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Mahanagar Telephone Nigam

BSE: 500108|NSE: MTNL|ISIN: INE153A01019|SECTOR: Telecommunications - Service
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Mar 16
Auditor's Report (Mahanagar Telephone Nigam) Year End : Mar '17

to, THE MEMBERS OF MAHANAGAR TELEPHONE NIGAM LIMITED Report on the Standalone IND AS Financial Statements

We have audited the accompanying Standalone IND AS financial statements of Mahanagar Telephone Nigam Limited, (“the Company''), which comprise the Balance Sheet as at 31st March, 2017, the Statement of Profit and Loss (including Other Comprehensive Income), the Cash Flow Statement and the Statement of Changes in Equity for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Standalone IND AS Financial Statements

The Company''s Board of Directors is responsible for the matters stated in Section 134(5) of the Companies Act, 2013 (“the Act”) with respect to the preparation of these Standalone IND AS financial statements that give a true and fair view of the State of Affairs (financial position), Profit or Loss (financial performance including Other Comprehensive Income), Cash flows and Changes in Equity of the Company in accordance with the accounting principles generally accepted in India, including the Indian Accounting Standards (IND AS) prescribed under Section 133 of the Act. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the Company and for preventing and detecting frauds and other irregularities, selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and design, implementation and maintenance of adequate internal financial controls, that are operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the Standalone IND AS financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these Standalone IND AS financial statements based on our audit.

We have taken into account the provisions of the Act, the accounting and auditing Standards and matters which are required to be included in the audit report under the provisions of the Act and the Rules made there under.

We conducted our audit in accordance with the Standards on Auditing specified under Section 143(10) of the Act. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Standalone IND AS financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Standalone IND AS financial statements. The procedures selected depend on the auditor''s judgment, including the assessment of the risks of material misstatement of the Standalone IND AS financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal financial control relevant to the Company''s preparation of the Standalone IND AS financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of the accounting policies

used and the reasonableness of accounting estimates made by the Company''s Directors, as well as evaluating the

overall presentation of the Standalone IND AS financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified

audit opinion on the Standalone IND AS financial statements.

Basis for Qualified Opinion

(i) The Company has certain balances receivables from and payables to BSNL. The net amount recoverable of Rs,3729.78 Crores is subject to reconciliation and confirmation. In view of non reconciliation and non confirmation and also in view of various pending disputes regarding claims and counter claims, we are not in a position to ascertain and comment on the correctness of the outstanding balances and resultant impact of the same on the Standalone IND AS financial statements of the Company. (Also refer point no. (a) of note no. 65 to the Standalone IND AS financial statements).

(ii) The Company has certain balances receivables from and payables to Department of Telecommunication (DOT). The net amount recoverable of Rs,7263.61 Crores is subject to reconciliation and confirmation. In view of non reconciliation and non confirmation, we are not in a position to ascertain and comment on the correctness of the outstanding balances and resultant impact of the same on the Standalone IND AS financial statements of the Company. (Also refer point no. (a) of note no. 70 to the Standalone IND AS financial statements).

(iii) Up to financial year 2011-12 License Fee payable to the DOT on IUC charges to BSNL was worked out on accrual basis as against the terms of License agreements requiring deduction for expenditure from the gross revenue to be allowed on actual payment basis. From financial year 2012-13, the license fee payable to the DOT has been worked out strictly in terms of the license agreements. The Company continues to reflect the difference in license fee arising from working out the same on accrual basis as aforesaid for the period up to financial year 2011-12 by way of contingent liability of ''140.36 Crores instead of actual liability resulting in understatement of current liabilities and understatement of loss to that extent. (Also refer note no. 59 to the Standalone IND AS financial statements).

(iv) The Company continues to allocate the overheads towards capital works in a manner which is not in line with the accepted accounting practices and Indian Accounting Standard - 16 “Property, Plant and Equipmentprescribed under Section 133 of the Act, the same results into overstatement of capital work in progress/Property, Plant and Equipment and understatement of loss. The actual impact of the same on the Standalone IND AS financial statements for year is not ascertained and quantified. (Also refer note no. 36 and 39 to the Standalone IND AS financial statements).

