anddesign implementation and maintenance of adequate internal financial controls that wereoperating effectively for ensuring the accuracy and completeness of the accountingrecords relevant to the preparation and presentation of the standalone financialstatements that give a true and fair view and are free from material misstatement whetherdue to fraud or error.
3. Auditor's responsibility
Our responsibility is to express an opinion on these standalone financial statementsbased on our audit. We have taken into account the provisions of the Act the accountingand auditing standards and matters which are required to be included in the audit reportunder the provisions of the Act and the Rules made thereunder. Because of the mattersdescribed in the "Basis for disclaimer of opinion" paragraph we were not ableto obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.
4. Basis for disclaimer of opinion
(i) In view of irregularities and suspected fraudulent transactions noted during theyear ended 31 March 2016 the Company carried out investigations. As a result of theinvestigations the Company recorded significant adjustments in its books of accountduring the year ended 31 March 2016. These primarily related to recognition of adjustments/ transactions which had remained out of books in earlier periods disclosure of bankborrowings / bills discounted reversal of circular sale and purchase transactions withcertain parties with minimal value addition considered fictitious and inappropriaterevenue recognition correction of inventory values and provisions of receivable balancesconsidered bad / doubtful of recovery.
We have made the necessary reporting to Central Government on 30 June 2016 of suspectedoffence involving fraud being committed or having been committed as required by Rule13(1)(ii) of the Companies (Audit and Auditors) Rules 2014 [as amended by the Companies(Audit and Auditors) Amendment Rules 2015].
In view of the fact that matters relating to abovementioned financial irregularitiesare sub-judice and investigations by regulatory authorities are yet to be completed weare unable to comment on the consequential impact if any on the financial statements ofthe outcome of such investigations / enquiry by law enforcement agencies and outcome ofrelated litigation and claims.
(ii) We had made various observations in our audit report dated 18 November 2016 on thefinancial statements for the year ended 31 March 2016 which inter alia included apartfrom other matters [including those listed in paragraph 4(i) above] limitations withregard to availability of original documents and information satisfactory explanationsand justifications required for audit. In view of the limitations and uncertaintiesinvolved we had expressed our inability to express an opinion on the financial statementsfor the year ended 31 March 2016. Our opinion on the current year's financial statementsis also modified to this extent because of the possible effects of the above matters onthe figures for the current year and on the corresponding figures as at and for the yearended 31 March 2016 which also affects their comparability with current year figures.
(iii) While there has been significant improvement in the overall availability ofinformation / documentation as compared to the previous year we are unable to comment onthe necessary adjustments / disclosures in relation to the following items in view ofnon-availability of certain necessary information / documentation / satisfactoryexplanations / justifications relevant to current audit -
a. existence and accuracy of certain net sales and related purchases of products wherelinkage of proof of deliveries to the corresponding sales / purchase invoices could not bemade available and consequential impact if any on related account heads;
b. completeness existence and accuracy of the contingent liabilities provision forcontingencies and asset balances with Government authorities and others includingadjustments made during the year in the absence of system of tracking various claimsnotices demands and litigations;
c. appropriateness of related accruals / provision for onerous contracts in absence ofcomplete correlation of contract related purchases to relevant contracts; d.appropriateness of an amount of INR 717.14 lacs included in trade payables in the absenceof complete information and supporting documentation;
e. original documents / agreements were not available in some cases and hence we havehad to carry out our substantive audit procedures on photo copies of those documents.
(iv) In respect of revenue contracts checked on a sample basis for our audit purposeswe noted discrepancies / inaccuracies in assumptions used which included allocation ofrevenues and costs to multiple elements of the contracts assessment of nature of revenue(out-right sale vs. lease) estimated costs to complete or exit the contracts etc. Suchdiscrepancies / inaccuracies have been substantially corrected only for the abovementioned sample. Consequently we are unable to comment on the existence of discrepancies/ inaccuracies if any in the remaining untested revenue contracts.
