CMA Inter Paper 10 cheat sheet

Section 2(20) of the Companies Act 2013 defines a company as one incorporated under this Act or any previous company law; key features are separate legal entity, perpetual succession, limited liability and common seal.

Share capital ladder: authorised (stated in the memorandum) → issued (allotted) → subscribed → called-up → paid-up; definitions appear in Sections 2(64) to 2(68) of the Companies Act 2013.

Schedule III Division I prescribes the format of financial statements for companies preparing accounts under Accounting Standards; Division II applies to companies required to comply with Ind AS.

Section 129(1) requires financial statements to give a true and fair view and to comply with accounting standards; any deviation must be disclosed with reasons.

Fundamental accounting equation: Assets = Liabilities + Equity, where equity equals paid-up capital plus reserves and surplus less accumulated losses.

Reserve is an appropriation of profit; provision is a charge against profit for a known liability or a known diminution in asset value, and is created even when the company incurs a loss.

Capital expenditure yields benefit beyond one accounting year and is capitalised; revenue expenditure is consumed within the year and charged to the statement of profit and loss.

Book value per equity share = equity shareholders' funds ÷ number of equity shares outstanding; preference capital and preference dividend arrears are excluded from equity shareholders' funds.

Section 68(2)(c): buy-back cannot exceed 25% of the aggregate of paid-up capital and free reserves; buy-back of equity shares in any financial year cannot exceed 25% of paid-up equity capital.

Buy-back conditions: authorised by the articles, special resolution (Board resolution suffices where buy-back is 10% or less of paid-up equity capital and free reserves), fully paid shares, completion within 12 months, post-buy-back debt-equity ratio not exceeding 2:1, and no default in deposits, interest or preference share redemption.

Section 69: Capital Redemption Reserve equals the nominal value of shares bought back less proceeds of a fresh issue; it can be applied only for issuing fully paid bonus shares and cannot be reduced except as permitted by law.

Section 80: redemption of preference shares out of profits requires a Capital Redemption Reserve equal to the nominal value redeemed; redemption out of proceeds of a fresh issue requires no such reserve.

Section 55: redeemable preference shares must be redeemed within 20 years of issue; for infrastructure projects the period may extend to 30 years, with at least 10% of such shares redeemed each year from the 21st year.

Section 63 bonus issue: made from free reserves, securities premium or capital redemption reserve; revaluation reserve cannot be capitalised and the shares must be fully paid up.

Forfeiture: where the premium on shares was not received, the securities premium credited at issue cannot be used to reduce the forfeited shares account; the balance in forfeited shares account after reissue is transferred to capital reserve.

Pro-rata allotment: when applications exceed shares offered, excess application money is adjusted towards allotment or calls; Table F prescribes interest on calls in advance at 12% p.a. and on calls in arrears at 10% p.a.

Section 71 permits issue of debentures with an option to convert into shares; secured debentures require creation of a charge within 30 days of issue; debenture holders are creditors and have no voting rights.

Issue at discount creates a capital loss; the discount is written off against securities premium under Section 52 or charged to the statement of profit and loss over the life of the debentures, with the unamortised balance shown as a non-current asset.

Premium on redemption of debentures may be provided out of the statement of profit and loss or out of securities premium, which Section 52(2)(d) permits for premium payable on redemption of debentures.

Debenture Redemption Reserve: Rule 18 of the Companies (Share Capital and Debentures) Rules 2014 requires creation of DRR out of profits available for dividend, and investment or deposit of at least 15% of debentures maturing during the year in specified securities.

Redemption methods: lump-sum payment at maturity, draw of lots, purchase in the open market, and conversion into shares; each method produces different journal entries and disclosure.

Interest on debentures is a charge against profit and is payable whether or not the company earns a profit; TDS under Section 193 applies where interest to a resident debenture holder exceeds ₹5,000 in a financial year.

Convertible debentures: interest ceases on the date of conversion; the conversion price or ratio is fixed at the time of issue, so no cash outflow arises on conversion.

Debenture versus share: a debenture is debt carrying a compulsory interest charge, while a share represents ownership carrying a dividend that depends on profits and a board recommendation.

Section 129 read with Schedule III: financial statements comprise the balance sheet, statement of profit and loss, cash flow statement, statement of changes in equity (where Ind AS applies) and notes.

Schedule III Division I balance sheet: equity and liabilities split into shareholders' funds, non-current liabilities and current liabilities; assets split into non-current and current, with sub-classification prescribed.

Schedule II depreciation: charged on the useful life method using either straight line or written down value; component accounting is mandatory for components whose cost is significant relative to the total asset cost.

Section 123: dividend may be declared from current year profits after charging depreciation or from accumulated profits; it cannot be declared from unrealised gains, and transfer to reserves is optional.