(v) Except for the impairment loss of assets of CDMA units, no adjustment has been considered on account of impairment loss, if any, during the year, with reference to Indian Accounting Standard - 36 “Impairment of Assets” prescribed under Section 133 of the Act. In view of uncertainty in achievement of future projections made by the Company, we are unable to ascertain and comment on the provision required in respect of impairment in carrying value of cash generating units and its consequent impact on the loss for the year, accumulated balance of reserve and surplus and also the carrying value of the cash generating units. (Also refer note no. 72 to the Standalone IND AS financial statements).

(vi) Amount receivables from and payables to the various parties are subject to confirmation and reconciliation. Pending such confirmation and reconciliations, the impact thereof on the Standalone IND AS financial statements are not ascertainable and quantifiable. (Also refer, note no. 67 to the Standalone IND AS financial statements).

(vii) Dues from the operators are not taken into account for making provision for doubtful debts. In the absence of any working, the impact thereof on the Standalone IND AS financial statements cannot be ascertained and quantified. (Also refer clause no. l (ii) of note no. 3 to the Standalone IND AS financial statements).

(viii) (a) In Delhi Unit, reconciliation of balances of subscriber’s deposits as per subsidiary records with financial books (WFMS) is still in progress and the impact, if any, of the differences arising out of such reconciliation on Standalone IND AS financial statements cannot be ascertained and quantified at present. (Also refer point no.

(a) of note no. 66 to the Standalone IND AS financial statements).

(b) Unlinked credit of ''36.91 Crores on account of receipts from subscribers against billing by the Company which could not be matched with corresponding receivables is appearing as liabilities in the balance sheet. To that extent, trade receivables and other current liabilities are overstated. (Also refer point no. (c) of note no. 66 and 77 to the Standalone IND AS financial statements).

(ix) In the absence of detailed information i.e. break up of amount received with relation to the individual invoices raised through MACH; invoice wise reconciliation of the roaming debtors is pending in Delhi Unit. Pending such reconciliation, the impact of the same on the Standalone IND AS financial statements cannot be ascertained and quantified. (Also refer note no. 68 to the Standalone IND AS financial statements).

(x) Property, Plant and Equipment are generally capitalized on the basis of completion certificates issued by the engineering department or bills received by finance department in respect of bought out capital items. Due to delays in issuance of the completion certificates or receipt of the bills, there are cases where capitalization of the Property, Plant and Equipment gets deferred to next year. The resultant impact of the same on the statement of profit and loss by way of depreciation and amount of Property, Plant and Equipment capitalized in the balance sheet cannot be ascertained and quantified.

(xi) Certain Land and Buildings transferred to MTNL from DOT in earlier years have been reflected as leasehold. In the absence of relevant records, we are not in a position to comment on the classification, capitalization and amortization of the same as leasehold and also the consequential impacts, if any, of such classification, capitalization and amortization not backed by relevant records. In the absence of relevant records, impact of such classification on the Standalone IND AS financial statements cannot be ascertained and quantified.

(xii) Department of Telecommunication (DOT) had raised a demand of ''3313.15 Crores in 2012-13 on account of one time charges for 2G spectrum held by the Company for GSM and CDMA for the period of license already elapsed and also for the remaining valid period of license including spectrum given on trial basis.

As explained the demand for spectrum usage for CDMA has been revised by Rs,107.44 Crores on account of rectification of actual usage.

Also as explained, pending finality of the issue by the Company regarding surrender of a part of the spectrum, crystallization of issue by the DOT in view of the claim being contested by the Company and because of the matter being sub-judice in the Apex Court on account of dispute by other private operators on the similar demands, the amount payable, if any, is indeterminate. Accordingly, no liability has been created for the demand made by DOT on this account and Rs,3205.71 Crores has been disclosed as contingent liability.

In view of the above we are not in a position to comment on the correctness of the stand taken by the Company and the ultimate implications of the same on the Standalone IND AS financial statements of the Company. (Also refer note no. 58 to the Standalone IND AS financial statements).