In view of the above matter we are unable to comment on consequential impact onaccounting of revenue and costs recognized for these contracts and the correspondingbalances of contract work-in-progress unearned revenues receivables and provision forliabilities including those towards onerous contracts.
(v) During the year ended 31 March 2016 in respect of receivables for machines givenon lease we were not able to complete our audit procedures due to non-availability ofcomplete documentation / details e.g. absence of lease contracts / details andreconciliation of amount collected till 31 March 2016 / amount due as at period-end andanalysis of nature of lease such as operating lease vs. finance lease etc. Further weobserved inaccuracies / inconsistencies in details used for computation of leasereceivable as at period end such as fair value of lease lease terms computation ofinterest rate implicit in the lease etc. No further information in respect of such leasecontracts entered till 31 March 2016 has been provided to us for the purpose of our auditin the current year.
Further based on samples tested in respect of lease contracts entered during thecurrent year we noticed inconsistencies / errors in calculation of amounts allocated tomultiple elements in the contracts (e.g. lease instalment and charges based on number ofprints) and classification of leases into operating and finance leases.
In view of abovementioned observations we are unable to comment on the carrying valueof lease receivables balances and appropriateness of lease income and depreciation expenserecognised for the year ended 31 March 2017 and the consequential impact on the carryingvalue of assets given on lease as at 31 March 2017.
(vi) In relation to trade receivables -a. the age wise analysis and consequently therelated classification / disclosure in the financial statements are not appropriate; b. asper the aforesaid age-wise analysis and based on information provided to us the balanceas at the year-end includes amount totaling to INR 29445.74 lacs that has beenoutstanding for more than six months.
This includes amounts due from certain parties totaling to INR 21262.65 lacs with whomthere have been no significant transactions during the six months ended 31 March 2017.Further of the total receivables INR 19596.99 lacs is outstanding for more than oneyear. In the absence of adequate evidence and information we are unable to comment on therecoverability of these amounts; c. the Company does not have a regular system in place toperform periodical reconciliation of balances with the customers. Further the response toour request for balance confirmations on a sample basis from the customers as on 31 March2017 and the subsequent receipts from customers have been insignificant.
In view of the above we are unable to comment on the financial impact of this matteron the carrying value of accounts receivables related deposits provision for bad /doubtful receivables and consequential impact if any on the revenue recognized for theyear ended 31 March 2017.
(vii) In respect of inventories the Company has not provided us -
a. evidence of existence and valuation of certain inventories valued at INR 2914.34lacs (after a write down of INR 2653.62 lacs) for which no physical verification has beenconducted;
b. evidence regarding existence of inventories in respect of certain revenue contractslying with third parties valued at INR 5479.24 lacs [also refer to our comments inparagraph 4(iii)(a) above];
c. appropriate justification for the basis of determining the write down in relation toold / slow moving / non-moving inventories. Based on information provided to us the valueof inventories which have been lying in stocks for more than six months as at 31 March2017 amounts to INR 16756.78 lacs against which a write down of INR 3796.08 lacs hasbeen taken by the Company;
d. classification of costs relating to items of purchase of traded goods includingcosts incurred towards warranty and certain contract expenses.
Therefore we are unable to comment on possible adjustment of these if any to thecarrying value of inventories purchase of traded goods warranty and other expenses andrelated provisions / disclosures thereof.
(viii) During the current year the Company has carried out reconciliations /confirmations with a large number of vendors. Such reconciliation process has resulted insignificant differences when compared with the balances appearing in the books of accountof the Company. Pending completion of reconciliation with the remaining vendors andconsidering the insignificant response to our request for balance confirmations on asample basis from the vendors as on 31 March 2017 we are unable to comment on thedifferences and consequential adjustments if any and the impact thereof on purchasesother expenses and trade payables.
Further in respect of one of the key vendors of the Company the balance recoverable(net advance given) is INR 33984.42 lacs as at 31 March 2017. As informed to us by themanagement the Company believes that the entire amount is good and recoverable. Howeverbasis the evidence currently available we are unable to express an opinion whether anyprovision is required therefor.
