Part A

Question 1

Net Profit for the mentioned company has increased from Rs. 10,208.55 Lakhs to Rs. 47,749.17 Lakhs from FY
2020 to FY 2021. This 367% increase in the net profit is due to the following factors:

1. Gross sale has increased from Rs. 271382.77 Lakhs to Rs. 317849.41 lakhs from FY 2020 to FY 2021. This
17% increase in gross revenue / gross sale value has contributed directly towards the companies
profitability.
The company has preformed very well in terms of sale of masterbatches. Item wise profits can be viewed
below:

2. In term of other income, the company has Rs. 48 lakhs in excess of previous year FY2020 for interest on
trade receivable. This has contributed directly towards the increase in profitability of the company.

3. The company has also witnessed a reduction in the cost of material consumed. The company has
witnessed approximately 2.63% reduction of cost of materials in comparison to the previous year.

4. The company has also witnessed reduction in purchase of stock in trade. As compared to the previous
year the purchase cost of raw materials has reduced by approximately Rs. 1400 lakhs. This reduction in
purchase cost of stock materials has contributed directly towards increase in gross sales.

5. The company has also managed their closing stock i.e. finished goods and work in progress. As compared
to the previous year the company has been able to save in stock cost by an amount of Rs. 641.78 lakhs.
This has contributed directly to the increase in profitability.

6. The company has also witnessed an increase in net gain on fair value of investment. The increase has
been from Rs. 13.74 lakhs for FY 2020 to Rs. 420.79 lakhs for FY 2021.

7. The company has also witnessed a gain in foreign currency transaction by Rs. 372.11 lakhs. The same was
Zero in FY 2020.

8. The company has witnessed remarkable gain in investment redemption. Supreme Petrochem Limited has
has made a 1301% increase in gain from redemption of mutual fund as compared to the previous year.

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External Factors that led to increase in profitability:

 Increased demand for the company's products from OEMs, the closure of one of the company's
competitors' plants, and the prohibition on the import of air conditioners with refrigerant, as well as
higher demand from appliance manufacturers, all contributed to the PS and EPS businesses' improved
performance. In comparison to the previous year, the SPC division performed admirably.

 The sad event of SM vapour leak at a competitor's PS/EPS facility in Visakhapatnam in May 2020, which
resulted in deaths and destruction in the area, forced the plant's closure. The factory is currently closed.
From the second quarter of the year under review, the company rose to the occasion and has been
satisfying the needs of PS/EPS customers in India. It gives me great pleasure to report that no customer
has been inconvenienced due to a lack of material supply.

 Because of the company's concern for the environment, it has taken steps to recycle PS and EPS post-
consumer waste. As a first step, the company is encouraging organised collection and recycling of post-
consumer EPS trash in a number of cities, as well as actively helping EPS processors in Maharashtra who
have banded together to build a circular economy.

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Question 2

Importing Styrene Monomer, the key raw ingredient, has international pricing and demand/supply risk. On an
annual basis, the company enters into procurement contracts for Styrene Monomer imports. The monthly
pricing is determined by the amount and qualities specified in the contracts. A portion of the requirement is also
sourced on a spot basis to keep up with market variations and protect against price volatility. Some of the
supply to large OEMs is based on annual contracts related to monthly SM pricing, allowing for an equitable
distribution of SM price volatility. As a hedge against Styrene Monomer volatility, the company has expanded its
product line to include compounds, masterbatches, and foam products.

The impact of global and Indian economic events on dollar-rupee parity has a direct impact on import costs as
well as the pricing of the Company's products. To mitigate the cost and pricing risks associated with foreign
exchange volatility, the Company hedges a portion of its open foreign exchange exposure linked to imports,
reducing the impact of foreign exchange rate variations on raw material imports. In addition, the company has a
natural hedge in the amount of exports it makes and prices its products locally on an import parity basis.
Because foreign currency conversion rates are continuously changing, the company keeps a close eye on them
to determine the best course of action.

Data and system security is an important component of running a corporation. To protect its data, the Company
has implemented industry-standard best practises. All of the company's servers are co-located in Tier III+ data
centres, with disaster recovery on the cloud and the essential cloud security tools. Antivirus setup, maintenance,
and monitoring for incoming data filtering, end point security controls, Firewall setup for network access
control/restrictions, Device whitelisting to restrict and ensure access to authorised people and their authorised
devices, Access control to Business Application and File System, and E-mailing and Internet Policies to control
outgoing data / information Only using licenced software and products, and not allowing unlicensed/pirated
software to be downloaded and installed on company-provided devices. Periodically, the company's IT
infrastructure is audited by third-party service providers. Application Security Assessment, Internal / External
Penetration Testing Using Ethical Hacking Tools, Server / Network Device Configuration Audit, Software / License
Audit, Network Architecture Review, and Firewall Rule Based Review are just a few of the audits available. Issues
discovered during the audit are examined and mitigated in accordance with the recommendations, followed by
a re-audit to ensure that the mitigation is effective.