In the absence of information, the effect of which can''t be quantified, we are unable to comment on the possible impact of the items stated in the point nos. (i), (ii), (iv), (v), (vi), (vii), (viii)(a), (ix), (x), (xi), and (xii) on the Standalone IND AS financial statements of the Company for the year ended on 31st March 2017.

We further state that without considering the impact of items stated in preceding para, the effect of which could not be determined, had the observations made by us in point nos (iii) and (viii)(b) been considered in the Standalone IND AS financial statements, loss for the year would have been Rs,3081.44 Crores as against the reported figure of Rs,2941.08

Crores in the Statement of Profit and Loss and Trade receivables under the head Current Assets would have been ''454.67 Crores as against the reported figure of Rs,491.58 Crores, Other Financial Liabilities would have been ''1362.25 Crores as against the reported figure of ''1258.80 Crores in the Balance Sheet.

Qualified Opinion

In our opinion and to the best of our information and according to the explanations given to us, except for the possible effects of the matters described in the Basis for Qualified Opinion paragraph, the Standalone IND AS financial statements give the information required by the Act, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India including the Indian Accounting Standards (IND AS), of the state of affairs (financial position) of the Company as at 31st March, 2017 and its losses (financial performance including other comprehensive income) and its cash flows and the changes in equity for the year ended on that date.

Emphasis of Matters

We draw attention to the following notes on the Standalone IND AS financial statements being matters pertaining to Mahanagar Telephone Nigam Limited requiring emphasis by us. Our opinion is not qualified in respect of these matters:

(i) Note no. 79 to the Standalone IND AS financial statements regarding non provision of diminution in the value of investments in joint ventures/subsidiary as these diminutions are considered temporary in nature.

(ii) Note no. 62 to the Standalone IND AS financial statements regarding the adequacy or otherwise of the provision and / or contingency reserve held by the Company with reference to pending dispute with the Income Tax Department before the Hon''ble Courts regarding deduction claimed by the Company u/s 80 IA of the Income Tax Act,1961.

(iii) Point no.(a) of note no. 64 to the Standalone IND AS financial statements regarding accounting of claims and counter claims of MTNL with M/S M&N Publications Ltd., in a dispute over printing, publishing and supply of telephone directories for MTNL, in the year when the ultimate collection / payment of the same becomes reasonably certain.

(iv) Classification of trade receivables as unsecured without considering the security deposit which the Company has received from the subscribers. (Also refer note no. 15 to the Standalone IND AS financial statements).

(v) Amount receivable from BSNL & Other Operators have been reflected as loans and other financial assets instead of bifurcating the same into trade receivables and other receivables. (Also refer note no. 15 to the Standalone IND AS financial statements).

(vi) Disclosure of consumption of imported and indigenous stores and spares and percentage to the total consumption as required by Schedule III of the Companies Act, 2013 has not been made by the Company in the Standalone IND AS financial statements.

(vii) The Standalone IND AS financial statements of the Company reflect that net worth of the Company has virtually eroded; The Company has incurred net cash loss during the current year as well as in the previous year and the current liabilities exceeded the current assets substantially. All these conditions indicate the existence of material uncertainty that may cast significant doubts about the Company''s ability to continue as a going concern. However, the Standalone IND AS financial statements of the Company have been prepared on a going concern basis for the reasons stated in the note no. 78 to the Standalone IND AS financial statements.

Other Matters

The comparative financial information of the Company for the transition date opening balance sheet as at 01st April, 2015 included in these Standalone IND AS financial statements, are based on the previously issued statutory financial statements prepared in accordance with the Companies (Accounting Standard) Rules, 2006 audited by predecessor auditor whose report for the year ended 31st March, 2015 dated 30th May, 2015 expressed qualified opinion on those

standalone financial statements, as adjusted for the differences in accounting principles adopted by the Company on

transition to the Indian Accounting Standard (IND AS), which have been audited by us.

Our opinion is not modified in respect of this matter.

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 sub-section (11) of section 143 of the Act, we give in the Annexure - ''A'' a statement on the matters specified in paragraphs 3 and 4 of the Order, to the extent applicable.

2. As required by Section 143(5) of the Act, we give in Annexure - ''B'', a statement on the matters specified by the

Comptroller and Auditor-General of India for the Company.

