Signing Off a Depreciation Change and Doubtful Input Tax Credit
You are the statutory auditor of a private limited company doing textile job work, with turnover of Rs 4.2 crore for FY 2023-24. During the year the company changed depreciation on plant and machinery from written-down value at 15% to straight-line over 10 years, which increased profit before tax from Rs 56 lakh to Rs 74 lakh. The CFO says that because the company is small, no disclosure is needed and the change can be absorbed silently. Separately, the company has claimed input tax credit on a car purchased in the director's name but used partly for business, and has booked a Rs 6 lakh purchase invoice from a supplier whose GSTIN is not registered. Both credits appear in the GST returns already filed. The CFO wants the audit signed before the board meeting, and warns that a qualification will embarrass the company before its bankers.
1. Advise on the accounting treatment and disclosure of the depreciation change. Is the CFO correct that a small company need not disclose it?
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A change in the method of depreciation is not a correction of an error and is not plugged silently into the current year. Under AS 10 (Revised), and expressly under Ind AS 8, it is treated as a change in accounting estimate, applied prospectively from the date of change. The financial statements must disclose the nature of the change and its quantitative effect, so that a reader can compare the current year with the prior year. Here the effect is Rs 18 lakh on a restated profit before tax of Rs 56 lakh, roughly one-third of the earlier figure, and therefore clearly material by any reasonable benchmark.
The small-company argument is misconceived. The Companies (Accounting Standards) Rules give small and medium companies relief from selected standards such as those on employee benefits and segment reporting; they do not remove the requirement to disclose a material change in depreciation method. Without disclosure the statements are not comparable and the audit opinion on true and fair view is exposed. The correct course is to reinstate the disclosure note, show the prior-year figures on the original basis, and explain the reason for the change and its effect. If management refuses, the auditor should record the disagreement and consider modifying the opinion under section 143.
2. Assess the two input tax credit positions under GST, and state what the auditor should do before signing.
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On the car, section 17(5)(a) blocks input tax credit on motor vehicles for transport of persons with seating capacity up to thirteen, except where the vehicle is used for further supply of such vehicles, for passenger transport, or for driving training. A car used partly by a director does not fall within those exceptions, and the block is not proportionate: the whole credit is unavailable, not merely the private-use share. The credit already taken is therefore an ineligible credit and should be reversed with interest under section 50.
On the Rs 6 lakh invoice, credit requires a valid tax invoice issued by a registered supplier and actual receipt of the goods. An unregistered supplier cannot issue such an invoice, so the credit is unsustainable unless the transaction falls within a reverse-charge category notified under section 9(4), in which case tax must have been paid by the recipient and the prescribed self-invoice and payment conditions met. The auditor should obtain the invoice, the e-way bill, the goods receipt note and the supplier's registration status, quantify the exposure, and place the findings before the board. If the credits are not reversed or adequately provided for, the auditor should consider qualification under section 143(3)(g) and reporting under CARO 2020 on statutory dues, and should not allow the banker-facing timetable to override the evidence.