CREDIT RISK: Because of the trustworthiness of the banks with whom the Company does business, credit risk
from cash and cash equivalents, derivative financial instruments, and bank deposits is deemed negligible. The
Company has special policies in place to manage client credit risk on an ongoing basis; these policies take into
account the customer's financial situation, previous experience, and other unique characteristics.
When there is no reasonable expectation of recovery, such as when a debtor fails to comply with the company's
repayment schedule, financial assets are written off. When a debtor fails to make contractual payments for
more than two years, the Company makes a provision for doubtful debt or a write-off. When loans or
receivables are either provided for or written off, the Company continues to pursue recovery of the debt.
Recoveries are recorded in the profit and loss statement.

COMMODITY PRICE RISK OR FOREIGN EXCHANGE RISK & HEDGING ACTIVITIES:

The import of Styrene Monomer, the Company's major raw material, is fraught with international pricing and
demand/supply risk. On an annual basis, the company enters into procurement contracts for the import of
Styrene Monomer. The monthly pricing is determined by the amount and qualities specified in the contracts.
However, a portion of the requirement is sourced on a spot basis to keep up with market swings and protect
against price volatility. The Company has also tied a portion of its to raw material prices so that it has enough
cushion to maintain its margin in the event of a raw material cost increase or decline.

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Because the Company's primary raw materials and important additives are imported, the Company has a
significant exposure to foreign exchange currencies, as well as the risk that comes with it. To mitigate the risk of
market foreign exchange volatility, the Company's Board of Directors has authorised a policy to hedge foreign
exchange exposures using appropriate hedging products. Export receivables and domestic sales tied to raw
material prices help the company hedge against this risk to some extent. For the Company's principal raw
material, styrene monomer, there is no direct hedging available.

Any projections of any evaluation of internal financial controls with reference to financial statements to future
periods run the risk of the internal financial controls with reference to financial statements becoming
insufficient as conditions change, or the degree of compliance with policies or procedures deteriorating.

For liquidity risk and financial risk, a snap from the annual report has been provided below:

Companies formal action to tackle the risk:

On July 18, 2018, the Company established a Risk Management Committee in accordance with Regulation 21 of
the SEBI (LOOR) Regulations, 2015, to execute the following responsibilities under the overall supervision of the
Board of Directors.
To determine, review, monitor, and, if necessary, make modifications to the Company's Risk Management
Policy, which covers all risks relevant to the Company's operations, including cyber security.

The company has developed a comprehensive Risk Management Policy that aster-alla provides for the review
and assessment of the mk elements, mitigation/minimization procedures, and procedures to inform the Board
in specific and significant risk matters, as well as periodic review of the procedures to ensure that executive
management controls the risks property through a well-defined framework.

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Question 3

Reason for decline in fixed assets:

 The company has disposed off its certain tangible fixed assets amounting to Rs. 1266 Lakhs. This
contributes to main reason for downfall of fixed assets. During this sale the company has also incurred a
loss of Rs. 538 Lakhs. Proceeds from sale of property, plant and equipment is Rs. 441 Lakhs.

 The depreciation has also increased in compared to the previous year from Rs. 2364.12 Lakhs to Rs.
2384.87 lakhs i.e. from FY 2020 to FY 2021.

Reason for reduction in equity share capital

 In FY 21, the company has bought back and 2415376 equity shares which has reduced the paid up share
capital of the company from 9643 Lakhs to 9402 Lakhs.

 There is a reduction in shares held by Resident individual by 44,05,035 number of share. The shareholding
% has reduced from 30.23% (FY20) to 26.34% (FY21)(source MGT – 7 of company)

 For NRI individual the share holding % has reduced from 0.94% to 0.84%. (source MGT – 7 of company)

 The Company's Buy Back Scheme, which ended on September 18, 2020, resulted in the purchase of
24,81,287 equity shares. As a result, the Company's paid-up share capital was decreased from 9,65,01,958
equity shares of $10 each to 9,40,20,671 equity shares of $10 each after the buyback. The shares were
purchased back for a total of 48.85 crores (including 9.26 Crores towards transaction expenses and Buy
Back distribution tax etc).