3. 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 best of our knowledge and belief were necessary for the purpose of our audit except for the matters described in point nos. (i),

(ii), (iv), (v), (vi), (vii), (viii)(a), (ix), (x), (xi), and (xii) of the paragraph on Basis of Qualified Opinion given above ;

(b) In our opinion proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books except for our comments under the head ''Basis for Qualified Opinion'' stated above;

(c) The Balance Sheet, the Statement of Profit and Loss (including Other Comprehensive Information), the Cash Flow Statement and the Statement of Changes in Equity dealt with by this Report are in agreement the books of account;

(d) In our opinion and based on our comments in point nos. (iii), (iv), (v), (x), (xi) and (xii) of the paragraph on Basis for Qualified Opinion given above, the aforesaid Standalone IND AS financial statements comply with the Indian Accounting Standards prescribed under Section 133 of the Act except for IND AS - 16 regarding Property, Plant and Equipment , IND AS - 36 regarding Impairment of Assets and IND AS 37 on Provisions, Contingent Liabilities and Contingent Assets;

(e) In view of the Government notification No. GSR 463 (E) dated 5th June 2015, government companies are exempt from the applicability of Section 164 (2) of the Act;

(f) With respect to the adequacy of internal financial controls over financial reporting of the Company and operating effectiveness of such controls, refer to our separate report in “Annexure C”:

(g) The qualification relating to the maintenance of accounts and other matters connected therewith are as stated in the Basis for Qualified Opinion paragraph above.

(h) With respect to the other matters to be included in the Auditors Report in accordance with Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according to the explanations given to us;

i. the Company has disclosed the impact of pending litigations, wherever quantifiable, on its financial position in its Standalone IND AS financial statements. Refer Note no. 48 to the Standalone IND AS financial statements.

ii. the Company is not required to make any provision for any material foreseeable losses under any law or accounting standards on long terms contracts. Also the Company is not dealing into derivatives contracts. Refer Note no. 76 to the Standalone IND AS financial statements.

iii. There has been no delay in transferring any amount to the Investor, Education and Protection Fund during the year. Refer Note No. 75 to the Standalone IND AS financial statements.

iv. The Company has provided requisite disclosures in the Standalone IND AS financial statements as to holding as well as dealings in specified Bank Notes during the period from 08th November, 2016 to 30th December, 2016. Based on audit procedures and relying on the management representations, we report that the disclosures are in accordance with books of accounts maintained by the Company and as produced to us by the management. Refer point no. (iv) of Note No. 16 to the Standalone IND AS financial statements.

REFERRED TO IN OUR INDEPENDENT AUDITORS'' REPORT OF EVEN DATE TO THE MEMBERS OF MAHANAGAR TELEPHONE NIGAM LIMITED ON THE STANDALONE IND AS FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST MARCH, 2017.

(i) (a) Delhi unit has maintained records of fixed assets. However in MS unit-Delhi, identification numbers are not mentioned. It has been noticed that records of the Estates Department in respect of land and building do not match with the records as per financial books. In case of Mumbai unit (both basic and WS), fixed assets registers have been maintained w.e.f. 01.04.2002. However, the fixed assets records maintained by the Mumbai unit are not updated and reconciled with the financial records. Also identification numbers are not mentioned in respect of most of the items. The corporate office has maintained fixed assets records showing full particulars including quantitative details and situation of fixed assets.

(b) As per the accounting policy of the company, fixed assets are required to be physically verified by the management on rotation basis, once in three years, which in our opinion is reasonable and adequate in relation to the size of the Company and the nature of its business. As certified by the management, Electrical Appliances, Furniture and Fixtures, Lines & Wires and Computers were physically verified in accordance with programme of verification by the management during the year and no material discrepancies were noticed on such verification.