(ix) During the previous year the Company had performed physical verification ofcertain fixed assets. As a result a number of assets were physically found and were notappearing in the fixed assets register. These were recorded at zero value in the books ofaccount / fixed assets register. The Company has not identified / assigned appropriatevalues to such assets and these assets continue to be recorded at zero value. Accordinglywe are unable to comment on the carrying value of such fixed assets and correspondingdepreciation thereof.
(x) During the year the Company has recorded adjustments in the financial statementsto take effect of unrecorded / unadjusted transactions till the end of the previous yearand actualization of various assumptions and estimates made by the Company in preparingits financial statements for the year ended 31 March 2016. However the impact of suchadjustments has not been quantified and disclosed separately as required under AS-5"Net Profit or Loss for the Period Prior Period Items and Changes in AccountingPolicies".
(xi) The Company did not prepare consolidated financial statements for the year ended31 March 2016 in respect of long term investments in equity shares of IDC ElectronicsLimited (an associate) being carried at INR 1 (net of provision for diminution) in thebooks of account as required under section 129 sub-section 3 of the Companies Act 2013.Accordingly we are unable to comment on the possible impact if any of thenon-compliance with provisions of the Act.
In view of our observations in paras 4(i) to 4(xi) above we are unable to determinethe adjustments if any that are necessary in respect of the Company's assetsliabilities as on balance sheet date income and expenses for the year the elementsmaking up the cash flow statement and related presentation and disclosures in thefinancial statements.
Most of the aforesaid matters except for 4(xi) were also included (completely orpartially) in the basis of disclaimer of opinion in our previous year audit report.
5. Disclaimer of opinion
Because of the significance of the matters described in the Basis for disclaimer ofopinion paragraph we have not been able to obtain sufficient appropriate audit evidenceto provide a basis for an audit opinion. Accordingly we do not express an opinion on thestandalone financial statements.
6. Emphasis of matter
(i) Attention is drawn to note 1 in the financial statements which brings out in detailthe fact that the Company's net worth has been completely eroded by its accumulated lossesas at the end of the current year. However in view of continued financial support whichis also evidenced by significant capital infusion during the year from a fellowsubsidiary (second largest shareholder) management is of the view that the Company shallbe able to continue as a going concern. Accordingly the management considers itappropriate to prepare these financial statements on a going concern basis.
(ii) We draw attention to note 45 to the financial statements which explains that theCompany has not been able to make a reliable estimate of the expenditure to be incurred tofulfil the obligation to collect electronic and electrical equipment ('EEE') waste underthe E-Waste (Management) Rules 2016 ('E-Waste Rules') owing to the uncertaintiesdiscussed therein. Consequently the Company has not been able to estimate and recognize aprovision for the same in its books of account as at 31 March 2017 and the obligation hasbeen disclosed as a contingent liability.
7. Report on Other Legal and Regulatory Requirements
(i) As required by the Companies (Auditor's Report) Order 2016 ('the Order') issuedby the Central Government of India in terms of sub- section (11) of Section 143 of the Actand except for the effects if any of the matters described in the basis for disclaimerof opinion paragraph we enclose in the "Annexure A" a statement on the mattersspecified in paragraphs 3 and 4 of the Order.