 Other reason for reduction in share capital: The Company's Board of Directors recommended, at their
meeting on March 12, 2021, that the Company's paid-up equity share capital be reduced from 10/- per
share to 24/- per share, in accordance with section 66 of the Companies Act, 2013 and regulation 37 of
the SEBI (LODR) Regulations, 2015, without reducing the number of shares. As a result, each shareholder
will be paid 6/- per share for each share held on the record date, as decided for this purpose. This is
subject to shareholder approval, as well as BSE/NSE/SEBI/NCLT approval. The existing paid-up equity
share capital will be reduced from 9,402.07 lakhs to 3,760.83 lakhs after the reduction.

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Question 4

The Company's recommendations expose it to a wide range of financial risks, including commodities price risk,
credit risk, liquidity risk, capital risk, and foreign currency risk. To minimise any negative effects on the Company's
financial performance, these risks are managed by the Company's top management, which is overseen by the
Board of Directors.

Importing styrene monomer, the principal raw ingredient, entails international pricing and demand/supply risk.
On an annual basis, the Company enters into procurement contracts for the import of styrene monomer. For
amving at monthly pricing, the contracts specify the amount and qualities. However, a portion of the requirement
is sourced on a spot basis to keep up with market swings and protect against price volatility. The Company has
also tied a portion of its sales to raw material prices to ensure that its margins are protected in the event of a rise
or fall in raw material costs.

Currency Forwards: Due to the company's lingering foreign currency risk, the company must manage that risk by
locking in a price or hedging against the impact of fluctuations in domestic and foreign currency exchange rates.
This could work like this: -

Assume the corporation is expecting a payment from the United States, valued at $1 million. The current
exchange rate is 1 USD = 75 INR. If the exchange rate maintains the same, the corporation will receive a fair value.
If it falls below INR 73, however, the corporation will lose 2 rupees for every dollar. They can go to an investment
bank and execute a currency forwards contract with the bank for a set payment of INR 75 per dollar in this
situation.

The investment bank will receive the foreign currency payment and pay INR 75 per dollar. Now, if the rupee
strengthens against the dollar, say to INR 78, the corporation will not receive the additional 3 rupees per dollar.
They are, nonetheless, safe from all risks. The currency forward will assist the organisation in avoiding potential
currency risk in this way.

Commodity futures: To manage the risk of cost and income variations, the petrochemical industry has used a lot
of futures trading. A future contract for commodities that are among the raw materials or any other component
in the manufacturing of the product might be presented to the company here. This manner, if the cost of that
particular raw material or component rises, the corporation can hedge their risk by going long on the futures of
that particular commodity.

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Question 5

Net cashflow for the company has been Rs. 266 crore.

Major cash inflows during the FY 2021:

 Increase in profit before tax by 446% as compared to the previous year. The profit before tax has increase
from Rs. 118 crore to Rs. 646 crore

 Increase in trade payable by Rs. 107 crores has contributed to a great extent as compare to the previous
year. The company has managed their trade payable really well.

 Sale of liquid investment has contributed to a great extent toward cash inflow of the company. The
company has managed to ger cash revenue of Rs. 2234 crores of cash from sale of liquid investment.

 Increase in current liabilities: The increase by Rs. 4.8 crores has contributed towards cash inflow as
compared to the previous year.

Major cash Outflow during the FY 2021:

 Increase in trade receivables by Rs. 137 cores has been a leading reason for the cash outflow. As
compared to the previous year the company has failed to manage their cash flows in respect to trade
receivables. This is because of increase in demand of products, the company is making a simplified
conservative approach.

 Tax paid: tax payment has increased by 317% in comparison to the previous year. The company has not
been able to take the benefits of financial leverage. The tax payment has increased from Rs. 39.4 crores
to 165 crores.

 The company has also expended Rs. 261 crores in acquisition of property, plant and equipment.

 The major factor for increase in cash outflow is purchase of liquid investment: i.e. Rs. 2223 crores. This
has marked for a major reason in increase in cash outflow.

 The company has also brought back shares in which the company has made of cash outflow of Rs. 46
crores.

 Dividends of Rs. 38 crores was also paid.

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 Part B

1. Company having too many subsidiaries with significant financial transactions with them.

The above matter can be a sign of warning for the auditors during closing of financial statement.

The company with too many subsidiaries usually interact among themselves via purchase or sale transaction or
via processing of loan among each other. For an auditor it is necessary to identify that each transactions are fair
and genuine and do not involve any unfair means. Hence, the auditor needs to verify these transaction among the
subsidiaries and the company closely.

Purchase/Sale Transactions

Purchasing or Selling among subsidiaries in high price i.e. above the fair market value, can lead to misreporting of
profits and losses. The company can should higher consolidated profits by selling/buying things in high prices
within the organization. Hence the auditors need to make sure that the value every such transaction is within the
fair market value or fair price. The company should not should high sale value or purchase value.