(c) Title deeds of most of the immovable properties recorded in the books of the Company are not held in the name of the Company. Details of such properties are given hereunder:

(Rs,in Crores)

PARTICULARS

DELHI UNIT

MUMBAI UNIT

Free Hold Land

-Total Number of Cases

1

16

-Gross Block

0.06

Rs,3.13

Lease Hold Land

-Total Number of Cases

89*

6

-Gross Block

219.53

Rs,3.45

-Net Block

156.46

Rs,2.44

Building

-Total Number of Cases

531

NIL

-Gross Block

32.37

NIL

-Net Block

4.92

NIL

* In respect of 43 cases out of 89 where the lease hold land acquired from DOT have been capitalized by MTNL and no data is available in respect of depreciation and net WDV of such assets as the same is not identifiable from the fixed assets register.

(iv) The Company has not entered any transaction involving compliance with the provisions of Section 185 and 186 of the Companies Act 2013. Thus, paragraph 3(iv) of the Order is not applicable

(v) The Company has not accepted any deposits from the public within the meaning of Section 73 to Section 76 or any other relevant provisions of the Companies Act, 2013 or rules framed there under.

(vi) As per information and explanation given to us, Company is required to maintain the cost records under Section 148(1) of the Companies Act 2013. As explained the Company has not yet maintained the required cost records for year 2016-17.

(vii) (a) According to the information and explanations given to us and on the basis of our examination of the records of the Company, amounts deducted/ accrued in the books of account in respect of undisputed statutory dues including provident fund, employees'' state insurance, income tax, sales tax, service tax, duty of customs, duty of excise, value added tax, cess and other material statutory dues, wherever applicable, have generally been regularly deposited with the appropriate authorities though there has been a slight delay in few cases.

According to the information and explanations given to us, no undisputed amounts payable in respect of provident fund, employees'' state insurance, income tax, sales tax, service tax, duty of customs, duty of excise, value added tax, cess or other material statutory dues were in arrears as at 31 March 2017 for a period of more than six months from the date they became payable.

(b) According to the information and explanations given to us, there are no dues of income tax, sales tax, service tax, duty of customs, duty of excise, value added tax which have not been deposited with the appropriate authorities on account of any dispute except for the following dues::

Delhi Unit

i. Sales Tax

Name of the Statute

Amount (Rs,in Crores) (Net)

Period

Authority where Forum where the dispute is pending

Delhi Value Added Tax Act, 2004

12.21

2007-08

Delhi Value Added Tax, Tribunal

Delhi Value Added Tax Act, 2004

62.60

2009-10 & 2010-11 (CWG 2010)

Delhi Value Added Tax, Tribunal

Central Sales Tax Act, 1956

0.04

2012-13

Addl. Comm. Sales Tax

TOTAL

74.85

ii. Service Tax

Name of the Statute

Amount (Rs,in Crores) (Net)

Period

Forum where the dispute is pending

Finance Act, 1994

8.45

2005-06

Commissioner of Central Excise and Service Tax

Finance Act, 1994

22.13

2006-08

Custom Excise and Service Tax Appellate Tribunal

Finance Act, 1994

0.08

2000-03

Commissioner of Central Excise and Service Tax

Finance Act, 1994

0.71

2008-12

Commissioner of Central Excise and Service Tax

TOTAL

31.37

iii. Labour Cess

Name of the Statute

Amount (Rs,in Crores) (Net)

Period

Forum where the dispute is pending

Building and other Construction Workers Welfare Cess Act, 1996.

9.73

1996 to 2001

Deputy Labor Commissioner

Mumbai Basic Unit

i. Income Tax:

Name of the Statute

Amount (Rs,in Crores) (Net)

Year to which amount relates

Forum where the dispute is pending

Income Tax Act, 1961

0.02

2000-01

Commissioner of Income Tax

Income Tax Act, 1961

0.64

2001-02

Commissioner of Income Tax

Income Tax Act, 1961

0.05

2002-03

Commissioner of Income Tax

Income Tax Act, 1961

0.28

2003-04

Commissioner of Income Tax

Income Tax Act, 1961

0.03

2006-07

Commissioner of Income Tax

Income Tax Act, 1961

0.01

2007-08

Commissioner of Income Tax

Total

1.03

ii. Sales Tax:

Name of the Statute

Amount (Rs,in Crores) (Net)