(ii) As required by Section 143(3) of the Act we report that:
a. as described in the basis for disclaimer of opinion paragraph we were unable toobtain all the information and explanations which to the best of our knowledge and beliefwere necessary for the purpose of our audit;
b. due to the possible effects of the matters described in the basis for disclaimer ofopinion paragraph we are unable to state whether proper books of account as required bylaw have been kept by the Company so far as appears from our examination of those books;
c. the balance sheet the statement of profit and loss and the cash flow statementdealt with by this Report are in agreement with the books of account as maintained;
d. due to the effect of the related matters described in the basis for disclaimer ofopinion paragraph we state as below -
i. the balance sheet statement of profit and loss and cash flow statement do notcomply with AS-2 [refer to paragraph 4(vii) above]; AS-5 [refer to paragraph 4(x) above];AS-6 and AS-10 [refer to paragraph 4(ix) above]; AS-9 and AS-19 [refer to paragraph 4(v)above]; AS-23 [refer to paragraph 4(xi) above] and AS-29 [refer to paragraph 4(vii) above]specified under Section 133 of the Act read with Rule 7 of the Companies (Accounts)Rules 2014;
ii. we are unable to state whether the balance sheet statement of profit and loss andcash flow statement comply with the Accounting Standards (other than those referred to inparagraph 7(ii)(d)(i) above) specified under Section 133 of the Act read with Rule 7 ofthe Companies (Accounts) Rules 2014;
e. in view of the the matters described in the basis for disclaimer of opinion andemphasis of matter paragraphs above we are unable to comment on the impact if any onthe functioning of the Company;
f. on the basis of written representations received from the directors as on 31 March2017 and taken on record by the Board of Directors none of the directors is disqualifiedas on 31 March 2017 from being appointed as a director in terms of Section 164 (2) of theAct;
g. the reservation relating to the maintenance of accounts and other matters connectedtherewith are as stated in the basis for disclaimer of opinion paragraph above;
h. 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" and
i. 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 in our opinionand to the best of our information and according to the explanations given to us:
i. in view of the related matters described in paragraph 4 basis for disclaimer ofopinion we are unable to state whether note 39 to the standalone financial statementsdiscloses the complete impact of pending litigations on the financial position in thestandalone financial statements of the Company;
ii. in view of the related matters described in paragraph 4 basis for disclaimer ofopinion we are unable to state whether the Company has made provision as required underthe applicable law or accounting standards for material foreseeable losses if any onlong-term contracts (the Company does not have any derivative contracts);
iii. there has been no delay in transferring amounts required to be transferred tothe investor education and protection fund by the Company; and iv. the Company hasprovided requisite disclosure in the financial statements as to holdings as well asdealings in specified bank notes during the period from 8 November 2016 to 30 December2016 and in accordance with the books of account maintained by the Company. However inthe absence of necessary supporting documents we were unable to check the accuracy ofsuch disclosure. Refer note 43 to the financial statements.
For B S R & Co. LLP
Firm registration number: 101248W/W-100022
Membership Number: 091765
Place: New Delhi
Date: 26 May 2017
Annexure A to the Independent Auditor's Report
The Annexure A referred to in Independent Auditor's Report to the members of RicohIndia Limited on the financial statements for the year ended 31 March 2017 we report that:
(i) (a) Except for the effects of the matter described in paragraph 4(ix) of our mainreport the Company has maintained proper records showing full particulars includingquantitative details and situation of its fixed assets.
(b) According to the information and explanations given to us the Company has aregular program of physical verification of its fixed assets. In accordance with thisprogram fixed assets except for machines given on lease were verified by the managementduring the year. In our opinion this periodicity of physical verification is reasonablehaving regard to the size of the Company and the nature of its fixed assets. As informedto us material discrepancies were noticed on such verification and the same have beenproperly dealt with in the books of account. In respect of machines given on lease theCompany has relied upon the underlying documentation including agreements / receipt ofperiodic income from such machines as an evidence of their existence.
(c) Original title deeds have been verified by us in respect of one immovable property.For the remaining immovable properties photocopies of title deeds of immovable propertieshave been examined by us (other than 3 properties - having a net book value of INR 12.30lacs as at 31 March 2017 for which even the photocopies have not been made available).Accordingly we are unable to comment as to whether the immovable properties are held inthe name of the Company or not.
(ii) The inventories except goods-in-transit stocks lying with third parties [alsorefer to paragraphs 4(vii)(b) of our main report] and except as referred to in paragraph4(vii)(a) of our main report have been physically verified by the management during theyear. In our opinion the frequency of verification is reasonable for the stocks verified.As informed to us material discrepancies noted on verification carried out during theyear between the physical stocks and the book records have been properly adjusted in thebooks of account. For the inventories not verified as stated above except forgoods-intransit we are unable to comment on the reasonableness of verification processand also on the discrepancies if any.