The auditors also need to make sure that closing stock in term of purchase from within group companies is also
correctly accounted for. Unrealised profits need to deduct from the closing stock value.

Loan Transaction:

The auditors must make sure that every loan transaction must be in according to the corporate law and
framework. The auditor must make sure that every loan/ advance transaction are with the MCA laws.

In order to verify the loan transactions, minutes for board meeting and loan approvals needs to be verified.

In major scenarios it has been observed that the company passes on the loan to other group companies in the
form of advances or unsecured loan only to divert money. Hence such transactions needs to be verified and
checked.

Certain transactions among the group companies are to marked and analyzed by the auditors.

 Purchase within the group companies

 Sale within the group companies
 Loan within the group companies.
 Transfer of services within the group companies.

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2. Operating cash flow much lower than declared Profit

There is something wrong with the cash cycle when operating cash flow is smaller than net income. In extreme
instances, a corporation could record positive EPS despite having successive quarters of negative operating cash
flow. In this case, investors should figure out where the cash is coming from (inventory, receivables, etc.) and
whether the problem is short-term or long-term.

The above matter can be because of various reasons. Certain reason include are:

 The company has huge non-cash transactions like: depreciation. High deprecation needs to be verified.

 Increase in trade receivables. Lower management of trade receivables. Receivable turnover needs to be
verified. This shows that the company is making sale but is not able to recover their receivables.

 Decrease in trade payable: It represents that the company is not able to manage their trade payables.
Trade payables must be in link with trade receivables. The cash conversion cycle must be taken into
consideration.

 High closing stock. Keeping huge amount blocked in closing stock can also been a sign where operating
cashflow is less then profit. The high closing stock will reflect high profit, however the increase will lead to
an reduction in cashflow. The auditor must analyse the value at which the closing stock is value. The
auditor must make sure that the closing stock value must be in link with the cash outflow of purchase of
closing stock. Any major deviation should be verified.

 High tax paid: The auditor must verify the cash payments in term of tax. The auditor must also analyse the
calculation for deferred tax assets. The difference in tax liability and tax payments can be because of
deferred tax calculation. The same needs to be verified accordingly.

 Adjustments for non-operating transaction needs to be properly accounted for. In certain times the
company has huge non-operating transaction which reflects difference in net profit and cash from
operations. The same must be duly analyzed and verified in term of proper entries and positing.

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3. Increase in receivables without corresponding increase in sales.

If a corporation collects payments at a lower rate than sales, it's a sign that customers are suffering, or that the
company is providing customers with excessively favourable credit terms or discounts.

Sales should be tracked through accounts receivables. When receivables grow at a far quicker rate than sales,
something is wrong. When it's noticed, it's a red flag. It could be due to-

 The account department are not in sync with the sales department. It can happen that the bills are
accounted for in the next financial year while the sale is being made in the current financial year.

 Lag in collection of receivables. The high receivables can be justified as inability of the company to collect
its receivables. It represents that the customers are not satisfied with the sales.

 Booking of advances in trade payables account. In certain cases, due to incorrect entries, advances paid to
suppliers has posted under trade receivables accounts. This is a scene of incorrect posting of entries. In
such case, trade receivables will increase but there will not be any increase in sales account.

 Incorrect increase in trade receivables by the company through group company entries in order to better
their current ratio. This can be analysed unfair means. The company in order to better their current ratio
books unfair transactions to increase the trade receivables account.

 Incorrect posting of inventory movement. In such scene, when a stock is sent to another place, the
company inadvertently reduces the value of stock and increase the debtors account in the name of the
person to whom the stock is sent. This will increase the receivables without increase in sale.

Negative impacts:

 Incorrect CA ratio.

 Incorrect presentation of financials

 Inability to manage trade receivables.

 Low cash recovery.

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4. The same party is shown both debtor and creditor.

This can happen because of the following reason:

 Advances from debtors/ to creditor is not adjusted in the appropriate account. Increase in corresponding
account has been made.

 Same party reflects twice in the books of the company.

 To be check whether correct posting of entries has been made or the same been has not been posted
twice.

Negative impacts to the company:

 Hindrances in analyzing the credits and debtors of the company.

 Issues in aging of trade receivables.

 Issues in deriving of net balance for debtors and credits.

 Incorrect current assets ratio and quick assets ratio.

 Issues in attaining balance confirmation from the parties.

Suggestion to rectify the same:

 Locating negative balance in both debtors and creditors account.

 Check for the updated amount.

 Pass correct entries to rectify the same.

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