Year to which amount relates

Forum where the dispute is pending

Bombay Sales Tax Act, 1959

0.17

1993-94

Maharashtra Sales Tax Tribunal, Mumbai

Bombay Sales Tax Act, 1959

5.27

1996-97

Hon''ble High Court

Bombay Sales Tax Act, 1959

351.85

1997-98

Hon''ble Supreme Court of India

Bombay Sales Tax Act, 1959

216.01

2003-04

Maharashtra Sales Tax Tribunal, Mumbai

Bombay Sales Tax Act, 1959

101.32

2004-05

Joint Commissioner of Sales Tax, Mumbai

Bombay Sales Tax Act, 1959

14.97

2009-10

Joint Commissioner of Sales Tax, Mumbai

Bombay Sales Tax Act, 1959

6.11

2011-12

Joint Commissioner of Sales Tax, Mumbai

Total

695.70

iii. Luxury Tax

Name of the Statute

Amount (Rs,in Crores) (Net)

Year to which amount relates

Forum where the dispute is pending

Luxury Tax Act, 1987

0.64

2007-08

Joint Commissioner of Sales Tax (Appeal) - IV, Mumbai

Name of the Statute

Amount (Rs,in Crores) (Net)

Year to which amount relates

Forum where the dispute is pending

Luxury Tax Act, 1987

1.11

2008-09

Joint Commissioner of Sales Tax (Appeal) - IV, Mumbai

Luxury Tax Act, 1987

0.26

2009-10

Joint Commissioner of Sales Tax (Appeal) - IV, Mumbai

Luxury Tax Act, 1987

0.51

2010-11

Joint Commissioner of Sales Tax (Appeal) - IV, Mumbai

Luxury Tax Act, 1987

0.93

2011-12

Joint Commissioner of Sales Tax (Appeal) - IV, Mumbai

Total

3.45

iv. Service Tax:

Name of the Statute

Amount (Rs,in Crores) (Net)

Year to which amount relates

Forum where the dispute is pending

Finance Act, 1994

0.20

2004-05

Custom Excise and Service Tax Appellate Tribunal

Finance Act, 1994

2.44

2006-14

Custom Excise and Service Tax Appellate Tribunal

Total

2.64

Mumbai MS Unit Central Excise:

Name of the Statute

Amount (Rs,in Crores) (Net)

Year to Which Amount Relates

Forum where the dispute is pending

Central Excise Act, 1944

0.58

2004-05

Commissioner of Central Excise

Central Excise Act, 1944

0.32

2006-07

Commissioner of Central Excise

Central Excise Act, 1944

0.53

2013-14

Commissioner of Central Excise

Central Excise Act, 1944

0.11

2006-07

Commissioner of Central Excise

Central Excise Act, 1944

4.75

2005-06

Commissioner of Central Excise

Total

6.29

(viii) The Company has not defaulted in the repayment of loans or borrowings to a financial institution, bank, Government or dues to debenture holders.

(ix) The Company has not raised any money by way of initial public offer or further public offer (including debt instruments) during the year and term loans has been applied for the purposes for which they were raised.

(x) Based on audit procedures applied and according to the information and explanations given to us, we report that no fraud on or by the Company has been noticed or reported during the course of our audit for the year ended on 31st March 2017 except for the following case:

Nature of Fraud

Amount (Rs,in Crores)

Remarks

Misappropriation of cable store item in Transmission Unit

Rs,1.076

FIR Lodged

(xi) In view of the Government notification No. GSR 463 (E) dated 5th June 2015, Government Companies are exempt from the applicability of Section 197 of the Companies Act 2013. Accordingly clause 3 (xi) of the Order is not applicable to the Company.

(xii) In our opinion and according to the information and explanations given to us, the Company is not a Nidhi Company. Hence, Clause 3 (xii) of the Order is not applicable to the Company.

(xiii) In our opinion and as per the information and explanation given to us, the company has not entered into any transaction requiring compliance with Section 177 and 188 of the Companies Act, 2013. Hence, Clause 3 (xiii) of the Order is not applicable to the Company.

(xiv) Based on the information and explanation given to us, the Company has not made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review requiring compliance with Section 42 of the Companies Act, 2013. Hence, Clause 3 (xiv) of the Order is not applicable to the Company.