(iii) Except for the effects of the matters described in the basis of disclaimer ofopinion paragraph 4 of our main report according to the information and explanationsgiven to us the Company has not granted any loans secured or unsecured to companiesfirms limited liability partnerships or other parties covered in the register maintainedunder section 189 of the Act.
(iv) Except for the effects of the matters described in the basis of disclaimer ofopinion paragraph 4 of our main report according to the information and explanation givento us the Company has not given any loans or made any investments or provided anyguarantee or security as specified under Section 185 and 186 of the Companies Act 2013.
(v) Except for the effects of the matters described in the basis of disclaimer ofopinion paragraph 4 of our main report as per the information and explanation given tous the Company has not accepted any deposits as mentioned in the directives issued by theReserve Bank of India and the provisions of Section 73 to 76 or any other relevantprovisions of the Companies Act 2013 and the rules framed there under.
(vi) According to the information and explanations given to us the Central Governmenthas not prescribed the maintenance of cost records under Section 148(1) of the CompaniesAct 2013 for any of any activities / services rendered by the Company. Accordinglyparagraph 3(vi) of the Order is not applicable.
(vii) (a) According to the information and explanations given to us; on the basis ofour examination of the records of the Company; and appearing in the books of the accountsas statutory dues paid / payable except for the effects of the matters described in thebasis of disclaimer of opinion paragraph 4 of our main report amounts deducted / accruedin the books of account in respect of undisputed statutory dues including provident fundemployees' state insurance income-tax sales tax service tax duty of customs valueadded tax cess and other material statutory dues have generally been regularly depositedexcept in case of sales tax and value added tax where the statutory dues have notgenerally been regularly deposited with the appropriate authorities though the delays indeposit have not been serious. As explained to us the Company did not have any dues onaccount of duty of excise.
According to the information and explanations given to us; on the basis of ourexamination of the records of the Company; and appearing in the books of the accounts asstatutory dues paid / payable except for the effects of the matters described in thebasis of disclaimer of opinion paragraph 4 of our main report no amounts payable inrespect of undisputed statutory dues including provident fund employees' state insuranceincome-tax sales tax service tax duty of customs value added tax cess and othermaterial statutory dues were in arrears as at 31 March 2017 for a period of more than sixmonths from the date they became payable.
(b) Except for the effects of the matters described in the basis of disclaimer ofopinion paragraph 4 of our main report in particular paragraph 4(iii)(b) and according tothe information and explanations given to us there are no dues of income tax sales taxservice tax duty of customs and value added tax which have not been deposited with theappropriate authorities on account of any dispute except as mentioned below. As explainedto us the Company did not have any dues on account of duty of excise.
|Name of the Statute ||Nature of dues ||Amount demanded (Rs. In lacs) ||Amount paid under protest ||Period to which it relates ||Forum where dispute is pending |
|Income-tax Act 1961 ||Income-tax ||94.33 ||- ||Assessment year (A.Y.) 1999-00 and 2006-07 ||High court |
|Income-tax Act 1961 ||Income-tax ||373.10* ||- ||A.Y. 2005-06 2006-07 and 2009-10 ||Income tax appellate tribunal |
|Income-tax Act 1961 ||Income-tax ||271.07 ||- ||A. Y. 2002-03 2003-042006-07 2007-082008-09 2011-122012-13 2013-142014-15 ||Appellate authority- upto commissioner's level |
|Finance Act 1994 ||Service tax ||79.76 ||16.00 ||Dec 2008 to Sept 2009 Oct 2009 to Sept 2010 ||Customs Excise and Service tax Appellate tribunal Delhi |
|Finance Act 1994 ||Service tax ||225.60 ||- ||Dec 2004 to Sept 2006 Oct 2009 to Sept 2010 Oct 2003 to Mar 2004 Oct 2010 to Mar 2012 Oct 2009 to Sept 2012 ||Appellate Authority- upto Commissioner's level |
|Sales tax Act ||Sales tax ||65.34 ||2.45 ||FY 2013-14 ||High Court |
|Sales tax Act ||Sales tax ||4244.49 ||376.06 ||Various years between FY 1984-85 to FY 2012-13 ||Tribunals of various states |
|Sales tax Act ||Sales tax ||36074.29** ||872.70 ||Various years betweenFY1981-82 to FY 2014-15 ||Appellate Authority- upto Commissioner's level |
*Subsequent to year end ITAT has passed the order for INR 103.76 lacs in favour of theCompany pertaining to AY 2006-07. **Subsequent to year end Assistant Commissioner haspassed the revised order for INR 152.06 lacs in favour of the Company pertaining to F.Y.2014-15.