Section 197: total managerial remuneration cannot exceed 11% of net profits computed under Section 198; a single managing or whole-time director may receive up to 5% and a professional director up to 10%.

Section 135 CSR: applies where net worth is ₹500 crore or more, turnover ₹1,000 crore or more, or net profit ₹5 crore or more in the preceding financial year; spending is 2% of average net profits of the preceding three years.

Dividend distribution tax stands abolished; dividend is taxed in the hands of shareholders, and TDS at 10% applies where dividend paid to a resident shareholder exceeds ₹5,000 in a financial year.

Disclosure standards to apply: AS 17 segment reporting, AS 18 related party disclosures, AS 22 taxes on income, AS 5 net profit or loss for the period, prior period items and changes in accounting policies.

AS 14 defines amalgamation as the merger of two or more companies into one and prescribes two methods: pooling of interests (amalgamation in the nature of merger) and purchase method.

Pooling of interests applies only when all assets and liabilities are taken over, shareholders of the transferor become shareholders of the transferee, consideration is mainly equity shares, and the business is intended to be continued.

Purchase method: assets and liabilities of the transferor are recorded at fair values; consideration above the net assets acquired is goodwill, and consideration below net assets is capital reserve.

Pooling method: assets and liabilities are recorded at existing book values, reserves of the transferor are reflected in the transferee, and any difference between consideration and share capital is adjusted in reserves without recognising goodwill.

External reconstruction: a new company is formed specifically to take over the business of an existing company, which is then liquidated; only one existing business is involved.

Absorption: an existing company takes over the business of another existing company; no new company is incorporated, so the transferee continues under its own name.

Transferor's books: open a Realisation Account, transfer assets at book value, record liabilities taken over and purchase consideration, and transfer the resulting profit or loss to shareholders' account.

Purchase consideration may be computed by the lump-sum method, net assets method, net payment method or intrinsic value method; the method used must be disclosed and applied consistently.

AS 21 and Ind AS 110 require a parent with one or more subsidiaries to present consolidated financial statements; Ind AS 110 defines control as power over the investee, exposure to variable returns and ability to use power to affect those returns.

Consolidation is line by line: like items of assets, liabilities, income and expenses are added, the parent's investment is eliminated against the subsidiary's share capital, and intragroup balances, transactions and unrealised profits are eliminated in full.

Goodwill or capital reserve on consolidation = cost of the parent's investment − the parent's share of the fair value of the subsidiary's identifiable net assets at the acquisition date; pre-acquisition reserves are treated as capital.

Non-controlling interest is presented separately within equity in the consolidated balance sheet, and the subsidiary's post-acquisition profit is split between the parent and the non-controlling interest.

Consolidation begins from the date control is acquired and continues until control ceases; a subsidiary is excluded where control is intended to be temporary or severe long-term restrictions impair the parent's ability to exercise control.

Uniform accounting policies must be applied across the group; where the subsidiary's reporting date differs, adjustments are made for significant transactions up to the parent's reporting date.

Associates under AS 23 and Ind AS 28: significant influence is presumed where the investor holds 20% or more of voting power, and the investment is accounted for by the equity method.

Joint ventures: AS 27 requires proportionate consolidation for jointly controlled entities, while Ind AS 111 requires the equity method for joint ventures.

Audit is the independent, systematic examination of financial information and underlying records to express an opinion on whether the financial statements give a true and fair view.

An audit provides reasonable assurance, not absolute assurance; inherent limitations include sampling, exercise of judgement, availability and persuasiveness of evidence, and inherent limitations of internal control.

Primary objective is the audit opinion on the financial statements; secondary objective is detection of material fraud and error, dealt with under SA 240 and SA 250.

Types of audit: statutory, internal, external, cost, tax, management, forensic, energy, secretarial and information systems audit; each has a different appointing authority and scope.

Ethical requirements under the ICAI Code of Ethics: independence, integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.

Auditing versus accounting: accounting records transactions and prepares financial statements; auditing verifies those statements and the evidence supporting them without preparing them.

Auditing standards: Standards on Auditing issued by ICAI apply to all audits; SA 200 states the overall objectives of the independent auditor and SA 210 governs agreeing the terms of engagement.

SA 300: the auditor establishes the overall audit strategy covering scope, timing and direction, then develops an audit plan setting the nature, timing and extent of audit procedures; planning is iterative and not a separate phase.

Audit risk model: audit risk = inherent risk × control risk × detection risk; the auditor cannot change inherent or control risk but reduces detection risk through the nature, timing and extent of procedures.

SA 315: the auditor obtains an understanding of the entity and its environment, including internal control, and identifies and assesses risks of material misstatement at financial statement and assertion levels.