(xv) Based on the information and explanation given to us, the Company has not entered into any non-cash transactions with directors or persons connected with him. Hence, Clause 3 (xv) of the Order is not applicable to the Company.

(xvi) In our opinion and according to the information and explanations given to us, Company is not required to register under Section 45 - IA of the Reserve Bank of India Act, 1934. Hence, Clause 3 (xvi) of the Order is not applicable to the Company.

FOR MEHRA GOEL & CO. FOR KUMAR VIJAY GUPTA & CO.

CHARTERED ACCOUNTANTS CHARTERED ACCOUNTANTS

Firm Registration No.: 000517N Firm Registration No.: 007814N (NITISH KUMAR CHUGH) (ROOPA GARG)

PARTNER PARTNER

Membership No.: 512742 Membership No.: 500677 PLACE : NEW DELHI DATED : May 30, 2017

REFERRED TO IN OUR INDEPENDENT AUDITORS'' REPORT OF EVEN DATE TO THE MEMBERS OF MAHANAGAR TELEPHONE NIGAM LIMITED ON THE STANDALONE IND AS FINANCIAL STATEMENTS FOR THE YEAR ENDED 31ST MARCH 2017.

Directions indicating the areas to be examined by the Statutory Auditors during the course of audit of annual accounts of Mahanagar Telephone Nigam Limited (Standalone) for the year 2016-17 issued by the Comptroller & Auditor General of India under section 143(5) of the Companies Act, 2013.

Based on the information and explanations given to us we report as under:

Sr.

No.

Areas Examined

Observation / Finding

1

Whether the company has clear title/lease deeds for freehold and leasehold respectively? If not please state the area of freehold and leasehold land for which title/lease deeds are not available.

The Company does not have clear title/lease deeds in a number of cases. Summarized position of such cases is as under :

DELHI UNIT

The Company does not have clear title deeds in respect of 1 land property at Minto Road, Delhi and classified as freehold. Also Company does not have any lease deed in respect of 89 cases of land properties spread across Delhi and classified as Leasehold.

MUMBAI UNIT

The Company does not have clear title deeds in respect of 16 cases of land properties spread across Mumbai and classified as freehold. Also, Company does not have lease deeds in respect of 6 cases of land properties spread across Mumbai and classified as Leasehold.

2

Please report whether there are any cases of waiver / write off of debts / loans / interest etc. if, yes, the reason therefore and the amount involved.

The details of cases of waiver / write off of debts / loans / interest by the Company during the year are as under:

Particulars

('' in Crores)

Write off of debts Due to non recoverability

25.87

Waiver of penalty & interest

0.00

TOTAL

25.87

Sr.

No.

Areas Examined

Observation / Finding

3

Whether proper records are maintained for inventories lying with third parties & assets received as gift from Govt. or other authorities.

a. There are no inventories lying with third parties.

b. The Company has not received any assets as gifts from Government or other authorities during the year.

4

Amount of Revenue Share (License Fee and Spectrum Usage Charges) appearing in the Financial Statements should be thoroughly checked for its correctness.

The details have been verified by us.

REPORT ON THE INTERNAL FINANCIAL CONTROLS UNDER CLAUSE (I) OF SUB-SECTION 3 OF SECTION 143 OF THE COMPANIES ACT, 2013 (“THE ACT”)

We have audited the internal financial controls over financial reporting of Mahanagar Telephone Nigam Limited (“the Company”) as of 31st March 2017 in conjunction with our audit of the Standalone IND AS financial statements of 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 internal financial controls based on the internal control over financial reporting criteria established by the Company considering the essential components of internal control stated in the Guidance Note on Audit of Internal Financial Controls over Financial Reporting issued by the Institute of Chartered Accountants of India (''ICAI''). These responsibilities include the design, implementation and maintenance of adequate internal financial controls that were operating effectively for ensuring the orderly and efficient conduct of its business, including adherence to company''s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information, as required under the Companies Act, 2013.