(viii) According to the information and explanations given to us and on the basis ofour examination of the records of the company the Company has not defaulted in repaymentof loans or borrowing to a financial institution bank or dues to debenture holders duringthe year. The Company did not have any outstanding dues to Government during the year oras at 31 March 2017.
(ix) According to the information and explanations given to us the Company has notraised any money by way of initial public offer or further public offer (including debtinstruments) and term loans during the year. Accordingly paragraph 3 (ix) of the Order isnot applicable.
(x) Attention is invited to paragraph 4(i) of our main report in respect of financialirregularities noted during the year ended 31 March 2016 and the investigation for whichhas been concluded by the Company during the year.
According to the information and explanations given to us and except for the effectsof the matters described in the basis of disclaimer of opinion paragraph 4 of our mainreport no other material fraud by the Company or on the Company by its officers oremployees has been noticed or reported during the course of our audit.
(xi) According to the information and explanations give to us and based on ourexamination of the records of the Company the Company has paid / provided for managerialremuneration in accordance with the provisions of section 197 read with Schedule V to theAct.
(xii) According to the information and explanations given to us the Company is not aNidhi Company. Accordingly paragraph 3(xii) of the Order is not applicable.
(xiii) Except for the effects of the matters described in the basis of the disclaimerof opinion paragraph of our main report in our opinion and according to the informationavailable as at present and explanations given to us and on the basis of our examinationof the records of the Company the transactions with the related parties are in compliancewith sections 177 and 188 of the Companies Act 2013 where applicable and the details havebeen disclosed in the financial statements as required by the accounting standards.
(xiv) According to the information and explanations given to us the Company hascomplied with the provisions of section 42 of the Companies Act 2013 in respect of thepreferential allotment / private placement of shares during the year and the amountsraised have been used for the purposes for which the funds were raised. The Company hasnot made any preferential allotment or private placement of fully or partly convertibledebentures during the year.
(xv) Except for the effects of the matters described in the basis of the disclaimer ofopinion paragraph of the main report according to the information available as at presentand explanations given to us and based on our examination of the records of the Companythe Company has not entered into non-cash transactions with directors or persons connectedwith him.
(xvi) According to the information and explanations given to us the Company is notrequired to be registered under section 45-IA of the Reserve Bank of India Act 1934.
For B S R & Co. LLP
Firm registration number: 101248W/W-100022
Membership Number: 091765
Place: New Delhi
Date: 26 May 2017
Annexure B to the Independent Auditor's Report
Report on the Internal Financial Controls under Clause (i) of Sub-section 3 of Section143 of the Act
We were engaged to audit the internal financial controls over financial reporting ofthe Company as of 31 March 2017 in conjunction with our audit of the financial statementsof the Company for the year ended on that date.