SA 320: materiality is the amount of misstatement that could influence the economic decisions of users; the auditor sets overall materiality, performance materiality and specific materiality where needed, and revises them as the audit progresses.

SA 500: audit evidence must be sufficient and appropriate; reliability is higher for external evidence than internal, for original documents than copies, and for auditor-obtained evidence than management representations.

Evidence-gathering procedures: inspection, observation, external confirmation, inquiry, recalculation, reperformance and analytical procedures; inquiry alone is not sufficient.

SA 230: audit documentation must enable an experienced auditor with no previous connection to understand the work performed, evidence obtained and conclusions reached; retention is at least seven years from the date of the report.

Related standards: SA 520 analytical procedures, SA 530 audit sampling, SA 550 related parties, SA 560 subsequent events, SA 570 going concern and SA 580 written representations.

Section 139(1): an auditor is appointed for five consecutive years at a general meeting; the first auditor is appointed by the Board within 30 days of incorporation, failing which by members within 90 days.

Section 139(8): a casual vacancy is filled by the Board within 30 days; a vacancy caused by resignation is filled by the Board within 30 days and the appointment must be approved by members within three months.

Section 141 disqualifications: a body corporate, an officer or employee, a partner or employee of such persons, a person indebted to the company above ₹5 lakh, a person with a business relationship, or a relative holding securities above ₹1 lakh face value.

Section 143: the auditor has a right of access to books and records and must report on the accounts; fraud of ₹1 crore or more must be reported to the Central Government under Rule 13 of the Companies (Audit and Auditors) Rules 2014.

Section 144 prohibits non-audit services by the statutory auditor, including accounting and book keeping, internal audit, actuarial services, investment advisory and investment banking services.

CARO 2020 (Companies (Auditor's Report) Order 2020) requires specified companies' auditors to report on fixed assets, inventory, loans, related party transactions, statutory dues, fraud and going concern indicators.

Statutory audits other than the financial audit: internal audit under Section 138, cost audit under Section 148 and secretarial audit under Section 204 for listed and prescribed companies.

Tax audit under Section 44AB is required where business turnover exceeds ₹1 crore, or ₹10 crore where cash receipts and cash payments each do not exceed 5% of total receipts and payments.

SA 700 governs forming an opinion and the form of the auditor's report; SA 705 covers modifications, SA 706 covers Emphasis of Matter and Other Matter paragraphs, and SA 701 governs Key Audit Matters.

Opinion types: unmodified (true and fair view), qualified (material but not pervasive), adverse (material and pervasive misstatement) and disclaimer (inability to obtain sufficient appropriate evidence, material and pervasive).

Standard report elements: title, addressee, auditor's opinion, basis for opinion, going concern (where applicable), Key Audit Matters, management's responsibilities, auditor's responsibilities, signature, place, date and UDIN.

Emphasis of Matter paragraph draws attention to a matter appropriately presented or disclosed in the financial statements and does not modify the opinion; an Other Matter paragraph covers matters not presented in the financial statements.

Section 143(3)(i) requires the auditor to report on the adequacy and operating effectiveness of the company's internal financial controls with reference to financial statements.

The report date must not precede the date on which the auditor obtained sufficient appropriate evidence, including evidence that the financial statements were approved by those charged with governance.

Audit certificate confirms specific factual matters such as turnover, net worth or receipts; it is not an opinion on the truth and fairness of financial statements.

UDIN (Unique Document Identification Number) is mandatory on audit reports and certificates issued by ICAI members, enabling verification of the document's authenticity.

Internal audit under Section 138 is an independent appraisal activity covering internal controls, risk management and governance; it applies a risk-based approach and reports to the audit committee or board.

Management audit evaluates the efficiency and effectiveness of management policies, decisions and performance; it is not statutory and has no prescribed format.

Cost audit under Section 148 requires maintenance of cost records and audit of cost statements by a cost accountant, with the report submitted to the Board and to the Ministry of Corporate Affairs.

Energy audit is carried out under the Energy Conservation Act 2001 to assess patterns of energy use and identify conservation opportunities; it is conducted by a certified energy auditor.

Forensic audit investigates financial information for use in legal proceedings, focusing on fraud detection, evidence gathering, quantification of loss and litigation support.

Information systems audit reviews IT controls, data integrity, access security, change management and business continuity; COBIT is a commonly used control framework.

Secretarial audit under Section 204 applies to listed companies and other prescribed companies and is conducted by a practising company secretary on compliance with applicable laws.

Audit committee under Section 177: minimum three directors with independent directors forming a majority and an independent chairperson; the company must also establish a vigil mechanism for reporting concerns.