Auditors'' Responsibility

Our responsibility is to express an opinion on the Company''s internal financial controls over financial reporting based on our audit. We conducted our audit in accordance with the Guidance Note on Audit of Internal Financial Controls over Financial Reporting (the “Guidance Note”) and the Standards on Auditing, issued by ICAI and deemed to be prescribed under section 143(10) of the Companies Act, 2013, to the extent applicable to an audit of internal financial controls, both applicable to an audit of Internal Financial Controls and, both issued by the Institute of Chartered Accountants of India. Those Standards and the Guidance Note require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether adequate internal financial controls over financial reporting was established and maintained and if such controls operated effectively in all material respects.

Our audit involves performing procedures to obtain audit evidence about the adequacy of the internal financial controls system over financial reporting and their operating effectiveness. Our audit of internal financial controls over financial reporting included obtaining an understanding of internal financial controls over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. The procedures selected depend on the auditor''s judgment, including the assessment of the risks of material misstatement of the Standalone IND AS financial statements, whether due to fraud or error.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion on the Company''s internal financial controls system over financial reporting.

Meaning of Internal Financial Controls over Financial Reporting

A company''s internal financial control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Standalone IND AS financial statements for external purposes in accordance with generally accepted accounting principles. A company''s internal financial control over financial reporting includes those policies and procedures that:

(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of Standalone IND AS financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company''s assets that could have a material effect on the Standalone IND AS financial statements.

Inherent Limitations of Internal Financial Controls over Financial Reporting

Because of the inherent limitations of internal financial controls over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of the internal financial controls over financial reporting to future periods are subject to the risk that the internal financial control over financial reporting may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Qualified Opinion

According to the information and explanations given to us and based on our audit, the following material weaknesses have been identified in the operating effectiveness of the Company''s internal financial controls over financial reporting as at March 31, 2017:

(i) The company did not have an appropriate internal control system for identification of overheads to be capitalized with the cost of Property, Plant and Equipment which could potentially result into under /over capitalization of Property, Plant and Equipment and corresponding impact on the operational results of the Company.

(i) The company did not have appropriate internal control system for ensuring capitalization of Property, Plant and Equipment as and when the same is ready for use due to delayed issue of completion certificate by engineering department or due to delay in receipt of bills from the vendors for bought out items. This could potentially result into under capitalization and corresponding impact on the operational results due to lower charge of depreciation.

(ii) The company did not have an appropriate internal control system to ensure that provisions made pending receipt of bills from vendors/contractors at the quarter end and year end are duly reversed when actual bills are received and accounted for. This could potentially result in the same being accounting twice.

(iii) The company did not have an integrated ERP system. Different software packages used by the company are interfaced through software links or manual intervention leaving gaps between them. This could potentially result into impaired financial reporting.

(iv) The company did not have an appropriate internal control system for reconciliation of vendor/contractor accounts which could potentially result in some changes in the Standalone IND AS financial statements.

(v) The company did not have effective internal audit system so as to cover all major areas with extensive scope. This could potentially result into weak checks and balances and unreported financial irregularities ultimately resulting into distorted financial reporting.

A ''material weakness'' is a deficiency, or a combination of deficiencies, in internal financial control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company''s annual or interim financial statements will not be prevented or detected on a timely basis.

In our opinion, except for the effects / possible effects of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has maintained, in all material respects, adequate internal financial controls over financial reporting and such internal financial controls over financial reporting were operating effectively as of March 31, 2017, based on the internal control over financial reporting criteria established by the Company considering the essential components of internal control stated in the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by the Institute of Chartered Accountants of India.

We have considered the material weaknesses identified and reported above in determining the nature, timing, and extent of audit tests applied in our audit of the March 31, 2017 Standalone IND AS financial statements of the Company, and these material weaknesses do not affect our opinion on the Standalone IND AS financial statements of the Company.

FOR MEHRA GOEL & CO. FOR KUMAR VIJAY GUPTA & CO.

CHARTERED ACCOUNTANTS CHARTERED ACCOUNTANTS

Firm Registration No.: 000517N Firm Registration No.: 007814N

(NITISH KUMAR CHUGH) (ROOPA GARG)

PARTNER PARTNER

Membership No.: 512742 Membership No.: 500677

PLACE : NEW DELHI

DATED : May 30, 2017

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