Management's responsibility for internal financial controls
The Company's management is responsible for establishing and maintaining internalfinancial controls based on the internal control over financial reporting criteriaestablished by the Company considering the essential components of internal control statedin the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting (the"Guidance Note") issued by the Institute of Chartered Accountants of India('ICAI'). These responsibilities include the design implementation and maintenance ofadequate internal financial controls that were operating effectively for ensuring theorderly and efficient conduct of its business including adherence to Company's policiesthe safeguarding 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 over financial reporting based on our audit. We conducted our audit in accordancewith the Standards on Auditing issued by ICAI to the extent applicable to an audit ofinternal financial controls. Those Standards require that we comply with ethicalrequirements and plan and perform the audit to obtain reasonable assurance about whetheradequate internal financial controls over financial reporting were established andmaintained and 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 over financial reporting and their operatingeffectiveness. Our audit of internal financial controls over financial reporting includedobtaining an understanding and an examination of whether internal financial controls overfinancial reporting existed assessing the risk that a material weakness exists andevaluating the design and operating effectiveness of internal control based on theassessed risk. The procedures selected depend on the auditor's judgement including theassessment of the risks of material misstatement of the standalone financial statementswhether due to fraud or error.
We believe that the audit evidence we have obtained is sufficient and appropriate toprovide a basis for our adverse opinion on the Company's internal financial controlssystem over financial reporting.
Meaning of internal financial controls over financial reporting
A company's internal financial control over financial reporting is a process designedto provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generallyaccepted accounting principles. A company's internal financial control over financialreporting includes those policies and procedures that (1) pertain to the maintenance ofrecords that in reasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the Company; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles and that receipts andexpenditures of the Company are being made only in accordance with authorisations ofmanagement and directors of the Company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorised acquisition use or disposition of theCompany's assets that could have a material effect on the financial statements.
Inherent limitations of internal financial controls over financial reporting
Because of the inherent limitations of internal financial controls over financialreporting including the possibility of collusion or improper management override ofcontrols material misstatements due to error or fraud may occur and not be detected.Also projections of any evaluation of the internal financial controls over financialreporting to future periods are subject to the risk that the internal financial controlover financial reporting may become inadequate because of changes in conditions or thatthe degree of compliance with the policies or procedures may deteriorate.
As described in paragraph 4 of our main report a large number of irregularities andsuspected fraudulent transactions pertaining to earlier years were noted during 2015-16and during the current year which were all adjusted in the financial statements for theyear ended 31 March 2016. As described in detail in the aforesaid paragraph theseirregularities and suspected fraudulent transactions clearly illustrate that the Companyhad not established adequate internal financial controls and that whatever financialcontrols had been established were not operating effectively. Subsequently the Company isfocussing on strengthening its internal controls and the process is still continuing as atthe balance sheet date. According to the information and explanations given to us andbased on our audit following significant aspects of material weaknesses in internalcontrol system are particularly noteworthy -
a) Deficiencies in the IT control environment;
b) Deficiencies in maintenance of books of accounts and documentation includingnon-availability of certain documents / agreements;
c) Internal control systems relating to sales including maintenance of third partydocumentation linkage of proof of deliveries with invoices and controls around manualinvoicing;
d) Errors in cost estimations and inadequate tracking of costs in relation to revenuecontracts;
e) Deficiencies in accounting of revenue recognition from leases;
f) Absence of periodic reconciliation with customers;
g) Unreconciled differences in quantitative reconciliation of inventories and ofidentification of contract costs / warranty costs from within traded goods.
A 'material weakness' is a deficiency or a combination of deficiencies in internalfinancial control over financial reporting such that there is a reasonable possibilitythat a material misstatement of the company's annual or interim financial statements willnot be prevented or detected on a timely basis.
In our opinion because of the matters described in the basis of disclaimer of opinionparagraph of our main report and in view of the material weaknesses described above theCompany has not maintained adequate and effective internal financial controls overfinancial reporting as of 31 March 2017 considering the essential components of internalcontrols as stated by the Guidance Note issued by the Institute of Chartered Accountantsof India.
We have considered the material weaknesses identified and reported above in determiningthe nature timing and extent of audit tests applied in our audit of the 31 March 2017standalone financial statements of the Company and these material weaknesses haveinter-alia affected our opinion on the financial statements of the standalone Company andwe have issued a disclaimer of opinion on the financial statements.
For B S R & Co. LLP
Firm Registration Number: 101248W/W-100022
Membership Number: 091765
Place: New Delhi
Date: 26 May 2017