Background You are a Chartered Accountant, possessing hands on rich experience of more than a decade in providing professional advice on a diverse…

Background You are a Chartered Accountant, possessing hands on rich experience of more than a decade in providing professional advice on a diverse range of businesses. You are a unique individual known for making rational and correct judgements about data and numbers, possess the ability to identify and discover the potential solutions, assess alternatives and finally select/execute best solutions to fix the issue. Recently, you have joined as a partner in an established firm of Chartered Accountants based out of Chennai. Immediately on assuming your mantle, you were made in-charge of conducting the statutory audit of 'Youth Trends Limited' (YTL), located at Madurai, South India, a Company that operates a vast retail network, providing consumers with a wide range of fashionable apparel options. The Audit firm's senior Partner, CA. Rajesh Shiv Prasad (fondly referred to as 'RAJ' Sir) has allocated to you to conduct the audit. The senior partner is very close to the family which owns the Company and you strongly believe that this is at least part of the reason why the Company decided to appoint your audit firm. The CFO of the Company made available to you the Annual Reports of the last five years and the draft summary of management prepared financial statements for the FY 2024-25. Before the commencement of the audit, you reviewed the Company's audited financial statements and accounts of the previous year. You noticed that the Auditors Report of the previous statutory auditor was qualified due to departure from Ind As 2 on 'Inventories Accounting' wherein the management has not stated the inventories at lower of cost and net realizable value but has stated them solely at cost. At this juncture, you wished that you had access to the working papers of the previous auditors but you were informed that it was not possible. All said and done, you made a detailed audit program and deputed your audit team to look meticulously into every material aspect and conduct the audit from the propriety angle. You also instructed that all observations made by the audit team would be reviewed by you with proper assessments to ensure that the financial statements reflect a true and fair view. Your audit team has summarized the following items which are open and are pending to be dealt within the financial statements for your consideration: The Company has recognized deferred tax asset on the carried forward business losses. The Management do not for see any further profits in the next couple of years. However, the Management expects confirmed orders after a couple of years. The amount of Cash and Cash Equivalents as at 01-04-2024 (excluding restricted cash and bank balances) was 40 lakh. The aggregate amount of Cash Flows during the FY 2024-25 from Operating, Investing and Financial Activities was 250 lakh. The amount of restricted bank balances as at 01-04-2024 and 31-03-2025 was 150 lakh and the Company does not believe the same as qualifying for disclosure under Cash and Cash Equivalents. As at 31-03-2025, the off Balance Sheet exposure in the form of Contingent Liabilities to the extent not paid and not provided for is 125 lakh. There was no disclosure of outstanding Letter of Credits (LCs) opened for import of certain assets from Turkey under Contingent Liabilities in the financials prepared by the Company amounting to 60 lakh. The Company is liable to pay 5 lakh under protest against certain tax claims under dispute where the Company believes it has a fair chance of favourable orders and hence not provided in the financial statements nor was it disclosed as Contingent Liabilities. During the discussions, the Company has also mentioned that since they have not provided for the same, this would not be an item in the Companies (Auditor's Report) Order 2020 (CARO, 2020) reporting by the Statutory Auditors as disputed dues. Sosmitha International Inc. has served a legal notice on the Company claiming 300 lakh for patent infringement and the Company has challenged the notice through its legal counsel. In this regard, an Independent legal opinion obtained suggests that the possibility of a cash outflow is more likely than not under the existing legal framework / available evidences as provided to the legal counsel. An amount of 125 lakh towards accrual of certain liabilities relating to refurbishment of certain spares meant for a specialized operating machine is yet to be made. The spares for refurbishment/receipt of spares were sent in March, 2025. Completion of the refurbishment/ receipt of spares by the Company is expected only in March, 2026. The amount of expected credit loss for doubtful receivables pending to be accounted as at 31st March, 2025 is 105 lakh and the Company intend to account it proportionately on a straight line basis over the calendar year 2025 to spread the impact for the same. Further, no 'Expected Credit Loss' (ECL) provision is considered for the 'Retention Receivables' under the contract terms, which, if determined, would be 75 lakh as at 31st March, 2025. Other Inputs for Management Decision Making: YTL submitted a credit proposal to ANZ Bank Limited for sanction of a Term Loan of 150 crore required for procuring and installing a latest Plant and Machinery for their upcoming project. Based on the application, ANZ Bank Limited approached Ms. 'C', a Chartered Accountant, a friend of yours who is not associated with the Audit firm to investigate the profitability of the business for judging the accuracy of the schedule of repayment furnished by YTL as well as the value of the security in the form of assets of the business already possessed and those which will be created out of the loan. One of the associate companies of YTL is Nahar Hotels and Resorts Limited, which is engaged in the business of owning, operating and managing hotels during the previous year 2024-25. The tips are paid by the guests by way of charge to the Credit Cards, UPI or Net Banking in the bills. The Company disburses the same to the employees at periodic intervals. Quick Fix Electronics Limited, a subsidiary of YTL, the manufacturer of electronic components, has taken floating interest rate loan of 2 crore on 1st April, 2024. The rate of interest at the inception of loan is 9% per annum. Interest is to be paid every year on 31st March. The Central Bank of the Country released the following projections about the interest rates likely to prevail in future: On 31st March, 2024 9.25% On 31st March, 2025 9.50% On 31st March, 2027 9.00% On 31st March, 2028 8.25%